The number of non-corporate pass-through businesses — meaning profits are passed directly through to owners on their individual tax returns – has tripled in the past 30 years to more than 30 million, according to a study released today by the Tax Foundation. At the same time, the number of corporations has doubled. The income of pass-through businesses has increased five-fold, while that of traditional corporations doubled, the group found.
As federal lawmakers consider whether to reduce the corporate tax rate — the highest among developed countries — to improve American businesses’ competitiveness, they need to understand that “individual income tax rates are just as important to business activity as the corporate rate,” Tax Foundation economist Kyle Pomerleau said in a statement.
Most businesses today are pass-throughs, and the bulk of the income is earned by taxpayers with incomes greater than $200,000 a year, he said.
“Pass-through businesses account for a large percentage of business income and employment in the United States. Raising taxes on them could curtail their hiring and other investment plans, putting more strain on an already struggling economy,” he said.
The top federal rate on pass-through income is 39.6 percent, but pass-through businesses are also liable for additional city and state income tax and self-employment tax, which add up to a relatively high top marginal tax rate, according to the Tax Foundation. The average top marginal rate for the 23 million sole proprietorships in the United States is 47.5 percent, and the average top rate for the 7.3 million S-corporations is 44.5 percent, the organization said.
New York ranks third highest in the country after California and Hawaii for its marginal tax rate for both sole proprietorships — 50.2 percent — and S-corporations — 47.2 percent.
This is a 2012 report from the Congressional Research Service on who earns pass-through business income.