The working rich are driving income inequality, not the rentiers

by on November 13, 2017 at 1:22 pm in Data Source, Economics | Permalink

Anti-Piketty:

Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using administrative data linking 10 million firms to their owners, this paper shows that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income—most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century.

That is from a new paper by Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, via the excellent Kevin Lewis.

1 Iskander November 13, 2017 at 1:33 pm

I wonder what the opportunity cost of all the talk about inequality has been over the past few years?

Forget about wealth taxes, perhaps Piketty and the pundits should be made to face higher marginal tax rates to equate social and private marginal costs for their work.

That’s part of what they wanted all along, right?

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2 Al November 13, 2017 at 2:56 pm

+1

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3 GoneWithTheWind November 13, 2017 at 6:01 pm

Income inequality is a good thing. It is what drives people. Virtually everything good and useful in this world was created by people who worked harder than others to accomplish things. With very few exceptions this “drive” was the result of their desire for more income and most certainly not for any desire for higher taxes for some ill begotten Marxist effort to provide income equality.

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4 Arthur November 13, 2017 at 10:10 pm

No, not really.

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5 TMC November 14, 2017 at 12:58 am

Besides everywhere and always, you are correct.

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6 GoneWithTheWind November 14, 2017 at 9:59 am

That is because you believe the productive should be punished and the indolent should be rewarded. Or as Karl Marx said: From each according to his ability, to each according to his needs.

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7 JonFraz November 14, 2017 at 1:54 pm

Why do you think taxes are “punishment”? They’re just a necessary part of civilized life, no different really from the passing of time which, yes, makes us all older and ultimately six feet under– but without which nothing would exist at all.

Part of growing up is learning to accept life in both its good and its bad aspects, which are often inextricably linked. You want high tech, high income opportunities– you’re going to need a complex society and complex government structures.

8 GoneWithTheWind November 15, 2017 at 10:19 am

“Why do you think taxes are “punishment”? They’re just a necessary part of civilized life, ”

Of course taxes are punishment/punitive. You tax what you want to discourage and subsidize what you want to encourage. Our politicians in their wisdom tax the productive and subsidize the unproductive. This is crazy.

To your second point taxes are necessary and they should be fair. Everyone should pay taxes on their income but we don’t do that. The only reason we do not is because politicians have learned that they can get elected to office if they give enough people “free stuff”. Another stupid counterproductive decision.

Imagine the boom in business if we ended federal taxes on business. With that boom we could have full employment and rid the welfare roles of the indolent. A win/win for the country. The only loser would be those politicians who push socialism to get votes, they would have to try to get elected based on their actual accomplishments then.

9 M November 14, 2017 at 2:11 pm

Leaving aside the questionable idea that most things of value were created by individuals particularly desirous to have a high income, I guarantee you places with more income inequality do not have higher fractions of people who have “worked harder than others to accomplish things” or some kind of general work ethic superiority across the population. Especially so when adjusted for the Inequality Possibility Frontier (richer societies can maintain higher inequality without people dying because they’re beneath some basic level of subsistence).

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10 Ray Lopez November 14, 2017 at 8:48 pm

@M – who says: “I guarantee you places with more income inequality do not have higher fractions of people who have “worked harder than others to accomplish things” or some kind of general work ethic superiority across the population” – where is your proof? No guarantees on this message board unless TC or I say so. And AlexT on occasion.

My takeaway from this paper is that trade secrets are bad for society. Look at this Abstract sentence fragment and connect the dots: “Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income—most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner death.” – so there you have it: in non-capital intensive industries, when the founder dies, he or she take their trade secrets with them, and the next generation cannot replicate success. By contrast, in a more advanced civilization with stronger IP rights (e.g., better patents) a robot or even a simpleton out of high school could step into the shoes of the founder, adopt the proprietary methods of the founder (as patented in method patents) and continue successfully, to the betterment of society which now doesn’t have to reinvent the wheel again.

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11 Daws November 13, 2017 at 2:11 pm

which r the skill-intensive, non-concentrated industries? maybe it’s not too late, for me!

