The Rise of Pass-Throughs and the Decline of the Labor Share

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.