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

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32Journal of Economic Literature, Vol. XLIX (March 2011)Fourth, there is a concern that tax basedtop income shares also exaggerate theincrease because of income shifting towardthe individual tax base following the tax ratereductions on the 1980s. Indeed, the seriesexcluding capital gains does display a large4.0 point upward jump from 1986 to 1988.As is well known (Daniel R. Feenberg andJames M. Poterba 1993, Saez 2004), almostone-half of this jump is due to a shift fromcorporate income toward individual businessincome due to the Tax Reform Act of 1986. 21However, corporate retained earnings translateinto capital gains that are eventually realizedand reported on individual tax returns.Therefore, in the medium run, this shiftwill be matched by an equivalent reductionin capital gains. Indeed, the top 1 percentincome share series including capital gainsdisplay no notable discontinuity around theTRA 1986 episode (the CPS top incomeshares increase as fast as the tax return basedtop income share including capital gains inthe medium run from 1985 to 1990). 22Therefore, from 1976 to 2006 and erasingthe 1992–93 measurement discontinuityin the CPS, the CPS top 1 percent shareeffectively misses 10.4 points of the surgeof the top 1 percent income share relativeto income tax data including realized capitalgains (the most economically meaningfulseries to capture total real top incomes). Aswe show on figure 6 and table 5 (panel B),this has a substantial impact on the official21 TRA 1986 made it more advantageous for closelyheld businesses to shift from corporate to pass-throughentities taxed solely at the individual level. Furthermore,those firms that remain corporate have an incentive to shiftmore of their taxable income to the personal tax base. Thiscan be done in many ways, e.g., higher royalty payments,payments for rent, higher interest payments, as well ashigher wage payments to entrepreneurs (Roger H. Gordonand Joel B. Slemrod 2000).22 The top income share including capital gains isabnormally high in 1986 because of very large capital gainrealizations in that year to avoid the higher capital gain taxrates after TRA 1986, a well established finding clearly visibleon figure 3.CPS Gini coefficient series over the 1976 to2006 period. Three points are worth notingon figure 6.First, as mentioned above, the official CPSGini increased from 39.8 percent in 1976to 47.0 percent in 2006 and this increaseincludes a 2 percentage jump from 1992 to1993 due to the measurement change discussedabove, so that the real increase inthe Gini is only 5.3 points over the period(table 5). Second, when excluding the top1 percent, the Gini for the bottom 99 percenthouseholds displays no discontinuity atall from 1992 to 1993 which shows that thediscontinuity is entirely due to measurementchanges within the top 1 percent. 23 The Ginifor the bottom 99 percent increases only by3.2 points from 1976 to 2006. Third, whencorrecting the Gini coefficient using the differentialin top 1 percent shares between thetax data (either including or excluding capitalgains) and Burkhauser et al. (2009), the Ginicoefficient increases by 10.8 and 8.8 pointsrespectively over the 1976–2006 period.Using our preferred series including capitalgains, the increase in the Gini is 10.8 points,i.e., more than twice as large as the 5.3 pointrecorded in the Gini (after correcting the1992–93 discontinuity) and more than threetimes as large as the 3.2 point increase inthe Gini for the bottom 99 percent. In otherwords, the top percentile plays a major rolein the increase in the Gini over the last threedecades and CPS data that do not measuretop incomes fail to capture about half of thisincrease in overall inequality.23 We have estimated the Gini for the bottom 99percent using the Atkinson formula G = (1 − S) G0 + Sfrom Atkinson (2007b) where G is the Gini for the full population(Official CPS series), G0 the Gini for the bottom 99percent, and S is the top 1 percent income share estimatedby Burkhauser et al. (2009). This method is not perfectbecause the official CPS Gini is based on households andincome including cash transfers while Burkhauser et al. top1 percent income share is based on families and excludescash transfers.
Atkinson, Piketty, and Saez: Top Incomes in the Long Run of History3355%50%Adjusted with tax data including K gainsAdjusted with tax data excluding K gainsOfficial CPS seriesCPS data (bottom 99%)45%40%35%30%196719691971197319751977197919811983198519871989199119931995199719992001200320052007Gini coefficientFigure 6. CPS Gini Coefficients: Correcting Top 1 Percent with Tax DataNotes: Official CPS data series is the official Gini coefficient estimated from CPS data by the Bureau of Census(Current Population Reports, Series P60–231). The unit of analysis is the household (not the family) and incomeincludes cash transfers. The discontinuity from 1992 to 1993 is due to changes in measurement and survey collectionmethods.CPS data (bottom 99 percent) series report the Gini coefficient based on CPS data but excluding the top 1 percent.We have computed those series using the formula G = (1 − S)G0 + S from Atkinson (2007b) where G is the Ginifor the full population (Official CPS series), G0 the Gini for the bottom 99 percent, and S is the top 1 percent incomeshare (from Burkhauser et al. 2009, depicted on figure 5). Note that the discontinuity from 1992 to 1993 vanishesentirely for the bottom 99 percent Gini demonstrating that the discontinuity in the Gini is entirely due to changes inthe measurement and censoring of top incomes within the top 1 percent.Adjusted tax data series adjusts the CPS Gini coefficient for the rise in the top percentile share in the tax data notcaptured by the CPS. Defining as D the difference in the top percentile shares from tax data (from Piketty and Saez,2003) and the CPS data (from Burkhauser et al. 2009), the adjusted Gini is computed as (1 − D) G + D where G isthe Official CPS Gini series (displayed in the graph). We have made those corrections both using the tax data seriesincluding capital gains and using tax data series excluding capital gains. Again, the fact that the discontinuity from1992 to 1993 disappears in those corrected series confirms that the discontinuity in the official CPS Gini series isentirely due to changes in the measurement of top incomes within the top 1 percent.The Gini correction using series including capital gains is the most meaningful economically because (a) realizedcapital gains are a significant source of income at the top (as many corporations retain substantial earnings or distributeprofits using share repurchases instead of dividends), (b) top 1 percent income share series including capitalgains are not affected as much by tax manipulation around TRA 1986 (as explained in the notes to figure 5).
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