Rates of return on private and public businesses

Finance and Economics Discussion Series Federal Reserve Board, Washington, D.C. ISSN 1936-2854 (Print) ISSN 2767-3898 (Online) Rates of return on private and public businesses Jesse Bricker, Kevin B. Moore, Alice H. Volz 2025-107 Please cite this paper as: Bricker, Jesse, Kevin B. Moore, and Alice H. Volz (2025). “Rates of return on private and public businesses,” Finance and Economics Discussion Series 2025-107. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2025.107. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers.

Rates of return on private and public businesses* Jesse Bricker†, Kevin Moore‡, Alice Volz§ November 25, 2025 Abstract Privately owned business assets are an important source of wealth for families acrosstheworld,butmeasurementissuesarebelievedtohamperourunderstandingof thesefirms. WeuseincomeandvaluationsofprivatefirmsintheSurveyofConsumer Finances (SCF), first validating the data against external aggregates and then using these data to find rates of return for private firms. With the exception of the years leadinguptotheGlobalFinancialCrisis,overallratesofreturnonpublicfirmshave generallyoutpacedratesofreturnonprivatefirmsduringthepast30years. *WethankDaltonRuhandMayaSatchellforexcellentresearchassistance,ourFederalReserveBoard colleagues for feedback, and helpful comments and suggestions from Olympia Bover, Arthur Kennickell, JohnSabelhaus,MattSmith,AnnetteVissing-Jorgensen,DanielWaldenström,EricZwick,GabrielZucman, and conference participants at the Household Finance and Consumption Network meeting at the Bank of Greece, the Society for the Study of Economic Inequality, the National Tax Association, and the NBER SummerInstitute(CRIW).Theviewsexpressedhereinarethoseoftheauthorsanddonotnecessarilyreflect theviewsoftheFederalReserveBoardofGovernors. †FederalReserveBoard,jesse.bricker@frb.gov ‡FederalReserveBoard,kevin.b.moore@frb.gov §FederalReserveBoard,alice.h.volz@frb.gov

1 Introduction Privately owned business assets are among the largest assets for wealthy families in the United States (Smith et al. (2023); Bricker et al. (2021)) and across the world (Fagereng etal.(2020);Bachetal.(2020b)). IntheUnitedStates,theeconomicsizeoftheseprivate nontraded firms is about equal to the economic size of publicly traded corporate firms (see Moskowitz and Vissing-Jørgensen (2002) for valuations, or Campbell and Robbins (2025) for aggregate sales). Private firms should carry a rate of return premium because oftheirrelativeilliquidity,theirlackofdiversificationwithinthehouseholdportfolio,and the required skill and attention to operate. Early work, though, showed a puzzle: rather than carrying a premium, the rate of return on private firms lagged those of public firms (MoskowitzandVissing-Jørgensen(2002)). Morerecentevidenceonthissubjectismixed (Kartashova(2014)andBhandarietal.(2020b)). Thatsaid,alackofagreed-upondatahas hamperedourunderstandingofprivatefirmsintheUS(Bhandarietal.(2020b)). In this paper, we return to owner-reported values of income and wealth from privately heldbusinessesintheSurveyofConsumerFinances(SCF)tore-estimateandupdaterates ofreturnforprivatefirms,asinMoskowitzandVissing-Jørgensen(2002)andKartashova (2014). The SCF data have clear benefits: business income and wealth are measured independently in the SCF for the same firms, in contrast to efforts that use income tax data to infer business wealth. Importantly, the SCF oversamples wealthy families by using tax data, which ensures that coverage of the top of the wealth distribution—where privatebusinesswealthisconcentrated—iscomparabletotheincometaxdata(Brickeretal. (2019)). Due to inherent difficulty in measurement, the starting point for many researchers is to be skeptical of private business wealth and income data reported in survey data. Given this uncertainty, we begin with basic checks of the data quality: comparing aggregate net income and sales from private firms in the SCF to private firm aggregates derived from IRS business returns data. We show that the SCF and IRS aggregates are not statistically 1

different from each other, even at granular levels of business organization (figures 1 and 2). Further, recent work has shown that SCF valuations are similar to those of transacted businesses—again, even by business organization level Campbell and Robbins (2025)— and we show here that the self-reported valuations of SCF respondents are well-anchored tobusinessfundamentals(figure3a). Next,usingSCFincomeandvaluationdata,weupdateandextendtheworkofMoskowitz and Vissing-Jørgensen (2002) and Kartashova (2014) using a rate of return estimation strategyproposedinBhandarietal.(2020b). Ratesofreturnunderthisnewmethodlargely confirm the previous results in Moskowitz and Vissing-Jørgensen (2002) and Kartashova (2014): returns to public firms outpaced returns to private firms in the 1990s and reversed intheleaduptotheGlobalFinancialCrisis. We then extend the analysis to include the years since the Financial Crisis. In triennial estimates in the 2010-2022 period, returns to private firms lag returns to public firms (figure 5), providing support for the original “private equity puzzle”. Over the full time period of the SCF (1989-2022), then, the 2000-2010 period may be the outlier due to lower-than-usualreturnsonpublicfirms(figure4bandappendixfigureA.1). Reliabledataonprivatefirmshastypicallybeendifficulttofind. Whileregularincome declarations from public firms help facilitate public stock exchanges, private firms do not need to file regular public disclosures and rarely transact. Reporting incentives and lack of third-party verification appears to lead private firms to underreport income to the US tax authority (Guyton et al. (2021); GAO (2015); Johns and Slemrod (2010)); as a result, NIPA assumes business income reported to the IRS is 18-50% underreported (depending on the type of business income—NIPA (2024)). Thin markets make valuations hard to determine,andintangibleassetvaluationanddepreciationrulescandistortalreadyfraught modelsthatrelatebookvalue,assets,andincometomarketvalue(asinSaezandZucman (2020),BoardofGovernorsoftheFederalReserveSystem(2020),Smithetal.(2023),and Campbell and Robbins (2025)). The most reliable, comprehensive data on private firms 2

has often been found in the SCF survey data (Moskowitz and Vissing-Jørgensen (2002), Kartashova(2014),CagettiandDeNardi(2006)). Recently,Bhandarietal.(2020b)leverageddataontransactedprivatefirmsfromPratt’s Stats—now DealStats—and the IRS Integrated Business Database (IBD) to argue that SCF business income is overstated and that valuations are too low. As a consequence, central questions in public finance may need to be revisited—including rates of return (MoskowitzandVissing-Jørgensen(2002))andreasonsforbeinganentrepreneur(Cagetti and De Nardi (2006)—in favor of a theory of “sweat equity” advanced in Bhandari and McGrattan(2021). While acknowledging the inherent uncertainty around data on private firms—many of which are private precisely to shield their owners and maintain opacity—we argue here that SCF data on private firms align with external data. One uncertainty to confront is what income concept to use to evaluate data quality and measure business returns.1 The SCF questionnaire asks respondents to report the “net income” of their business. In the IBD, there are two possible net incomes—one that excludes all net income except profits (or “ordinary business income”), and another that includes profits plus other sources of capital income by which a business pays out its owners: dividends, interest, capital gains, andrent. ComparingtheSCFincometoamorerestrictedversionofbusinessincomefrom the IRS—as in Bhandari et al. (2020b)—leads to the conclusion that the SCF overstates private business income. However, SCF business income lines up well with the broader net income measure in the IBD (figure 2a). Sales and receipts are a less-debated concept, so it is also re-assuring that the gross receipts reported by owners of private firms in the SCFaligntothereceiptsreportedtotheIRS(figure1). Withoutamarketfortradingshares,privatebusinessesvaluationsareinherentlyuncertain. Updated data from DealStats, though, on transacted private business used by CampbellandRobbins(2025)—thesamedatausedinBhandarietal.(2020b)—providesupport 1Asinthecaseofhouseholds,thereareavarietyofbusinessincomemeasures—EBIT,EBITDA,profits, netincome,amongothers. SeeClarkeandKopczuk(2025)formoreonhouseholdincomeconcepts. 3

for SCF self-reported valuations. The transactions data from DealStats (or Pratt’s Stats) are not representative of the universe of private businesses in the IRS business tax filings data. After constructing weights to make the data representative, the DealStats valuations aresimilartotheSCFvaluations(figure5ofCampbellandRobbins(2025)). Furthermore, self-reported business values in the SCF align to values that are estimated from valuation multiples—a common valuation methodology (Lui et al. (2002))—based on SCF sales andincome,withvaluationmultiplesgeneratedbybusinessorganization(figure3aand3b fromCampbellandRobbins(2025)),andbyindustry(figureA.6,fromCompustatdata). This paper proceeds as follows. Section 2 describes the SCF data on private firms and dataonprivatefirmsfromincometaxdata;acomparisonofthetwoisfoundinsection2.3. Section3validatesself-reportedbusinessvaluationsusingbasicvaluationmodels. Section 4presentsourestimatesofpublicandprivateratesofreturn,andSection5concludes. 2 Data: the SCF, CRSP/Compustat, and income tax data 2.1 The SCF TheSCFisacross-sectionsurvey,conductedeverythreeyearsbyNORConbehalfofthe Federal Reserve Board (FRB) and with the cooperation of the Department of Treasury.2 Thesurveycombinesawealthyoversamplewithanationallyrepresentativesetoffamilies, and collects a comprehensive snapshot of the assets, liabilities, income, and demographic characteristicsofthesefamilies. Private businesses are an increasingly important source of wealth, and the sampling techniques in the SCF ensures the representation of wealthy families. The SCF identifies wealthy households to sample by predicting wealth based on administrative records derived from income tax returns, and verifies that wealthy families participate by grouping sampled families into narrow classes of increasing wealth, and targeting completion rates in each wealth group (Kennickell (1999)). The set of wealthy families that respond to the 2SeeAladangadyetal.(2023)forresultsfromthemostrecenttriennialSCF. 4

