The Tax Policy Center’s Joseph Rosenberg posted an article commenting on the substantial increase of flow through income from 1988 to 2012.
More than 90 percent of businesses, representing
more than one-third of all business activity, in the
United States are structured as flow-through entities
— businesses that do not pay the corporate
income tax, but rather pass profits through to
owners who pay tax under the individual income
tax. Over the past two decades, the importance of
flow-through businesses — partnerships and S corporations
in particular — has grown dramatically.
In 2012 net income from sole proprietorships, partnerships,
and S corporations totaled nearly $840
billion and accounted for more than 9 percent of
total adjusted gross income reported on individual
income tax returns.
Sole proprietor income (reported on Schedule C)
declined gradually as a percentage of AGI beginning
in the mid-1990s, from 4 percent down to just
over 3 percent. In 2012, 23 million returns reported
net income of roughly $300 billion or 3.3 percent of
In contrast, income from partnerships and S
corporations has more than tripled as a share of AGI
since the late 1980s. Following the Tax Reform Act
of 1986, partnership and S corporation income
accounted for 2 percent of AGI. Beginning in 1992,
that share increased sharply, reaching 5.4 percent by
2005. Following a drop associated with the Great
Recession, partnership and S corporation income
again rose as a percentage of AGI, reaching 5.9
percent in 2012 (the most recent year IRS data are
available). In 2012, 8.3 million returns reported $535
billion in net income from those sources.
In essence, the article supports my position that by using tax data Thomas Piketty’s figures are artificially inflated as businesses have shifted ownership structure from corporations to pass through entities – from form 1120 to form 1040 thus increasing reported AGI. This effect disproportionately misrepresents post-Tax Act of 1986 income for higher income individuals by shifting income previously reported by corporations (pre-1986) to individuals’ tax returns.