How does the 1 percent capture the surplus?

from David Ruccio

The share of income captured by the 1 percent more than doubled (from 10 to 20.1 percent) between 1980 and 2013.

How did they do it?

Well, we know the tiny group at the top received much higher CEO salaries as well as stock dividends, capital gains, interest payments, and rent on the land and buildings they own. Those sources account for about 60 percent of the increase.

What about the other 40 percent? According to a new study from the National Bureau of Economic Research, the rest stems from the rapid growth in so-called pass-through businesses.

The basic idea is that “pass-throughs”—businesses whose annual income is taxed at the owner-level (such as partnerships and S-corporations)—now account for more than half of all U.S. business income, thus passing traditional (so-called C) corporations. The figure above shows this dramatic transformation in the structure of business activity: 54.2 percent of U.S. business income in 2011 was earned in the pass-through sectors, compared to only 20.7 percent in 1980.

The key is that pass-through participation and income are especially concentrated among high-income individuals.

Relative to households in the bottom half of the income distribution, households in the top-1% of the income distribution are over fifty times as likely to receive positive partnership income. And the average top-1% household earns over six-hundred times the amount of partnership income as the average household in the bottom half. Overall, 69% of pass-through income earned by individuals accrues to the top-1%. S-corporate income is similarly concentrated, but other business income (typically considered very concentrated) is substantially less concentrated. For instance, only 45% of C-corporate income (as proxied by dividends) accrues to the top-1%, and top-1% households are only eight times as likely to receive C-corporate income as households in the bottom half. Furthermore, the majority of partnership income earned by the top-1% derives from partnerships in finance and professional services.

In addition, the pass-through income of partnerships is taxed at a much lower rate than traditional corporate income.

What the study shows, then, is that the change in the structure of U.S. business activity over the past three and a half decades means that members of the top 1 percent have managed to capture (via pass-through income) and keep (via lower taxes) a growing share of the surplus. That, as it turns out, is the major reason their share of total income has grown so dramatically. It’s also the reason why U.S. tax revenues from business income have decreased during that period.

The consequence is that rest of us, the 99 percent, have been forced to accept a smaller share of total income but to shoulder a higher tax burden.

That’s because the 1 percent have found new ways of both capturing and keeping the surplus.