A widely propagated myth contends that raising top tax rates doesn’t hurt small businesses because only a small percentage of them pay rates at that level. But the number of businesses that pay top rates is economically meaningless.
By this more accurate measure it is obvious that raising top income tax rates would have an enormous negative impact on the most successful small businesses and the many workers they employ.
According the Treasury Department and as shown in the chart below, 8 percent of small businesses pay the highest two tax rates. But those businesses earn 72 percent of all small business income and pay 82 percent of all income taxes paid by small businesses.
The small businesses hit by a tax increase earn an overwhelming majority of small business income. It is these businesses that the economy desperately needs to create new jobs to pull it out of the current severe recession. Unfortunately, higher tax rates will make it harder for them to add new workers.
Raising rates on these successful businesses would damage the economy at any time, but doing so now will not only slow economic recovery, it will also cost more people their jobs.
Instead, President Obama and Congress should drop their plans to increase top tax rates and permanently extend the 2001 and 2003 tax cuts for all taxpayers. This will encourage small businesses to expand and add new jobs and would be the best stimulus for the economy to date.