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Accounting for Business Income in Measuring Top Income Shares: Integrated Accrual Approach Using Individual and Firm Data from Norway

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  • Annette Alstadsæter
  • Martin Jacob
  • Wojciech Kopczuk
  • Kjetil Telle

Abstract

Business income is important in the upper tail of the personal income distribution, but the extent to which it is captured by measures of personal income varies substantially across tax regimes. Using linked individual and firm data from Norway, we are able to attribute business income to personal owners as it accrues rather than when it is realized. This adjustment leads to an increase in top income shares, and the size of this effect varies dramatically depending on the tax regime in place. After a tax reform in 2005 that created strong incentives to retain earnings within businesses, the increase was massive: accounting for earnings retained in the corporate sector leads to more than doubling of the share of income of top 0.1% in some years. Furthermore, adjusting for retained earnings stabilizes the composition of the top income group before and after the reform. We also show that the response is driven by majority owners in closely held firms and facilitated through indirect ownership. As the result, traditional measures of top income shares become misleadingly low (even when accounting for capital gains). We speculate on the implications of our findings for levels and trends in top income shares observed in other countries. In particular, we note that the major tax reforms of the 1980s in the United States correspond to a shift toward business income being passed through to personal owners, and argue that top income shares constructed using income tax statistics before 1987 are likely to be significantly understated relative to those afterwards.

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  • Annette Alstadsæter & Martin Jacob & Wojciech Kopczuk & Kjetil Telle, 2016. "Accounting for Business Income in Measuring Top Income Shares: Integrated Accrual Approach Using Individual and Firm Data from Norway," NBER Working Papers 22888, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22888
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    Cited by:

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    2. Pawel Bukowski & Filip Novokmet, 2019. "Between communism and capitalism: long-term inequality in Poland, 1892-2015," CEP Discussion Papers dp1628, Centre for Economic Performance, LSE.
    3. Bastani, Spencer & Waldenström, Daniel, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," IZA Discussion Papers 11475, Institute of Labor Economics (IZA).
    4. Advani, Arun & Summers, Andy, 2020. "Capital Gains and UK Inequality," The Warwick Economics Research Paper Series (TWERPS) 1260, University of Warwick, Department of Economics.
    5. Andreas Fagereng & Martin Blomhoff Holm & Benjamin Moll & Gisle Natvik, 2019. "Saving Behavior Across the Wealth Distribution: The Importance of Capital Gains," NBER Working Papers 26588, National Bureau of Economic Research, Inc.
    6. Kopczuk, Wojciech, 2016. "U.S. capital gains and estate taxation: a status report and directions for a reform," CEPR Discussion Papers 11208, C.E.P.R. Discussion Papers.
    7. Carla Krolage & Andreas Peichl & Daniel Waldenström & Carla Krolage, 2018. "Richer or more Numerous or both? The Role of Population and Economic Growth for Top Income Shares," CESifo Working Paper Series 7385, CESifo.
    8. Aaberge, Rolf & Atkinson, Anthony B. & Modalsli, Jørgen, 2020. "Estimating long-run income inequality from mixed tabular data: Empirical evidence from Norway, 1875–2017," Journal of Public Economics, Elsevier, vol. 187(C).
    9. Pascal Paul, 2017. "Historical Patterns of Inequality and Productivity around Financial Crises," Working Paper Series 2017-23, Federal Reserve Bank of San Francisco.
    10. Rolf Aaberge & Anthony B Atkinson & Jørgen Modalsli, 2016. "On the measurement of long-run income inequality. Empirical evidence from Norway, 1875-2013," Discussion Papers 847, Statistics Norway, Research Department.
    11. Benjamin Pugsley & Sebastian Dyrda, 2017. "Taxes, Regulations of Businesses and Evolution of Income Inequality in the US," 2017 Meeting Papers 1463, Society for Economic Dynamics.
    12. Advani, Arun & Summers, Andy & Tarrant, Hannah, 2020. "Measuring UK top incomes," CAGE Online Working Paper Series 490, Competitive Advantage in the Global Economy (CAGE).
    13. Pascal Paul, 2018. "Historical Patterns of Inequality and Productivity around Financial Crises," 2018 Meeting Papers 583, Society for Economic Dynamics.
    14. Ravaska Terhi, 2018. "Top incomes and income dynamics from a gender perspective : Evidence from Finland 1995-2012," Working Papers 1822, Tampere University, School of Management and Business, Economics.
    15. Wojciech Kopczuk & Eric Zwick, 2020. "Business Incomes at the Top," Journal of Economic Perspectives, American Economic Association, vol. 34(4), pages 27-51, Fall.
    16. David Gallusser & Matthias Krapf, 2019. "Joint Income-Wealth Inequality: An Application Using Administrative Tax Data," CESifo Working Paper Series 7876, CESifo.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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