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12 Doug November 13, 2017 at 4:44 pm

Taking a guess here:

– Private practices in lucrative medical specialties. Think cataract surgeons, radiation oncologists, and cosmetic dentists.

– Technology consultants. Basically freelance software engineers who specialize in a lucrative niche. Think about how much a major bank will pay a COBOL programmer to un-screw their backend end systems after some system failure. Alternatively you could be talking about a new technology that’s recently exploded, so demand far exceeds supply. Example would be Docker.

– Well-respected regional law firm that’s basically an elder statesman in the local community. Think of a guy who has all the judges and zoning boards in the area in his rolodex.

– Construction contractor who has a local monopoly on some service, which is expensive in absolute terms, but cheap relative to the cost a large project. E.g. this electrician charges twice the competition, but he’s 100% reliable. Saving $50,000 isn’t worth it to risk delaying a $5 million project.

– A lot of stupid things in the periphery of the financial system. Banks, insurance companies and institutional funds are often tightly constrained by regulation and investor covenants. A lot of things tend to fall through the gap. E.g. there’s a small firm that does bridge loans to coal mines that are in the process of selling off their capital equipment. Nobody with public shareholders wants to defend investing in coal in 2017, but the loans are fully collateralized and the returns are huge for basically 60 days of no risk.

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13 NatashaRostova November 13, 2017 at 6:20 pm

I’m overpaid as a data scientist, even though I’m not particularly remarkable, because of the massive boom in demand outpacing lagged pipelines.

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14 a clockwork apriori November 13, 2017 at 10:45 pm

12+13=25, 21+13=34, 2×5=(10), 3×4=(12)

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15 a clockwork apriori November 13, 2017 at 10:47 pm

36-25=11

16 Daws November 14, 2017 at 6:38 am

Thanks for explaining, dude. Sometimes i love people and the internet

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17 Tim November 14, 2017 at 10:14 am

You could do more than guess, though the guesses are pretty solid. From the paper:
Among the top 1-0.1%, the five largest industries are offices of physicians ($9.0B), other professional and technical services ($4.9B), offices of dentists ($4.4B, not shown), other specialty trade contractors ($4.3B), and legal services ($3.5B).

Typical firms owned by the top 1-0.1% are single-establishment firms in professional services (e.g., consultants, lawyers, specialty tradespeople) or health services (e.g., physicians, dentists). A typical firm owned by the top 0.1% might be a regional business with $30M in sales and 150 employees, such as an
auto dealer, beverage distributor, or a large law firm.

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18 celestus November 13, 2017 at 5:08 pm

I can remember owner-managers taking half a million dollar to a million dollar plus salaries in trucking, powder coating, shipbuilding, rail construction, building displays for trade shows, and socks. I’m sure there are more I can’t remember, and many more I’ve never seen as I don’t look at middle market businesses in eg healthcare/technology.

It’s not clear to me if partners at large law or accounting firms are included in their characterization. I don’t think they are, and that’s a fairly adjacent phenomenon.

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19 derek November 13, 2017 at 7:27 pm

That depends on what you call ‘top earners’.

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20 derek November 13, 2017 at 7:30 pm

$386k to $1.5m.

947k in count for the first, 150k for the second. That isn’t very many people.

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21 Daws November 14, 2017 at 6:36 am

Yes that is a strikingly small group

22 Harun November 13, 2017 at 10:26 pm

Yep. Company has revenue of, say 5 – 10 million, and the boss squeezes 5-10% profit = 250,000 – 1 million in profit. Seems totally doable.

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23 Axa November 13, 2017 at 2:14 pm

Interesting, where should attention be focused instead? On business that should compete but are owned by the same people/funds? If more companies are owned by ETFs, can competition still exist?

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24 JWatts November 13, 2017 at 2:29 pm

“The working rich are driving income inequality, not the rentiers”

This seems rather obvious and indisputable from an American point of view. Indeed, the only “rentiers” that are commonly the refrain of commentary are trust fund babies. I’ve never seen any indication that trust fund babies is a particularly large or influential group.

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25 msgkings November 13, 2017 at 2:35 pm

That group will be a lot larger and more influential if the estate tax is scrapped.

