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HOW THE RICH GOT RICHER  
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John Miller
August 14, 2025
Dollars & Sense
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_ As more and more pass-through business income goes to the
super-rich, the income share of the top 1% doubles. _

, iStock.com/claffra

 

Massive inequality is the hallmark of today’s U.S. economy. Fully
one-fifth of the nation’s income goes to the richest 1% of families.
That’s twice their income share from four decades ago. These
horrifying trends are well-documented. The top (blue) line in the
figure
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depicts how the income share of the top 1% more than doubled from
9.09% in 1985 to 20.7% in 2021. That’s larger than the 19.6% income
share of the top 1% in 1928 on the eve of the Great Depression. 

This large increase in inequality is well-known
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What is not well-known is the key role that pass-through business
income played in this unrelenting rise in the share of our nation’s
income that went to the super-rich.

Unless you’re a tax nerd, like yours truly, pass-through business
income is probably not part of your everyday vocabulary. But
pass-through income is a remarkably apt term for the tax treatment of
the profits of businesses that don’t pay corporate income taxes. The
profits of sole proprietorships (businesses with a single owner),
partnerships (law firms, investment firms, and other businesses with
multiple owners), and S-corporations (companies with 100 or fewer
stockholders) are _not _subject to the corporate income tax. Rather,
their profits are “passed through” their business to the owners,
who then themselves pay individual income taxes on those profits
(along with their other sources of income). The profits of
C-corporations, on the other hand, are taxed at the corporate level
(by the corporate income tax) and then by the individual income tax
when their profits are remitted to stockholders in the form of
dividends.  

Credit: Washington Center for Equitable Growth

Pass-through businesses have accounted for a larger and larger share
of business income since 1980. And since 2006, the share of business
income of pass-through businesses has been consistently greater than
50%. Pass-through businesses offer considerable tax advantages to
their owners. In their detailed National Bureau of Economic Research
(NBER) study
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IRS tax returns, economist Michael Cooper and his co-authors
established that the owners of pass-through businesses paid a lower
tax rate on their business income than the tax rate on the profits
of  C-corporations. In 2011, the effective tax rate (taxes owed as a
share of a business’s total income) was 13.6% for sole
proprietorships, 15.9% for partnerships, and 25.0% for S-corporations.
All those rates were substantially lower than the 31.6% effective tax
rate levied on the business income of C-corporations. In addition, in
2011, much of the country’s pass-through business income went to the
richest 1% of families—67% of partnership business income and 69% of
S-corporation business income came from pass-through business
income.   

The increasing amount of pass-through business income going to the
richest 1% helped fuel the decades-long increase in U.S. inequality.
Using the calculations of economist Owen Zidar, one of the authors of
the NBER study mentioned above, the figure above depicts the dramatic
increase in the income share of the top 1% from 1985 to 2021 and how
pass-through business income contributed to it. In 1985, 1.00% of the
total national income of the richest 1% came from pass-through
business income, and 8.09% of the total came from other sources. By
2021, 7.06% of the total came from pass-through business income, and
14.64% of the total came from other sources.  

Based on those figures, Zidar calculates what would have happened to
the share of national income of the richest 1% since 1985 if
pass-through business income continued to account for 1.00% of
national income and _not_ a larger share of national income. The
answer is depicted by the lower (red) line in the figure above. In
that case, the income share of the top 1% would have increased 5.55
percentage points from 1985 to 2021, not 11.61 percentage points. In
other words, the ever-increasing share of pass-through business income
going to the top 1% is responsible for over half (52.2%) of the
increase in their share of national income from 1985 to 2021.

If we’re going to make our economy more equal, it is high time that
corporations, pass-through business owners, and corporate shareholders
pay their fair share of taxes. That begins by repealing the provisions
of Trump’s 2017 tax cut that were made permanent in his 2025 One Big
Beautiful Bill, which made things even worse. The 2017 tax cut allowed
taxpayers to deduct 20% of their pass-through business income from
their taxable income, in effect lowering their highest income tax
bracket (or marginal tax rate) from 37% to 29%. Pass-through business
income needs to be taxed at least at the same rate as workers’ wage
income, not at lower rates. The same is true for dividends paid to
stockholders. The 20% cap on the highest tax rate on dividends needs
to be repealed, and dividends should be subject to the same 37%
maximum income tax rate on wages and other income. 

The problems with Trump’s tax bill aren’t just their treatment of
pass-through business income.  His tax bills gutted the corporate
income tax, slashing the tax rate from 35% to just 21%.
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effective corporate income tax (corporate tax liability as a share of
total profits) had fallen to just 12.6% in 2020, lower than at any
time since 1952. (The earliest data available.) All told, Trump’s
2025 bill cuts an average of $68,430 from the taxes of the top 1%, all
with an income of at least $916,9000, and an average $30 from the
taxes paid by the poorest 20%. Worse yet, after the bill’s spending
cuts, the poorest 40% of taxpayers will have less income after taxes
and transfers, not more.
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Published in Left Hook Economics

_Dollars & Sense_ is a non-profit, non-hierarchical, collectively-run
organization that publishes economic news and analysis, with the
mission of explaining essential economic concepts by placing them in
their real-world context. We publish a bi-monthly magazine, as well as
economics books that are used in college social science courses, study
groups and other educational settings.

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