SCFmirrorsthatofwealthynonrespondents(Brickeretal.(2021)).3 2.1.1 Privatebusinessincome,businessassets,andbusinesstraitsintheSCF TheSCFquestionnaireisdesignedtoelicitinformationaboutfamilyownershipofalltypes of privately-held businesses through a business module.4 The questionnaire distinguishes between businesses with an active management role and those with a passive role. For actively-managed businesses, respondents are asked questions about the family’s ownershipshareofthefirm,thatshare’svalue,totalincomeandsalesofthefirm,industry,numberofemployees,andlegalbusinessorganization,alongwithabatteryofquestionsabout thebusiness’sfinances. Summaryquestionsonincomeandnetworthareaskedaboutany additionalactivelymanagedbusinessesbeyondthefirsttwo. Forpassively-managedbusinesses,thequestionnairecollectsinformationaboutincome,networth,costbasis,andthe legalbusinessorganization,withallfirmsgroupedbytypeofbusinessorganization. Businessreceiptsarecollectedviathequestion“Whatwerethegrosssalesofthebusiness as a whole in [the year prior]?” It is asked only for actively-managed businesses and can be used to generate aggregate receipts when used along with the family’s ownership share and the SCF weights. For actively-managed businesses, income is collected via the question: “What was the business’s total pre-tax net income in [the year prior]?” and for passively-managed businesses through the question: “What was the total net income you (andyourfamilylivinghere)receivedfromthisbusiness."Thisistheentiretyofthequestion text and it does not refer to “special lines of IRS tax forms” that specify the ordinary 3The SCF cannot sample families in the Forbes 400 but the very wealthiest SCF families have wealth comparable to the lower end of the Forbes 400 (Vermeulen (2018), Kennickell (1999)). Though we have developedwaysofincorporatingtheForbeswealthingeneral(Brickeretal.(2019)),wedonothavedetailed enoughbalancesheetstoincludetheminthisanalysis. 4AseparatesetofquestionsareaskedaboutpubliclytradedstockandholdingsofmutualfundsandETFs laterinthesurvey, andthelead-intotheprivatebusinessmodulenotes“Donotincludecorporationswith publicly-tradedstock”. 5

businessincomeconcept(contrarytoBhandarietal.(2020b)).5 Nearly all private businesses are so-called “pass through” businesses, whereby income from the business gets “passed through” to distinct lines on the owner’s individual tax return. Private firms pay out their owners in many ways: the profits (ordinary business income) of the firm, and also through dividends, capital gains, rent, interest, and other income. Private S Corporations, for example, may pay dividends to their owners (like public or private C Corporations). The sale of owned assets may generate a capital gain. Anownermayreceiveinterestpaymentsfromloanstheyhavemadetotheirprivatefirms.6 The SCF is agnostic about whether a business owner would consider these income flows from their business as part of the net income that they receive from that business. We will later show that (a) the SCF aggregates here line up with business income tax aggregates that include such flows, and that (b) pass-though business owners receive a large share of aggregatecapitalincomethatappearsonapersonalincometaxform. Income from businesses is generally reported twice in the SCF: first, in the set of questions about privately-held businesses (the “net income” of the business, as described above) and, second, later in the survey in the income module. In this later set of questions,respondentsareguidedtoseparatelyreporteachofthecomponentsoftheirpersonal income as on a personal tax form, including wages, business profits, dividends, interest, 5However,thisappearstobeasimplemis-interpretationoftheSCFcodebook;namely,whetheranytext afterthewords“READONLYIFNECESSARY”ispartofthequestiontextforvariableX3132. Wenote herethattextisnotpartofthequestion; rather, itispartofascreeninstruction—thelastlayerofamultilayeredstrategytoaidthefieldinterviewer.ScreeninstructionsintheSCFareonlyvisibletotheinterviewer, andareonlyreadaloudwhentheSCFrespondentisconfusedabouttheintentofaquestionandwhenthe firsttwolayersofinterventionshavebeenexhausted. Inthiscase,thescreeninstructionreferstolinesona taxform,thoughonlyreadaloudtocloseoffdiscussion. AninformalpollofSCFfieldinterviewersshow noinstancesofitbeingnecessarytorefertothisscreeninstruction. Accordingly,almostnorespondentwill ever be asked to refer to tax forms at this point in the interview. Screen instructions are found throughout thequestionnaireandhavebeenusedsince1995. 6We note that the question flow allows for net income to be larger than gross receipts, which could be possibleifincomeotherthanordinarybusinessincomeisincluded.Theinterviewerispromptedtocomment if this unusual situation occurs, but the “edit check” that is noted in Bhandari et al. (2022) does not force grossreceiptstobelargerthannetincome.OnedesignphilosophyoftheSCFhasbeentoallowforavariety ofunusualpossibilities,ratherthanconstrainingtherespondents(Kennickell(1999)). 6

capitalgains,andrent. Forexample,dividendincome—whetherfromadirectly-heldpublicequityorapayoutfromaprivatebusiness—wouldbereportedonline3ofthepersonal Form 1040 and at variable X5710 in the SCF, while business profits would appear on line 8 of the 1040 and at variable X5714 in the SCF. This makes it challenging to look at an individual tax return and separately identify anything but profits that flows from a business. ButbusinessincomefromScheduleCandEinthisincomesectionoftheSCFalign wellwithrecordsfrompersonalincomefilings,asdoesfinancialincome(appendixfigure A.4).7 The SCF data also show a strong overlap between ownership of private firms and financial assets: about 40%-50% of recent capital gains flows, for example, are reported byownersofpartnerships(appendixfigureA.5). Due to this difficulty in studying business profits with individual income tax records, Bhandari et al. (2020b) appeal to the set of business tax records maintained at the IRS— the Integrated Business Database, described in the next sub-section—and we will begin ourcomparisonoftheSCFbyfollowingthisapproach. 2.2 Income tax data The Integrated Business Dataset (IBD) are a set of publicly-available business income statistics based on samples of tax filings from S corporations (Form 1120S), C Corporations(Form1120C),partnerships(Form1065),andsoleproprietorships(ScheduleC),and are produced by the Statistics of Income (SOI) at the Internal Revenue Service (IRS). We usepubliclyavailabletablesfromtheIBDthatsummarizegrossreceiptsandincomefrom thesebusinesses. NetincomeintheIBDdataaretypicallyreportedtwice: thefirstjustincludesordinarybusinessincomeand,thesecondincludesallofordinarybusinessincome, dividends,interest,capitalgains,andotherformsofcapitalincomethattheseprivatefirms 7Further, the income section refers to all income from the prior year and the business section refers to current businesses (but income from the prior year); in the case where a business started or folded in the currentyear,theremaybeamismatchbetweenincomeinthebusinesssectionandtheincomesectiondue tothedifferencesintiming. 7

