NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Capitalists in the Twenty-First Century

Matthew Smith, Danny Yagan, Owen M. Zidar, Eric Zwick

NBER Working Paper No. 25442
Issued in January 2019, Revised in April 2019
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Industrial Organization, Labor Studies, Public Economics, Productivity, Innovation, and Entrepreneurship

How important is human capital at the top of the U.S. income distribution? Using tax data linking 11 million firms to their owners, this paper finds that entrepreneurs are key for understanding top income inequality. Most top income is non-wage income, a primary source of which is private "pass-through" business profit. These profits—which can include labor income disguised for tax reasons—accrue to working-age owners of closely-held, mid-market firms in skill-intensive industries. Pass-through business 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 his or her income from human capital, not financial capital. Our approach also raises the overall top 1% labor share in 2014 from 45% to 56%. 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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Document Object Identifier (DOI): 10.3386/w25442

 
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