The progressivity of our income tax system not only snares the "rich corporate CEOs", but also many of the entrepreneurs trying to build their businesses.
The effective federal income tax rate faced by small businesses varies by the legal form of organization, according to a report issued yesterday by the Office of Advocacy of the U.S. Small Business Administration. Average rates range from 13.3 percent for sole proprietorships, which are often the smallest of the small businesses, to 26.9 percent for S corporations. The effective federal income tax rate is the actual amount of taxes paid by a firm as a percent of its net income.
Overall, small businesses of all types pay an estimated average effective tax rate of 19.8 percent. Sole proprietorships face a 13.3 percent rate, small partnerships face 23.6 percent, and small S corporations face 26.9 percent.
The progressivity of the tax code also affects effective rate calculations, as firms with less income face a lower statutory rate. Nearly 60 percent of small sole proprietorships have a net income of less than $10,000, while only 3.1 percent have a net income of at least $100,000. On the other hand, more than 18 percent of small S corporations have a net income of at least $100,000.
Most entrepreneurs spend years toiling away trying to get market traction. Most put their own personal wealth into these ventures. In fact, recent studies have found that over 85% of funding comes directly from the entrepreneur and his or her family. At some point, if all goes well, the entrepreneur finally begins to make a profit and earn a living.
And then just at the time that the entrepreneur begins to gain momentum and build a successful venture, the federal government swoops in and takes away much of the fruits of their success through a highly progressive tax code, that will soon become even more progressive.
