THE RELATIONSHIP BETWEEN .REALIZED INCOME 

AND WEALTH 

Report from a Select Sample of Estates 

Containing Farms or Businesses 

C. Eugene Steuerle 

U.S. Department of the Treasury 

OTA Paper 50 Decembe r 1982 

OTA Papers are circulated so that the preliminary 

findings of tax research conducted by staff members 

and others associated with the Office of Tax 

Analysis may reach a wider audience. The views 

expressed are those of the authors, and do not 

reflect Treasury policy. Comments are invited, but 

OTA Papers should not be quoted without permission 

from the authors. Managing editors are Michael 

Kaufman, Harry Grubert and Ralph Bristol. 

Office of Tax Analysis 

U.S. Treasury Department, Room 4040 

Washington, D.C. 20220 

Issued: December 1982 
ABSTRACT 

A unique sample of estate tax returns matched with 

previous years' income tax returns allows calculation of 

reported or realized income relative to value of assets. 

For owners of closely held businesses and farms, the 

realized rate of return on all assets is found ta be about 

2 percent: when wages are added to capital income, realized 

income is still less than 4 percent of the value of assets. 

The rate of realization is found to decline significantly as 

wealth increases (both before and after accounting for 

portfolio adjustments), and as the percentage of wealth in 

noncorporate, closely held form increases. 
THE RELATIONSHIP .BET\TEEN REXLIZED INCOME AND WEALTH: 

Report from a Select Sample of Estates 

Containing Farms or Businesses** 

I INTRODUCTION 

Income from wealth can be realized or unrealized for both 

tax and accounting purposes. Generally, realized income is in 

the form of direct cash flow from the underlying assets, while 

unrealized income is in the form of appreciation in the value of 

the assets. This division is not pure. The selling of an asset, 

for instance, causes a cash flow from previously unrealized 

income. 

The Federal income tax is primarily a tax on realized 

income. The base for calculating the tax is essentially the cash 

receipts of the taxpayer less certain outlays for business costs. 

Imputations of changing asset value are normally not used, except 

in the case of depreciation of qualified assets. 

In filing their income tax returns, taxpayers provide direct 

information on the amount of their income realization. These 

data are used for a wide variety of studies, ranging from 

national income accounting to analyses of behavioral reactions 

to tax disincentives. Whatever their limitations, income tax 

returns are widely believed to be one of the best sources of 

microdata on realized property income, partly because they do not 

suffer from the amount of underreporting present in survey data. 

Unfortunately, previous comparisons of households on the 

basis of realized income suffered from the drawback that there 

was no information on the wealth which was the’source of property 

income. One draws very different conclusions about a household 

which realizes $10,000 in property income if the associated value 
-2-

of its property is $100,000 than if it is $1,000,'000. Because 

unrealized income is not reported or even calculated by most 

households, knowledge of the wealth of households, when combined 

with other information on economic rates of return on assets, 

would also give a means of determining whether much economic 

income goes unrealized for tax purposes. 

On a separate track, however, work has proceeded on the use 

of estate tax returns as a source of wealth data (Lampman, 1962: 

Smith and Franklin, 1974). These data are highly valued because 

of the requirement of complete assessment of property value at 

death and because there have been serious problems of nonresponse 

and underreporting when other attempts have been made to gather 

data on the wealth of households. 

The availability of a small national sample of estate tax 

returns matched with the previous year's income tax returns 

therefore made possible a unique opportunity to examine the 

relationship between realized income from capital and the 

underlying value of the assets that produced that income. 

This data set is especially rich in information on reported rates 

of return on closely held assets, as the sample consists of 

farmers and businessmen with substantial amounts of such assets 

at time of death. For purposes of this paper, the ratio of 

realized income to value of wealth shall be referred to as the 

realized rate of return or simply the rate of return. The 

realized rate of.return differs from the actual economic rate 

of return by the amount of unrealized income or other income on 

capital not reported on the tax return. 

