Abstract

This paper studies the relationship between the growth in private capital markets and the rise in economic inequalities in the U.S over the last two decades. First, we document that the share of financing raised by early-stage companies from U.S. highnet-worth individuals (HNWIs) tripled from 2004 to 2022. Second, exploiting both company-and state-level variation in exposure to the expanded federal capital gains tax exclusion on qualified small business stock (QSBS), we find that QSBS-eligible companies’ probability of staying private increased by 3.5 percentage points, and that the average income gap between HNWIs and other income earners increased by 7.2%. Third, we show that this rise in income concentration appears to have been driven by HNWIs’ excess returns on their early-stage investments relative to public stock market returns. Finally, using counterfactual simulations, we find that HNWIs’ excess returns on these investments accounted for 2% and 14% of the growth in the top 0.5% share of post-tax income and wealth, respectively, from 2010 to 2022.

Authors

Ararat Gocmen, University College London and Centre for Research and Analysis of Migration
Clara Martínez-Toledano, Imperial College London and CEPR
Vrinda Mittal, UNC Chapel Hill, Kenan-Flagler Business School