Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality

Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality. Gerald Auten and David Splinter. Draft Paper, Annual Conference, ASSA Annual Meeting, 2017. https://www.aeaweb.org/conference/2017/preliminary/paper/NkfkQ2a

Abstract: Previous studies using U.S. tax return data conclude that the top one percent income share
increased substantially since 1960. This study re-estimates the long-term trend in inequality after
accounting for changes in the tax base, income sources missing from individual tax returns and
changes in marriage rates. This more consistent estimate suggests that top one percent income
shares increased by only about a quarter as much as unadjusted shares. Further, accounting for
government transfers suggests that top one percent shares increased a tenth as much. These
results show that unadjusted tax return based measures present a distorted view of inequality
trends, as incomes reported on tax returns are sensitive to changes in tax laws and ignore income
sources outside the individual tax system.