Wednesday, September 25, 2019
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.