For this sample the size of the realized rate of return on 

all wealth is found to be around 2 percent, much less than would 

be recognized if that wealth were invested in the lowest paying 

savings account. Even when wage income is added to capital 

income (because of the difficulty of separating the two 

components), the amount of realized income is still less than 

4 percent of the total value of assets. 
-3-

Because economic theory holds that each investor equalizes 

after-tax rates of return on assets of equal risk, it is 

difficult to believe that these low realized rates of return 

actually reflect equally low economic rates of return. Indeed, 

if account is made for the illiquidity and riskiness I/of many 

of the assets held by members of the sample, one would expect 

that the average economic return of these individuals would be 

in excess of the rate of return received by individuals holding 

less risky assets such as savings accounts and, therefore, 

considerably in excess of therates of return realized for tax 

purposes. In a related paper (Steuerle, 19821, it was reported 

that the net income from capital reported on individual tax 

returns is less than one-third of the net income from capital 

(excluding inflationary returns) in the economy. The evidence 

presented here is consistent with the earlier finding that much 

income from capital is not reported or required to be reported on 

individual income tax returns. 

This study also finds that the realized rate of return 

varies according to certain economic'circumstances of the 

taxpayer. The realized rate of return on all assets generally 

declines as the value of assets increases. Even after accounting 

for portfolio differences, regression analysis reveals that there 

is still a significant rate of decline. In terms of portfolio 

differences themselves, the greater the percentage of assets 

which are closely held, the lower the realized rate of return on 

all assets. Additionally, farmers and owners of real estate 

businesses tend to realize lower rates of return on their total 

portfolio than other businessmen. 

This low ratio of realized income to economic income has 

a number of implications for both policy and research. For 

expenditure and tax policy, these results imply that realized 

income is not a very reliable measure of well-being, at least 
-4-

for persons with substantial ownership of capital. If need is 

based on economic income, then an expenditure program may be 

inadequately targeted if grants vary only with realized income. 

A similar limitation applies to the individual income tax system, 

where realized income is used as the measure of ability-to-pay. 

Moreover, the e�ficiency of investment in the economy may be 

seriously distorted when the tax rate (or the potential for not 

realizing income) varies by asset type. Tax considerations lead 

individuals to invest more in assets �or which smaller portions 

of total economic income are realized as income subject to tax. 

Resulting portfolio adjustments lead to a sectoral misallocation 

of investment. 

The low ratio of realized income to asset value has 

implications ,for a number of related areas of research. 

Realized income is often used to measure the degree of inequality 

in society and counts of those in poverty (e.g., Bureau of the 

Census, 1981). This study provides further evidence of the 

extent to which such data, if not adjusted to account for 

unrealized income or wealth, must be interpreted with a good deal 

of caution. 

Finally, realized income is sometimes used by researchers as 

a means to estimate wealth of households. Under the investmentincome approach to wealth estimation, the wealth of an individual 

in a particular asset is estimated by dividing the realized 

income (data sources generally contain information only on 

realized income) from that asset by the expected rate of return 

on that asset (Atkinson and Harrison, 1978, p. 171). This paper 

presents one of the few independent estimates of such rates of 

return, and perhaps the only independent estimate for those who 

wish to apply wealth/income multipliers to income tax return 

data. 
-5-

Source of Data 

This study uses a sample of 117 estate tax returns matched 

with the income tax returns of decedents for the calendar year 

before the year of death. The estate tax returns were filed 

during 1973 (for deaths generally in 1972 or 1973), while the 

income tax returns usually covered calendar 1971 or calendar 1972 

income. Each estate in the sample had a gross estate of $60,000 

or more, contained a large percentage of assets in the form of 

closely held business or farm, and its executor applied for 

deferred payment of estate tax. To be more precise, this study 

uses a random sample of returns-which applied under IRS Code 

Section 6166 for an extension of time for payment of estate tax. 

Under this provision, the value of the interest in the closely 

held business must exceed 65 percent of the adjusted gross 

estate. 

Although this study presents heretofore ungathered 

information on the important relationship between income and 

wealth for owners of closely held assets, ideally the sample 

would have included all estate tax returns, not just those 

with closely held assets. Nonetheless, it is hoped that this 

study will prove to be an important first step in estateincome analysis and a useful catalyst for comments on alternative 

approaches to using such data. Although the hypothesis cannot be 

tested here, we might also expect that much of the portfolio 

behavior of this sample is similar to that of wealthholders with 

similar amounts of wealth, especially with regard to behavioral 

responses to tax incentives. 

