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Monday, March 2, 2009

The Wealthiest Americans are Business Owners

The TaxFoundation.org puts a summary together of individual income tax payers. I kept this one from a few years back because I thought the comment they had on business owners was important. Basically if you really want to be rich - start a business!

Source: TaxFoundation.org

Over the past 25 years, the number of taxpayers reporting business activity on their individual tax returns has grown at an exceptionally rapid rate. Between 1980 and 2004, as shown in Chart #7, 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.

S-Corporations alone grew almost seven-fold, from 545,389 in 1980 to roughly 3.5 million in 2004, and they now far exceed the number of conventional C-Corporations. 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 as their incomes rise, so too does the likelihood that they have business activity.

Overall, as is shown in Chart #8, 43 percent of taxpayers in the top 20 percent have business income, twice the percentage of those in the middle income group. Of those taxpayers in the top 1 percent – 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 percent have business income.

Remarkably, because so many taxpayers now have business income (or are paying their business’s taxes through their individual tax form), Tax Foundation economists estimate that taxpayers with business income paid 54.3 percent of all individual income taxes in 2004.

What this means is that calls to shift the tax burden even further up the income scale will, in fact, end up penalizing business owners and entrepreneurs, endangering our long-term economic vitality.

Here's my take on the data - if you work hard as an employee you can make $100,000 - $200,000 per year. BUT if you want to make $500,000 or more in a year, you probably have to be either a sports athelete or a business owner.



Jason Cohen said...

I'm not convinced that the conclusion is "start a business."

The data don't say that "people who start businesses make the most money." It says that "people who have businesses" and "people who have money" are correlated.

I contend that a simpler explanation is that people with lots of money always start "businesses" to handle the money.

For example, it's cheaper (from a tax perspective) if rental properties are technically owned by a separate company. For another example, joining a hedge fund means joining a company, and often it's useful to shell another company around that.

What are your thoughts on this?

Tom said...

Jason - I agree with your point that sometimes having a lot of money means you need a business, but the point of writting this was if you aren't working towards haviing "business" income - you are unlikely to be wealthy.

Even someone who is starting their own real estate business (whether under a business or not) is working to become wealthy.

I'm just not sure you'll ever get to "wealthy" by being an employee - I think owning your own business is the only way.

Dale said...

Jason, way to use an argument I usually use :). I think you're right to think there could be some correlation vs. causality going on, but I think there's a decent percentage of causality. I think the amount of people who are starting businesses to handle the money is probably lower than people who make a lot of money by starting a business.

Either way, it's really hard to make more than 6 figures as an employee.

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