There is a good deal of confusion about the tax rate increases President Obama is proposing, including a widespread belief that these rate increases would devastate small businesses. So let's clarify a few facts.
First, the rate increases won't affect all income. For a married couple filing jointly, the rate would increase from 33 to 36 percent on income between $241,900 and $390,050. The rate on the top bracket would increase from 35 to 39.6 percent, but only on income over $390,050.
Second, these rates apply not to total income, but to taxable income (after all 401k contributions, credits, deductions and exemptions are subtracted out).
In essence, for a small business with profit in 2013 of $450,000, if the owner puts 10 percent in a tax-sheltered 401k, earns $5,000 in interest, pays self-employment tax, receives a deduction for self-employed health insurance and has total itemized deductions and personal exemptions of $60,000, the proposed rate increases would cause this business owner's taxes to go up by $2,673, which is 0.8 percent of his taxable income and only 0.68 percent of his adjusted gross income.
He would have to earn well over $500,000 to pay any taxes at the 39.6 percent rate.
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