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The Great Overestimation: Tax Data And Inequality Measurements In The United States, 1913–1943

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  • Vincent Geloso
  • Phillip Magness

Abstract

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)

Suggested Citation

  • Vincent Geloso & Phillip Magness, 2020. "The Great Overestimation: Tax Data And Inequality Measurements In The United States, 1913–1943," Economic Inquiry, Western Economic Association International, vol. 58(2), pages 834-855, April.
    • Handle: RePEc:bla:ecinqu:v:58:y:2020:i:2:p:834-855
    DOI: 10.1111/ecin.12865
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    Citations

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    Cited by:

    1. Kutuk, Yasin, 2022. "Inequality convergence: A world-systems theory approach," Structural Change and Economic Dynamics, Elsevier, vol. 63(C), pages 150-165.
    2. Dustin Chambers & Colin O’Reilly, 2022. "The economic theory of regulation and inequality," Public Choice, Springer, vol. 193(1), pages 63-78, October.
    3. Pim Zwart, 2022. "Inequality in late colonial Indonesia: new evidence on regional differences," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 16(1), pages 175-211, January.

    More about this item

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • N32 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - U.S.; Canada: 1913-
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts

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