Less than a Tenth or More than Four Fifths?

Should we worry about the number of businesses that would affected by a tax increase or the amount of small business income that would be subject to the tax?

It’s an important question. The share of small businesses and the fraction of small business income hit by tax increases are usually very different numbers.

The figure below presents data from the U.S. Treasury, on the share of businesses and business income belonging to companies at different annual income levels. The data show that less than one percent of businesses generate between $5 million and $10 million in annual earnings. However, these businesses account for 20 percent of small business income.

This means, of course, that concentrating tax increases only on the highest earning businesses affects relatively few companies. However, it impacts a lot of business income. For instance, numbers from the U.S. Treasury show that a tax increase on businesses earning more than $1 million per year would affect less than 7 percent of small companies but would hit 81 percent of small business income.

Cumulative Share of Small Business Income and Number of Small Businesses by Business’s Total Income:

Small business income hit by tax increase
Source: Created from data from the Office of Tax Analysis, U.S. Department of Treasury

Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions
  1. Congress knows full well that taxing an activity decreases that activity. That is why (they say) they keep raising taxes on cigarettes and lower taxes on things they want to promote.

    Once you come to that realization, then there is no excuse for any tax increases on small businesses (or any business) when the stated goal of Congress and the President is to get the economy back on track.