Robert Waldmann proposes what sounds to me to be a better way to estimate the distribution of income from capital:
Robert's Stochastic thoughts: When one attempts to measure inequality, one faces the problem that much of the income of the very rich is... capital gains and the deeper problem that the variable of interest is income plus capital gains and not income or even income plus realised capital gains.... A standard approach to this problem is to report the distribution of income excluding capital gains and the distribution of income plus realised capital gains.
I have a suggestion for a third calculation....
In theory retained (reinvested) profits should show up as capital gains to shareholders. In (simplistic) theory realised capital gains should be a moving average of capital gains obtained year by year. In practice, the stock market bounces up and down insanely and realisations are, in the short run, extremely sensitive to changes in the tax code....
[A] simple way to assign retained earnings to individuals which is crude but might be useful. There are aggregate data on... [the] dividend payout ratio.... There are individual data on dividends received. Why not just divide dividends received by the dividend payout ratio? This will give dividend income plus the corresponding share of retained earnings owned as a shareholder. If there were not systematic differences in the dividend payout ratio of firms whose shares are owned by high and low income people, this will work fine. There are such systematic differences of course, but I doubt that they are huge....
This is a way to immunise estimates of the upper tail of the income distributions to changes in dividend payout without infecting the estimates with vulnerability to irrational exuberance....
[There are] tax shelters in which overstated depreciation of structures hides true income, and then when the structure is sold the hidden income appears as a capital gain. The amount of this activity fluctuated enormously.... When accelerated depreciation was introduced in 1981... it became huge... tax rates were cut and the practice was specifically banned in 1986.... The period after tax reform shows a huge spike in reported personal income of the richest 1%....
I would guess that true inequality increased even more than inequality of reported personal income in the period 1979-1986 as increasingly massive amounts were hidden from the IRS in this period. Similarly, I would guess that the huge increase in the share of the top 1% from 86 through 89 is largely the effect of a reduction in such sheltering...
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