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26 JWatts November 13, 2017 at 3:27 pm

Not exactly. The whole point of setting up trust funds is to get around the current inheritance taxes. So, every trust fund baby in existence is the result of (through clever tax avoidance) avoiding paying the current level of inheritance taxes.

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27 msgkings November 13, 2017 at 3:52 pm

OK once you don’t need to set up trust funds to mitigate inheritance taxes you will have rentiers called inheritance babies with a lot more capital and influence. Getting rid of the estate tax will create far more rentiers, and far more wealth for them, than keeping it.

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28 byomtov November 13, 2017 at 7:09 pm

The whole point of setting up trust funds is to get around the current inheritance taxes. So, every trust fund baby in existence is the result of (through clever tax avoidance) avoiding paying the current level of inheritance taxes.

Not true.

You can’t just set up a trust fund and avoid estate taxes. That’s ridiculous. If it were true, why would so many wealthy people be fighting hard to get rid of the estate tax? Why would anyone care?

No nonsense about the non-existent businesses and family farms that are destroyed, please.

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29 anonymous November 13, 2017 at 9:35 pm

I agree with byomtov. I am well below the estate tax threshold, perhaps 2 or 3 million, but I actually do not want to bequeath all of my money to my two children, who are college aged. I don’t trust my children’s future (still unspecified) spouses, and hence am not interested in giving my kids my money without strings or restrictions. Thus, I my will establishes trust funds that allow income but not wealth to flow to my kids until much later in their lives.

As an aside, I would be interested to know the demographics of this blog. My sense is that the readers are both much more educated and much wealthier than most blogs. What do others here guess is the average income/wealth of readers at 30, 40 and 50 years old? My guess:
30 years old: $100k family income/$100k net worth
40 years old: $130k family income/$400k net worth
50 years old: $180k family income/$800k net worth
60 years old: $200k family income/2 million net worth (but not a lot of older readers–libertarianism is for younger males)

30 anonymous November 13, 2017 at 9:37 pm

I agree with byomtov. I am well below the estate tax threshold, perhaps 2 or 3 million, but I actually do not want to bequeath all of my money to my two children, who are college aged. I don’t trust my children’s future (still unspecified) spouses, and hence am not interested in giving my kids my money without strings or restrictions. Thus, I my will establishes trust funds that allow income but not wealth to flow to my kids until much later in their lives.

As an aside, I would be interested to know the demographics of this blog. My sense is that the readers are both much more educated and much wealthier than most blogs. What do others here guess is the average income/wealth of readers at 30, 40 and 50 years old? My guess:
30 years old: $100k family income/$100k net worth
40 years old: $130k family income/$400k net worth
50 years old: $180k family income/$800k net worth
60 years old: $200k family income/2 million net worth (but not a lot of older readers–libertarianism is for younger males)

Different guesses?

31 Harun November 13, 2017 at 10:27 pm

If its no big deal, explain trust funds.

32 byomtov November 13, 2017 at 10:36 pm

Trust funds serve a few purposes, based on my limited experience.

1. Putting your assets in a trust fund avoids probate, which is expensive and also is public knowledge.

2. Having one’s heirs’ assets in a trust fund protects the assets from a lot of things like court judgments, being lost in divorce proceedings, etc.

3. Trust documents can control how money is spent, guarding against the various ways it can be pissed away.

So let me turn it around. If avoiding estate taxes is as easy as all that, why is it an issue, and how do they raise $20 billion or so? And before you answer, let me repeat what I said above. It is not because small businesses and farms are destroyed.

33 clockwork_prior November 14, 2017 at 12:51 am

My guess is that you are not really all that familiar with GS (and state equivalent) payscales.

https://en.wikipedia.org/wiki/General_Schedule_%28US_civil_service_pay_scale%29

34 Jeff R November 13, 2017 at 3:29 pm

It can’t get larger; it can only inherit more money.

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35 TMC November 13, 2017 at 3:41 pm

They tend to piss it all away in a generation or so. The nearby service industries will do well.

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36 athEIst November 14, 2017 at 1:40 am

Actually the group will be no larger but far more influential.

