THE GREAT OVERESTIMATION: TAX DATA AND INEQUALITY MEASUREMENTS IN THE UNITED STATES, 1913–1943

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)     

Inheritances and wealth inequality: a machine learning approach

This paper explores the relationship between received inheritances and the distribution of wealth (financial, non-financial and total) in four developed countries: the United States, Canada, Italy and Spain. We follow the inequality of opportunity (IOp) literature and???considering inheritances as the only circumstance? we show that traditional IOp approaches can lead to non-robust and arbitrary measures of IOp depending on discretionary cut-off choices of a continuous circumstance such as inheritances. To overcome this limitation, we apply Machine Learning methods (‘random forest’ algorithm) to optimize the choice of cut-offs and we find that IOp explains over 60% of wealth inequality in the US and Spain (using the Gini coefficient), and more than 40% in Italy and Canada. Including parental education as an additional circumstance ?available for the US and Italy? we find that inheritances are still the main contributor. Finally, using the S-Gini index with different parameters to weight different parts of the distribution, we find that the effect of inheritances is more prominent at the middle of the wealth distribution, while parental education is more important for the asset-poor.

     

Poverty, income distribution and CGE micro-simulation modeling: Does the functional form of distribution matter?

This paper explores income distribution modeling approaches for poverty analysis in a CGE micro-simulation context. Income distribution functional forms such as the lognormal, Pareto, beta distribution and empirical methods are currently used in CGE models in parallel with the estimation of FGT poverty indices. The particular methods or functional forms used in this context are not always clearly defined and justified. In this paper, we investigate and provide better criteria for selecting a functional distribution for poverty analysis. To achieve this, we apply parametric estimation to seven functional forms and compare the results to a purely “empirical” method. The results showed that no single form is more appropriate in all instances or for all household subgroups. The choice of a modeling approach should be motivated by a search for best fit and should be based on appropriate statistical tests. Selecting inappropriate distributional forms can lead to biased results in terms of poverty analysis. Introducing functional forms in the empirical approach can also provide greater confidence in the results obtained.

---

An erratum to this article can be found at     

Community and anti-poverty targeting

The standard theory of anti-poverty targeting assumes individual incomes cannot be observed, but statistical properties of income distribution in broadly defined groups are known. ‘Indicator targeting’ rules are then derived for the forms of transfers conditioned on group membership of individuals. In this literature the motivating notion of a ‘group’ is purely statistical, even when it is groups such as localities and ethnicities. We focus instead on groups which are ‘communities’, meaning thereby collections of individuals who have access to community-specific public goods, from which non-members are excluded. Such differential access constitutes a source of inequality among poor individuals belonging to different communities, which is not captured by monetary earnings. We show that this formulation of what constitutes a group changes many of the basic results of the indicator targeting literature. Optimal targeting for poverty alleviation leads to seemingly paradoxical rules, such as targeting transfers to the community that is richer. Total wealth of non-poor members of a community and its distribution both become relevant for specifying optimal indicator targeting rules. In addition, a poverty measure that is sensitive to the community identities of poor individuals, yet defined on nominal incomes, may be incompatible with some of the basic axioms in the standard literature on poverty measurement.     

Information theoretic approaches to income density estimation with an application to the U.S. income data

The size distribution of income is the basis of income inequality measures which in turn are needed for evaluation of social welfare. Therefore, proper specification of the income density function is of special importance. In this paper, using information theoretic approach, first, we provide a maximum entropy (ME) characterization of some well-known income distributions. Then, we suggest a class of flexible parametric densities which satisfy certain economic constraints and stylized facts of personal income data such as the weak Pareto law and a decline of the income-share elasticities. Our empirical results using the U.S. family income data show that the ME principle provides economically meaningful and a very parsimonious and, at the same time, flexible specification of the income density function.     

The sensitivity of income polarization

This study looks at polarization and its components’ sensitivity to assumptions about equivalence scales, income definition, ethical income distribution parameters, and the income accounting period. A representative sample of Danish individual incomes from 1984 to 2002 is utilised. Results show that polarization has increased over time, regardless of the applied measure, when the last part of the period is compared to the first part of the period; primary causes being increased inequality (alienation) and faster income growth among high incomes relative to those in the middle of the distribution. Increasing the accounting period confirms the reduction in inequality found for shorter periods, but polarization is virtually unchanged, because income group identification increases. Applying different equivalence scales does not change polarization ranking for different years, but identification ranks are affected. The welfare state considerably reduces income polarization and inequality, but at the expense of some more identification.      

“Left Behind?” Financialization and Income Inequality Between the Affluent,Middle Class,and The Poor

There is increasing scholarly evidence that financialization has contributed to rising income inequality, especially by concentrating income among the affluent and rich. There is less empirical research examining who is losing out to the affluent. This paper fills this gap by examining how three measures of financialization (finance, insurance, and real estate or FIRE employment; credit expansion; and financial crises) affect upper-tail (measured as the ratio between the 90th and 50th income percentiles) and lower-tail (measured as the ratio between the 50th and 10th income percentiles) income inequality. Using concepts from economic sociology and the social stratification literature, I develop a perspective that links financialization to income inequality by creating more unequal market incomes while simultaneously reducing redistribution and social transfers. I analyze disposable household income data (after taxes and transfers) from the Luxembourg Income Study (LIS) and other public sources like the OECD from 16 affluent nations between the years 1981 and 2011, and I use an unbalanced panel design due to LIS data coverage. I find that the relative incomes of both the middle class and the poor are hurt by financialization (strongest evidence tied to FIRE employment); however, relative incomes of the poor are especially sensitive to financialization.     

