The Rise of Pass-Throughs: an Empirical Investigation

48 Pages Posted: 30 Aug 2023 Last revised: 15 May 2024

See all articles by Sebastian Dyrda

Sebastian Dyrda

University of Toronto - Department of Economics

Benjamin W. Pugsley

University of Notre Dame - Department of Economics

Date Written: March 11, 2024

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

Suggested Citation

Dyrda, Sebastian and Pugsley, Benjamin W., The Rise of Pass-Throughs: an Empirical Investigation (March 11, 2024). Available at SSRN: https://ssrn.com/abstract=4555942

Sebastian Dyrda (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

Benjamin W. Pugsley

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

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