Proposed tax’s impact on business formation undetermined but unlikely to be negative

Congress recently announced a plan to raise taxes on high-income individuals, returning the top two marginal tax rates (currently 33 percent and 35 percent, respectively) to their pre-2001 levels of 36 percent and 39.6 percent starting in 2011. This proposed measure has caused heated debates, in no small part because of the potential consequences of the tax increases on business formation rates.

According to the Congressional Research Service, critics believe that the legislation will undermine economic incentives that drive small business formation and investment. They argue that it will alter the domestic climate for business formation and small business owners.

On the other hand, supporters feel the tax change will – at most – result in a shift in business types organized. A report from the Urban Institute-Brookings Institution Tax Policy Center shows that an average of less than 2 percent of small business owners have been subject to the top two marginal tax rates since 2007.

The TCP argues that entrepreneurs who organize their firms as C corporations might not be affected by the tax in any way as the proposed legislation does not change the top corporate tax rates.

Whether the tax passes or not, entrepreneurs who are interested in learning about how to incorporate a business as a C corporation can visit online incorporation sites to learn about all of the tax benefits the entity offers.