With election season heating up, taxes are a hot topic. You’ll often hear politicians rail on the fact that “no one” pays the top tax rates. Is this true? Technically yes, but it’s a deception that makes the wealthy seem like tax-dodgers.
Here’s the real truth. In 2019 the top federal tax bracket for income is 37%. This is the top marginal tax rate for income. While it’s true that no one pays 37% of their income in federal taxes according to these brackets, many people pay very close to that. The reason you don’t end up paying 37% on income if you’re a high earner is that 37% is a limit. As you probably learned in pre-calculus, you never reach a limit, you simply approach it. Thus, you can end up paying a tax rate of 36.5% or 36.9% if your income is high enough.
This is how the politicians are able to deceive voters about taxation. Technically, they’re not lying, but they’re being very deceptive about it. Many small business owners are taxed at or very near the highest tax rates (think 36.9%). If you have a successful business that’s generating $10M in profits and you’re a single-owner LLC or S Corp, you’re going to have a mighty hefty tax bill that’s pretty darn close to the top tax bracket.
Increasing the marginal tax rates (or implementing a so-called “wealth tax”) can have a significantly negative impact on small business owners, which can cause a ripple effect down to the middle class. The reason for this is that small businesses employ nearly half of the total workforce in the United States. There are over 30 million small businesses in the US that employ nearly 59 million people. Small businesses in the US represent more than 99% of the total businesses in the US.
The so-called “1 percent” are largely entrepreneurs and small business owners. Increasing their taxes can have a significant damaging effect on their employees and the overall economy of the United States.
Here are a few articles about who the 1% are and the tax rates the pay:
The Top One Percent Are Business Owners
Effective Tax Rate By Size Of Income
Number of Small Businesses In The US
Tax Brackets vs Effective Tax Rates
2019 Tax Rates