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37 Devin November 13, 2017 at 5:50 pm

The contrast they are making is with a growing corner of the literature that points to monopolistic and superstar firms as dominating the economy. This firms have some advantage in terms of technology, marketing/brand value or quasi-monopolistic consolidation that prevents others from effectively competing with them and thus allowing these huge firms to extract rents.
For example: Autor, David, David Dorn, Lawrence F Katz, Christina Patterson, and John Van Reenen. 2017. “The Fall of the Labor Share and the Rise of Superstar Firms.” Working Paper, Massachusetts Institute of Technology.

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38 Bob November 13, 2017 at 3:09 pm

Income is not the same thing as wealth. Income inequality is not the same thing as wealth inequality.

What would the state of physics be today if physicists couldn’t distinguish between position and velocity, between a variable and the rate of change of that variable?

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39 Candle of Illumination November 13, 2017 at 3:22 pm

You need to befriend a libertarian and stop being so partisan.

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40 Viking November 13, 2017 at 4:19 pm

x*v>=h/(4*pi*m)!

You can say the same about the lack of ability to distinguish between debt and deficit. Also, those talking about momentum stocks should rather say speed stocks, as there is typically not a specification about what is the analogy of mass on the stock exchange.

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41 Viking November 13, 2017 at 4:20 pm

“What would the state of physics be today if physicists couldn’t distinguish between position and velocity, between a variable and the rate of change of that variable?”

Physics would be more like economics.

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42 A Truth Seeker November 13, 2017 at 3:38 pm

Such is life in America: http://www.smbc-comics.com/comic/work Yet, Americans blame Brazil first.

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43 msgkings November 13, 2017 at 3:53 pm

Silly boy, Americans hardly ever think about Brazil.

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44 A Truth Seeker November 13, 2017 at 5:31 pm

Then, why the posts slandering Brazil? The lady doth protest too loud.

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45 msgkings November 13, 2017 at 5:45 pm

Tyler =/= Americans
Tyler’s posts about Brazil =/= slander

The only one protesting to infinity is you, milady.

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46 A Truth Seeker November 13, 2017 at 6:17 pm

Yes, Mr. Tyler is American and his echoing the slander of anti-Brazilian American souless minions of the malefctors of great wealth that control the American regime.

Why is Brazil singled out for abuse? Why are the Chinese murderers of American young men praised and pampered by the powers that beninnAmerica?

47 a clockwork apriori November 13, 2017 at 11:19 pm

William Miller (February 15, 1782 – December 20, 1849), an American Baptist preacher, is credited with beginning the mid-19th century North American religious movement known as the Millerites. After his prophecies of the Second Coming did not occur as expected in the 1840s, new heirs of his message emerged, including the Advent Christians (1860) and the Seventh-day Adventists (1863). Later movements found inspiration in Miller’s emphasis on Bible prophecy; the Bahá’í Faith holds that his predictions of 1844 events were accurate.

48 Bill November 13, 2017 at 3:46 pm

Will there be an update

With the

Paradise Papers?

Or, were they included within the data sources?

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49 Guy Makiavelli November 13, 2017 at 3:49 pm

Indeed it’s the “working rich” of the managerial class who are exploiting knowledge workers around the globe while plotting to commoditize their skill sets and throw them overboard as the earliest opportunity.

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50 Harun November 13, 2017 at 10:29 pm

Oh rubbish. Working rich = best salesmen in the company.

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51 rayward November 13, 2017 at 3:54 pm

I wasn’t going to comment on this blog post (what’s the point), but Bob’s comment inspired me to comment, so here goes. Excessive income inequality is a problem but the far greater problem is excessive wealth inequality. What fuels wealth inequality is rising asset prices. Of course, those with high incomes can purchase assets, and in time convert high income to high wealth (and the income assets produce). As everyone knows, wealth inequality plummeted following the 1929 financial crisis (because asset prices plummeted) but income inequality actually remained quite high into the great depression. So what’s the problem with excessive wealth inequality? Look at a graph of wealth inequality during the past 100 years. Duh.

