More Than They Realize: The Income of the Wealthy

Income realized for tax or survey purposes usually understates economic income for the wealthy because capital income recognition is often voluntary. Using estate tax returns filed in 2007 linked with income tax returns from 2002 to 2006, we find realized returns to capital for most wealthy individuals are less than 2 percent, with the richest filers reporting the lowest returns. Because of tax preferences, taxable returns are even smaller than reported returns. Consequently, studies relying upon realized income tend to overstate tax progressivity, understate income inequality, and miscalculate the distribution of wealth when derived through income-capitalization techniques.