Correcting the Underestimation of Capital Incomes in Inequality Indicators: with an Application to the UK, 1997–2016

Tahnee Christelle Ooms ()
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Tahnee Christelle Ooms: London School of Economics - International Inequalities Institute

Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, 2021, vol. 157, issue 3, No 5, 929-953

Abstract: Abstract This paper proposes a methodological framework to better incorporate non-labour income into existing top adjusted indicators of economic inequality. Surveys are known to miss the rich, receiving disproportionate amounts of capital income. There has been a surge in top harmonisation methodologies, which complement survey-based estimates of inequality with information from the rich reported in tax administrative sources. These harmonisation methods are found to have a significant upward effect on inequality indicators. This analysis uses the Family Resources Survey (household survey) and the Survey of Personal Incomes (tax data) to explore the extent to which existing UK harmonisation methodology corrects for capital income. First, this analysis finds that the FRS has experienced a significant decline in capital income measurement over the past 20 years (1997–2016), taking reported levels of capital income in the SPI as benchmark. Second, the top harmonisation methodology is found to only partially correct for this decline. Third, in response, the paper proposes a multi-step capital income correction to allocate the remaining capital income missing from top adjusted inequality indicators. The adjustment accounts for both under-coverage and under-estimation error of capital income across the income distribution. Poor measurement of capital incomes in household surveys has long been acknowledged but attempts to correct for this have remained few. This paper highlights the need for decomposable top adjusted indicators of inequality to give a better picture of the role of capital incomes in driving inequality. Surveys are traditionally used to produce inequality indicators used by governments, statistical offices and policy makers. The policy implication is that income missing from indicators structurally falls out of inequality debates, which has arguably been the case for capital incomes.

Keywords: Inequality indicators; Top income adjustments; Capital income correction; Household survey; Income tax (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s11205-021-02644-4

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