Falling inequality and the growing capital income share: Reconciling divergent trends in survey and tax data

Abstract

• Based on a unique array of administrative records and household survey microdata, we provide detailed evidence on inequality trends for the recent period of survey-based inequality reduction in Uruguay (2009–2016). • Inequality trends are sensitive to the data source and inequality measure. • Synthetic indices decreased, but the top 1% and 0.1% income shares fell in household survey data, whereas in the corrected administrative data, they remained steady and even increased in 2016. • Differences result from increasing inequality in the upper tail of administrative data, mainly driven by a growing share of capital income and particularly dividends. • The probability of reaching top income positions is higher for men, liberal professionals, capital income receivers, and occupations associated to health services. In contrast to the remaining regions of the world, the available evidence from household surveys indicates that most Latin American countries experienced substantial reductions in monetary poverty and personal income inequality in the first 15 years of the 21 st century. However, it is still unclear whether these trends are robust to the inequality index and database. Based on a unique array of matched social security and personal and firm income tax records, and household survey microdata, we provide detailed evidence on inequality trends for the period of survey-based inequality reduction in Uruguay (2009–2016), focusing on the top income groups and the evolution of the capital income share. We correct administrative data to account for informality and social security/income tax underreporting. Trends are sensitive to the data source and inequality measure. Synthetic indices decreased in both datasets and the top income shares diverged. This results from increasing inequality in the upper tail of administrative data, mainly driven by a growing share of capital income, and particularly dividends. The probability of reaching top income positions is higher for men, liberal professionals, capital income receivers, and occupations associated to medical services. In contrast to evidence for developed countries, the financial and tech sectors are less represented. These findings have strong implications for the design of public policies aimed to reduce persistent inequalities in developing countries.