"Top Incomes in the Long Run of History" with Tony Atkinson and

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18Journal of Economic Literature, Vol. XLIX (March 2011)(such as pension funds), it is not evident thata constant percentage is appropriate. Sincetransfers were also smaller at the start of thetwentieth century, total household returnableincome was then closer to total personalincome. Atkinson (2007) compares the twomethods in the case of the United Kingdom.He shows that the total income estimatedfrom the first method by estimating theincome of nonfilers trends slightly downwardsrelative to personal income minustransfers from around 90 percent in thefirst part of the twentieth century to around85 percent in the last part of the century.Furthermore, there are substantial shorttermvariations especially during world warepisodes when the national accounts figuresappear to be relatively higher by as much as15–20 percent. Some countries do not havedeveloped national accounts, especially inthe earlier periods covered by tax statistics.In that case, the total income control is chosenas a fixed percentage of GDP where thepercentage is calibrated using later periodswhen National accounts are more developed.Need for a control total for income is ofcourse avoided if we examine the “shareswithin shares” that depend solely on populationtotals and the income distribution withinthe top, measured by the Pareto coefficient.This gives a measure of the degree of inequalityamong the top incomes that may be morerobust but does not compare top incomes tothe average as top income shares do.3.1.4 Adjustments for Income DefinitionIn a number of cases, the definition ofincome used to present the tabulationschanges over time. To obtain homogeneousseries, such changes need to be correctedfor. The most common change in the presentationof tabulations is due to shifts from netincome (income after deductions) to grossincome (income before deductions). Whencomposition information on the amount ofdeductions by income brackets is available,the series estimated can be corrected forsuch changes. If we assume that ranking ofindividuals by net income and gross incomeare approximately the same, the correctioncan be made by simply adding back averagedeductions bracket by bracket to go from netincomes to gross incomes. This assumptioncan be checked when micro-data is availableas is the case in the United States since 1960for example (Piketty and Saez 2003).It is also of interest to estimate both seriesincluding capital gains and series excludingcapital gains (see below). This can alsobe done if data on amounts of capital gainsare available by income brackets. Becausecapital gains can be quite important at thetop (see figure 3), ranking of individualsmight change significantly when including orexcluding capital gains. The ideal is thereforeto have access to micro-data to create tabulationsboth including and excluding capitalgains. The micro-data can also be used toassess how ranking changes when excludingcapital gains and hence develop simple rulesof thumb to construct series excluding capitalgains when starting with series includingcapital gains (or vice versa). This is done inPiketty and Saez (2003) for the period before1960, the first year when micro-data becomeavailable in the United States.3.1.5 Other StudiesAs mentioned above, Kuznets (1953)developed the methodology of combiningnational accounts with tax statistics to estimatetop income shares. Before Kuznets,studies using tax statistics were limited tothe estimation of Pareto parameters (startingwith Pareto 1896 and followed by numerousstudies across many countries and time periods)or to situations where the coverage oftax statistics was substantial or could be supplementedwith additional income data (asin Scandinavian countries, the Netherlands,the German states, or the United Kingdomas we mentioned above). Therefore, there
Atkinson, Piketty, and Saez: Top Incomes in the Long Run of History19exist a number of older studies in thosecountries computing top income shares fromtax statistics. In general, those studies arelimited to a few years. Those studies are surveyedin Lindert (2000) for the United Statesand the United Kingdom and Morrisson(2000) for Europe. They are also discussed ineach modern study country by country. Wemention the most important of those studiesat the bottom of table 4. The only countryfor which no modern study exists and olderstudies exist is Denmark. Those studies forDenmark show that top incomes shares fellsubstantially (as in other Nordic countries) inthe first half of the twentieth century till atleast 1963 (Rewal Schmidt Sorensen 1993).We also mention in table 4 other importantrecent country specific contributions, includingthose by Joachim Merz, Dierk Hirschel,and Markus Zwick (2005) and by StefanBach, Giacomo Corneo, and Viktor Steiner(2008) of Germany, by Bjorn Gustafsson andBirgitta Jansson (2007) of Sweden, and byJordi Guilera Rafecas (2008) of Portugal. 17Table 4 provides a synthetic summary ofthe key features of the estimates for all thestudies to date. It should be noted that thetable refers, in some cases, to testimatesupdating those in the published studies.3.2 Possible LimitationsTop income share series are constructedusing tax statistics. The use of tax data is oftenregarded by economists with considerabledisbelief. In the United Kingdom, Richard M.Titmuss wrote in 1962 a book-length critiqueof the income tax-based statistics on distribution,concluding, “we are expecting too muchfrom the crumbs that fall from the conven-17 This survey does not cover the estimates for formerBritish colonial territories being prepared as part of a projectbeing carried out by Atkinson (apart from Singapore,shown in table 4). This project has assembled data for someforty former colonies covering the periods before and afterindependence. Data for French colonies and Brazil arebeing examined by Facundo Alvaredo.tional tables” (p. 191). More recently, compilersof databases on income inequality havetended to rely on household survey data, dismissingincome tax data as unrepresentative.These doubts are well justified for at least tworeasons. The first is that tax data are collectedas part of an administrative process, which isnot tailored to our needs, so that the definitionof income, of income unit, etc. are not necessarilythose that we would have chosen. Thiscauses particular difficulties for comparisonsacross countries, but also for time-series analysiswhere there have been substantial changesin the tax system, such as the moves to andfrom the joint taxation of couples. Secondly, itis obvious that those paying tax have a financialincentive to present their affairs in a waythat reduces tax liabilities. There is tax avoidanceand tax evasion. The rich, in particular,have a strong incentive to understate theirtaxable incomes. Those with wealth take stepsto ensure that the return comes in the formof asset appreciation, typically taxed at lowerrates or not at all. Those with high salariesseek to ensure that part of their remunerationcomes in forms, such as fringe benefits or stockoptions, that receive favorable tax treatment.Both groups may make use of tax havens thatallow income to be moved beyond the reachof the national tax net. Third, the tax data isin general silent about the industrial compositionof top incomes, which limits our abilityto interpret and understand changes. It wouldbe good, for example, to know more about thelinks between rising top income shares andInformation and Communication Technologies(ICT), but this requires other data.These shortcomings limit what can be saidfrom tax data but this does not mean that thedata are worthless. Like all economic data,they measure with error the “true” variablein which we are interested. As with all data,there are potential sources of bias but, as inother cases, we can say something about thepossible direction and magnitude of the bias.Moreover, we can compensate for some of the
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