Staff Report 560
Sweat Equity in U.S. Private Business
Revised March 9, 2018
In this paper, we first provide evidence that existing measures of business incomes and valuations based on widely-used surveys such as the Survey of Consumer Finances are mismeasured. We then develop a theory disciplined by U.S. national accounts and business census data to measure net incomes and private business sweat equity—which is the value of time to build customer bases, client lists, and other intangible assets. We estimate an aggregate sweat equity value of 0.65 times GDP, with little cross-sectional dispersion in valuations when compared to business net incomes and large cross-sectional dispersion in rates of return. Our estimate of sweat equity is close to the estimate of marketable fixed assets used in production by private businesses, implying a high ratio of intangible to total assets. We use the model to evaluate the impact of greater tax compliance of private businesses and lower tax rates on the net income of both privately held and publicly traded businesses. We find larger sectoral and aggregate effects from the tax policy experiments relative to studies that abstract from private business and, in particular, the accumulation of sweat capital. Finally, we show that our results are robust to including non-pecuniary benefits of business ownership.
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