Working Paper: NBER ID: w21651
Authors: Michael Cooper; John McClelland; James Pearce; Richard Prisinzano; Joseph Sullivan; Danny Yagan; Owen Zidar; Eric Zwick
Abstract: “Pass-through” businesses like partnerships and S-corporations now generate over half of U.S. business income and account for much of the post-1980 rise in the top- 1% income share. We use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. 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. (3) The average federal income tax rate on U.S. pass- through business income is 19%|much lower than the average rate on traditional corporations. If pass-through activity had remained at 1980's low level, strong but straightforward assumptions imply that the 2011 average U.S. tax rate on total U.S. business income would have been 28% rather than 24%, and tax revenue would have been approximately $100 billion higher.
Keywords: Passthrough businesses; Taxation; Income inequality; Business income; Economic analysis
JEL Codes: D31; D33; E25; E62; H2; H22; H25; M2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| passthrough business income is significantly more concentrated among high earners (D33) | concentration of passthrough business income (H24) |
| households in the top 1% are over fifty times more likely to receive positive partnership income (D31) | concentration of passthrough business income (H24) |
| partnership ownership is opaque (J54) | difficulties in identifying income sources (E25) |
| the average federal income tax rate on passthrough business income is 19% (H24) | comparison to traditional corporations (G38) |
| passthrough activity at 1980 levels (H59) | average tax rate on total US business income would have been 28% rather than 24% (H25) |
| passthrough activity at 1980 levels (H59) | estimated additional tax revenue of approximately $100 billion (H27) |