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Sweat Equity in U.S. Private Business

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  • Title:
    Sweat Equity in U.S. Private Business
  • Author: Bhandari, Anmol ; McGrattan, Ellen R ; Federal Reserve Bank of Minneapolis. Research Department
  • Subjects: Capacity ; Capital ; E13 - General Aggregative Models: Neoclassical ; E22 - Investment ; H25 - Business Taxes and Subsidies including sales and value-added (VAT) ; Intangible Capital
  • Description: We develop a theory of _sweat equity_—which is the value of business owners’ time and expenses to build customer bases, client lists, and other intangible assets. We discipline the theory using data from U.S. national accounts, business censuses, and brokered sales to estimate a value for sweat equity for the private business sector equal to 1.2 times U.S. GDP, which is roughly the value of fixed assets in use in these businesses. Although latent, the equity values are positively correlated with business incomes, ages, and standard measures of markups based on accounting data, but not with financial assets of owners or standard measures of business total factor productivity (TFP). We use our theory to show that abstracting from sweat activity leads to a significant understatement of the impacts of lowering tax rates on business incomes—on both the extensive and intensive margins. We also document large differences in the effective tax rates and the effects of tax changes for owner and employee labor inputs. Lower tax rates on owners results in increased self-employment and smaller firm sizes, whereas lower rates on employees has the opposite effects. Allowing for financial constraints and superstar firms does not overturn our main findings. Part of: Staff Reports -- Federal Reserve Bank of Minneapolis
  • Publisher: Federal Reserve Bank of Minneapolis
  • Creation Date: 2019
  • Language: English
  • Source: Open Shared Collection
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