The “Top One Percent” Own Businesses

Ernest Hemingway apparently got the answer wrong when F. Scott Fitzgerald told him “the rich are different from you and me” and Hemingway responded “Yes, they’ve got more money.”

His answer should have been: “They own businesses.”

The chart at the bottom of the page shows the probability that a taxpayer includes a partnership or S-Corp on his or her federal income tax return. As you can see, the odds of having business income increase substantially once adjusted gross income (AGI) exceeds $100,000. More than 40 percent percent of people with an AGI of $250,000 or more have one of these two types of businesses. More than 72 percent of the really wealthy – people who earn more than $1 million per year – have a partnership or S-Corp. And nine-in-ten of the super wealthy – people with an AGI in excess of $10 million – have one of these.

The correlation between AGI and the odds of having a partnership or S Corp isn’t just a curiosity. It also tells us something about who experiences collateral damage from recent criticism of the wealthy. Whether directed at business owners or not, any disparaging remarks made about the “top one percent” – people who earned more than $344,000 in 2009 – are negative statements about them. IRS data reveal that the majority of the “top one percent” has a partnership or S-Corp.

Source: Created from data from the IRS Statistics of Income

14 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

14 Reactions

  1. Yes – so true. But, will anyone listen? The 99% don’t care – they just want and not have to work for it. What about the 54% that are actually working – for those 1% – where do they fit in.

    I wish they would put that same protest energy into starting their own business. Right, if you can’t beat them – join them!

    • Anita Campbell

      BMT – I wish people would direct their anger toward the government and policies that encourage high risk taking in the banking industry knowing that the U.S. taxpayer will eventually be called on to bail them out, and large multinational corporations that use their multinational status to avoid paying taxes despite record megamillions in profits.

      Instead, as this graph points out, the anger is directed towards anyone who makes money. So small business owners that are actually paying taxes and had nothing to do with financial industry meltdown a few years ago, and have no power in Washington to affect ANYTHING, get caught up like dolphins in the tuna net.

      - Anita

  2. Ms. Campbell said it succinctly — those playing by the rules and adding asset value to societal “game” have been and are being victimized. While the toxic, self-indulging financial chaos of 2004-7 should have been remedied with fines, prison time, and restrictions on what to do with “bailout” funding streams (i.e., strictly for economy enhancement and infrastructure development, and subordinating underwater debt modification opportunities), small businesses and owners’ families are being hit with additional taxation — inheritance taxes, state/locally-driven “revenue builders” and operations challenges. The pushback among small businesses will be felt by both parties in the coming primaries. I trust the media will share these “occupy” moments so there can be some truth to the madness besetting our young people. It’s apparent some of them have yet to make payroll and worry about the productiveness of a group in order to ensure the viability of a company…

  3. Martin Lindeskog

    As a “poor” capitalist, I support the top one percent who is a business owner, with intellectual ammunition and rational arguments in favor of a free market. Let the individuals keep the fruits of their labor.

  4. Kip Marlow

    Great article that puts things in perspective in this age of miss-information and political correctness.

    Thanks

  5. Kip Marlow

    Anita, thanks for your comment. The tail is wagging the dog. Hopefully our policy makers will wake up one day and change things, but I’m not holding my breath.

  6. A great article and excellent comments. But what chance do the facts have when we have a media establishment that honors bald faced lies like the Senate Majority Leader Harry Reid saying that the top 1% is just a bunch of hedge fund people and smart lawyers. Fort 40 years we have failed to educate people in how our system really works to everyone’s advantage. Marx is still wrong. Bill Ayers is still wrong. If MoveOn.org almost got someone like Howard Dean nominated, can’t we start something that gets the word out to people about how dangerous a path we are on and how deadly class warfare is? Thank goodness for the top 1%. I am certainly not in it, but I am glad they are there.

  7. Kip Marlow

    Paul, great comments. Everyone should be required to take basic economics in high school. All students should understand the system and how important it is to the creation of new inventions, new ideas, a good economy, and a better life for all. Until we all learn about it, politicians will still be successful promoting drivel to the ignorant and uninformed.

  8. It is misleading to represent the top .1% as entrepreneurs and innovators. A majority are professionals – doctors, lawyers, and consultants. They create capital from their craft, not innovation. And, they hire other professionals like themselves or support staff. They mirror the two-tier hierarchy and income gap in America.

  9. Wow, I can’t believe how gullible some people are.

    What your data tells me is not that people are “entrepreneurs”; it tells me that the richer you are, the better off you will be if you put your money into an S-corp. Why would you do that? There is the little matter of paying less in taxes. It’s a smart use of a legal loophole, and it is not a secret.

    Your data might be correct, but the implied conclusions that people are arriving at are completely ignoring logic and reality.

    • Anita Campbell

      Hmm, JuanValdez, while an S-Corp provides certain tax advantages (totally legit, I might add) what evidence do you have that it has nothing to do with being an entrepreneur?

      An S Corp can’t be used solely for passive income so by its nature doesn’t it demand an active business?

  10. Scott,
    I admire so much of the research you do (including this) but I have to disagree with your conclusion here. You seem to say that this indicates that comments against the wealthy are shown to be comments against business owners because of this data. That’s probably true in a strictly legal sense. I know many rich people who are technically, and for tax purposes principals in corporations or partnerships who are not really engaged in commerce on any kind of regular basis. So while not exactly wrong, I’m not sure your conclusion is useful for creating policy.

    Anita,
    You said >>An S Corp can’t be used solely for passive income so by its nature doesn’t it demand an active business?<< Well that's the letter of the law. But in practice what counts as active and passive involvement are open to debate. Witness Mitt Romney's contention that he was not involved in running Bain when the SEC filings indicated he was CEO, sole shareholder, etc.

    • Anita Campbell

      Hmmm, John, I don’t think bringing Mitt Romney’s experience at Bain into this has anything to do with small businesses and S Corps. It is unrelated to the issue at hand.

      • Anita, After realizing that I did not fit the church ministry, I could not ‘buy’ a job with a Theological degree. Twenty-four years ago, my wife and I began a commercial cleaning business. That little family business has catapulted us into the top ten per cent of incomes in America. We are still in operation and I am currently writing a ‘how to’ book on starting a business from scratch.

        Thanks for your well-done article. So timely and so true!

        Larry Fazzio

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