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

Atkinson, Piketty, and Saez: Top Incomes in the Long Run of History35to an underestimation of top income shares.Ideally, one would want to impute excludedcapital income back to each income group.Because of lack of data, such an imputationis very difficult to fully carry out. 25 Some ofthe studies discuss whether the exclusion ofcapital income affects the series. For example,Chiaki Moriguchi and Saez (2008), in thecase of Japan, use survey data to estimate howinterest income—today almost completelyexcluded from the comprehensive income taxbase in Japan—is distributed across incomegroups. In the case of France, Piketty (2001,2003) has shown that the long-run decline oftop income shares was robust in the sense thateven an upper bound imputation of today’stax-exempt capital incomes to today’s reportedtop incomes would be largely insufficient toundo the observed fall. In the estimates oftop shares for Norway (Rolf Aaberge andAtkinson 2010), a calculation has been madeof income including the “full” return to stocks,but no systematic attempt has been made toimpute full capital income on a comparablebasis over time and across countries. We viewthis as one of the main shortcomings—probablythe main shortcoming—of our data set.As we shall see in sections below, this limitsthe extent to which one can use our data setto rigorously test the theoretical economicmechanisms at play.The treatment of capital gains and lossesalso differs across time and across countries.For a number of countries, series both includingand excluding capital gains have beenproduced (see table 4). As shown in figure 7,the effects of the inclusion of capital gainson the share of the top percentile is oftensubstantial. In the case of Sweden, JesperRoine and Daniel Waldenström (2008) notethat “over the past two decades the generalpicture turns out to depend crucially on25 Wolff and Zacharias (2009) use the Survey ofConsumer Finance and combine income and wealth datato estimate broader measures of capital income since 1982.how income from capital gains is treated.If we include capital gains, Swedish incomeinequality has increased quite substantially;when excluding them, top income shareshave increased much less.” In all cases, onlyrealized capital gains are included, if at all,in tax statistics and no information on accruingcapital gains is available. Some accruedcapital gains are never realized, for example,when there are step-up of basis provisions attime of death as in the United States. 26Finally, although the distinction betweencapital and labor income is clear conceptually,it is often partly blurred in the compositionaltax statistics. For example, realizedcapital gains of business owners often correspondto the sale of accumulated earningsof entrepreneurs in their firm, rather thanreturn on capital. Stock-option compensationsometimes appears as wage income butsometimes as capital income in tax statisticsdepending on the tax law.Income tax systems differ in the extentof their provisions allowing the deductionof such items as interest paid, depreciation,pension contributions, alimony payments,and charitable contributions. Income fromwhich these deductions have been subtractedis often referred to as “net income.” (We arenot referring here to personal exemptions.)The aim is in general to measure grossincome before deductions, but this is notalways possible. The French estimates showincome after deducting employee socialsecurity contributions. In a number of countries,the earlier income tax distributionsrefer to income after these deductions, butthe later distributions refer to gross income.In the United States, the income tax returnsprior to 1944 showed the distribution by26 Using the Survey of Consumer Finances, Poterbaand Scott Weisbenner (2001) estimate that, in 1998, capitalgains unrealized at time of death were $42.8bn (table 10-8,p. 440), i.e., slightly less than 10 percent of the $440bn ofnet realized capital gains reported on individual tax returnsin 1998 (Piketty and Saez 2003).