Measuring Top Incomes Using Tax Data: A Case Study from Malaysia

Accurate measurement of income inequality is crucial for understanding economic disparities and designing effective policy interventions. However, traditional household surveys, including the Malaysian Household Income Survey (HIS), often underrepresent top incomes due to sampling limitations and underreporting by high earners. This study addresses these challenges by integrating HIS data from 2016 to 2022 with administrative tax records, applying a reweighting method to correct for biases in income distribution estimates. The results indicate that tax-adjusted data increases the Gini coefficient by about 2 percentage points, revealing a higher level of inequality than estimation from survey data alone. Our analysis shows that in 2022, the top 1% of earners captured 11.4% of national income, while the top 10% accounted for 35.0%, marking a substantial concentration of wealth. In contrast, the middle 40% experienced a decline in their income share, highlighting increasing polarization within Malaysia's income distribution. Ethnic disparities remain pronounced: despite a gradual decline in their overall population share, Chinese Malaysians continue to dominate the highest income brackets, comprising 56.5% of the top 1%. Meanwhile, Bumiputera, the majority ethnic group, account for 70% of the bottom 50%, underscoring persistent socio-economic inequalities. Although Bumiputera representation among top earners has risen slightly, this trend is primarily driven by gains in self-employment income rather than structural shifts in wage employment or wealth creation through property ownership. These findings underscore the importance of incorporating tax data into inequality assessments to obtain a more accurate and comprehensive picture of income distribution. Furthermore, the persistent ethnic and class-based disparities highlighted in this study emphasize the need for targeted policies that promote inclusive economic growth, equitable opportunities, and structural reforms to address long-standing inequalities in Malaysia's multi-ethnic society.