Paul L. Caron

Wednesday, September 25, 2019

Capitalists In The Twenty-First Century

Matthew Smith (U.S. Treasury Department), Danny Yagan (UC-Berkeley), Owen Zidar (Chicago) & Eric Zwick (Chicago), Capitalists in the Twenty-First Century, 135 Q. J. Econ ___ (2019) (Stanford Policy Brief, Tax Avoidance at the Top):

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 article 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 workingage owners of closely held mid-market firms in skill-intensive industries. Passthrough 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.


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"Passthrough profit falls by three-quarters after owner retirement or premature death." So, once they stop working, their income based on accrued wealth is much, much lower. It would be interesting to know what percentage of that is also due to increased giving to charity during retirement years. For the highest earners, I suspect it's quite a bit as their new "occupation" transitions to being one of determining how best to give back to society. (Although the way they made their money while working must also have given a great deal to society, or people wouldn't have paid them for it.)

Posted by: M | Sep 26, 2019 6:53:53 AM

Imagine that. These greedy capitalists actually earned their wealth. Moreover, if you could drill down I suspect you would find a temporal effect to their earnings. That is, most are say in the 5% group during their working years, but when they sell, they rise up into the top 1% bracket, only to fall back down the following year.

Thank you for the dose of reality.

Posted by: Dale Spradling | Sep 25, 2019 5:43:07 AM