The distribution of capital gains in the United States

Booming stock, housing, and private business markets have driven large capital gains in the United States, averaging 20% of national income over the past two decades. Using internal IRS tax return data, this paper studies the distribution of these gains, and their contribution to income inequality and tax progressivity. We find capital gains to be highly concentrated, with 75.7% flowing to the richest 10% and 45.3% to the top 1%. Capital gains substantially increase inequality, raising the top 1% share of income to 21.0%, compared to 18% in their absence. Due to low realization levels, effective tax rates on capital gains are only 5%. Accounting for capital gains reduces the progressivity of the tax system, with flat rates across the Haig-Simons distribution. We document evidence of substantial heterogeneity in returns and cap rates across income groups. Richer individuals have higher owner and tenant occupied housing returns, own businesses that sell for higher multiples, and lower property tax rates.