The Rise of Pass-Throughs: an Empirical Investigation

Abstract

Almost half of all private employment in the United States is within businesses that do not pay corporate income tax. Instead business income passes through to the owners' individual income taxes. This pass-through share of employment has more than tripled since the early 1980s. Using comprehensive, confidential administrative data, this paper highlights five core findings underlying this growth: (1) the rise in pass-throughs is pervasive across industries and states; (2) the pass-through share converges unconditionally across both; (3) entrants' organizational choices drive 60\% of the rise; (4) shifts in firm and organizational dynamics following the 1986 Tax Reform Act show continued effects through the 2000s; (5) organizational forms exhibit high persistence with little lifecycle variation. Our study implies that tax or regulatory policy changes might take decades to manifest fully.

Keywords: Legal Forms of Organization, Pass-Throughs, Business Taxation, Entrepreneurship, Firm Dynamics

JEL Classification: E60, H32, K2, D22, L2