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Capitalists in the Twenty-First Century

Author

Listed:
  • Matthew Smith
  • Danny Yagan
  • Owen M. Zidar
  • Eric Zwick

Abstract

How important is human capital at the top of the U.S. income distribution? A primary source of top income is private “pass-through” business profit, which can include entrepreneurial labor income for tax reasons. This paper asks whether top pass-through profit mostly reflects human capital, defined as all inalienable factors embodied in business owners, rather than financial capital. Tax data linking 11 million firms to their owners show that top pass-through profit accrues to working-age owners of closely-held, mid-market firms in skill-intensive industries. Pass-through profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of pass-through profit as human capital income, we find that the typical top earner derives most of her income from human capital, not financial capital. Growth in pass-through profit is explained by both rising productivity and a rising share of value added accruing to owners.

Suggested Citation

  • Matthew Smith & Danny Yagan & Owen M. Zidar & Eric Zwick, 2019. "Capitalists in the Twenty-First Century," NBER Working Papers 25442, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25442
    Note: CF EFG IO LS PE PR
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    References listed on IDEAS

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    5. Michael Cooper & John McClelland & James Pearce & Richard Prisinzano & Joseph Sullivan & Danny Yagan & Owen Zidar & Eric Zwick, 2016. "Business in the United States: Who Owns It, and How Much Tax Do They Pay?," Tax Policy and the Economy, University of Chicago Press, vol. 30(1), pages 91-128.
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    8. Raj Chetty & Nathaniel Hendren & Patrick Kline & Emmanuel Saez, 2014. "Where is the land of Opportunity? The Geography of Intergenerational Mobility in the United States," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1553-1623.
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    Cited by:

    1. Jae Song & David J Price & Fatih Guvenen & Nicholas Bloom & Till von Wachter, 2019. "Firming Up Inequality," The Quarterly Journal of Economics, Oxford University Press, vol. 134(1), pages 1-50.
    2. Astrid Marinoni & John Voorheis, 2019. "Who Gains from Creative Destruction? Evidence from High-Quality Entrepreneurship in the United States," Working Papers 19-29, Center for Economic Studies, U.S. Census Bureau.
    3. John Van Reenen, 2018. "Increasing Differences Between Firms: Market Power and the Macro-Economy," CEP Discussion Papers dp1576, Centre for Economic Performance, LSE.
    4. Anmol Bhandari & Ellen R. McGrattan, 2017. "Sweat Equity in U.S. Private Business," Staff Report 560, Federal Reserve Bank of Minneapolis.
    5. Davud Rostam‐Afschar & Kristina Strohmaier, 2019. "Does Regulation Trade Off Quality against Inequality? The Case of German Architects and Construction Engineers," British Journal of Industrial Relations, London School of Economics, vol. 57(4), pages 870-893, December.
    6. Anmol Bhandari & Serdar Birinci & Ellen R. McGrattan & Kurt See, 2018. "What Do Survey Data Tell Us about U.S. Businesses?," Staff Report 568, Federal Reserve Bank of Minneapolis.
    7. D�ttling, Robin & Perotti, Enrico C, 2017. "Secular Trends and Technological Progress," CEPR Discussion Papers 12519, C.E.P.R. Discussion Papers.
    8. Suresh Nallareddy & Ethan Rouen & Juan Carlos Suárez Serrato, 2018. "Do Corporate Tax Cuts Increase Income Inequality?," NBER Working Papers 24598, National Bureau of Economic Research, Inc.
    9. Florian Scheuer & Joel Slemrod, 2019. "Taxation and the Superrich," CESifo Working Paper Series 7817, CESifo Group Munich.
    10. Louis Kaplow, 2019. "Market Power and Income Taxation," NBER Working Papers 25578, National Bureau of Economic Research, Inc.
    11. Florian Scheuer & Joel Slemrod, 2019. "Taxation and the Superrich," CESifo Working Paper Series 7817, CESifo Group Munich.
    12. Brant Abbott & Giovanni Gallipoli, 2018. "Human Capital Inequality: Empirical Evidence," Working Papers 2018-085, Human Capital and Economic Opportunity Working Group.
    13. Ayse Imrohoroglu & Cagri S. Kumru & Arm Nakornthab, 2018. "Revisiting Tax on Top Income," ANU Working Papers in Economics and Econometrics 2018-660, Australian National University, College of Business and Economics, School of Economics.
    14. Suresh Nallareddy & Ethan Rouen & Juan Carlos Suárez Serrato, 2019. "Do Corporate Tax Cuts Increase Income Inequality," CESifo Working Paper Series 7824, CESifo Group Munich.
    15. Greg Kaplan & Sam Schulhofer-Wohl, 2018. "The Changing (Dis-)utility of Work," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 239-258, Summer.
    16. Patrick Kline & Neviana Petkova & Heidi Williams & Owen Zidar, 2019. "Who Profits from Patents? Rent-Sharing at Innovative Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 134(3), pages 1343-1404.
    17. Matthew Rognlie, 2018. "Comment on "Accounting for Factorless Income"," NBER Chapters, in: NBER Macroeconomics Annual 2018, volume 33, pages 235-248, National Bureau of Economic Research, Inc.
    18. anmol bhandari & Ellen McGrattan, 2018. "Sweat Equity in U.S. Private Business," 2018 Meeting Papers 415, Society for Economic Dynamics.
    19. repec:bin:bpeajo:v:49:y:2019:i:2018-01:p:257-345 is not listed on IDEAS

    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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