payouttotheowners.8 TheamountofbusinessincomethatisreportedtotheIRSisknowntobeunderreported inIRSauditstudies(GAO(1995),MoskowitzandVissing-Jørgensen(2002),GAO(2015), Guyton et al. (2021), Bhandari et al. (2020b)). To be as comparable to the past literature aspossible,weadjustthetaxdataaggregatestoreflectthisunderreporting. Aside from known underreporting, a further wrinkle in analyzing the IBD is that the amountofpartnershipprofitsthatflowstoindividualsandhouseholds—themainvariable of interest in Bhandari et al. (2020b)—is unknown. Partnerships are sometimes set up in deliberatelyopaquewaystoshieldownershipandmaketracingincomebacktoanindividual impossible; the best estimates find that about one quarter of partnership income filed inForm1065cannotbetracedbacktoanindividual(Cooperetal.(2016)). Togetaround this issue, Bhandari et al. (2020b) assume that 32% of the total ordinary business income (profits) in the IRS partnership returns data flows to individuals, an estimate derived from Cooper et al. (2016).9 The Individual and Sole Proprietor (INSOLE) dataset produced by SOI, though, contains business profits that flow to individuals, and we will use these data inourpreferredestimates. AcknowledgingthisuncertaintyintheIBDdata—butwantingtostayasclosetoBhandari et al. (2020b) as possible for comparison purposes—we produce three estimates of aggregate privately-held “pass-through” business income from the IBD data. Each estimate adjusts for underreporting, with variation in the assumptions made to address the unknownsabouthowmuchpartnershipincomeflowstoindividuals. The first estimate uses the IBD net income data for S Corporations and sole propri- 8For partnerships, we use data from Table 1 and Table 5 of https://www.irs.gov/statistics/ soi-tax-stats-partnership-statistics-by-sector-or-industry. For S Corps, Table 2.4 of https://www.irs.gov/ statistics/soi-tax-stats-s-corporation-statistics. For sole-proprietorships, Table 1 of https://www.irs.gov/ statistics/soi-tax-stats-nonfarm-sole-proprietorship-statistics. 9Cooperetal.(2016)showthattheshareofallpartnershipincome—whichrepresentsincomepaidoutto corporate,partnership,nonprofit,nominee,andindividualsownersofpartnerships—thatflowstoindividuals is about 32 percent but is silent on the share of ordinary business income that flows to individuals. In an update of that paper, Love (2021) reports that about 40 percent (not 32 percent) of this total flows to individuals. 8

etorships,andforpartnershipsusestheshareoftheaggregateIBDpartnershipnetincome that flows to individuals—taken from Table 5 of the partnership returns data. We also faithfully replicate the underreporting adjustment factors in the Bhandari et al. (2020b) methodology. As in the NIPA tables (NIPA (2024)), Bhandari et al. (2020b) adjust all noncorporatebusinessprofitsbyanassumed50percentunderreportingrate(meaningthat profits for noncorporate business are doubled) and adjust corporate profits by an assumed 18percentunderreportingrate(asinJohnsandSlemrod(2010),Guytonetal.(2021),IRS (2016), GAO (2015)). However, since much of the IBD partnership income is not businessprofits,weestimatepartnershipincomeintwosteps. First,weisolatethepartnership profits—assumed to be 32 percent of the IBD Table 1 aggregate, as in Bhandari et al. (2020b)—and use the same noncorporate adjustment as that paper. The financial income thatpartnershipspayouttoindividualsareadjustedthisbythecorporateadjustment. Our second adjustment is based on estimates of underreported business income and other capital income from Guyton et al. (2021). Here, we adjust both partnership and S Corporation profits by 18 percent underreporting assumption, and adjust other capital income from businesses by a 9 percent underreporting rate. We also include a portion of nominee partnership income, assuming that about half of income that flows to estates and trustsendsupwithfamilies. In our third estimate, we again separate partnership profits from partnership financial income—as in the first estimate—and adjust each for underreporting. Instead of the indirect profit measure of the first estimate, the third estimate contains a direct measure: the amount of ordinary business income from partnerships reported on individual Schedule E returns(INSOLE).ThisamountisabouttwotimesaslargeinrecentyearsastheBhandari et al. (2020b) estimate of partnership business income that flows to households. As in option2,wealsoincludehalfofnomineeflows. 9

2.3 Comparison: SCF and IBD sales and income Both the SCF and the IBD collect data on sales and income of private businesses, and the following figures compare these data for all “pass-through” businesses: sole proprietorships, S Corporations, LLCs, and partnerships. The SCF data collects the legal organization type, which is identical to the tax filing status found in the IBD data except for the case of LLCs. LLCs with one owner typically file as sole proprietors and LLCs with multiple owners typically file as partnerships (Internal Revenue Service (2025)), and we group LLCs in their expected tax filing status in figures 1 and 2. While there are a host of income concepts that could possibly be reported, business receipts are a more straightforwardconcept,sowebeginthere. Sales at pass-through businesses reported to the SCF are remarkably consistent with sales at pass-though businesses reported to the IRS. Figure 1a plots aggregate business receipts for pass-though businesses in the IBD and in the SCF (along with the SCF 95% confidence band), showing that aggregate pass-though receipts in both data sets are comparable in levels and trends, and the aggregate captured in the IBD data is always in the 95%confidencebandthatsurroundstheSCFestimate(figure1a).10 Receiptsforeachtypeofpass-throughbusinessareshowninfigures1b-1d. Theaggregates plotted for all pass-throughs in figure 1a are the most forgiving, as they do not rely onSCFrespondentstoaccuratelyreportthebusinessorganization(soleproprietorshipsin figure 1b, S Corps in figure 1c, or partnerships in figure 1d). Many private businesses are set up under complex business tax structures—with nested ownerships, with partnerships owning corporations, and so forth—and the SCF is not necessarily designed to capture 10IntheSCF,grossreceiptsareonlycollectedforbusinessesinwhichthefamilyhasanactivemanagementrole,andnotforthosebusinessesinwhichthefamilyhasapassiverole. Income,though,iscollected forbothactiveandpassively-managedbusinesses,andinfigures1a-1dwescaleupreceiptsintheactivelymanagedbusinessesaccordingtotheratioof incomeactive+incomepassive foreachbusinessorganizationaltype. incomeactive 10

all of these complexities.11 That said, the SCF aggregates are generally consistent with receipts reported to the IRS by pass-through businesses. Small samples in the SCF mean thereisvolatilityintheestimates,especiallywhendisaggregated(panels1b,1c,and1d). The panels of figure 2 demonstrate that aggregate business net income collected in the SCF aligns with the broader net income aggregate from the IBD. Figure 2a plots net income for all pass-through businesses by tax filing status—sole proprietorships, S Corporations, and partnerships—in the SCF and the IBD.12 The IBD data are adjusted for underreporting as in Bhandari et al. (2020b)—as described in the previous section—and includebothprofitsandothercapitalincomethatflowfromprivatefirmstotheirowners. TheSCFaggregatesmoveremarkablywellwiththeIBDaggregateacrosstimeinfigure 2a: steadilyincreasingthroughtheearly2000s,spikingpriortotheFinancialCrisis,falling during the Crisis, steadily rising in the aftermath (with a plateau in the years prior to the Covid era), and the spiking again while exiting the Covid era. These adjusted IBD aggregates typically fall in the 95% confidence interval surrounding the SCF estimates (theshadedregion). Again, aggregates plotted in figures 2b, 2c, and 2d rely on SCF respondents to accurately report the business organization, figure 2a is the most forgiving. That said, the SCF pass-throughaggregatesalignwiththoseintheIBDevenbybusinessorganization.13 Both thelevelandtrendinsoleproprietorshipnetincomeintheSCFhastrackedthatintheIBD (figure2b). TheIBDtaxdataincludesallScheduleCincome,includingself-employment incomefromthosewhomaynotconsiderthemselvesbusinessowners(suchasfreelancers, side-gigs,thosewhoreceivea1099-MISC).WhilethebusinessmodulecollectsSchedule 11TheSCFisahouseholdsurveythatisdesignedtocaptureimportanthouseholdassets—includingprivate businesses. Bhandarietal.(2020b)notethatthenumberoftaxfilingsislowerintheSCFthanintheIBD, butthatistobeexpected: theSCFisnotabusinesssurvey,nordoesitrequirerespondentstoenumeratea listofnestedbusinessstructures,asasurveyofsmallbusinessesmaydo. 12Solo-owned LLCs typically file as sole proprietors and LLCs with multiple owners typically file as partnerships(InternalRevenueService(2025)). Accordingly,solo-ownedLLCsaregroupedwithsoleproprietorsandmultipleownerLLCswithpartnershipsinfigures1and2becomparabletotaxfilingdata. 13Wefocusonlyonpass-throughbusinessesinthissection,omittingatreatmentofprivateCCorporations capturedintheSCF.PrivateCCorpsareincludedinouranalysisofthereturnstoprivatebusinesses. 11

2.3 Comparison: SCFandIBDsalesandincome 12 Figure1: Aggregatesalesbybusinessorganization: SCFandIBD 30 25 20 15 10 5 0 1985 1990 1995 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt Sales: AllPass-through 8 SCF IBD 6 4 2 0 1985 1990 1995 2000 2005 2010 2015 2020 year (a)Allpass-throughreceipts )srallod .mon(snoillirt Sales: Soleproprietors SCF IBD (b)Soleproprietorshipsreceipts 20 15 10 5 0 1985 1990 1995 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt Sales: SCorps SCF IBD 15 10 5 0 1985 1990 1995 2000 2005 2010 2015 2020 year (c)SCorpreceipts )srallod .mon(snoillirt Sales: Partnerships SCF IBD (d)Partnershipreceipts Note:ThefigureshowstheaggregatesalesintheSCFandreceiptsintheIBD.TheSCFcollectsreceiptsdataontheyearpriortothe surveywave. Inpanel1b,SCFsoleproprietorsincludesole-ownedLLCs(“singlememberLLCs”),asthesebusinessesaregenerally taxedasasoleproprietor(InternalRevenueService(2025)). LLCswithmultipleownerstypicallyfileaspartnerships,andLLCsin theSCFwithmultipleownersareclassifiedassuchinpanel1d. Receiptsareonlycollectedforactively-managedbusinessesinthe SCF,whileincomeiscollectedforbothactiveandpassivebusinesses. Thegreenlinesinthesefigures,then,arescaledbytheratio of incomeactive+incomepassive. Authors’calculationsusingBoardofGovernorsoftheFederalReserveSystem,SurveyofConsumer incomeactive Finances(SCF)andStatisticsofIncome,InternalRevenueService,IntegratedBusinessDatabase(IBD).

