# Some pass-through tax breaks do little to boost investment

Markdown copy of https://realalpha.app/s/some-pass-through-tax-breaks-do-little-to-boost-investment/ on Real Alpha, the best minutes from long interviews with the people building AI. Cite and link the page, not this copy.

- Speaker: [Owen Zidar](https://realalpha.app/people/owen-zidar/) · Professor of Economics and Public Affairs, Princeton University
- Host: [Ed Elson](https://realalpha.app/people/ed-elson/)
- Show: Prof G Markets
- Episode: [Meet The Millionaire Class That Really Runs America](https://realalpha.app/v/i7c5RGKznxI/), Oct 23, 2026
- Moment: 9:01 to 14:19 of the episode (5 min), playing on https://realalpha.app/s/some-pass-through-tax-breaks-do-little-to-boost-investment/; the episode from there: https://realalpha.app/v/i7c5RGKznxI/?t=541

## Quote

> “And that really has **very little impact** on employment and investment, and it was hugely expensive.”
> — [Owen Zidar](https://realalpha.app/people/owen-zidar/) at [13:46](https://realalpha.app/v/i7c5RGKznxI/?t=826) · Prof G Markets

## Takeaways

1. Pass-through income is taxed on owners’ individual returns.
2. Tax changes helped drive the growth of pass-through businesses.
3. Some deductions lower owners’ taxes without much effect on jobs or investment.

## About this segment

Zwick explains how tax rules helped pass-through businesses grow; Owen Zidar contrasts investment incentives with a costly deduction that did little for jobs or investment. That distinction matters when judging tax cuts.

From “Meet The Millionaire Class That Really Runs America”, Oct 23, 2026. [Watch the full episode](https://realalpha.app/v/i7c5RGKznxI/)

## Transcript

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

[9:13](https://realalpha.app/v/i7c5RGKznxI/?t=553) You also point out that our tax code has been structured to really benefit these kinds of companies. You talk about pass-through businesses. What are pass-through businesses, and how does our tax code relate to the success of some of these people, Eric? Yeah, so pass-through businesses, unlike traditional corporations, so if you look at the stock market, these are public companies. They're traditional corporations or subchapter C corporations for the internal revenue code category that taxes them. They pay tax at the firm level, and then the owners pay tax on dividends that they receive.

[9:49](https://realalpha.app/v/i7c5RGKznxI/?t=589) If pass-throughs, in contrast, don't pay tax at the firm level, the income passes through them to the owners who then pay tax at the individual level, subject to the individual income tax. And in the 1980s, there was a massive tax reform, a bipartisan reform with Reagan and the White House and Democrats in Congress that brought the personal income tax rate down below the corporate rate if you include both the first layer and the second layer of dividend tax for the first time in the history of the income tax.

[10:18](https://realalpha.app/v/i7c5RGKznxI/?t=618) This triggered a rapid growth in the number of pass-through businesses, so a bunch of firms immediately decided they would switch. And then new businesses, as they entered, elected this form because they were getting a better tax deal by organizing that way. And fast forward 40 years, you've had individual income tax cuts under Bush. 2017 did another round of tax cuts that favored these businesses again.

[10:42](https://realalpha.app/v/i7c5RGKznxI/?t=642) 2025 codified and made permanent those tax cuts. you have more than half of the business income in the economy isn't passed businesses. You have almost half the workers working in pass-through businesses. These are private businesses that don't have listed tickers on the stock exchange. And most businesses in the economy actually are pass-throughs. So often when we talk to professional podcasters, they reveal that they are organized as pass-throughs for tax reasons. And in some cases, they don't know it because the accountant does whatever they tell them to. But it turns out they're all over the economy even where you're not even thinking to look as experts in tax policy is this a good policy is it a good thing that the tax code has been structured this way I'm sort of of two minds because on the one hand I'm like okay good this promotes entrepreneurship and on the other hand

[11:37](https://realalpha.app/v/i7c5RGKznxI/?t=697) I also do see the widening of inequality and sure it's not billionaires who are well it is billionaires. But it's not just billionaires who are accumulating vast amounts of wealth. It's also decamillionaires, centimillionaires. That is the subject of your book. And it seems like the tax policy has been designed to protect their wealth, preserve their wealth, yes, expand access, but make it easier to get to that point. And we have seen this widening of inequality.

[12:06](https://realalpha.app/v/i7c5RGKznxI/?t=726) So I guess, Owen, what do you make of the tax breaks that we have made for this group of people? I think one common thing that you see is that there are a lot of provisions that are sold to be on the benefit of small business, which is the venerated institution in America that many people really respect, to expanding to very large and extremely big private businesses that are still trying to enjoy the same benefits.

[12:34](https://realalpha.app/v/i7c5RGKznxI/?t=754) And so, for example, if you look at the estate tax, which is one way that the tax on capital has gone down very materially in recent decades, that was largely argued, you know, from the perspective of, oh, look at this small business. There's this guy named Charles Thigpen who testified before Congress who is the grandson of slaves and was a farmer, and he wouldn't even have been facing the estate tax.

[12:58](https://realalpha.app/v/i7c5RGKznxI/?t=778) And that was when it was about a million dollars for a couple, and now it's $30 million that's exempt. so it's way uh way way smaller in terms of its how much money it's actually bringing in and then on other provisions i think my general view is it's important to have a results-based fiscal policy where you actually look at what happens to real activity when you do a various tax change. So there are some tax policies that are very good at stimulating investment, and we've written papers on those, but there are others that are quite prevalent in this everywhere millionaire category that really don't do very much for employment and investment, but are very good at accelerating the accumulation of gains for these owners. So a concrete example is in 2025, there's about a trillion dollars of this large pass-through

[13:50](https://realalpha.app/v/i7c5RGKznxI/?t=830) deduction that basically said, if you're a qualified pass-through owner, instead of paying the 37% top rate, you get to pay less than 30%. And that really has very little impact on employment and investment, and it was hugely expensive. And I feel like that's the type of thing that really should be first on the chopping block when you think about tax reform.