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Pareto's Limits: Improving Inequality Estimates in America, 1917 to 1965

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  • Vincent Geloso
  • Alexis Akira Toda

Abstract

American income inequality, generally estimated with tax data, in the 20th century is widely recognized to have followed a U-curve, though debates persist over the extent of this curve, specifically regarding how high the peaks are and how deep the trough is. These debates focus on assumptions about defining income and handling deductions. However, the choice of interpolation methods for using tax authorities' tabular data to estimate the income of the richest centiles -- especially when no micro-files are available -- has not been discussed. This is crucial because tabular data were consistently used from 1917 to 1965. In this paper, we show that there is an alternative to the standard method of Pareto Interpolation (PI). We demonstrate that this alternative -- Maximum Entropy (ME) -- provides more accurate results and leads to significant revisions in the shape of the U-curve of income inequality.

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  • Vincent Geloso & Alexis Akira Toda, 2024. "Pareto's Limits: Improving Inequality Estimates in America, 1917 to 1965," Papers 2408.16861, arXiv.org.
    • Handle: RePEc:arx:papers:2408.16861
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    3. Peter H. Lindert & Jeffrey G. Williamson, 2016. "Unequal Gains: American Growth and Inequality since 1700," Economics Books, Princeton University Press, edition 1, number 10670.
    4. Geloso, Vincent & Msaid, Youcef, 2018. "Adjusting Inequalities for Regional Price Parities: Importance and Implications," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 48(4), February.
    5. Jeff Larrimore & Richard V. Burkhauser & Gerald Auten & Philip Armour, 2021. "Recent Trends in US Income Distributions in Tax Record Data Using More Comprehensive Measures of Income Including Real Accrued Capital Gains," Journal of Political Economy, University of Chicago Press, vol. 129(5), pages 1319-1360.
    6. Smiley, Gene, 1983. "Did Incomes for Most of the Population Fall from 1923 Through 1929?," The Journal of Economic History, Cambridge University Press, vol. 43(1), pages 209-216, March.
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