2.3 Comparison: SCFandIBDsalesandincome 13 Figure2: AggregatenetincomeinSCFandIBD 3.5 3 2.5 2 1.5 1 0.5 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 year )srallod .mon(snoillirt Totalnet income SCF 0.8 IBD 0.6 0.4 0.2 1985 1990 1995 2000 2005 2010 2015 2020 2025 year (a)Allpass-through )srallod .mon(snoillirt ScheduleCsoleprop. net income SCF(new) SCF(orig.) IBD(adj) (b)Soleproprietors(Sch. C) 1.2 1 0.8 0.6 0.4 0.2 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 year )srallod .mon(snoillirt SCorp. net income SCF 2 IBD(adj) 1.5 1 0.5 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 year (c)SCorporations )srallod .mon(snoillirt Partnershipnet income toindividuals SCF IBD(adj#1) IBD(adj#2) IBD(adj#3) (d)Partnerships Note:author’scalculationsfromBoardofGovernorsoftheFederalReserveSystem,SurveyofConsumerFinances(SCF)andStatistics ofIncome,InternalRevenueService,IntegratedBusinessDatabase(IBD)andIndividualfile(INSOLE).Bluelinesplotaggregatenet incomefromSCFbusinesssection.Reddashedlinesaretaxreturnaggregatesafteradjustmentsforunderreporting(adjustmentsasin Bhandarietal.(2020b)). Inpanel(d),adjustment#1re-createstheBhandarietal.(2020b)butaddsothersourcesofbusinessincome thatflowstohouseholds,inlinewitha“netincome”concept.Adjustment#2augmentsunderreportingasinGuytonetal.(2021)and addshalfofflowstoestatesandtrusts.Adjustment#3usespartnershipprofitsreportedintheINSOLEdatafromindividualtaxreturns (adjustedasinBhandarietal.(2020b))addsothersourcesofbusinessincomethatflowstohouseholds,andretainshalfofflowsto estatesandtrustsasinversion2.Thedashedredlineinpanel(a)isthesumofthedashedredlinesinpanels(a),(b),and(c).

C income just for those who consider themselves business owners, the SCF income module has collected Schedule C income since 2007, and we plot that amount beginning in 2007 in figure 2b to be most comparable to the IBD data. Prior to 2007, the plot shows just the subset who consider themselves as owning a business. The IBD data are adjusted forunderreporting,asinBhandarietal.(2020b)andNIPA(2024).14 Aggregate business income from S Corporations owned by SCF families is shown in 2c, and it is plotted with aggregate income of S Corporations from all sources in the IRS S Corporation returns data. S Corporations mainly produce ordinary business income, and the SCF aggregate values are generally comparable in magnitude and in time trend. AggregateprofitstoSCorporationssurgedin2021,asinPalazzo(2023). Figure2dplotsaggregateSCFbusinessincomefrompartnershipsandintheincometax return data (red dashed lines). As described earlier, net income from partnerships to individuals cannot be exactly determined in the IBD (Bhandari et al. (2020b)), so we plot the three estimates—described in the previous section—in figure 2d. While these estimates are generally smaller than the comparable SCF net income estimates, they are typically close to the lower bound of the 95 percent confidence interval surrounding the SCF estimate. In Bhandari et al. (2020b), income from partnerships drives the gaps in SCF and IBD income; appendix A.3 offers a replication of these estimates and describes in more detailwhyBhandarietal.(2020b)mayundercountpartnershipincometohouseholds. 3 Valuations In the SCF data, private business wealth is the most important component of the wealthy asset portfolio (Bricker et al. (2016)), as is the case in Sweden (Bach et al. (2020a)), Norway (Fagereng et al. (2020)), Germany (Bach et al. (2020b)) and others. In theory, 14Theexactunderreportingcorrectionvariesbyyear,butBEAhasgenerallyassumedthatabout50percentofScheduleCincomeisreportedtothetaxauthority,meaningthattheunderreportingcorrectionwill approximately double the aggregate amount of sole proprietor income. We use the underreporting adjustmentsfoundinBhandarietal.(2020b)forthesecorrections. AppendixfigureA.3plotstheunadjustedIBD data. 14

private business values in the SCF may be too low due to undervaluing of intangibles (Bhandarietal.(2020b))ortoohighduetooverlyoptimisticowners(Smithetal.(2023)). Gauging the accuracy of the self-reported values is challenging because there are few sourcestouseasacomparison.15 Data on private business transactions offer a comparison, and these data (DealStats and BizComps) are used in Bhandari et al. (2020b) and Campbell and Robbins (2025).16 Data from transactions are often not representative of their target population (Gallin et al. (2021)),butthesedatamaybeusedwithoutanycorrections(asinBhandarietal.(2020b) or after aligning them to known totals (Campbell and Robbins (2025)). In particular, Campbell and Robbins (2025) show that the aggregates and distributions of income and salesinthetransactionsdatadonotaligntothoseintheIRS-IBDandproposeaweighting correction to align the transactions data and the IBD. After doing so, the self-reported valuations in the SCF are comparable to those in the transactions data (see figure 5 of CampbellandRobbins(2025)) To verify whether self-reported valuations in the SCF are grounded in business fundamentals, we use value-to-sales and value-to-income multiples by business organization fromCampbellandRobbins(2025)andpredictbusinessvaluationsforeachSCFfirmusingSCFbusinessincomeandsalesdata.17 Suchpredictedbusinessvaluationsarecommon in the finance and accounting literature (Lui et al. (2002), Smith et al. (2023)). Our base 15TheB.101.htableintheFinancialAccountsoftheU.S.(Z.1)offersanaturalcomparisonfortotalnoncorporate, nonfinancial business valuations held by the household sector, but differences in measurement hamperdirectcomparisons(Battyetal.(2019)). Smithetal.(2023)andCampbellandRobbins(2025)both offeradjustmentstotheB.101.haggregate,whichissmallerthantheSCFaggregates,butare(a)amixture ofbookandmarketvalues, (b)modeledpartiallyfromtaxdata, and(c)donotincludefinancialfirms, the largestindustryamongpartnerships. TrendsintheSCFandB.101.haggregatesarecomparableovertime, though(Battyetal.(2019)). 16Bhandari et al. (2020b) use DealStats and Campbell and Robbins (2025) use BizComps—an updated andre-brandedversionofDealStats. 17Asanalternate,intheappendix,weusedataonpublicfirmsfromCRSP/Compustatandcalculateboth value-to-salesandvalue-to-incomemultiplesineachyearandforeightbroadindustryclasses,applythem to the SCF business income and sales for each firm, and calculate a predicted valuation. These predicted valuationsareinlinewiththeself-reportedSCFvaluations(figureA.6). 15

