Abstract

This paper studies the interplay between the rise in private capital and the rise in income inequality over the last two decades in the US. Using novel data sources, we first document that the growing importance of high-net-worth individuals (HNWI) in private capital markets is largely driven by venture investments. We then exploit state-level variation in capital gains tax rates on qualified small business stock and find that the increasing participation of HNWI in private capital markets has led to higher income concentration. Finally, we show that the rise in income inequality is mainly driven by higher capital gains on private investments at the  top.