WHAT DRIVES SECOND GENERATION SUCCESS? THE ROLES OF EDUCATION,CULTURE, AND CONTEXT

I explore differences in intergenerational income mobility among second generation Australians—why do some communities do better or worse than would be expected from first generation incomes alone? I present a new decomposition of this exceptional income mobility, finding exceptional educational mobility drives many of these differences. Drawing on rich survey and test score data, I provide evidence that educational mobility partly reflects a role for culture—but also the wider context of migration. In particular, migrants facing higher first generation income penalties tend to aspire to and acquire more education, and see it as more important to success. (JEL J62, F22, I2)     

Occupational mobility and wealth evolution in a model of educational investment with credit market imperfections

We study the implications of individual heterogeneity for occupational mobility and the evolution of wealth distribution. These issues are investigated within a model of occupational choice with credit market imperfections and local non convexities in educational investment. Whether and under which conditions private wealth accumulation leads to the elimination of the effects of credit market imperfections is also studied. In the cases where steady states feature wealth and occupational mobility we show that private wealth accumulation cannot eliminate the effects of credit market imperfections if, at any point in time, investment correlates with wealth within households in the skilled occupation. Persistence of wealth constraints in the economy with occupational mobility motivates our exploration of policies. Compared to the case of homogeneous ability, we show that heterogeneity requires more persistent policies to achieve similar results in terms of enhanced investment opportunities and income per capita. It is also shown that the scope for policies is larger under heterogeneity: policies can be effective in environments where they would fail in a world of homogeneous abilities.     

The effect on inequality of changing one or two incomes

We examine the effect on inequality of increasing one income, and show that for two wide classes of indices a benchmark income level or position exists, dividing upper from lower incomes, such that if a lower income is raised, inequality falls, and if an upper income is raised, inequality rises. We provide a condition on the inequality orderings implicit in two inequality indices under which the one has a lower benchmark than the other for all unequal income distributions. We go on to examine the effect on the same indices of simultaneously increasing one income and decreasing another higher up the distribution, deriving results which quantify the extent of the ‘bucket leak’ which can be tolerated without negating the beneficial inequality effect of the transfer. Our results have implications for the inequality and poverty impacts of different income growth patterns, and of redistributive programmes, leaky or not, which are briefly discussed.     

From classes to copulas: wages,capital, and top incomes

Public debates about the rise in top income shares often focus on the growing dispersion in earnings, and the soaring pay for top executives and financial-sector employees. But can the change in the marginal distribution of earnings on its own explain the rise in top income shares? Are top executives replacing capital owners in the group of top-income earners, or are we rather witnessing a fusion of top capital and top earnings? This paper proposes an extension of the copula framework and uses it for exploring the changing composition of top incomes. It illustrates that changes in top income shares can easily be decomposed into respective changes in the marginal distributions of labour and capital income and the changing association between the two types of income. An application using tax record data from Norway shows that the association between top labour and capital incomes grew stronger between 1995 and 2005 in the top half of the wage and capital income distribution, though it declined for the top 1% of capital income receivers. A gender decomposition demonstrates that the association of wage and capital incomes at the top is particularly striking for men, whilst women are largely under-represented in the top halves of the two marginal distributions.     

Long-run trends in top income shares: The role of income and population growth

This paper studies the sensitivity of long-run trends in top income shares to differences in top-share measures. While the standard measure fixes a share of the population, we define alternatives that allow variation in both incomes and size of the top group based on defining absolute income thresholds. In an application to United States data, we find that top income share trends over the past century vary somewhat depending on the measure used. Allowing top groups to increase in size after 1980 along with overall economic growth results in a larger increase of top income shares. The historical drops before WWII are sensitive to the choice of income deflator: using GDP inflates interwar top income shares but using CPI deflates them. Altogether, these results recommend using complementary approaches to defining top income groups when measuring long-term top income share trends.

     

Accounting for income distribution trends: A density function decomposition approach

This paper develops methods for decomposing changes in the income distribution using subgroup decompositions of the income density function. Overall changes are related to changes in subgroup shares and changes in subgroup densities, where the latter are broken down further using elementary transformations of individual incomes. These density decompositions are analogous to the widely-used decompositions of inequality indices by population subgroup, except that they summarize multiple features of the income distribution (using graphs), rather than focusing on a specific feature such as dispersion, and are not dependent on the choice of a specific summary index. Nonetheless, since inequality and poverty indices can be expressed as PDF functionals, our density-based methods can also be used to provide numerical decompositions of these. An application of the methods reveals the multi-faceted nature of UK income distribution trends during the 1980s.     