predictedvaluationsmodelisaweightedaverageofincomeandsalesmultiples: bu ˆ s SCF = 1 salesscf value + 1 incscf value (1) 2 · i · sales 2 · i · income ∀k (cid:20) (cid:18) (cid:19)k(cid:21) (cid:20) (cid:18) (cid:19)k(cid:21) (cid:88) where (value) and ( value ) are taken from Campbell and Robbins (2025) for each k sales k income k typeoftaxfilingbusiness(k soleprop,SCorp,partnership )ineachSCFyear. ∈ { } Figure3: Predictedaggregatevaluations 1012 · 20 15 10 5 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt SCF:self-reported,predictedvalues 1012 · SCF Predicted 20 15 10 5 2000 2005 2010 2015 2020 year (a)Predictedaggregatevaluations )srallod .mon(snoillirt SCF:self-reported,predictedvalues(salesonly) SCF Predicted (b)Predictedaggregatevaluations—salesonly Note: author’scalculationsfromSurveyofConsumerFinancesanddatafromCampbellandRobbins(2025). SolidbluelineisSCF aggregatevaluationofallpass-throughactively-managedprivatebusinesses(organizationtypes: soleproprietorship,partnership,S Corporation, orLLC,wheresolo-ownedLLCsaremappedtosoleproptaxfilingstatusandmultiple-ownerLLCsaremappedto partnershipfilingstatus).Solidredlineisthepredictedvalueforthesebusinesses,usingequation1andmultiplesofvalue-to-salesand value-to-income—whichvarybybusinesstaxfilingstatus—fromfigure3ofCampbellandRobbins(2025).Thetimeseriesisshorter thanthefullSCFtimeseriesduetotheavailabilityofthemultiplesfromCampbellandRobbins(2025). Panel(b)ispredictedusing onlyvalue-to-salesmultiples. Thebluelineinfigure3aplotstheaggregateofallactively-managedpass-thoughbusinesses in the SCF. We restrict to actively-managed because the prediction model depends on sales, income, and business organization type, and the SCF does not contain information on all three inputs for nonactively managed businesses. The predicted SCF private aggregate business wealth—as in equation 1—of the actively-managed firms included in 16

the blue series is shown in the red line. The self-reported aggregates and those modelled fromtheself-reportedsalesandincomearetypicallyclose. Using SCF business income in equation 1 may be problematic if it includes capital gainsandotherfinancialincome. Re-runningthemodelinequation1usingonlysalesand thesalesmultiples,theSCFself-reportedvaluationsarestillinlinewithtransaction-based businessfundamentals(figure3b). 4 Rates of return After establishing that SCF income aligns to available external data and that SCF private business values are governed by fundamentals, we compare the aggregate rate of return for private and public firms (figure 5). We use the SCF for private firm valuations and the CRSP/Compustatdataforpublicfirmvaluations. The rate of return comparison used here is a method suggested in Bhandari et al. (2020b): calculating aggregate returns separately for income yields and capital gains and sumthesetwopiecestogether.18 AfullreplicationandextensionoftheoriginalMoskowitz andVissing-Jørgensen(2002)andKartashova(2014)method,though,canbefoundinappendix A.2.19 We construct both the income yield and capital gains yield in the SCF and intheCompustatdata,constructinggeometricaveragesofthree-yearcapitalgainsinboth SCF and Compustat, as in Bhandari et al. (2020b). The aggregate income yield (income divided by market value) and aggregate capital gains (change in market value between SCFyears)aredescribedbythefollowingequations: income Rinc = i,t (2) t value i,t i (cid:18) (cid:19) (cid:88) 18Bhandari et al. (2020b) note that the returns used in Moskowitz and Vissing-Jørgensen (2002) and Kartashova (2014) may conflate two things—an annual income yield and an annualized three-year capital gainsreturn—thatarenotquitecomparabletotheannualizedCompustatvalue-weightedreturn. 19See appendix section A.2 for more details on the differences in rate of return computations between Bhandarietal.(2020b)—usedhere—andMoskowitzandVissing-Jørgensen(2002). 17

1 value 3 R ˜kg = i i,t+3 1 (3) t+3 value − (cid:18)(cid:80) i i,t (cid:19) Netincomefromprivatefirmsisamix(cid:80)oftheowners’laborincomeandcapitalincome, while net income from publicly-traded corporations excludes the owners’ labor income. In constructing Rinc, then, we use off-the-shelf estimates of the labor share of owners’ t incomefromprivatefirmstoremovelaborincomeandretainthecapitalincomethatflows to these owners. Two recent estimates come from Smith et al. (2019), who estimate that only 25 percent of pass-through business income is capital income, and from Saez and Zucman (2020) who argue that the Smith et al. (2019) estimate is correct for small firms, whileforlargefirmsabout75percentofpass-throughbusinessincomeiscapitalincome.20 The income yields from private businesses in the SCF and public firms in Compustat (Rinc, based on equation 2) are plotted in figure 4a. Income yields of private firms in the t SCF are shown after labor adjustments from Saez and Zucman (2020) and Smith et al. (2019). The differences between the public and private—especially the Saez and Zucman (2020)-adjusted yield—are generally small, though in most years the Compustat publicfirmincomeyieldsarelargerthantheSCFprivate-firmyields.21 Capital gains yields are more volatile and generally larger than the the income yields. While the income yields in figure 4a are always positive and generally between 5 and 9 percent, the capital gains yields (R ˜kg , based on equation 3) are sometimes negative but t+3 also typically larger than the income yields when they are positive (in figure 4b). The capital gains yields for public firms are largest during the stock boom period in late 90s and the recovery period since the Financial Crisis (figure 4b). The capital gains yields for 20Overall, the Saez and Zucman (2020)-based method classifies about 50 percent of business income as labor income, similar to Bhandari and McGrattan (2021). An alternate approach removes predicted wageincomefromthebusinessincomeofallSCFbusinessownerswhodonotreportwagesandremoves actual wages for those who report one (Moskowitz and Vissing-Jørgensen (2002)) and is produced in the MoskowitzandVissing-Jørgensen(2002)replicationinappendixA.2. 21Appendix table 1 shows the full set of income yields, including un-adjusted SCF private firm income yieldsandadjustmentsasinMoskowitzandVissing-Jørgensen(2002). 18

19 Figure4: Yields,bytype 15 10 5 0 1990 1995 2000 2005 2010 2015 2020 2025 year dleiyemocnI Incomeyield(publicandprivatefirms) SCFprivate(SZZadj) SCFprivate(SZadj) Compustat 30 20 10 0 10 − 1990 1995 2000 2005 2010 2015 2020 2025 year (a)Incomeyields dleiyniaglatipaC Capitalgainsyield(publicandprivatefirms) SCFprivate(3yearreturn) Compustatpublic(3yearreturn) (b)Capitalgainsyields Note: author’scalculationsfromSCFandCRSP/Compustatdata. Thesefiguresplotincomeyields(Rinc, inpanel4a)basedon t equation2,andcapitalgainsyields(R˜kg ,inpanel4b)basedonequation3. Rincarealsofoundinappendixtable1columns3,4, t+3 t and5,andR˜kg arealsofoundinappendixtable1columns6and7.Inpanel(b),thereisno1989returnthatcanbecalculated,asit t+3 isthefirstyearinthetimeseries.Returnscalculatedbetween1989and1992,forexample,areplottedas1992onthex-axis.

publicfirmsgenerallyoutpacethoseofprivatefirmsexceptduringthemid-to-late2000s. Figure 5 displays the total return for public and private firms in SCF years recommended by Bhandari et al. (2020a) and Bhandari et al. (2020b): Rinc + R ˜kg . The rate t t+3 of return on public firms (orange line) has outpaced the return on private firms (black lines) in most of the survey years, as in the original “private equity puzzle” Moskowitz andVissing-Jørgensen(2002). Notably, the pattern and level of the overall rate of returns in figure 5 can be inferred purely from the capital gains yields in figure 4b, ignoring the income yields. Income data tend to be fraught with measurement choices, both for families (Clarke and Kopczuk (2025)) and for businesses shown here. Income also interacts with the tax system in ways that tend to impart downward bias (Guyton et al. (2021)), and for business owners, the tax system also leads to a co-mingling of labor and capital income in the business profits.22 The cleanest comparison between public and private firms, then, may focus only on valuations,asinfigure4b. 4.1 Comparison with past papers Figures4band5usetherateofreturnadvisedinBhandarietal.(2020b). Butdespiteusing adifferentmethodofconstructingaggregatereturns,thequalitativepatternsofMoskowitz and Vissing-Jørgensen (2002) and Kartashova (2014) remain: prior to 2001, the total return on public firms exceeded that of private firms, and in the 2001-2010 period, private returnsexceedpublicreturns. Our results also provide an update of Moskowitz and Vissing-Jørgensen (2002) and Kartashova (2014) for the years since the Financial Crisis (2013-2022). Overall returns on public firms have tended to outpace the returns to private firms in this period (figure 5). Thisisthecaseforboththeincomeyield(figure4a)andthecapitalgainsyield(figure 22Owners of partnerships and S Corps, for example, have incentive to pay out in profits over wages to avoidSECAtaxes,andtopayoutincapitalgainsoverprofitsforevenlowertaxrates(KrupkinandLooney (2017)). 20

