Discussion Papers no. 837

Integrated accrual approach using individual and firm data from Norway

Accounting for business income in measuring top income shares

Business income is important in the upper tail of the personal income distribution, but the extent to which it is captured by measures of personal income varies substantially across tax regimes.

Using linked individual and rm data from Norway, we are able to attribute business income to personal owners as it accrues rather than when it is realized. This adjustment leads to an increase in top income shares, and the size of this effect varies dramatically depending on the tax regime in place. After a tax reform in 2005 that created strong incentives to retain earnings in the business, the increase is massive: accounting for earnings retained in the corporate sector leads to more than doubling of the share of income of top 0.1% in some years. As the result, traditional measures of top income shares become misleadingly low (even when accounting for capital gains). We speculate on the implications of our ndings for levels and trends in top income shares observed in other countries. In particular, we note that the major tax reforms of the 1980s in the United States correspond to a shift in the direction of business income being passed through to personal owners, and argue that top income shares constructed using income tax statistics before 1987 are likely to be signicantly understated relative to those afterwards.

About the publication

Title

Accounting for business income in measuring top income shares. Integrated accrual approach using individual and firm data from Norway

Authors

Kjetil Telle, Annette Alstadsæter, Martin Jacob

Series and number

Discussion Papers no. 837

Publisher

Statistics Norway

Topic

Discussion Papers

ISSN

1892-753X

Number of pages

37

Language

English

About Discussion Papers

Discussion papers comprise research papers intended for international journals and books. A preprint of a Discussion Paper may be longer and more elaborate than a standard journal article as it may include intermediate calculations, background material etc.

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