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52 TMC November 14, 2017 at 1:11 am

“Excessive income inequality is a problem but the far greater problem is excessive wealth inequality. ”

There is proof of this for neither of these. Not even an inclination.

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53 Donald Pretari November 13, 2017 at 4:56 pm

Does it do much good to portray the less well-off as lazy and the wealthy as rapacious? Isn’t there a sell-by date to this narrative?

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54 Barkley Rosser November 13, 2017 at 5:27 pm

Piketty himself spends some time talking about the role of top managerial salary increases in increasing inequality. Indeed, over the last three decades we have seen a tenfold increase in the ratio of CEO salaries to those of workers at the bottom of the heap, with no such increase in that proportion at all in other nations. Most observers think that a lot of this increase in salaries is unwarranted, but Piketty in fact wrote of it.. Not “anti-Piketty” at all.

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55 Jay November 13, 2017 at 5:56 pm

“Indeed, over the last three decades we have seen a tenfold increase in the ratio of CEO salaries to those of workers at the bottom of the heap”, Source?

Because if your source is data similar to this (see link below) you have made an egregious misrepresentation in your statement. Because your population of “CEO salaries” isn’t all CEOs, but instead the ones on the right tail of the distribution. I think most would consider a majority of these people (see second link below) to be in the rentier class.

http://c.o0bg.com/rf/image_1920w/Boston/2011-2020/2014/10/26/BostonGlobe.com/Business/Images/ceopay2graf.jpg
http://www.equilar.com/reports/18-200-highest-paid-CEO-rankings-2015.html

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56 Barkley Rosser November 14, 2017 at 2:52 am

Jay,
Your first link fully supports what I said, and your second one is a small part of that. Yes, a broad set of CEOs has the ratio lower, but the issue is time trend, and your links fully support that the ratio has risen sharply if you hold the set you are looking at constant over time. Do you disagree with that?

And, Piketty got it, which was my point. Or, I suppose, you have not read Piketty, so do not know what you are talking about?

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57 Jay November 14, 2017 at 11:47 am

“Your first link fully supports what I said”

No it doesn’t. Otherwise you just laid cover for a white nationalist to claim “Blacks are criminals” and when someone counters that the majority of blacks (in America) do not have criminal backgrounds the white nationalist will simply reply “I was referring to the right/left tail of the black population”. If you want to use the 20X factor then write “the ratio of Fortune 500 CEO salaries to those of workers at the bottom of the heap”.

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58 Barkley Rosser November 14, 2017 at 1:07 pm

Jay,

I do not know who you are, but this last comment is just rank nonsense, looney-bin fake news drivel. Were you in Charlottesville carrying a tiki torch on August 12?

The hard fact is that however you measure it, salaries at the top of the managerial heap have risen substantially in the US compared both to other groups in the population as well as relative to such people in other high income nations over the last three decades or so. it is also true, as I noted, that Piketty noted this phenonmenon in his book, so that the claim that all this stuff is “anti-Piketty” is simply incorrect.

59 Jay November 14, 2017 at 3:38 pm

It is real simple. If you want to cite a statistic, use the proper adjectives to describe your population. If you have – purposefully – excluded the bottom 99% of a certain population to create hyperbole do the honest thing and at least use the proper adjectives so everyone knows the statistical slight you are trying to pull.

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60 Jay November 14, 2017 at 3:46 pm

To give a concrete example:
Right-wingers often claim that X% of the US population doesn’t pay taxes. Left-wingers point out this lie; X% of the population may not pay FEDERAL PERSONAL INCOME taxes but they certainly pay other taxes.
Left-wingers often claim that X number of US Corporations don’t pay taxes. Right-wingers point out this lie; X number of US Corporations may not pay FEDERAL CORPORATE INCOME taxes but they certainly pay other taxes.

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61 Devin November 13, 2017 at 6:00 pm

Notable in light of current tax policy debates:
“Most of this top business income growth comes from private “pass-through” businesses, which are not taxed at the entity level; instead, income passes through to the owners who pay taxes on their share of the firm’s income.”

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62 Harun November 13, 2017 at 10:31 pm

Please note that also means you pay taxes on the money you put back in the company if your expanding.

