Capitalists in the Twenty-First Century

NBER Working Paper No. 25442

Issued in January 2019, Revised in June 2019

NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Industrial Organization, Labor Studies, Public Economics, Productivity, Innovation, and Entrepreneurship



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.

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Acknowledgments

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Document Object Identifier (DOI): 10.3386/w25442

Published: Matthew Smith & Danny Yagan & Owen Zidar & Eric Zwick, 2019. "Capitalists in the Twenty-First Century*," The Quarterly Journal of Economics, vol 134(4), pages 1675-1745. citation courtesy of