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THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943
Author(s) -
Geloso Vincent,
Magness Phillip
Publication year - 2020
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12865
Subject(s) - economic inequality , economics , income inequality metrics , income distribution , state income tax , inequality , income tax , revenue , distribution (mathematics) , enforcement , demographic economics , public economics , tax reform , finance , political science , law , mathematical analysis , mathematics
Historical measures of income inequality in the United States must grapple with the challenge of data quality. We examine one such problem affecting the well‐known estimates of income inequality produced by Piketty and Saez (2003) using the records of the Internal Revenue Service (IRS). Prior to 1943, incomes were self‐reported. Combined with lax enforcement on the part of the IRS, self‐reporting of incomes could provide a misleading portrait of the income distribution. To test the accuracy of IRS records, we compare them to independently tabulated state income tax returns between 1919 and 1945 from states with more comprehensive and rigorously enforced tax collection procedures. State income tax records show lower overall levels of income inequality than IRS records. However, we still find that top income concentrations declined across the period between 1929 and World War II. These findings attest to the sensitivity of distributional estimation to the reporting selectivity and economic quality of underlying tax data, suggesting that the existing IRS‐derived series systematically overstates top‐income concentration in the interwar period. ( JEL H2, N32, D31, E01)