Almost always ignored in discussions of corporate profits is proprietors’ income, which is included in personal income on a pretax basis. It is up 2.7% y/y and in record-high territory. A comparison with pretax corporate profits shows that proprietors’ income recently has approximated 60% of corporate profits. Here are some definitions from the National Income and Product Accounts:
(1) “Nonfarm proprietors’ income measures the income, before deducting income taxes, of sole proprietorships, partnerships, and other private nonfarm businesses that are organized for profit but that are not classified as corporations. Sole proprietorships are businesses owned by a single individual. Partnerships include most associations of two or more of: individuals, corporations, noncorporate organizations that are organized for profit, or of other private businesses. Other private businesses are made up of tax-exempt cooperatives, including credit unions, mutual insurance companies, and rural utilities providing utility services and farm marketing and purchasing services.”
(2) “Unincorporated businesses … are able to move assets freely between business and personal accounts with little, if any, reporting requirements, and tax liabilities are not separated between unincorporated businesses and their owners. In fact, the income of unincorporated businesses is generally reported on individual income tax returns; while compensation paid to employees is separately reported, the income of the business is not distinguished from the labor of the business owner and therefore reflects the incomes that accrue as a result of the owner’s own labor and entrepreneurship. Similarly, dividend and interest incomes are separately reported but do not distinguish between business and personal receipts.”
(3) “Reflecting the concepts of national economic accounting, nonfarm proprietors’ income in the NIPAs is defined as that arising from current production.”
Obviously, the wellbeing of small unincorporated businesses is an important contributor to the wellbeing of the overall economy. Corporations, partnerships, and sole proprietorships all are likely to increase their payrolls and expand their capacity when their profits are rising. They are likely to retrench when their profits are falling.
We soon should find out whether the Republicans’ tax reform plans include substantial benefits, not only for corporations but for other businesses as well.