4b). Thatsaid,thepublicandprivatereturnsareverysimilarinthisperiod,andmaynotbe differentfrom eachotherin theusualstatisticalsense (asnotedin Bhandarietal. (2022)). Further, a replication that uses the original Moskowitz and Vissing-Jørgensen (2002) and Kartashova(2014)rateofreturncalculationshowsanalternatingpatterninthepost-Crisis era,wherepublicreturnsoutpacedprivatereturnsinthe2013and2019waves,andprivate returnsoutpacedpublicreturnsinthe2016and2022waves(appendixfigureA.2a). We note here that the description above is a different interpretation than conveyed in Bhandarietal.(2020b),whouseincomefromprivatefirmswithoutadjustingforlaborand, accordingly, find larger income yields (Rinc) throughout the time series and larger returns t for private firms in general. Though there are a range of estimates in the ongoing debate over the correct capital-labor income shares for owners of private firms, labor makes up a notable share of owners’ income in each (Smith et al. (2019), Saez and Zucman (2020), Moskowitz and Vissing-Jørgensen (2002), Bhandari and McGrattan (2021)). Estimates of private firm rates of return that include all labor income could be considered an upper bound, then. That said, if income from private businesses is too tangled to use, a rate of return comparison that ignores income and uses only capital gains, as in figure 4b, paints asimilarpicture. Kartashova(2014)showedthatprivatereturnsfromtheSCFexceedpublicreturnsfrom Compustatin2001-2010periodandleftoffwiththeideathatthe1992-1998periodusedin MoskowitzandVissing-Jørgensen(2002)mayhaveseenunusuallyhighreturnsforpublic firms due to the “dot-com” boom. Over the full 1989-2022 SCF time period, though, it is the 2001-2010 period that stands out for unusually low returns to public firms (figure 4b). Using just S&P 500 firms, these low returns in the 2001-2010 period may be due to two years with exceptionally low public returns (appendix figure A.1). That said, the lowinterestrateenvironmentpost-FinancialCrisismaybeunusualitselfandcontributeto higher-than-expectedreturnsonpublicfirms(Lianetal.(2019)). 21

Figure5: Aggregateoverallbusinessreturn: SCFprivate,Compustatpublicbusiness 0.4 0.3 0.2 0.1 0 1990 1995 2000 2005 2010 2015 2020 2025 year dleiy niag .pac + dleiy emocni Rates of return: private vs. public business Private(SCFw/SYZZinc. adj.) Private(SCFw/SZinc. adj.) Public(Compustat) Note: author’scalculationsfromSCFandCRSP/Compustatdata. FigureplotsoverallratesofreturnforSCFprivatebusinessand Compustatusingequations2and3,asadvocatedinBhandarietal.(2020b). OrangelineisthesumofCompustatincomeyieldand annualized3-yearcapitalgains(appendixtable1,columns5and8,respectively).Blacklinesaddlabor-adjustedSCFbusinessincome yieldstoSCFannualizedcapitalgains(appendixtable1columns2,3,or4,andcolumn6). 5 Conclusion Measuring the value and income of private businesses is challenging due to the private nature of these firms. In this paper, we evaluate owner-reported values and income of privatelyheldbusinessesfromtheSurveyofConsumerFinances(SCF)andprovideestimates of rates of return on private business equity. Self-reported values are often met with skepticism, but the business sales and income in the SCF align closely to external aggregates, even when dis-aggregated into types of business organizations. In addition, self-reported businessvaluationsareinlinewithwhatbasicvaluationmodelswouldpredict. We then compare aggregate returns of private and public firms, updating and extend- 22

ing the work of Moskowitz and Vissing-Jørgensen (2002) and Kartashova (2014) using a methodproposedinBhandarietal.(2020b). IntheyearssincetheFinancialCrisis,thereturnsonpublicfirmshavetendedtobelargerthanthereturnsonprivatefirms—providing support for the “private equity puzzle” identified in Moskowitz and Vissing-Jørgensen (2002). That said, a replication of the original Moskowitz and Vissing-Jørgensen (2002) methodpaintsamorenuancedpicture,whereprivatereturnshaveexceededpublicreturns as often as public has exceeded private in these post-Crisis years. But over the past 30 years, with the exception of the years leading up to the Global Financial Crisis, overall ratesofreturnonpublicfirmshavegenerallyoutpacedratesofreturnonprivatefirms. 23

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A Appendix 28

A.1 CRSP/Compustat data Valuations of public firms are maintained in the CRSP database (CRSP (2025)), while accounting details of each firm are maintained by Compustat (Compustat (2025)). We mergethetwodatasetstogetprices,income,firmsize,sales,andothervariablesonpublic firms. We first use the Compustat/CRSP data in figures 4, 4a, and 4b, which use variables pi forincome,andwherecapitalgainsarederivedfromamarketvaluevariablesconstructed fromtheproductofcshoandprccf. TheredlineinfigureA.2ausesthevariablervwretd. The data can also provide some context for these earlier figures. For example, we referencebothanannualanda3-yearaverageannualizedreturnsforS&P500firmsplotted infigureA.1,whichusesvariablersprtrn. FigureA.1: RateofreturnonS&P500firms 0.3 0.2 0.1 0 0.1 − 0.2 − 0.3 − 0.4 − 1985 1990 1995 2000 2005 2010 2015 2020 2025 year nruter fo etaR Rate of return: S& P (public firms) S&P1yearreturn S&P3yearaveragereturn Note:author’scalculationsfromCRSP/Compustatdata.Figureplotsaverageannualized3-yearreturnsand1-yearreturn. In appendix A.5, we use these data to construct multiples of market value-to-sales and market value-to-income by broad industry categories in each year. As in Bhandari et al. (2020b), we use the pre-tax income variable in Compustat, which is similar to the SCF business income question (“what was the business’s total pre-tax net income in [the year prior]?”). 29

Income from private businesses is different from income from public corporate firms found in Compustat. First, the corporate pre-tax income concept (from Form 1120) includes business income along with interest, dividends, rent, and capital gains. Taxable business income for private pass-throughs, though, is generally just business income; any interest, dividends, rent, and capital gains may be included on a pass-through business tax form (1120S, 1165, or Schedule C) but are not included as business income. Second, corporate business income is income that flows from capital, but pass-through business income is a mix of capital income and owners’ labor income. Owners of pass-through businesses have an incentive to pay themselves out of business profits rather than through salary because of lower tax rates on capital income (Moskowitz and Vissing-Jørgensen (2002)), leading to other parts of tax code being contaminated with the owners’ labor income(Smithetal.(2019),SaezandZucman(2020),Smithetal.(2023)). InourcomparisonsoftheSCFprivatebusinessincomeandthefirmsinCompustat,we removelaborincomefrompass-throughbusinessincome,inordertoisolatecapitalincome and align our measure with corporate income as in the recent literature (Moskowitz and Vissing-Jørgensen(2002),SaezandZucman(2020),Smithetal.(2019)). Forexample,we constructvalue-to-incomeandvalue-to-salesmultiplesfromtheCompustatdata,andwhen applyingthesemultiplestothe SCF data,weapplythemonlytothecapital componentof pass-through business income (Smith et al. (2023)). Further, the evidence that we present in figure 2a supports the idea that the SCF business section is capturing more than just ordinary business income for pass-through firms, and in-line with income reported on the corporateform. 30

A.2 ComparisontoMoskowitzandVissing-Jørgensen(2002)andKartashova (2014) As noted in these earlier papers, the aggregate SCF private firm values are modified to include data on initial public offerings (IPOs) and mergers and acquisitions (M&A), and both income and values exclude new firm births.23 Rates of return on private firms are estimatedusingthegeometricaverageofreturnsintwoperiodsr = √R R 1: 1 2 · − value +3 income 1/3 t t−1 R = × (4) 1 value t−1 (cid:20) (cid:21) value +3 income 1/3 t t R = × (5) 2 value t−1 (cid:20) (cid:21) where value is the aggregate market value of private firms (after IPO and M&A adjustments), income is aggregate income (adjusted for taxes, retained earnings, and labor share),tissurveyyearandt 1isyearofpriorsurvey(threeyearsprior). − The qualitative results from the earlier papers are still evident: compared to the return on public firms in the CRSP data (the red line), the return on private firms is generally smallerpriorto2001,andlargerbetween2001and2010. Inthepost-FinancialCrisisera(since2010),returnstopublicandprivatefirmsalternate in size (figure A.2a). Returns on public firms outpace private firms in the 2010-2013 and 2016-2019 periods, returns on private firms outpace public firms in the 2013-2016 period and 2019-2022 period. These post-Financial Crisis results are somewhat in contrast to those generated from the rate of return formula advocated by Bhandari et al. (2020b), whereaclearerpictureofpublicfirmsoutpacingprivatefirmsemerges(figure5). Looking across the entire SCF time series, the results when using more recent labor adjustmentsproposedinSaezandZucman(2020)andSmithetal.(2023)arequalitatively similartothosewiththeMoskowitzandVissing-Jørgensen(2002)laboradjustment: publicreturnsoutpaceprivatefrom1989to2001,whileprivatereturnsoutpacepublicreturns from2004to2010(figureA.2a,dashedbluelines). AsshowninpanelBoffigureA.2,aggregateratesofreturnsforprivatecorporatebusinessesaregenerallycomparabletoreturnsonnon-corporatebusinesses. Privatecorporate firms include both S and C Corporations, and non-corporate firms include partnerships, soleproprietors,andLLCs. 23DataonIPOsarefromJayRitter(https://site.warrington.ufl.edu/ritter/ipo-data/)anddatafromM&Ais fromSDC,LSEGData&Analytics(formerlyRefinitiv). 31