Its not all as awesome as people make it sound. On your 1040 you may look super rich but you’re not and you don’t get to spend much of it if you’re expanding.

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63 Scoop November 13, 2017 at 6:24 pm

You can be both a rentier even if you’re a hard worker. Look at all the big tech company founders.

Bill Gates did 1/100,000 of all the valuable work at Microsoft but he collected a huge percentage of the value. Ditto basically every other tech billionaire. All of those guys are clearly tremendously hard workers, but no one has made more than 10b from work. Once their companies got market power, they began collecting huge rents and so they are rentiers.

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64 Bill November 13, 2017 at 6:24 pm

Just imagine how much harder

These millionaires and billionaires will work

If we just lowered their taxes.

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65 Anon November 13, 2017 at 6:48 pm

I just noticed for the first time that you are 1/3rd the way to becoming a Bill….ionaire. Only 8 more alphabets away.
I enjoy your posts. Haiku or otherwise.

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66 derek November 13, 2017 at 9:54 pm

Considering that the paper says there are about 1.1 million of them making from $386K to $1.5m and they generate a sizeable amount of economic activity through their abilities and smarts, I fail to see any downside of structuring the tax code to encourage more of them to exist.

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67 TMC November 14, 2017 at 1:19 am

Who cares? Why is that justification for taking people’s earned income? I bet they’d work harder if you’d shackle and whip them.

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68 Anonymous November 13, 2017 at 7:07 pm

America is rich, and small businesses capture a good part of the wealth. This is not surprising to anyone who has worked in or with those businesses.

Insert Whitefish Energy Holdings joke here.

(that may have been crooked, or it may have been a fast salesman with a smooth line. it happens.)

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69 Viking November 13, 2017 at 9:55 pm

When you are a known scammer and deadbeat, like Puerto Rico, and you can be expected to not pay your bills, then only scammers will deal with you.

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70 AskingTheObvious November 13, 2017 at 8:08 pm

Does anyone ask why people think they have a right to “adjust” income or wealth inequality if they feel like it?

If people stole their wealth then take it back.

Otherwise stop the totalitarian social engineering thievery masquerading as morality.

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71 Chris November 13, 2017 at 8:21 pm

So if this all just labor income, I guess we shouldn’t be lowering s-corp tax rates.

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72 Harun November 13, 2017 at 10:32 pm

No, in fact, its the owner’s capital, too. Both are often intertwined. The owner has the skill to use their own capital to better effect.

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73 Sebastian H November 13, 2017 at 9:15 pm

That’s a weird formulation “passive rentiers”. What about active rentiers like Goldman Sachs employees?

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74 PhilippeO November 13, 2017 at 9:22 pm

What totally misleading title. ‘Normal People’ generally use ‘working rich’ to assume high-ranking salaried employee (Executive, Top Programmers, Doctors, Lawyers) not about active Company Owner. And ‘Rentier Class’ would include any income from Capital, whether actively managed or not.

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75 Corp November 13, 2017 at 9:36 pm

+1 this post is ridiculous. I don’t care if the owners of assets are also “working” if they benefit from massive QE around the world while wages stagnate. Oh, good, they’re working, I guess maybe we can overlook their corruption. Well gee whiz. These posts will not age well in a few years.

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76 Harun November 13, 2017 at 10:33 pm

LOL. Most small and medium firms have no access to QE, dude.

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77 TMC November 14, 2017 at 1:23 am

BS. A lot of active Company Owners aren’t even considered rich. Most aren’t until they sell the business, and are ‘rich’ but for one year.

The difference here is whether someone is putting in the hours for the income. The active Company Owners are sure as hell putting the hours in, way more than you are.

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78 mpowell November 14, 2017 at 1:13 pm


Profit falls substantially after premature owner deaths.

This is a really critical part of the argument to differentiate between working rich and ‘rentiers’. Now maybe, it is a set of business connections that the owner has and we want to call that being a ‘rentier’, but it is really a big deal if you can prove that the profitability of the firm is closely tied to the person running it. That is a pretty damn strong argument that their income is not simply a function of the assets they already own.

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