Capitalists in the Twenty-First Century

60 Pages Posted: 15 Jan 2019 Last revised: 7 Jan 2022

See all articles by Matthew Smith

Matthew Smith

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Danny Yagan

University of California, Berkeley - Department of Economics

Owen Zidar

Princeton University

Eric Zwick

University of Chicago - Finance

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Date Written: January 2019

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

Smith, Matthew and Yagan, Danny and Zidar, Owen and Zwick, Eric, Capitalists in the Twenty-First Century (January 2019). NBER Working Paper No. w25442, Available at SSRN: https://ssrn.com/abstract=3315276

Matthew Smith (Contact Author)

U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

Danny Yagan

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Owen Zidar

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Eric Zwick

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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