Using various layers of CPS data (see Table 1 for a more precise definition of the various layers of CPS data we use) we show why not adjusting for topcoding in the public-use CPS data will falsely show that American income inequality has been rapidly growing. Once properly
adjusted, we find that for at least the bottom 99 percent of the income distribution, the rise in income inequality since 1993 has been small and its yearly growth much slower than in the previous two decades. Our results hold even when we estimate income values for the very top
part of the income distribution missing in the internal CPS data. Our findings are consistent with those found using IRS data on the 90th-99th percentile groups, only differing with respect to the top 1 percent of the income distribution. It is uncertain to what degree this difference is the result of our decreasing ability to capture income at the very highest income levels, even using internal CPS data, or of behavioral changes in the way that individual tax units report their adjusted gross income on their tax returns captured in the IRS data. . . .
Richard Burkhauser is a visiting scholar at AEI.