A living wage for former welfare recipients entering employment: The case of Butler County,Ohio

Since the late 1970s, changes in family income in the United States have varied by income category. While the average income of families with children in the top 20% of the income distribution has grown, the average income of families with children in the bottom 20% has declined. Factors contributing to the growing income gap include disparities in wages paid to low-income workers relative to high-income workers, an increase in female-headed single parent families, and a decrease in the value of the minimum wage. Welfare reform will likely only exacerbate this situation. This study synthesizes existing research as well as data from an Ohio county to demonstrate that the minimum wage incomes available to poor families are not sufficient for even basic necessities. In order for former AFDC recipients to become economically independent, government policies must be enacted to increase wages and/or provide income assistance for poor families.     

Gender inequality in the one percent: A look under the hood of high incomes in Germany

Gender differences in economic outcomes are important topics in social science research. However, the study of gender differences among economic elites—“the top one percent”—has received surprisingly little attention, likely also due to a lack of empirical data. This paper investigates gender differences in individual and household income among the top one percent of individual monthly net incomes and top two percent of net household incomes using data from the German Microcensus from 2006 to 2016 covering more than 3.3 million individuals. I find that women account for only around 14% of the one percent in individual incomes. Additionally, regarding the household level, women's incomes are sufficient to achieve two percent status in fewer than 10% of all households. Both numbers did hardly change over the decade from 2006 to 2016. Furthermore, women's pathways to belonging to a high-income household are far more dependent on their partner's education and employment status than men's. Overall, the findings thus show dramatic gender differences among the German economic elite that do not narrow over time.     

Constants and variables: Pareto's asymmetric distribution curve

The article sets out the classic Paretian theory of income distribution. As it does so, it seeks to highlight the constant elements in the human faculties represented, at aggregate level, by the invariability and persistence of the asymmetric income curve, and the variable elements connected with the same curve and manifest in upward and downward mobility – what Pareto calls ‘circulation’. The two theorems arising from Pareto's discovery constitute a specific theory of development which has been confirmed from two points of view: in the positive sense of development when – as in the West – the second theorem has been applied (also independently of Pareto) with the connected theory of the entrepreneur and innovation in democratic regimes; but also in the negative sense of underdevelopment, with the destruction of wealth and the consequent general impoverishment, when expropriation policies have been implemented in despotic regimes, or excessive taxation in others.     

EVALUATING CHANGES IN THE DISTRIBUTION OF CAPITAL WEALTH

A small-scale general equilibrium model in which the distribution of capital wealth is a key parameter is employed to examine the potential economic consequences of greater capital wealth equality. Every performance indicator examined – aggregate income, consumption equality, social welfare in the sum-of-utilities sense, and aggregate saving –is improved by greater capital wealth equality. However, the bottom-line social welfare gain, relative to the present high-inequality situation – even from the maximum achievable level of complete equality in capital wealth distribution – would be numerically rather modest.     

Resource Effects on Access to Long-Term Care for Frail Older People

Abstract

Access to long-term care depends primarily on personal resources, including family members and income, and on external resources, including Medicaid and Medicare. This study investigates how resources affect frail older individuals' access to long-term care, with a focus on Black and White widows. Data from the 1989 National Long-Term Care Survey is used, in conjunction with state-level Medicaid and Medicare reimbursement rates for nursing home and home health care, to estimate the likelihood of five types of care arrangements. Results show that children are a primary resource for unmarried individuals in maintaining access to informal care. Income effects are nonlinear in relation to nursing home care: increasing incomes below the mean income are associated with decreasing probabilities of nursing home care, while increasing incomes above the mean are associated with increasing probabilities of nursing home care. Income and Medicaid effects are interrelated, with nonlinearities associated with income having the potential to adversely affect some older persons' ability to access nursing home care.     

Top incomes and the gender divide

In the recent research on top incomes, there has been little discussion of gender. A great deal is known about gender differentials in earnings, but how far does this carry over to total incomes? This paper investigates the gender divide at the top of the income distribution using tax record data for eight countries with individual taxation. It shows that women are strongly under-represented at the top of the distribution. Although the presence of women at the top has increased over time, the rise becomes smaller at the very top. The income gradient by gender has become more marked. The paper also shows that income composition differs by gender and exhibits significant changes over time, underlining the fact that it is not sufficient to look only at earned income.     

Household wealth and the measurement of economic well-being in the United States

We analyze the level and distribution of economic well-being in the United States during the 1980s and 1990s based on the standard measure of money income and a measure in which income from wealth is calculated as the sum of lifetime annuity from nonhome wealth and imputed rental-equivalent for owner-occupied homes. Over the 1982–2000 period, median well-being increases faster when these adjustments are made than when standard money income is used. This adjustment also widens the income gap between African-Americans and whites but increases the relative well-being of the elderly. Adding imputed rent and annuities from household wealth to household income considerably increases measured inequality and the share of income from wealth in inequality. However, both measures show about the same rise in inequality over the period. We also find an increasing share of wage and salary income in our expanded definition of income among the richest 1% over the period but do not find that the “working rich” have largely replaced rentiers at the top of the economic ladder.