Capitalists in the Twenty-First Century*

TLDR

Top income is largely sourced from private pass‑through business profit, which may include entrepreneurial labor income for tax purposes. The study examines whether pass‑through profit for top earners mainly reflects human capital rather than financial capital. The authors link tax data on 11 million firms to owners, showing that top pass‑through profit accrues to working‑age owners of closely held mid‑market firms in skill‑intensive industries. Pass‑through profit falls three‑quarters after owner retirement or premature death, most top earners derive the majority of their income from human capital, and profit growth is driven by rising productivity and a larger share of value added accruing to owners.

Abstract

Abstract 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 article 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.