NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Matthew Smith

Office of Tax Analysis
U.S. Department of the Treasury
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Institutional Affiliation: Department of Treasury

NBER Working Papers and Publications

January 2019Capitalists in the Twenty-First Century
with Danny Yagan, Owen M. Zidar, Eric Zwick: w25442
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 ...
 
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