Capitalists in the Twenty-First Century

Abstract

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The Effects of Corporate Taxes on Small Firms

“…According to our results, the role of the owner-manager is crucial for business activity and growth. This evidence is well in line with a recent paper by Smith et al [2019] highlighting the importance of active owners in firm performance in the US. However, our results show that firms with active owner-managers also respond more actively to monetary incentives compared to firms with more passive owners.…”

The Optimal Taxation of Business Owners

“…The importance of business income is reinforced by the observation of Guvenen and Kaplan (2017) that the increase in inequality in the past decade observed in IRS data has not coincided with a similar rise in labor incomes recorded by the Social Security Administration. Smith et al (2019) also note that top income earners are disproportionately business owners, with households in the top 1 percent of the income distribution 50 times more likely to receive partnership income than households in the bottom half of the income distribution. Further, these authors show business income depends on the owners' active participation rather than passive ownership by documenting that the unexpected death of an owner-manager gives rise to an average fall in profits 1 See, e.g., Heathcote et al (2010), and references therein.…”

“…2 What is perhaps less well known is that much of the recent increase in income inequality is due to the growing importance of business income. Smith et al (2019) and Cooper et al (2016) use administrative tax data to document that business income now accounts for a greater share of the top 0.1 percent of income than both non-business capital income and wage income, and that the majority of this growth is due to private, pass-through entities (those not taxed at the firm level), such as partnerships and S-corporations. The importance of business income is reinforced by the observation of Guvenen and Kaplan (2017) that the increase in inequality in the past decade observed in IRS data has not coincided with a similar rise in labor incomes recorded by the Social Security Administration.…”

Is corporate governance a first-order cause of the current malaise?

“…In 2012, the cut-off for the top 1 per cent was $372,000, for the top 0.01 per cent, $7.2 million (Guvenen & Kaplan 2017). This group is receiving income not through 'executive compensation', but through flow-through vehicles that reflect returns to privately owned businesses (Smith et al 2017), and the profits of private equity and venture capital firms (Preqin 2018), which flow through to the partners and limited partners of those ventures.…”