The match of the estate tax with the previous year's income 

tax allowed a direct comparison of the income from capital with 

the value of the capital that produced that income. Since the 

year of death differed by one or two years from the year in which 

the income was recorded, the comparison was not exact. The value 

of an asset may have differed slightly from year to year, and the 

taxpayer may have engaged in purchases and sales of assets after 

the receipt of the income, but before death. In order to file 
-6-

for an extension of payment of estate tax, however, most of the 

assets for members of this sample had to be held in closely held 

businesses at time of death, and sales of portions of closely 

held businesses are often difficult. Moreover, to the extent 

that consumption was likely to be financed out of sales of 

assets, any bias in the estimates of realized rates of return 

would be upward. However, if wealthholders tend not to consume 

out of their wealth (David and Menchik, 1981) -2/, then the bias 

due to inexact match of year of income and year of valuation of 

assets is slightly downward, and the wealth measure should be 

discounted about one year. 

Any bias due to the inexact match of year of death and year 

of income is still likely to be small. However, there are two 

tax accounting reasons why there is almost certain to be a net 

upward bias in the realized rate of return measures. First, 

valuations of farms and businesses for estate tax purposes are 

typically low. While estimates of value must be reasonable, 

there clearly is a tax incentive for executors and heirs to 

provide the lowest among reasonable estimates. Second, the 

measure of asset value incl'udes only the assets of the deceased, 

while the income measure may include both the deceased's former 

income and that of a spouse. 

Practically all of the data items were taken directly from 

the estate and income tax returns. Further information on items 

of data is contained in the Appendix. 

11. REALIZED RATES OF RETURN 

Average rates of return for various asset types and various 

gross estate classes are presented in Table 1. (Estate classes 

are split so as to provide equal sample sizes in each class). 

For closely held business assets of all members of this sample, 

income was only 1.15 percent of the value of the assets 

(3.56 percent is the average of the individual rates of return, 
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if no weighting of individuals by amount of assets is made). 

Even this estimate may be high, as data limitations required 

attribution to the closely held business of all business and farm 

income reported on related tax schedules. -31 

The rate of return for corporate stock is the dividend,rate, 

To the extent that capital gains are earned and realized on such 

stock, the estimate of the realized rate of return from ownership 

of corporate stock does not reflect the total return. It is not 

possible in this study to separate out capital gains on corporate 

stock from other capital gains nor to know the year in which 

those capital gains were accrued. Dividends on nonclosely held 

stock equaled 2.32 percent of assets. This figure can be 

contrasted to a Standard and Poors dividend rate on 500 stocks of 

2.84 percent for 1972 and 3.14 percent for 1971. 

While all asset types exhibit realized rates of return which 

are low, the rate of return for stock of closely held corporations is the lowest of all. Closer examination of the data 

indicates that, of 49 persons owning stock in closely held 

corporations at time of death, only 16 reported any dividends 

at all. Of these 16 persons, 5 had dividend rates of less than 

1 percent, and 12 had rates of less than 3 percent. In effect, 

closely held corporations, at least in this sample, are not prone 

to pay out dividends. This result should not surprise us, for 

corporations (other than subchapter S corporations) are subject 

to corporate tax. Wages and dividends are both taxable to the 

individual recipient, but only wages are deductible against 

corporate tax. 

When all nonwage income -4/ is treated as capital income, 

the income for all. members of the sample is only 1.88 percent of 

their assets. Capital income includes income from all nonwage 

sources, including savings accounts and capital gains, while the 

asset measure includes value of homes and durables.. In practice, 

it is impossible to separate capital income from wage income for 
-9-

. 

owners of business and farms. These owners may receive capital 

income in the form of wages or labor income in the form of 

profits. By adding income designated as "wages" to capital 

income, then, we can derive an upper bound for the income earned 

on all assets. Total income is still only 3.66 percent of the 

value of assets. 

No matter what the measure of realized rate of return or the 

gross estate class, the rate is quite low-less than the lowest 

paying savings account. Moreover, as noted in the previous 

section, this method of estimation probably results in an 

overstatement of the rate actually declared. When wages are 

added to income from capital, the resulting measure of the 

realized rate of return from capital is biased upward even more. 

