Staff Report 560

Sweat Equity in U.S. Private Business

Anmol Bhandari | Visiting Scholar
Ellen R. McGrattan | Consultant

Revised April 22, 2019

Abstract
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 and business census data and estimate a ratio of intangible to total assets in private business that is close to 60 percent, in line with evidence from broker data on business sales. We use our theory to evaluate the impact of lower private business and corporate tax rates and find much larger effects on private business than studies that ignore the fact that owners accumulate sweat capital. We also find large differences between our model’s distributional predictions and those of earlier studies.

DOI: https://doi.org/10.21034/sr.560


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