Series by g-percentiles

Even when the production of microfiles is not possible, we give as much information as possible by providing series that describe the thresholds, averages and shares for every “generalized percentiles.” There are 127 of these generalized percentiles (or g-percentiles):

• 99 percentiles from p=0% to p=99%,

• 9 tenths of a percentile fromp=99% to p=99.9%,

• 9 hundredths of a percentile fromp=99.9% to p=99.99%,

• 10 thousandths of a percentile fromp=99.99% to p=100%.

These indicators are sufficient for most users. In particular they can be used to compute any inequality indicator with a great level of precision, locate oneself or others in the distribution, and perform arbitrary aggregations of countries.

Key Points

• DINA series use consistent units of observation over time and between coun-tries. Our benchmark series use the “equal-split adult.” They distribute income or wealth to the entirety of the resident adult population (by which we mean 20 and older) of an economic territory. Income is split equally between members of a couple. When the data allows it, we also consider alternative units, such as “individualistic adults” (income not split between household members) and

“per capita equal-split” (income distributed to children as well as adults).

• We do not use “equivalence scales” for both conceptual and practical reasons.

In particular, they would prevent us from cleanly linking macroeconomic aggregates to the individual distribution of income or wealth.

• The GDP deflator is our benchmark price index for all DINA series. Over long periods of time, comparing quantities that are independent of the price level (wealth/income ratios, share) can be more informative.

• We provide PPPs and market exchange rates to convert between currencies. In our view, they both provide complementary information. We extrapolate PPPs over time based on the most recent ICP round based of the relative evolution of prices between countries.

• Monetary series in the WID are always given in the local currency at the latest year’s prices. Therefore, to convert them using PPPs or market exchange rates, we only use the most the recent PPP or market exchange rate, and apply it to the whole series.

• The database does not focus on any specific indicator, but instead seeks to provide a complete description of the distribution from the bottom to the very top.

Income Concepts

Beyond the challenge of the observation unit discussed in chapter 1, another limitation of inequality series based only on raw tax data, such as those that used to be published in the World Top Incomes Database (WTID), is the lack of homogeneity of income concepts. In the Distributional National Accounts (DINA) project, we overcome this issue by defining harmonized income definitions for both pretax and post-tax income inequality. This chapter explains and discusses these concepts.

Most WTID series were constructed using a so-called “fiscal income” notion, meaning the total income that is or should be reported on income tax declarations (before any specific deduction allowed by fiscal legislation).¹ This concept naturally varies with the tax system and the legislation of the country and year under consideration. It does not correct for the fact that some forms of income (in particular some forms of capital income) are legally not subject to personal income taxes, and do not appear on income tax declarations.² As a consequence, the

“fiscal income” concept can have series breaks and comparability problems.

In contrast, the income concepts we use in DINA series are defined in the same manner in all countries and all time periods, regardless of the fiscal legislation of any given country and year.

1“Fiscal income” is broader and slightly more homogeneous than “taxable income,” which we define as fiscal income minus existing income tax deductions (which typically vary a lot across countries and over time with the tax legislation). For instance, in France, all wage earners benefit from a 10% standard deduction for “professional expenses” (up to a ceiling). In the case of France, like in most countries, the raw tax data generally use the concept of “taxable income” (post-deduction income), and a number of corrections were applied so that WTID series refer to “fiscal income” (pre-deduction income). Although the “fiscal income” concept in WTID series is broader than

“taxable income,” it is not sufficiently broad and homogeneous over time and across countries.

2Sometimes, some forms of income are not taxable but are reported on tax returns, in which case we usually include them in the “fiscal income” concept used in WTID series.

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As we will explain below, the four basic pretax and post-tax income concepts by which we measure income inequality are anchored to the comprehensive notion of “national income” — and are designed to fit within the macroeconomic national accounting framework that calculates gross domestic product (GDP), set forth in the 2008 System of National Accounts (SNA) standard.³

Our decision to use national accounts income (and wealth) concepts for distributional analysis certainly does not mean that we believe that these concepts are perfectly satisfactory or appro-priate. We are aware that official national accounts have many shortcomings and need to be improved. In fact, we view the DINA project as a contribution to that improvement. This is why we occasionally correct SNA concepts when we consider them inadequate for our purpose (for example with respect to the measurement of foreign income, see below), and in some cases make suggestions for changes to future SNA definitions. But whenever the concepts from the World Inequality Database (WID) depart from the SNA, we make it explicit and justify our choices.

The main reason for using national accounts concepts is simply that these concepts represent, at this stage, the only existing systematic attempt to define notions such as income and wealth in a common way, and which (at least in principle) can be applied to all countries and years for which we have data, independently of country-specific and time-specific legislation and data sources. These concepts do need to be refined, but to propose amendments and improvements, the best is to start from them, use them and modify them when needed. The alternative would be to start from scratch and propose entirely new definitions of income, output and wealth, which is neither realistic nor desirable.

Moreover, by using national accounts concepts and producing distributional series based on them, we hope we can help address what we view as their main blind spot: namely, that they do not provide any information about the extent to which the different social groups benefit from growth. To close the gap between inequality measurement and growth measurement in national accounts could also help close the gap between popular perceptions of economic growth (the actual distribution of growth among a population) and its macroeconomic measurement in the

3In some countries, or for some earlier years, available national accounts series still follow the earlier system of international guidelines, namely SNA 1993 (or the European version, the European System of Accounts (ESA) 1995). The differences between the two systems are usually minor. In the few cases where there are significant differences we mention them below or in the country-specific papers. The main innovation between SNA 1993/ESA 1995 and the SNA 2008/ESA 2010 is the fact that research and development is now explicitly treated as investment and capital accumulation (with the introduction of a new non-financial asset category: AN117, “Intellectual property product”).

headline (quarterly and annual) GDP growth statistics.

2.1 Aggregate Income

This section describes the aggregate income flows to be distributed to individuals. We do not yet explain how these aggregates should be distributed in pretax or post-tax income: this is left for section 2.2.

We illustrate this section with data from the “Sequence of accounts” tables provided by the SNA 2008 guidelines (United Nations, 2009). The actual amounts reported in this “Sequence of accounts” table progression do not refer to any real setting, but the overall structure is meant to be broadly representative of the national accounts of advanced economies, and to demonstrate how the components of these accounts must necessarily fit together.⁴

While we try to give a description of SNA concepts that is sufficient to understand and create DINA series, a complete overview of SNA concepts is beyond the scope of this document. For that, we refer the reader the complete guidelines (United Nations, 2009), or to Lequiller and Blades (2014) for a more pedagogical treatment of the topic.