TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

Tuesday, September 20, 2016

Zidar Presents Business In The United States: Who Owns It And How Much Tax Do They Pay? Today At Columbia

ZidarOwen Zidar (Chicago) presents Business in the United States: Who Owns It and How Much Tax Do They Pay? (with Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan (all of the U.S. Treasury Department, Office of Tax Analysis), Danny Yagan (UC-Berkeley), & Eric Zwick (Chicago)) at Columbia today as part of its Davis Polk & Wardwell Tax Policy Colloquium Series hosted by Alex Raskolnikov and Wojciech Kopczuk:

"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.

Owen Zidar (Chicago), Pass-Through Income and The Top 1%:

Figure 2

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. In blue circles, we plot actual top income share estimates from Piketty and Saez (2003), including capital gains and updated through 2013 (Piketty and Saez, 2014). In red 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. 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) . 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). See Piketty and Saez (2003) for further documentation, and see our footnote 2 for interpretation.

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