Wojciech Kopczuk, Columbia University - Accounting for Business Income in Measuring Top Income Shares

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

Abstract: Using linked individual and firm administrative data from Norway, we look through layers of holding companies and attribute corporate profits to the ultimate individual owner as they accrue rather than when realized. We show that our new measure of income inequality changes the level and trend of income inequality over time and eliminates the sensitivity of measures of inequality and income persistence to changing payout policies in response to tax reforms. After a tax reform in 2005 that incentivized the retention of earnings within businesses, the total income share of the top 0.1% more than doubled in some years, compared with ordinary realization-based income measures. We further utilize rich data to show that 1) using our comprehensive income measure reduces the estimated elasticity of income and 2) observed capital income flows on individual tax returns do not proxy well for overall corporate profits, so that an imputation method based on realized dividends that’s commonly used in the literature performs poorly. We discuss implications of these results for top income inequality measures in other countries, particularly in the United States.

Presenter: Wojciech Kopczuk, Columbia University

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