Adjusted U.S. Income Inequality

A 2016 working paper explores the well-tread topic on income inequality, but with proper adjustments. These include:

• Remove non-deductible losses before 1987
• Include tax-exempt interest
• Remove filers  younger than 20 years old and remaining dependent filers
• Remove non-resident filers
• Correct number and income of non-filers
• Correct for income sources
• Include C corporation retained earnings
• Include C corporation taxes
• Include employer payroll taxes
• Include employer provided health insurance
• Measure income group sizes using the number of adults
• Include Social Security benefits
• Include unemployment insurance benefits
• Include other cash transfers
• Include Medicare
• Include other non-cash transfers

When all is said and done, the researchers conclude,

Using unadjusted tax-based measures, Piketty and Saez (2003 and updates) estimate that between 1960 and 2013 top one percent pre-tax income shares increased by 10.0 percentage points. Using a consistent market income measure results in an increase of only 2.8 percentage points. Using a broad income measure with government transfers results in an increase of only 0.8 percentage points. Compared to unadjusted top one percent income shares, broad income shares were about 4 percentage points larger in the 1960s due to the inclusion of corporate retained earnings and taxes. They were about 5 percentage points lower in recent decades due to controlling for lower marriage rates outside the top of the distribution and including employer provided health insurance and government transfers. These differences illustrate how unadjusted tax-based income measures can present a distorted picture of inequality, as income sources outside the individual tax system can strongly impact inequality trends (pg. 14).