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

34Journal of Economic Literature, Vol. XLIX (March 2011)3.2.2 The Definition of IncomeTaxes affect the substance of the incomedistribution, and we return to this in section4, but they also affect the form of theincome distribution statistics. In all cases,the estimates follow the tax law, rather thana “preferred” definition of income, such asthe Haig–Simons comprehensive definition,which includes such items as imputed rent,fringe employment benefits, or accruing capitalgains and losses. In principle, transfersfrom the government should not be includedin pre-fisc incomes as they are part of thegovernment redistributive schemes whichtax pre-fisc incomes and provide transfers.In practice, the largest cash transfer paymentsare public pensions which are oftenrelated to social security contributions duringthe work life and hence can be consideredas deferred earnings. Means-testedtransfer programs are, in general, nontaxableand excluded from the estimates presented.Estimating top post-fisc income shares basedon incomes after taxes and transfers is alsoof great interest to measure the direct redistributiveeffects of taxes and transfer policies.24 Some studies, such as Atkinson (2005)for the United Kingdom, Piketty (2001) forFrance, and Piketty and Saez (2007) for theUnited States since 1960, have also estimatedpost-fisc top income shares.For a single country study, it may be reasonableto assume that income is a conceptwell understood in that context. Alternatively,one may assume that all taxable incomes differfrom the preferred definition by the samepercentage. Neither of these assumptions,however, seems particularly satisfactory anduse of taxable income may well affect the24 Taxes and transfers might also have indirect redistributiveeffects through behavioral responses. For example,high income earners might work less and hence earn lessif taxes increase. We come back to this important point insection 5.conclusions drawn about changes over time.When we come to a cross-country comparison,there seems an even stronger casefor adopting a definition of income that iscommon across countries and that does notdepend on the specificities of the tax law ineach country. Approaching a common definitionof income does however pose considerableproblems, as illustrated by the treatmentof transfers (which have grown very considerablyin importance over the century),by capital gains, by the interrelation withthe corporate tax system, and by tax deductions.The studies for the United States andCanada subtract social security transfers onthe grounds that they are either partially ortotally exempt from tax. In other countries,such as Australia, New Zealand, Norway, andthe United Kingdom, the tax treatment oftransfers differs, with typically more transfersbeing brought into taxation over time.Perhaps the most important aspect thataffects the comparability of series overtime within each country has been the erosionof capital income from the progressiveincome tax base. Early progressive incometax systems included a much larger fraction ofcapital income than most present pro gressiveincome tax systems. Indeed, over time, manysources of capital income, such as interestincome or returns on pension funds, havebeen either taxed separately at flat rates orfully exempted and, hence, have disappearedfrom the tax base. Some early income tax systems(such as France from 1914 to 1964) alsoincluded imputed rents of homeowners in thetax base, but today imputed rents are typicallyexcluded. As a result of this imputed rent exclusionand the development of numerous otherforms of legally tax-exempt capital income,the share of capital income that is reportableon income tax returns, and hence includedin the series presented, has significantlydecreased over time. To the extent that suchexcluded capital income accrues disproportionatelyto top income groups, this will lead