I114 REGRESSION RESULTS 

From Table 1, it appears that the realized rate of return 

decreases as gross estate size increases and that the rate of 

return is lower for closely held businesses than for other 

assets. For tax reasons, of course, we should not find such 

results surprising. Larger gross estate sizes are generally 

indicative of higher marginal tax rates. Taxpayers with higher 

marginal tax rates shift toward assets for which exclusions of 

income from tax are possible. Moreover, assets cannot be 

costlessly exchanged once they have appreciated in value (that 

is, investors become "locked into" their assets because of the 

capital gains taxes): therefore, past as well as current marginal 

tax rates may have induced the particular portfolios observed at 

any one point in time. Indeed, current wealth may be more 

representative than current income of the marginal rates which 

influenced the existing portfolio. 

While tax effects clearly induce the distribution of 

assets among different income and wealth groups, the data are 

insufficient to determine whether these low realized rates of 
-10-

return imply low economic rates of return as well. S/ Economic 

theory does hold that after-tax rates of return on assets of 

equal risk are equilibrated across assets and that differentials 

in tax rates will become reflected in different before-tax rates 

of return on the assets. -6/ However, this study finds that lower 

realized rates of return are generally associated with assets 

considered to have higher risk. Thus, the tax effects may 

indeed have lowered the economic rate of return on risky, but 

tax-preferred, assets relative to other assets: however, the 

economic rate is still likely to be higher �or these risky assets 

than for many less risky investments such as interest-bearing 

financial instruments. Empirical evidence generally has borne 

out the finding of higher economic rates of return to assets 

with higher risk (e.g., for corporate stock, see Ibbotson and 

Sinquefield, 1982; for farms, see U.S. Department of Agriculture, 

1981). There is no reason to suspect that such findings are not 

also applicable to this sample. 

There are two related reasons to believe that lower realized 

rates of return do not imply lower economic rates of return for 

persons with large amounts of wealth. First, the very presence 

of large amounts of wealth means that top wealthholders are 

likely to have been persons who were successful, rather than 

unsuccessful, in their investment. Second, top wealthholders are 

also likely to be persons who accumulated rather than consumed 

much of their income. In this case, a lower realized rate of 

return may simply indicate that persons with higher rates of 

savings do not need to realize as much income to finance their 

consumption. 

One means of testing this last hypothesis is to see 

if increases in wealth significantly affect realized rates 

of return even after accounting for differences in portfolio 

allocation. Such a finding would fend support to the notion 

that larger wealthholders are more likely to take advantage of 

the option not to realize income even when they receive equal 

before-tax rates of return on particular types of assets. 
-11-

In this section we use regression analysis to find out 

whether the relationship between realized rate of return and 

wealth is statistically significant and, further, whether 

realized rates of return vary by type of asset held, e.g., 

by type of closely held business: farm, real estate, or other 

business. Accordingly, regressions were run using rates of 

return from closely held business or farm (noncorporate), 

corporate stock, and all assets as dependent variables. In the 

case of all assets, wage income is both excluded’and included in 

the measure of income and, hence, rate of return from those 

assets. Recall that for owners of closely held business, it is 

often difficult to separate wage from capital income. 

Table 2 presents the results of these regressions. For 

each dependent variable, one equation was run using only one 

independent variable--the value of the assets from which the 

related income is derived. For instance, if the rate of return 

from corporate stock is the dependent variable, the independent 

variable is the value of all corporate stock in the estate. In 

remaining equations, other possible explanatory variables are 

added: the value of all other assets, income other than the 

income from the particular assets being examined, dummy variables 

for closely held business comprised entirely of farm assets or of 

real estate assets, and variables which reflect the percentage of 

assets in closely held or corporate form. 

The first equation of each series is meant primarily to be 

descriptive of the data. We check to see whether rates of return 

for closely held assets and all assets decline as the amount of 

ownership of those assets increase. As suggested by the summary 

data reported in the previous section, these rates do indeed 

decline and the relationship tends to be significant for all 

except corporate stock, although for closely held business 

(noncorporate), the relationship is significant only at the 

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-13-

.10 level. Although not reported in Table 2, similar regressions 

using value of a11 assets (rather than assets from which the 

income was derived) as the only independent variable show similar 

results--a decline in realized rate of return for all except 

corporate stock as the value of assets increases. 

