income and tax

Overview of Income Data Collection

  • Various government surveys collect income data including:

    • Current Population Survey (CPS) conducted by the Bureau of Labor Statistics
    • Census Bureau survey
    • Other supplementary surveys collecting nationwide income information

  • Key Issue:

    • Household surveys aim to represent the entire US population.
    • Limitations:
    • May not accurately represent smaller groups, especially at the very top of the income distribution (top 1% or 5%).

Adding Tax Data to Income Analysis

  • Researchers integrated tax data with CPS to measure inequality changes.

  • Findings:

    • Gini coefficient rises when tax data is included.
    • Better captures the top 1% income distribution, highlighting higher inequality.

  • Historical Income Shares:

    • Analyzed top income shares over the past century.
    • Tax data is reliably collected from wealthy individuals.
    • Useful for tracking changes over time in top income shares.
    • Reveals U-shaped pattern for top income shares since the 1900s.
    • Looks specifically at divisions of the top 10% (top 1%, next 4%, next 5%).

Evolution of Income Inequality Over Decades

  • From the 1980s onward, noticeable increase in income inequality.

  • Strong evidence shows that the top 1% has seen significant income gains.

  • Data Combination:

    • Use of tax data along with household survey data provides a comprehensive view of inequality.

National Accounts & GDP Tracking

  • Researchers observed the need for national accounts that reflect both overall economic growth (GDP) and its distribution.

  • Distributional National Account:

    • Essential for understanding where growth benefits are allocated across income groups.

  • Connections:

    • GDP can be analyzed from both production and income perspectives.
    • However, household surveys and tax data do not sum up to GDP due to missing income data.

Breakdown of U.S. National Income & Economic Measures

  • National Income is calculated and reported by the Bureau of Economic Analysis (BEA).
    • Developed post-Great Depression to capture comprehensive economic activities.
    • Gross Domestic Product (GDP): Represents market value of all goods/services produced in the U.S.
    • Accounts for both goods and services including non-manufacturing sectors.
    • Gross National Income (GNI):
    • Total income generated by U.S. residents, accounting for foreign income and ownership.
    • Excludes foreign ownership in domestic production.

National Income Composition

  • National Income comprises labor income (approx. 70%) and capital income (approx. 30%).

  • Income Breakdown:

    • Most people receive income primarily through labor, while wealthier groups derive a significant share from capital.
    • For top 1%, more than 50% of income stems from capital rather than labor.

  • Tax Data Gaps:

    • Missing components include tax evasion, certain labor/capital incomes not reported (like retained earnings from corporations, investment income in pension funds, and fringe benefits).

Income Measures from National Accounts

  • Key Income Measures:

    • Factor National Income: Reflects raw sum of labor/capital income for production factors.
    • Pre-Tax National Income:
    • Includes pensions and social insurance benefits, subtracts contributions.
    • Post-Tax National Income:
    • Subtracts taxes and adds government spending; includes transfers and public goods.

  • Example of U.S. Income Distribution (2014):

    • Bottom 50%: 12.5% pre-tax, 19.3% post-tax income share.
    • Middle 40%: Stable contribution, about 40% of total income.
    • Top 10%: Around half of all income, majorly skewed between pre-tax (47%) and post-tax (39%).

Historical Income Trends Over Time

  • Income distribution reflects a U-shape for top 10%, declining during the Great Depression, increasing again since the 1980s.
  • Income Redistribution via Tax System:
    • Demonstrates a process where wealth redistribution occurs, indicating a progressive tax structure.

Analysis of Economic Growth and Redistribution

  • Economic Growth (1946-1980):

    • Significant growth evident across all groups; full population income grew by 95%.

  • Post-1980: Growth slowed to 61% for full population, revealing a discrepancy between pre-tax and post-tax income shares.

  • Implications:

    • The super-rich benefited disproportionately under the current economic structure.
    • Economic growth has become increasingly skewed towards wealth concentration at the top.

Equalizing vs. Disequalizing Growth

  • Income growth from this point of analysis reflects continuing inequalities amplifying since the 80s.
  • Comparative Analysis:
    • Bottom 50% experienced stagnation while the top gained significantly.
    • Post-tax growth is not simply cash but includes the value of services and indirect government benefits provided to citizens.

Conclusion: Insights on Income Distribution and Economic Growth

  • The transition from equalizing to disequalizing growth patterns post-1980.

  • Critical for understanding how tax systems and public policies can mitigate or amplify inequality, impacting overall economic health and societal equity.

  • Future research and comprehensive databases set to emerge given these insights are pivotal for anyone studying economics or societal reforms targeted towards decreasing income inequality.