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 personal owner as the profits accrue rather than when income is realized. We show that our accrual-based 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 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 accrual-based measure of personal income reduces the estimated tax elasticity of income, and (2) observed capital income in individuals’ tax returns does not proxy well for overall corporate profits, so that an imputation method based on realized dividends, which is commonly used in the literature, performs poorly. We discuss implications for top income inequality measures in other countries. We also document the importance of indirect ownership as a mechanism behind our findings and its relevance in other developed countries and discuss implications for debates on capital income and wealth taxation.