Prof G Markets · 4 min · Oct 23, 2026

Business income can face lower taxes than wages

EZEric Zwick · Joel F. Gemunder Professor of Economics and Finance, University of Chicago Booth School of Business

Eric Zwick explains how owners can take profits instead of wages and avoid some payroll-related taxes, then layer on capital-gains and estate-tax advantages.

The episode’s best minutes

9:01 Some pass-through tax breaks do little to boost investment5 min
36:23Business income can face lower taxes than wages4 min
3 more moments in the full episode

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“But most of the income that you receive from that business is going to come out not in the form of wages, but in the form of profits.”

EZEric Zwickat 37:28 · Prof G Markets

Takeaways

Owners may take profits rather than wages from their businesses.
Profit income can avoid payroll taxes and other levies.
Capital gains and estate rules can further reduce taxes on accumulated wealth.

About this segment

Eric Zwick explains how owners can take profits instead of wages and avoid some payroll-related taxes, then layer on capital-gains and estate-tax advantages. The income label can change the tax bill even when labor is central.

EZ

Joel F. Gemunder Professor of Economics and Finance, University of Chicago Booth School of Business

Researches how taxation and private businesses shape wealth inequality; co-authored The Everywhere Millionaire.

Ed Elson, Host

From “Meet The Millionaire Class That Really Runs America”, Oct 23, 2026. Watch the full episode

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

36:35
And we're not properly taxing those through capital gains. One, because capital gains tax is significantly lower than income tax, but also because there are a lot of loopholes that allow for assets to go untaxed. And that really often focuses on the billionaires. Now, a lot of people would say that millionaires are paying taxes more so than billionaires, because I think a lot of people would assume that millionaires are making their money off of income, maybe they're dentists, maybe they're lawyers, they're white collar are professionals. And, you know, why are we going to increase taxes on them? It sounds like you have a different view that actually they are not necessarily the the owners, but a lot of them are the owners. And maybe they're also getting some of the benefits that the billionaires are
37:23
getting. Could you just expand on that, on the difference between the owners and the owners and the extent to which the top one percent actually identify with each of those groups? Yeah. So if you're one of these private business owners that we've talked about, you might still be working really hard. But most of the income that you receive from that business is going to come out not in the form of wages, but in the form of profits. And that is because the tax code prefers that income. You don't pay payroll tax on that. You don't pay ACA surcharge. You don't pay an IIT on that income.
37:57
There are all these taxes that apply to other categories of income that you can avoid through these loopholes in the tax code. And so over time, we've seen people that have the flexibility reduce the amount of salary they take out of the firm subject to the limits, the rules, but they get a high-paid accountant and lawyer to help them navigate that so it can be defensible. and then they pay lower effective tax rates than a salaried person who is doing the exact same thing in a slightly different corporate form or corporate structure working for a big company and that seems just fundamentally unfair so that's really not a question of owning versus earning that's a question of making it look like in the tax code you own something where the primary factor is still your labor your human capital you're contributing on top of that
38:44
that. If you then sort of reinvest the profits and the proceeds and build up a business and sell it like Portillo or something like that, you get sort of this accumulated tax preferred setup, which the tax code encourages folks to do so to grow these businesses. And maybe that's good for economic growth. When they sell it, they pay much lower rates because of capital gains taxes. Or if they pass it on to the next generation through strategic trusts, through valuation games, you can completely avoid estate tax. You get step up of basis. So when it passes to the next generation, there's no capital gains owed ever. And so you can pay much even much lower effective rate than that salary earner.
39:25
And so there are these additional benefits that layer on top. There are a bunch that are very prevalent in Silicon Valley that are not really the purview of this book that are quite relevant for thinking about just fairness of tax rates across different types of forms like qualified small business stock or carried interest compensation for venture capitalists, private equity fund managers. this is labor income again, deferred labor income, but it's being taxed and treated like it's passive capital income and getting a much lower rate. That just basically undermines a sense of fairness that people have in the system. There are all these buckets of income. Everybody thinks everybody else is getting a better deal. And so nobody wants to pay more tax because they think they're the one getting left with the bag. And that's a real problem with faith in the system. And we have to
40:11
really kind of harmonize these rates, then we can choose what level of rate makes sense to pay for the things we've chosen to buy. So what is the solution from a policy perspective? How do we