“The business of America is business.”
This common misquote from Calvin Coolidge is often used to paint the former Roaring ’20s-era president as a one-dimensional advocate of business. In reality, his full quote (see below) was the much more nuanced observation that America enjoys a broad-based business culture that permeates great swaths of society.
After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing, and prospering in the world. I am strongly of the opinion that the great majority of people will always find these the moving impulses of our life.1
President Coolidge’s words fly in the face of the more compartmentalized view of many Americans that there are “workers” and there are “owners of capital.” Alternatively there are the rich, the poor, and the middle class. A more realistic view of the incidence and form of business income in America today shows the divide is between the richer and the want-to-be rich!
American business structures over the past 15 years show a dramatic shift away from traditional corporate businesses in favor of sole proprietorships and limited liability companies — often referred to as pass-through entities, where business income and expenses are recorded on personal tax returns. Since 2000, the number of tax returns filing as corporations has declined by 27 percent between 2000 and 2012, the last year for which data is available, while the number of pass-through entities rose almost 40 percent. In absolute numbers there were about 1.6 million corporations versus over 31 million pass-through entities in 2012.2
To be clear, tax structure defines neither relative size of an entity nor wealth. You can have a small corporation that takes in a few hundred thousand dollars in revenues a year before expenses. You can also have a large private equity limited liability company that deals in the billions.
What tax structure does indicate is a striking shift in the organizational structure of the U.S. economy away from shareholder ownership and toward individual ownership, which aligns business interests and concerns among both lower- and higher-income Americans. The share of tax returns with business income is almost as high or higher in the under $15,000 adjusted gross income (AGI) group as among returns in the $100,000 tax bracket and above. It is worth noting that almost every income group has a meaningful share of returns (10 percent or more) with business income (Chart).
Even more striking is the business share of income reported in these lower-income brackets. As much as 20 percent of all income reported in the $10,000 to $15,000 income range is business income. The business income share is as high as 40 percent in the “no adjusted gross income” bracket because business losses offset other sources of income.3 The share of business income reported in these low-income brackets is twice as high as in the higher-income brackets in part because higher-income Americans have both higher wage and salary income and many more sources of income.
Business activity, like employment and wages, is influenced by national and local economic conditions, the availability of credit, public policies like health care and taxes, and government regulations. Given the importance of business at these low-income brackets, business conditions may be of even greater concern to lower-income Americans than to the rich.
Coolidge’s “great majority of people” who find business to be the “moving impulses of our life” could today constitute at least a substantial plurality. Assuming each of the 30 million sole proprietorships and other pass-through entitles has an average of three people, family members, and/or employees whose livelihood depends on business success, one could easily imagine that 100 million Americans constitute a voting bloc that puts the American economy at the top of the political priority list.
As we noted in Middle Class Economics: Is There a Middle?, the best government program for the middle class is a good economy with strong job growth and rising opportunity for advancement because the middle three quintiles of the income spectrum depend on wage and salary income. The distribution of business income supplements that analysis to show that government actions that either support or inhibit business development concern and influence the economic well-being of many more people than those considered rich. Policies, such as such as health care, taxes, and bank credit, are likely of equal or greater interest to those farther down the income ladder who have set a course to use business as their pathway to economic success.
1Calvin Coolidge: “Address to the American Society of Newspaper Editors, Washington, D.C.,” January 17, 1925. Online by Gerhard Peters and John T. Woolley, The American Presidency Project.
2“SOI Tax Stats – Integrated Business Data.” www.irs.gov. Internal Revenue Service. 15 Apr 2015. Web. 28 Mar 2015.
3 For the purposes of this discussion, business income and business losses are added together to obtain a measure of how important business income is by income bracket. We assume that individual businesses move from the income to loss category as often as year to year depending on national and local economic conditions and the viability of the business.
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