If Congress does not act, in 2011:

The top marginal income tax rates will increase to 36% and 39.6%, an increase of 9% and 13% on our most successful small businesses who pay taxes at individual marginal tax rates.

In addition to the increases in the top two marginal tax rates, Pease and PEP will return. In other words, these successful small businesses again will have their personal exemptions and itemized deductions reduced once their income reaches a certain threshold level. (1) Increased marginal combined with reinstating PEP and Pease, will subject our successful small businesses to even higher tax rates.

• Estimates suggest that reinstatement of the PEP phase-out will increase tax rates by another 0.8%. 
• Estimates suggest that reinstatement of the Pease phase-out will increase tax rates by another 1.2%.
• Thus, the top effective marginal rate on taxpayers when the phase-out of PEP and Pease is factored in is 41.6%.

Increasing marginal tax rates will have significant adverse effects on small businesses, the entrepreneurial sector of our economy. Roughly one-third of all business taxes paid are paid by owners of pass-thru entities –sole proprietorships, partnerships, and S corporations that are often small in size and entrepreneurial – since these entities file individual tax returns.(2) Small businesses will bear a substantial portion of the burden from these higher tax rates.(3)

• About one-quarter of taxpayers who derive at least 50% of their income from a pass-thru business will be subject to a higher tax. 
• Further, a substantial share of new revenue (50% for the increase in the top two rates) can be attributed directly to the income reported for pass-thru businesses by their owners.(4)

Small businesses are invaluable sources of innovation, risk taking, and job creation. Increasing marginal tax rates will crush these drivers of economic growth.

1 -- Tax Foundation, Fiscal Fact No. 182, The Economic Cost of High Tax Rates, http://www.taxfoundation.org/research/show/24935.html; Democrats’ Ticking Tax Bomb, Part I, http://republicans.waysandmeans.house.gov/UploadedFiles/Part_I_-_TickingTaxBombOverviewFINAL.pdf

2 -- Tax Foundation, Fiscal Fact No. 182: The Economic Cost of High Tax Rates, July 29, 2009, http://www.taxfoundation.org/research/show/24935.html#_ftnref5.

3 -- Tax Foundation, Fiscal Fact No. 182: The Economic Cost of High Tax Rates, July 29, 2009, Table 2 http://www.taxfoundation.org/research/show/24935.html#_ftnref5.

4 -- Joint Committee on Taxation, JCX-36-10, Present Law And The President’s Fiscal Year 2011 Budget Proposals Related To Selected Individual Income Tax Provisions Scheduled To Expire Under The Sunset Provisions Of The Economic Growth And Tax Relief Reconciliation Act Of 2001.