The Rise of Pass-Throughs and the Decline of the Labor Share

44 Pages Posted: 1 Nov 2021

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 26, 2021

Abstract

This paper studies the coevolution of the fall in the US corporate sector labor share and the rise of business activity in tax-preferred, pass-through form. Reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one third of the decline in the corporate sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, leaving a larger role for the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares.

JEL Classification: E01,E25,H25,J32

Suggested Citation

Smith, Matthew and Yagan, Danny and Zidar, Owen and Zwick, Eric, The Rise of Pass-Throughs and the Decline of the Labor Share (October 26, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-126, Available at SSRN: https://ssrn.com/abstract=3950681 or http://dx.doi.org/10.2139/ssrn.3950681

Matthew Smith

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 (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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