A.2 ComparisontoMoskowitzandVissing-Jørgensen(2002)andKartashova(2014)32 FigureA.2: Aggregateoverallbusinessreturn: SCFprivate,Compustatpublicbusiness 0.3 0.2 0.1 0 1990 1995 2000 2005 2010 2015 2020 year nruterfoetaR Rateofreturn: privateandpublicfirms Private(SCF,MVJ) Private(SCF,SZ) Private(SCF,SZZ) Public(Compustat) 0.3 0.2 0.1 0 1990 1995 2000 2005 2010 2015 2020 year (a)Privatefirms,bylaboradjustment,andpublic firms nruterfoetaR Rateofreturn: privateandpublicfirms Allprivate(SCF,MVJ) Corp.private(SCF,MVJ) Noncorp.private(SCF,MVJ) (b)Privatefirms,bylegalorganization Note:author’scalculationsfromSCFandCRSP/Compustatdata.FigureplotsoverallratesofreturnforSCFprivatebusinessandCompustatasinoriginalMoskowitzandVissing-Jørgensen(2002)andKartashova(2014).PanelAincludesthebaselinelaboradjustment forwagesonly(asinMoskowitzandVissing-Jørgensen(2002)insolidblueline)andalternatelaboradjustmentsasinSaezandZucman (2020)andSmithetal.(2023). InpanelA,SCFaggregatemarketvaluesaugmentedwithexternaldataonIPOsandM&Aareused. InpanelB,non-corporateorganizationalformsincludepartnerships,soleproprietorships,andLLCs;corporateorganizationalforms includebothCandSCorporations. PanelBwageadjustmentaccountsforwagelaboronly(asinMoskowitzandVissing-Jørgensen (2002).

A.3 Comparison to Bhandari et al. (2020b) A.3.1 BusinessincomeintheSCFandIBDdata Bhandari et al. (2020b) compare net income from SCF businesses to ordinary business income (profits) from the IBD. The following figures replicate panels from figure 1 of Bhandarietal.(2020b)andmirrorfigure2fromthispaper,butusingjustordinarybusiness income (profits) from the IBD (or estimates of ordinary business income in the case of partnerships), in contrast to the broader set of business income distributions (ordinary businessincomeandothercapitalincome)aswedoinfigure2a-2d. Most income from sole proprietors and S Corporations come in the form of profits, so the panel in figure A.3b is nearly identical to figure 2b (sole proprietorships) and figure A.3c is nearly identical to figure 2c (S Corporations). Note: the orange dashed lines here aretheamountreportedtotheIRSafteradjustingforunder-reporting(andaretakenfrom Bhandarietal.(2020b)). That said, our SCF sole proprietor aggregates are larger than those shown in Bhandari et al. (2020b) figure 1a (and replicated in the light blue line in figure A.3b), as our figure A.3b plots aggregate Schedule C income for all SCF families—including those who do not self-report as a “business owner”—to be as comparable as possible to the IBD, while the light blue line is just the sole proprietors that consider themselves business owners (a subset of all Schedule C filers). The IBD reports the aggregate Schedule C income of all families, even those who would not consider themselves as business owners. Bhandari et al. (2020b) plots Schedule C income just for families who report owning a sole proprietorship, but many families who file Schedule C in the SCF do not report owning a business. Themaindivergence,then,comesfrompartnerships,andisevidentinacomparisonof figure 2d to figure A.3d. The reliance on the IBD is fraught for understanding families’ partnership incomes, as the IBD do not report the amount of business profits that flow to individuals. The best estimates are that 32% to 40% of total partnership income flows to individuals are in the form of business profits (Cooper et al. (2016), Love (2021)); Bhandari et al. (2020b) form their aggregate partnership profits to individuals using the formershare. That said, the INSOLE file contains an estimate of profits from partnerships that flow to individual tax returns; these are publicly-available data in aggregated form and are displayed in figure A.3d in the red line (and red dashed line after applying the Bhandari etal.(2020b)non-corporateunder-reportingadjustment).24 24See https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-line-item-estimatespublication-4801. 33

A.3 ComparisontoBhandarietal.(2020b) 34 FigureA.3: ReplicationofBhandarietal.(2020b) 3.5 3 2.5 2 1.5 1 0.5 0 1985 1990 1995 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt SCF IBD(adj) 0.8 0.6 0.4 0.2 1985 1990 1995 2000 2005 2010 2015 2020 2025 year (a)Allpassthrough )srallod .mon(snoillirt SCF(Sch. C) SCF(BBMS20) IBD(adj) (b)Soleproprietorships 1 0.8 0.6 0.4 0.2 0 1985 1990 1995 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt SCF IBD(adj) 2 1.5 1 0.5 0 1985 1990 1995 2000 2005 2010 2015 2020 2025 year (c)SCorporations )srallod .mon(snoillirt SCF IBD(profits?) IBD(adj) INSOLE(profits) INSOLE(adj) (d)Partnerships Note:author’scalculationsfromBoardofGovernorsoftheFederalReserveSystem,SurveyofConsumerFinances(SCF)andStatistics ofIncome,InternalRevenueService,IntegratedBusinessDatabase(IBD)asinBhandarietal.(2020b)). InpanelA.3d,⋆denotesan estimateofbusinessprofitsfrompartnershipstoindividuals(thisconceptisnotreportedintheIBD,soBhandarietal.(2020b)estimate it).

A.3.2 Calculatedratesofreturnonbusinessincome Table 1 attempts to replicate Appendix Table A.12 in Bhandari et al. (2020a), but (a) includes labor-adjusted version of SCF income yields (columns 2-4), and (b) is based on aninternalversionoftheSCFdata. Table1: Estimatedincomeyieldsandcapitalgains,SCFandCompustat Incomeyield(Rinc,eqn. 2) KGyield(RKG,eqn. 3) t t+3 (1) (2) (3) (4) (5) (6) (7) (Memo) SCF SCF SCF SCF Compu. SCF Compu. Compu. Removelabor sharefromincome year All MVJ SZZ SZ PI KG KG KG t+3 t+3 t+1 1989 22.6 8.2 4.1 5.2 12.3 — — — 1992 25.8 14.2 5.3 6.3 6.6 0.9 13.2 27.2 1995 26.0 17.2 5.9 7.5 8.9 4.0 7.9 -1.1 1998 23.4 14.5 5.1 6.6 6.3 10.5 28.8 31.8 2001 23.0 16.4 5.4 6.9 5.3 12.5 15.6 4.3 2004 19.4 12.1 4.4 6.8 7.0 6.5 -4.8 28.7 2007 19.4 13.8 4.5 6.6 9.0 14.8 9.1 12.7 2010 15.1 8.4 3.6 5.2 6.0 -6.2 -8.6 21.4 2013 17.0 9.5 3.5 5.3 8.7 4.3 9.4 13.8 2016 16.2 7.0 3.7 6.7 5.5 11.8 10.8 -2.5 2019 13.8 8.7 3.1 4.5 6.9 3.4 6.8 -4.5 2022 12.6 5.4 2.6 2.6 6.9 13.0 21.1 20.7 Note:author’scalculationsfromSCFandCRSP/Compustatdata.Table1issimilartoAppendixTableA.12inBhandarietal.(2020a) butincludeslabor-adjustedversionofSCFincomeyields(columns2-4).Column1showstheincomeyieldonprivateSCFbusinesses beforeremovinglaborshareofbusinessincome.Column2removesthelaborcomponentofprivatebusinessincomeasinMoskowitz andVissing-Jørgensen(2002),column3removesthelaborcomponentofprivatebusinessincomeasinSmithetal.(2019),andcolumn 4thelaborcomponentofprivatebusinessincomeasinSaezandZucman(2020). Incomeyieldsineachofcolumns1-5arebased onequation2. Column5showstheincomeyieldonpublicfirmsintheCRSP/Compustatdata, usingthepre-taxincomeconcept (“PI”). Column6estimatesaggregatecapitalgainsreturns(realizedorunrealized)betweentheSCFsurveyyears(asinequation3), andcolumn7showstheequivalentcalculationfromCompustat(asinequation3andBhandarietal.(2020b)). Thememocolumn showsthecalculationusingannualchanges(availableonlyinCompustat). 35

