A Closer Look at Pass-Through Businesses and How Much They Pay in Taxes

A recent study conducted by economists at the U.S. Treasury and the National Bureau of Economic Research yielded surprising findings about pass-through entities.  The study’s authors sought to answer two questions: Who owns pass-through entities and how much do they pay in taxes?

The Brookings Institution’s David Wessel recently highlighted the study in a Wall Street Journal blog.  Wessel breaks down the study’s findings as follows:

• Pass-through business participation and income is concentrated among high-earners.  
• The average federal income tax rate paid by individuals who report pass-through business income was 19% in 2011.
• Across all business entities except for sole proprietorships, the study estimates that the average tax rate of U.S. business income in 2011 was 24.3%.
• The migration of business activity out of the C-corporate sector and into the pass-through sector has likely substantially reduced U.S. tax revenue.
• Even with access to tax returns, the Treasury economists couldn’t trace all partnership income to the ultimate owner or originating partnership because businesses have created such complicated mazes (often designed specifically to reduce their U.S. taxes).

http://www.nber.org/papers/w21651
http://www.brookings.edu/research/opinions/2015/09/24-surprising-data-who-owns-us-firms-how-much-they-pay-in-taxes-wessel