The rate of return for closely held businesses or farms 

is found to be sensitive primarily to the value of other assets 

(see equation lb). For a $1 million increase in value of assets 

other than closely held businesses, the rate of return on 

closely held business goes up by 11.0 percentage points. For a 

$1 million increase in closely held business assets, the realized 

rate of return on those assets goes down by 1.8 percentage 

points, but the relationship is no longer significant. A 

possible explanation of this result is as follows: as noted 

before, owners of closely held business have a great deal of 

discretion as to when to realize income, and, like other 

wealthholders, they tend to realize lower rates of return as 

their wealth increases. However, persons who show greater 

amounts of other assets include both those who are diversifying 

in order to obtain better or less risky returns elsewhere and 

those who find it necessary to realize more income in order to 

obtain more liquidity, perhaps to cover consumption needs. In 

summary, for owners of closely held business, the presence of 

larger amounts of other assets indicates a greater current 

tendency to realize income from the closely held assets 

themselves 

Other variables add little to the explanation of the 

realized rate of return on closely held business. Other 

income I/--in part a proxy for marginal tax rates applying when 

the first dollar of income is received from the business--is 

insignificant, as are dummy variables for farm and real estate. 

As noted above, however, past marginal tax rates may be more 

appropriate than current marginal tax rates when examining those 

parts of portfolios which are especially locked in due to past 

investment decisions. 
-14-

Turning to corporate stock, we find that only the 

"percentage of stock held closely" tends to explain much 

of the difference among individuals in rates of return 

(equation 2b). Given the tax incentive for owners of closely 

held corporations to pay wages in lieu of dividends, we expected 

the dividend rate on closely held stock to be lower than the 

dividend rate on other corporate stock. This is indeed what we 

found 

-

A number of theories assert that taxpayers with 

higher-than-average marginal tax rates will tend to hold 

corporate stock with lower-than-average dividend rates. 

However, in contrast to Blume, Crockett 6: Friend (19741, 

we found no significant, negative correlation between the 

dividend/price ratio and income (or wealth) in this sample. 

In equation (3b), we test whether the rate of return on all 

assets, capital income only, is related to several variables: 

value of assets, amount of other income, type of closely held 

business--farm, real estate, or other business, and percentage of 

assets in 1) noncorporate, closely held form, 2) stock of closely 

held corporations, and 3) stock of nonclosely held corporations. 

Only "other income" and "percentage of assets in noncorporate, 

closely held form" are significant at the .10 level. 8/ 

The percentage of assets in noncorporate, closely held form 

is significant not only in equation (3b), but in all equations 

in which it is introduced as a variable. However, equation (2b) 

is the only equation in Table 2 in which "other income" is 

significant, although only at the .10 level. Economic theory 

suggests that as other income goes up and marginal tax rates 

rise, taxpayers would tend to control their portfolios so as to 

minimize the extent to which the economic return from assets is 

realized for tax purposes. The insignificance of "other income" 
-15-

in equation (lb), as contrasted to (3b), would indicate that 

total portfolio rates of return are likely to be controlled 

through adjustments in asset holdings other than holdings of 

closely held business. A simpler explanation is that the measure 

of capital income, or the distinction between wage and capital 

income, is especially poor for closely held business assets. 

Equation (4d) is similar to equation (3b), except that wage 

income is included in the income from the assets and there is no 

"other income" since all income is included in the rate of return 

variable. In equation (4d), a decline in realized rate of return 

is indicated as asset value increases. Since this equation 

allows for various portfolio adjustments, the significance of the 

asset value variable lends support to the hypothesis that top 

wealthholders lower their realized rates of return not only 

through portfolio adjustments, but also by simply realizing less 

of their income for tax purposes. 

In terms of portfolio variables, equation (4d) also 

indicates a significant decline in rate of return as the 

proportion of the estate in noncorporate, closely held 

business increases. Even after adjusting for the proportion of 

assets held closely, owners of real estate have a much lower rate 

of return relative to owners of other business. Contrasting this 

equation to equation (3b)--in which the ownership of real estate 

is not significantly related to the rate of return on 

capital-would indicate that owners of real estate businesses pay 

themselves a lower wage rate (relative to value of capital) than 

owners of other businesses, while realizing about the same rate 

of capital income. Again, this does not imply a lower economic 

rate of return to owners of real estate, since owners of land and 

buildings may have substantial unrecognized income through 

appreciation in the value of assets. 
-16-

Equations (4b) and (4c) are presented primarily to show the 

effect of variables reflecting farm or real estate (as opposed to 

other business) ownership separately from the effect of portfolio 

allocations into noncorporate, closely held assets and corporate 

assets (both closely and nonelosely held). Note that farm owners 

tend to realize less than owners of other business in equation 

(4b1, but that this difference seems to be explained in equation 

(4d) by the allocation of the portfolio among closely held and 

nonclosely __ held assets, i.e., farmers realize lower rates of

return on their total portfolio by holding a greater percentage 

of their assets in the closely held form. 

