Working Paper: NBER ID: w29400
Authors: Matthew Smith; Danny Yagan; Owen M. Zidar; Eric Zwick
Abstract: This paper studies the coevolution of the fall in the US corporate sector labor share and the rise of business activity in tax-preferred, pass-through form. Reallocating activity to the form it would have taken prior to the Tax Reform Act of 1986 accounts for one third of the decline in the corporate sector labor share between 1978 and 2017. Our adjustments are concentrated among mid-market firms in services, leaving a larger role for the manufacturing sector and superstar firms in driving the remaining decline in the labor share. Our findings highlight the importance of tax policy when measuring factor shares.
Keywords: Passthroughs; Labor Share; Tax Policy
JEL Codes: E01; E25; H25; J32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| C-corporation status (G30) | Owner-managers paying themselves via labor income (J31) |
| Recharacterized labor payments (J33) | Increase in corporate sector labor share (E25) |
| Rise of partnership activity (D26) | Decline in corporate sector labor share (E25) |
| Treating partnerships as C-corporations (L14) | Increase in corporate sector labor share (E25) |
| 50 percentage point decline in labor share (E25) | Overstated by 32 percentage points (Y10) |
| Reallocating business activity to passthrough forms (H32) | Decline in corporate sector labor share (E25) |
| Firms switching from C-corporations to S-corporations (L20) | Decline in reported labor payments (J39) |
| Firms switching from C-corporations to S-corporations (L20) | Increase in reported profits (D33) |