Effective Tax Rates Paid by Small Businesses

Today, the Office of Advocacy released a study on estimated effective federal tax rates paid by small businesses by Quantria Strategies.  This report simulates these rates using primarily public Statistics of Income data from the Internal Revenue Service.  Its timing, of course, makes it helpful to the overall debate going on in the Congress regarding the FY 2010 fiscal budget.  Indeed, several Congressional staffers saw embargoed copies of this report – on both sides of the political spectrum – and found it helpful.

In general, the authors find that the average effective tax rate for small businesses is 19.8 percent.   By legal forms of organization, the breakdown is:

• Small nonfarm sole proprietors: 13.3 percent.
• Small partnerships: 23.6 percent.
• Small S corporations: 26.9 percent.

While the study does give an effective tax rate for C corporations, it is not comparable to the other figures due to limitations in the analysis.  One thing to note is that, as averages, these figures include every business making positive income; this somewhat skews the sole proprietor average.  In general, the effective tax rates show a high degree of progressivity in the tax code, with businesses earning more paying a higher effective tax rate.   For instance, sole proprietors earning less than $10,000 have an effective tax rate of 8.1 pecent versus those firms making $200,000 or more, which pay 23.9 percent in taxes.  The study also does a good job of breaking these figures down by major industry classification and by size of assets.

Hopefully, you will enjoy this study.  (If you want to see a shorter version, see the Research Summary.)  I suppose that it will be quoted often in the coming weeks and months in policy debates.