Comparison of personal income inequality estimates based on data from the IRS and Census Bureau

Kitov, Ivan (2007): Comparison of personal income inequality estimates based on data from the IRS and Census Bureau.

Abstract

This paper demonstrates quantitatively that modern estimates of income inequality based on the data reported by the IRS are not reliable. Principal problem of the IRS data consists in highly volatile income estimates in the low-end of personal income distribution. This volatility is likely related to measurement errors, changes in definitions or improper reporting. Personal income estimates at high and the highest incomes are robust and follow the Pareto law. At high incomes, personal income distributions for 1990 and 2004, when normalized to total population with income and total (gross) personal income, practically coincide. Hence, the inequality estimates based on the IRS data are distorted by inaccurate readings in the low-income zone. At the same time, income data provided by the US Census Bureau are consistent over time in all income ranges. Results presented by Kitov (2007) demonstrate that personal income distributions based on readings obtained in the Current Population Survey are characterized by practically constant Gini coefficient since 1960. This observation implies that normalized personal income distributions are also not changing with time.

• Item Type: MPRA Paper
• Institution: IDG RAS
• Language: English
• Keywords: personal income distribution; economic inequality; Gini coefficient; IRS; Census Bureau
• Subjects: D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development; D - Microeconomics > D0 - General > D01 - Microeconomic Behavior: Underlying Principles; J - Labor and Demographic Economics > J1 - Demographic Economics > J10 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E64 - Incomes Policy ; Price Policy; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E17 - Forecasting and Simulation: Models and Applications

References

Internal Revenue Service, (2007). Selected Income and Tax Items from Inflation-Indexed Individual Tax Returns. All Returns: Sources of Income, Adjustments, and Tax Items in Constant 1990 Dollars, http://www.irs.gov/taxstats/indtaxstats

Kitov, I., (2007). Modeling the evolution of Gini coefficient for personal incomes in the USA between 1947 and 2005, Working Papers 67, ECINEQ, Society for the Study of Economic Inequality, www.ecineq.org/milano/WP/ECINEQ2007-67.pdf

US Census Bureau, (2003). Technical Paper 63 Revised, Design and Methodology, http://www.census.gov/prod/2002pubs/tp63rv.pdf

US Census Bureau, (2004). Guidance on Differences in Income and Poverty Estimates from Different Sources, August 19, 2004

US Census Bureau, (2007). Current Population Reports Consumer Income Reports from 1946-2006 (P60), http://www.census.gov/prod/www/abs/income.html