This paper contributes to the burgeoning research on inequality and top incomes around the globe by presenting the first available estimates of top income shares and effective income tax rates in contemporary Chile based on analysis of anonymous income tax return microdata. We pay special attention to business income, which dominates at the top of the distribution. Our analysis includes not only distributed profits, but also the large proportion of accrued profits retained by firms.
Our most conservative estimate of the income share received by the top 1 per cent of Chileans, constructed directly from income reported to the tax agency, is 15 per cent for 2005 and 2009 – the fifth highest share reported in the top incomes literature. When distributed profits are adjusted for widespread under-reporting, we estimate that the top 1 per cent share increases to roughly 22 per cent. When distributed profits are replaced by accrued profits in our definition of income, we obtain 19 per cent as our lowest estimate for the top 1 per cent share. Despite this impressive income concentration, the rich in Chile pay modest effective income tax rates. The top 1 per cent pay an average effective rate of 16-17 per cent when distributed profits are not adjusted for under-reporting, and less than 9 per cent when distributed profits are adjusted to national accounts. When we include corporate income tax and accrued profits in our analysis (without adjustments), the effective tax burden for the top 1 per cent is 16 per cent.