A.4 SCF income data Asnotedinsection2.1.1,thequestionnaireasksallSCFfamiliestoenumerateeachcomponent of total income from the year prior in an “income section.” Questions in this section guide respondents to separately report each of these income components: wages, businessprofits,dividends,interest,capitalgains,rent,pensionincome,andmore. Earlier in the questionnaire, SCF businesses owners were also asked to report their net income fromactively-andnon-actively-managedbusinesses,meaningthatbusinessownersreport a business income concept twice. The responses in this “income section” are consistent with the interpretation that business owners report a broad net income concept in their “businesssection”responses(figureA.4). In the SCF income section, the sum of aggregate business income from Schedule C andEandallothersourcescapitalincome(interest,dividends,andcapitalgains)isnearly identicaltothesameincomeconceptsinindividualincometaxfilings(figureA.4a). When asked to parse out business income filed on Schedule C and Schedule E, the SCF aggregates are just a bit larger than the SOI aggregates (figure A.4b) after adjusting for underreporting on individual tax forms (as in Bhandari et al. (2020b), Guyton et al. (2021), and others).25 And SCF self-reports of non-business capital income follow the same trends as theincometaxdata,evenastheSCFaggregatestendtobeabitlowerthantheincometax data(figuresA.4candA.4d). TheseincomesectiondataalsoshowthatSCFbusinessownershaveinterest,dividend, and capital gains income flows on their tax forms, which is consistent with the interpretation that business owners report a broad net income concept in their “business section” responses. ThebiggestincomediscrepancynotedinBhandarietal.(2020b)involvespartnership income (as in figure A.3d). But if SCF business owners are reporting all income from businesses—not just profits—in section F of the survey, then we would expect these partnerstolaterreportalotofcapitalgainsandotherfinancialincomewhentheyareasked to report income from their tax forms in income section. In figure A.5 we show that this is the case: SCF families that own a partnership also receive 30-50% of capital gains and other financial income in income section of the survey (figure A.5). The share is growing over time, in line with the growth of partnership income reported in Section F of the SCF surveyandnotedelsewhere(DiCarloandShumovsky(2019),Smithetal.(2019)). 25Both the income section and business sections refer to income from the prior year, but the business sectionreferstocurrentbusinesses;inthecasewhereabusinessstartedorfoldedinthecurrentyear,there maybeamismatchbetweenincomeinthebusinesssectionandtheincomesectionduetothedifferencesin timing. 36

A.4 SCFincomedata 37 Figure A.4: Aggregate business and capital income: SCF income section and INSOLE personalincometaxfilings 3 2.5 2 1.5 1 0.5 1985 1990 1995 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt 2 SCF SOIPUF/INSOLE SOIPUF/INSOLE(adj) 1.5 1 0.5 1985 1990 1995 2000 2005 2010 2015 2020 year (a)All: pass-thoughbusiness,capitalincome )srallod .mon(snoillirt SCF SOIPUF/INSOLE SOIPUF/INSOLE(adj) (b)Pass-thoughbusinessincome(Sch. CandE) 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1985 1990 1995 2000 2005 2010 2015 2020 year )srallod .mon(snoillirt 0.6 SCF SOIPUF/INSOLE 0.4 0.2 0 1985 1990 1995 2000 2005 2010 2015 2020 year (c)Capitalincome(incl. cap. gains) )srallod .mon(snoillirt SCF SOIPUF/INSOLE (d)Capitalincome(excl. cap. gains) Note:author’scalculationsfromSurveyofConsumerFinancesandStatisticsofIncomeIndividualandSoleProprietorINSOLEdata andPUFdata. LightbluelineplotsaggregateincomefromSCFincomesection(SectionT).Redlinesplottheaggregatesfromthe INSOLEandPUFfiles. InpanelA.4a,dottedredlineisaggregateScheduleCandEincome(ordinarybusinessincome)andcapital incomeincludingcapitalgainsfromindividualtaxfilings,andtheredsolidlineaugmentstheseScheduleCandEincomeaggregates forunderreporting(asinBhandarietal.(2020b)).PanelA.4brepeatspanelA.4abutincludesonlySch.EandCbusinessincome.The bottompanelsplotcapitalincome(taxableinterest,non-taxableinterest,anddividends)withandwithoutcapitalgains(panelsA.4c andA.4d,respectively).

A.4 SCFincomedata 38 FigureA.5: ShareoffinancialincomereportedbyownersofpartnershipsinSCF 0.7 0.6 0.5 0.4 0.3 0.2 0.1 1990 1995 2000 2005 2010 2015 2020 2025 year erahS Share of portfolio income to SCF families with partnerships All portfolio Just cap. gains Note:author’scalculationsfromSCFdata.Figureplotsshareofcapitalgains(pinkline)andcapitalgainsplusdividends,interestand rent(brownline)thatownersofSCFpartnershipslaterreportinSectionTincomesection.

A.5 Predicted SCF business valuations using Compustat Absentanidealbenchmarkforprivatefirmvaluations,weturntodataonpublicfirmsasan imperfect gauge of respondent reported SCF valuations. To do so, we first calculate both value-to-salesandvalue-to-incomeratiosineachyearandforeightbroadindustryclasses from public firms in the CRPS/Compustat data. We then predict business valuations for each private SCF firm by applying these multiples to the sales and income reported in the SCF, as is common in the finance and accounting literature (Lui et al. (2002), Smith et al. (2023)). Ourpredictedvaluationsmodelisaweightedaverageofthesetwopredictions: compu compu bu ˆ s SCF = 1 salesscf value + 1 θincscf value (6) 2 · i · sales 2 · i · income ∀k (cid:34) (cid:18) (cid:19)k (cid:35) (cid:34) (cid:18) (cid:19)k (cid:35) (cid:88) where (value)compu and ( value )compu are generated from Compustat/CRSP linked data sales k income k foreightindustryclasses(k)foreachSCFyear. Thescalarθdescribestheshareofincome thatisretainedafterremovingthelaborincomeinherentinpass-throughbusinessincome. Unlikecorporateprofits,pass-throughbusinessincomeareoftenamixofcapitalandlabor income (Smith et al. (2019)). For example, income paid out as labor is subject to the payrolltax,whileprofitsarenot. Inrecentyears,preferentialtaxtreatmentofpass-through income—intheformoflowerrates—hasbeencodifiedintotaxlaw. PredictedSCFprivatebusinesswealthdescribedbytheaboveequationareshowninthe bluelinesinfigureA.6,usingmultipleapproachestoseparatelaborandcapitalincomefor businessowners.26 InMoskowitzandVissing-Jørgensen(2002),forSCFbusinessowners who do not report being paid a wage, we remove from their business profits a predicted wageincome. SCFbusinessvaluespredictedunderthiscorrectionareshowninthedotted line. More recently, Smith et al. (2019) estimate that 75 percent of pass-through business income should be classified as labor income. The long-dashed line in figure A.6, then, predicts business valuations when retaining 25 percent of business income (allocating 75 percent to labor, as in Smith et al. (2019)). The short-dashed line keeps the capital-labor allocation of Smith et al. (2023) for small firms but retains 75 percent of business income in larger firms, following the findings in Saez and Zucman (2020). Overall, the Saez and Zucman (2020)-based method classifies about 50 percent of business income as labor income,similartoBhandariandMcGrattan(2021). There are several notable features of figure A.6. First, the predicted SCF private business values using Compustat multiples are generally similar, though often larger than the 26This figure uses only actively managed businesses which all have data on industry, income and sales informationusedinthepredictions. 39

FigureA.6: Predictedaggregatevaluations 25 20 15 10 5 0 1990 1995 2000 2005 2010 2015 2020 2025 year )srallod .mon( snoillirt Priavte business valuation, SCF and predictions valueSCF SCF value (SZZadj.) SCF value (SZadj.) d SCF value (MVJadj.) d d Note:author’scalculationsfromSurveyofConsumerFinancesanddatafromCRSP(2025)andCompustat(2025)).SolidlineisSCF aggregate(foractivebusinesseswithindustrycodesonly),anddashedbluelinesarepredictedfromequation6. actual self-reported SCF values. We note here that there are numerous reasons why these Compustatmultiplesmayover-predict,especiallyifthemixofsmallandlargefirmsinthe SCF is not comparable to the firms in Compustat. Most of the small firms in Compustat have negative income, for example, but these are firms that may want to realize losses in the quest for growth—the SCF firms of a similar size or industry may face different incentivesorpriorities. Second, the predicted business values are more responsive to the business cycle than the self-reported values around the Great Recession period: each has a greater percent decline from 2007-2010 relative to self-reported values, and each has a greater increase from 2010-2013. These predictions based on public firms may be overly pessimistic, especially if self-reported values are better at incorporating the future stream of profits or discounting the current low-income realization of the business. The predicted values rely onthecurrentmeasuresofannualincome,whichmayincorporatetemporarydistress. 40