Partnership owners can also be foreigners, corporations, tax-exempt entities, and trusts, and partnership income and deductions need not be allocated pro rata to owners. Partner-ship ownership is particularly murky: partnerships can be owned by other partnerships, which, in turn, can be owned by other partnerships. We begin by documenting who owns partnerships and S-corporations, as compared to C-corporate and sole proprietorship ownership. This paper uses rich administrative data to identify US business owners and estimate how much tax they pay, with special emphasis on the partnership sector. This problem is especially severe for partnerships, which constitute the largest, most opaque, and fastest growing type of pass-through. Source: This figure uses data from Piketty and Saez ( 2003) to plot estimates of the income of households in the top-1% of the income distribution as a fraction of total income for years 1916–2013, under two scenarios.ĭespite this profound change in the organization of US business activity, we lack clean, clear facts about the consequences of this change for the distribution and taxation of business income. See Piketty and Saez ( 2003) for further documentation, and see our note 2 for interpretation. Total income is defined as the sum of this 1040-based income measure across all 1040-filers plus imputed non-filer income (equal to an assumed share of mean 1040-filer income that varies by year). These data define income as the sum of Form-1040 “total income” (i.e., adjusted gross income before the adjustments) minus Form-1040 transfer income (social security and unemployment benefits). In squares, we plot hypothetical top income share estimates where we hold top-1% “entrepreneurial” income (predominately pass-through income since 1980, but also including schedule C and farm income) as a share of total income fixed at its 1980 level of 1.0% in every year (in contrast, for example, to the actual 2013 level of 5.0%)-while allowing other top-1% income (salaries, dividend income, interest income, and capital gains) as a share of total income to evolve as it actually did. Role of pass-through income in rising top-1% income share Notes: In circles, we plot actual top income share estimates from Piketty and Saez ( 2003), including capital gains and updated through 2013 (Piketty and Saez 2003). Less well known is that 41% of that increase came in the form of higher pass-through business income. As is well known, the top-1% income share doubled (from 10.0% to 20.1%) between 19. Figure 2 uses Piketty and Saez ( 2003) data (updated through 2013) to plot two series: the actual share of Form 1040 household income accruing to the top-1% highest-income tax-filing units over the last century and the hypothetical share holding pass-through income fixed at the 1980 level. The rise of pass-throughs accounts for much of the rise in income inequality over the last three decades. If pass-through activity had remained at 1980’s low level, strong but straightforward assumptions imply that the 2011 average US tax rate on total US business income would have been 28% rather than 24%, and tax revenue would have been approximately $100 billion higher. We present three findings: (1) relative to traditional business income, pass-through business income is substantially more concentrated among high-earners (2) partnership ownership is opaque: 20% of the income goes to unclassifiable partners, and 15% of the income is earned in circularly owned partnerships and (3) the average federal income tax rate on US pass-through business income is 19%-much lower than the average rate on traditional corporations. We use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. “Pass-through” businesses like partnerships and S-corporations now generate over half of US business income and account for much of the post-1980 rise in the top-1% income share.
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