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Long Term Changes in Entrepreneurial Income

The income that Americans report to the Internal Revenue Service (IRS) generally takes three broad forms: the wages and salaries that people get for working for a business or organization; investment income (capital gains, dividends and interest); and income from running a business of one’s own.

Most of the income on which Americans pay income taxes takes the form of salary and wages. In 2011, the latest year for which data are available, 72.3 percent of the $8.4 trillion in reported income was of that form, data [1] from the IRS Tax Stats reveals.

Investment income comprises a much smaller fraction of the total. In 2011, interest, dividends, and capital gains together accounted for only 9.3 percent of Americans’ total income. Entrepreneurial income – the sum of sole proprietorship, Sub Chapter S corporation and partnership income less losses – made up a similary limited amount, 9.5 percent of the total in 2011.

However, the share of income that comes from entrepreneurship has changed substantially over time. For example, back in 1946, at the end of World War II, 17.4 percent of total income came from people’s efforts to run their own businesses, nearly double the fraction today.

As the figure below shows, the share of income coming from entrepreneurship has followed a curvilinear pattern since that time. (A U-shaped trend line fits the data with an R² of 0.89.) Between 1946 and 1982, the fraction of Americans’ total reported income that came from running sole proprietorships, partnerships and sub chapter S corporations declined from 17.4 percent to 2.6 percent. Then, between 1982 and 2005, the fraction rose back to 8.9 percent.

The data on the share of income coming from entrepreneurship support the assertion that Ronald Reagan’s presidency marked a sea change in how Americans made money. Through changes in tax policy and deregulation, President Reagan not only stemmed the decline in the share of Americans’ income coming from running their own businesses, he also set in motion a 25-year period of growth in the share of entrepreneurial income.

Source: Created from data from the IRS Tax Stats

Source: Created from data from the IRS Tax Stats