The most visible disagreement in the recent fiscal debate in Congress centered on the decision to increase tax rates on top earners. Some of those who opposed this rate increase invoked the argument that higher tax rates will fall disproportionately on owners of small businesses, and that further taxation of these business owners will result in adverse economic consequences, such as lower employment, wages, or investment.
However, there are no reliable estimates of the number of business owners, companies, or private sector employees that would be affected by these changes. In this report, we estimate the extent to which additional taxes will be paid by business owners due to an increase in the top federal income tax rate and reinstatement of a cap on certain exemptions and deductions. In turn, we consider the evidence as to whether increasing income taxes for business owners will have an impact on employment and investment by these business owners.