This paper has been accepted in American Economic Review: Insights.
We study the coevolution of the fall in the U.S. corporate-sector labor share and the rise of business activity in tax-preferred pass-throughs. We find that 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, magnifying the role of 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.
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