Tax Foundation's Countdown to Tax Reform V: High-Income Taxpayers and the Entrepreneurial Class

The Tax Foundation has published Countdown to Tax Reform, Part V: High-Income Taxpayers and the Entrepreneurial Class as part of a series in anticipation of the expected November 1 release of the report of the President’s Advisory Panel on Federal Tax Reform,  Here is a taste:

A key issue surrounding tax reform is the extent to which the current system affects business activity by taxing sole proprietorships, partnerships and S-Corporations through the individual income tax code....Over the past 25 years, the number of taxpayers reporting business activity on their individual tax returns has grown at an exceptionally rapid rate....[B]etween 1980 and 2004 the total number of sole proprietorships, partnerships, farms, and S-Corporations more than doubled, from 13.3 million in 1980 to 27.5 million in 2004....

When we look carefully at the distribution of these tax returns a clear picture emerges: an extraordinarily high proportion of high-income taxpayers have some form of business income (schedule C, E, or F) and that as their incomes rise, so too does the likelihood that they have business activity. As shown in Figure 2, overall 43% of taxpayers in the top 20% have business income, twice the percentage of those in the middle income group. Of those taxpayers in the top 1%—those earning more than $300,000 and subject to the highest marginal tax rates—nearly three quarters have business income. And for taxpayers with incomes above $1 million per year, nearly 83% have business income.

 

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For prior TaxProf Blog coverage of other pieces in the series, see:

• Countdown to Tax Reform: Ten Core Principles of Tax Policy
• Countdown to Tax Reform I: Not Your Father's Middle Class
• Countdown to Tax Reform II: Taxpayers and Non-Payers
• Countdown to Tax Reform III: Who Payns Income Tax in America?
• Countdown to Tax Reform IV: Life Cycle and Income Inequality