Tax changes since the 1980s made pass-through entities (S-Corps) incredibly lucrative. This structure, often labeled "small business," now accounts for over half the income growth for the top 1%, shifting the focus from publicly-traded company wealth.
The common perception of wealth focuses on tech founders and public company CEOs. However, a much larger, less visible "fat layer" of millionaires exists, owning successful regional businesses like auto dealerships, beverage distributors, and construction companies.
The Treasury commissioned research because its own tax databases were siloed, making it impossible to link business entities to their owners. This fundamental data gap hindered their ability to model the effects of tax policy on the wealthy and required outside expertise.
Industries like auto dealerships and beer distribution benefit from state franchise laws that create local monopolies and limit competition. These regulatory barriers to entry, originally meant to protect small players, now enable owners to capture immense, protected profits.
An anesthesiologist in private practice as an S-Corp can pay a lower effective tax rate than a salaried hospital counterpart with the same income. The pass-through structure allows them to avoid payroll and Medicare taxes on business profits classified as distributions, not wages.
From 2001 to 2021, the value added per worker in pass-through businesses grew by $18,000. Of that growth, owners captured $15,000, while workers received only $3,000. This demonstrates that rising inequality is driven heavily by profit capture, not just overall economic growth.
A majority of private equity deals involve acquiring successful, founder-owned businesses in unglamorous sectors. These founders often lack a succession plan, making their profitable, cash-flowing companies—like plumbing or cabinet manufacturing—ideal targets for PE firms seeking stable returns.
Instead of founding a new venture, entrepreneurs use "search funds" to raise capital specifically to find and acquire a single, profitable, existing business. This model, popular with MBA grads, allows them to do a "mini-LBO" on companies too small for traditional PE.
Data shows an individual's likelihood of starting a business in the top 10% of revenue or employment is three times higher if they grew up in Salt Lake City versus Mississippi. This points to the powerful influence of environment, networks, and cultural norms on entrepreneurship.