IV. SUMMARY 

The realized rate of return on all assets for owners of 

closely held businesses and farms is quite low. The rate tends 

to decline both as wealth increases and as the percentage of 

wealth in noncorporate, closely held form increases. Dividend 

rates for closely held corporate stock are lower than rates for 

other corporate stock and often are zero. Counting both wages 

and other income, the realized rates of return for owners of 

real estate business are lower than those of other businesses. 

Farmers also tend to realize lower rates on their total assets 

than other business owners, but the difference tends to be 

reflected in a greater percentage of assets held in closely held 

form. 

Although this source of data provides new and important 

information on the relationship between income and wealth, 

it does not allow determination of whether the decline in 

realized rates of return as wealth increases implies a similar 

decline in economic rates of return. Three factors, however, 

argue against such a result. First, the assets held by top 

wealthholders tend to be more risky: other sources of data have 

tended to confirm higher rates of return for riskier assets. 
-17-

Second, persons who accumulate wealth are likely to have 

achieved such accumulation through successful investment in 

assets with relatively high rates of return. Finally, even 

after adjusting for portfolio changes, rates of realization 

were still found to decline significantly as wealth increased. 

My conclusion is that tax effects do cause portfolio shifts and 

do lower the economic rate of return on risky, but tax-preferred, 

assets relative to other assets. However, this economic rate of 

return is still likely to be higher for the risky assets held by 

top wealthholders than for other assets. Moreover, there remains 

a realization effect: that is, for many tax-preferred assets, the 

rate of realization of income is somewhat discretionary in 

nature, and it declines as wealth increases. 

These low realized rates of return call'into serious 

question the use of realized income from capital as part of any 

measure of well-being or ability-to-pay. For owners of capital, 

economic income may have little relationship to realized income, 

and rates of realization may vary according to the assets they 

hold. Tax and expenditure programs based upon realized income 

can produce inequitable results and may lead individuals to 

allocate their investments inefficiently. 
-18-

**I am grateful to Ralph Bristol, Harvey Galper, Michael 

Hartzmark, and Eric Toder for helpful comments, to Gordon Wilson 

for programming support, and to Adoncia Bratcher and Carolyn

Greene for assistance in preparation of the manuscript. Readers 

are invited to provide comments on this approach and related 

approaches to analyzing matches of estate and income tax returns. 

1/ The relevant measure of risk is that which is 

nondiversifiable or unavoidable (systematic). See, for instance, 

Modigliani and Pogue (1974). 

2/ David and Menchik (1982) found that little of interspousal transfers were consumed, at least by persons in the top

earnings quintile (p.17). 

3/ Income from closely held business is calculated as 

the sum of business income, partnership income, rental and farm 

income. To the extent that there may have been some partnership

income which came from sources which did not qualify as closely

held business, for instance, the rate of return for closely held 

business may be overstated. 

4/ Income equals adjusted gross income as reported on 

tax returns. Except for a few items of exclusion, generally

small in nature, adjusted gross income equals gross income. 

5/ The economic rate of return discussed here is before 

indivzdual taxes, but after corporate taxes. The beforecorporate tax economic rate of return on noncorporate assets is 

generally believed to be lower than the rate obtainable on 

corporate investment. 

6/ For a splendid model of the extent to which economic 

rates-of return would be lowered in a no-risk world for higher

income individuals holding assets with greater tax preference, 

see Galper and Toder (1982). 

7/ Using total income would involve a simultaneity problem

since-the income variable would depend upon the rate of return 

and vice-versa. 

8/ Technically, these variable are significant at the 

-051 and .067 levels respectively. 
-19-

BIBLIOGRAPHY 

Atkinson, A.B. and Harrison, A.J., Distribution of Personal 

Wealth in Britain (Cambridge: Cambridge University Press, 

1978) 0 

Blume, Marshall E., Crockett, Jean and Friend, Irwin, 

"Stockownership in the United States: Characteristics and 

Trends," Survey of Current Business (November 19741, 

pp. 16-40. 

