Working Paper: NBER ID: w19110
Authors: Philip Armour; Richard V. Burkhauser; Jeff Larrimore
Abstract: Recent research on United States levels and trends in income inequality vary substantially in how they measure income. Piketty and Saez (2003) examine market income of tax units based on IRS tax return data, DeNavas-Walt, Proctor, and Smith (2012) and most CPS-based research uses pre-tax, post-transfer cash income of households, while the CBO (2012) uses both data sets and focuses on household size-adjusted comprehensive income of persons, including taxable realized capital gains. This paper provides a crosswalk of income growth across these common income measures using a unified data set. It then uses a more consistent Haig-Simons income definition approach to comprehensive income by incorporating yearly-accrued capital gains to measure yearly changes in wealth rather than focusing solely on the realized taxable capital gains that appear in IRS tax return data. Doing so dramatically reduces the observed growth in income inequality across the distribution, but most especially the rise in top-end income since 1989.
Keywords: income inequality; Haig-Simons income; capital gains; income measurement; distributional analysis
JEL Codes: C81; D31; H24; J3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| comprehensive Haig-Simons income definition (H24) | lower observed growth in income inequality (F62) |
| inclusion of accrued capital gains (H24) | reduction in reported income growth of the top quintile (F62) |
| traditional market income definitions (excluding capital gains) (E25) | overstate income growth of top earners (E25) |
| accounting for capital gains on an accrued basis (M41) | trends in income inequality appear less severe (D31) |
| choice to include/exclude certain income sources (H24) | influences observed trends in income inequality (F61) |