Taxing Business Incomes: Evidence from The Survey of Consumer Finances

More than half of economic income generated by closely held businesses does not appear on tax returns and that ratio has declined significantly over the past 25 years. Tax data alone provide incomplete insights about business income taxation because the incomes reported to the IRS are already affected by tax rules, avoidance strategies, and non-compliance. We explore distributional analyses of business income taxation using the Survey of Consumer Finances (SCF), which has the comprehensive household-level income, wealth, and demographics needed to simulate tax filings and benchmark against published IRS data. Under conservative assumptions, we show that the part of economic income from closely held businesses that does not show up on tax forms is distributed disproportionately to the most affluent households.