Brittain, John A., Inheritance and the Inequality of Material 

Wealth (Washington: The Brookings Institution, 1978). 

Bussman, Wynn V. "Estimation of Household Corporate Stock 

Portfolios and a Model of Rate of Return from a Sample of 

Wisconsin Income Tax Returns (1946-1964)." Ph.D. 

dissertation, University of Wisconsin, 1972. 

Cordes, Joseph J. and Sheffrin, Steven M., "Taxation and the 

Sectoral Allocation of Capital in the U.S." National Tax 

Journal XXXIV (December 1981), pp. 419-432. 

David, Martin, and Menchik, Paul L. "Modelling Household 

Bequests," presented at the Econometric Society, Washington, ' D.C., 28 December 1981. 

Feldstein, Martin S. "On the Theory of Tax Reform." Journal of 

Political Economy (July-August 19761, pp. ,770104. 

Fisher, Lawrence and Lorie, James H., "Rates of Return on 

Investments in Common Stock," Journal of Business 41 (July 

19681, pp. 291-316. 

Galper, Harvey and Toder, Eric, "Transfer Elements in the 

Taxation of Income from Capital." National Bureau of 

Economic Research Conference on Income and Wealth, Madison,

Wisconsin, May 14-15, 1982. 

Ibbotson, Roger and Sinquefield, Rex. Stocks, Bonds and 

Inflation: The Past and the Future (Charlottesville, Va.: , Financial Analysts Research Foundation, 1982). (1 

Lampman, Robert J., The Share of Top Wealthholders in National 

Wealth, 1922-56 (Princeton: Princeton University Press, 

1962). 
-20-

Modigliani, Franco and Pogue, Gerald A. "An Introduction to Risk 

and Return." Financial Analysts Journal 30 (May-June 1974), 

pp. 73-77. 

Pechman, Joseph A. and Okneri Benjamin A., Who Bears the Tax 

Burden? (Washington: The Brookings Institution, 1974). 

Smith, James D. and Franklin, Stephen De, "The Concentration of 

Personal Wealth, 1922-69," American Economic Review 64 (May

1974), pp. 162-167. 

Steuerle, Eugene, "Is Income from Capital Subject to Individual 

Income Taxation?" Public Finance Quarteriy, 10 (July 1982) 

ppe 283-303. 

' Tobin, James, "The Theory of Portfolio Selection." in The Theory 

of Interest Rates, pp. 3-51, edited By F.H. Hahn (London:

MacMillan and Company, 1965). 

U.S. Bureau of the Census, Characteristics of the Population . Below the Poverty Level: 1979 (Washington: Government 

Printing Office, 1981). 

U.S. Department of Agriculture, Balance Sheet of the Farminq

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Review 58 (December 1968): pp. 1315-29. 
-21-

APPENDIX 

Information on Source of Data 

Each income tax return contained items of income such 

as wages, interest, dividends, farm income, rental income, 

partnership income, and business income. Each estate tax return 

identified value of gross estate, real estate, corporate stock, 

farm and non-corporate business assets, and value of closely held 

business. This last item was required of taxpayers to determine 

eligibility to file for the extension of time to pay the estate 

tax. By turning to worksheets and schedules attached to the 

returns, it was possible to differentiate wages from closely 

held business, dividends from closely held stock, and value of 

corporate stock in closely held business. In addition, the value 

of own home was separated from value of all other real estate. 

In most cases, the value of own home could be found in the 

documents attached to the estate ta’x return. However, in some 

cases--particularly where there was a farm--the presence of a 

home was indicated but the value of the house was not separated 

from the reported value of the farm or real estate. To impute a 

value of own home in these cases, two regression analyses were 

run. In the first regression, the sample consisted of all farms 

or ranches where value of own home was known. In the second 

regression, the sample consisted of all nonfarm estates where the 

value of own home was regressed against size of gross estate. 

These regressions were then used to impute the value of own home 

to those estates where a home was likely to be present, but where 

a value was not reported. The value of real estate in closely 

held business and the total value of closely held business assets 

were then adjusted by the value of own home.