Analysis: Democrats Say They’re ‘Taxing The Rich,’ But They’re Actually Crushing Small Businesses

According to a new analysis, Democratic lawmakers’ newest tax hike will severely impact small businesses.

The potential $2.9 trillion in new taxes follows a separate Democratic attempt to pass a $3.5 trillion social welfare agenda — without any support from Republican colleagues. Among other items, the revenue proposal suggests raising the income tax, the corporate tax, and the investment tax, as well as creating an additional surtax on wealthy Americans.

It would also introduce forced retirement account distributions, taxes on tobacco and nicotine products, subsidies for journalists, and nearly $80 billion for the Internal Revenue Service to enforce federal tax laws.

In a recent analysis, however, Americans for Tax Reform notes that many of the new tax increases will target small businesses.

For instance, raising the top income tax rate from 37% to 39.6% “will increase taxes on businesses organized as pass-through entities like sole proprietorships, LLCs, partnerships and S-corporations” — a legal status that applies to 95% of America’s 26 million businesses. Pass-through companies also hire “65.7 million of all private sector workers,” carrying worrying implications for small business employment.

Democratic lawmakers’ suggestion to expand the 3.8% Obamacare net investment income tax “so that it applies to all earnings from passthrough businesses” will also raise costs for millions of small businesses.

Meanwhile, limiting the 20% small business deduction to $500,000 for a joint tax return — or $400,000 for an individual return — would impact as many as 860,000 households.

“While some Democrats characterize this tax cut as a ‘giveaway’ or ‘loophole’ for the wealthy, the Small Business Deduction is limited to prevent taxpayers from taking advantage of the tax code by improperly allocating wage income, which is paid by the individual, as business income,” explains the analysis. “One of the main limitations within the deduction is a wage limitation combined with a capital limitation. The wage limitation applies to taxpayers with greater than $315,000 in income for joint filers or $157,500 for single filers and is phased in over the next $100,000 or $50,000, respectively.”

Likewise, increasing the highest corporate tax bracket’s rate from 21% to 26.5% would impact the roughly 1.4 million small businesses currently operating as C-corporations.

The analysis refers to a United States Chamber of Commerce study examining the state-by-state impact of such a corporate tax increase. In New Jersey, for instance, “45,053 small businesses would face a combined state and federal corporate tax rate” of 36.3%. In West Virginia, “6,081 employers will face tax hikes, including 4,203 small businesses,” resulting in a combined state and federal tax rate of 32.7%.

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