On the Role of Capital Gains in Swedish Income Inequality

Realized capital gains are typically disregarded in the study of income inequality. We showthat in the case of Sweden this severely underestimates the actual increase in inequalityand, in particular, top income shares during recent decades. Using micro panel data to averageincomes over longer periods and re-rank individuals according to income excludingcapital gains, we show that capital gains indeed are a reoccurring addition to rather than atransitory component in top incomes. Doing the same for lower income groups, however,makes virtually no difference. We also try to find the roots of the recent surge in capitalgains-driven inequality in Sweden since the 1980s. While there are no evident changes interms of who earns these gains (high wage earners vs. top capital income earners), the primarydriver instead seems to be the drastic asset price increases on the post-1980 deregulatedfinancial markets. Also published in Working paper / Department of Economics, Uppsala University (Online), ISSN 1653-6975; 2011:7.