This latest report from UK think tank Resolution Foundation looks at the importance of accounting for capital gains.
Capital gains (the profits from disposing of an asset for more than it was worth when you acquired it) are generally excluded from analysis of incomes in the UK, despite being a significant driver of some people’s lifetime living standards. This report looks at what we know about taxable capital gains; how our understanding of top income shares changes if we include capital gains in our analysis; and whether definitions of income used in official statistics should be changed or supplemented. Capital gains matter for a number of reasons. They’re big. They’re concentrated among a relatively small number of people. They have varied significantly over time in response to both economic and tax policy changes. And they are often interchangeable with other forms of income that are included in existing income statistics. Around half of all taxable capital gains now relate to people’s occupations, rather than the traditional stereotype of gains made on arms-length investments, but neither our income statistics nor tax policy have kept pace with this development. We show for the first time that the choice of whether capital gains are counted as ‘income’ or not has a material impact on statistics about the top of the individual income distribution, and therefore inequality. Top income shares are greater, and their rise in recent decades more pronounced, when capital gains are included.Read Full Report