What's Been Happening to United States Income Inequality?

Visiting Scholar
Richard Burkhauser
The public-use version of the March Current Population Survey (CPS), an annual cross-sectional survey of over 50,000 American households, is the primary data source used by public policy researchers and administrators to investigate trends in average U.S. income and its distribution. Despite the widely held view that United States income inequality has increased substantially since the 1980s, our research, which derives from unprecedented access to internal CPS data, tells a very different story. Most of the evidence of a large increase in income inequality since 1993 has come either from those who do not adjust for topcoding in the public-use CPS or from Internal Revenue Service (IRS) administrative record files that have their own consistency problems. In a practice called topcoding, for incomes above some value in the public-use CPS--the topcode threshold--the Census Bureau reports income as equal to this topcode threshold rather than providing the exact recorded value from the internal CPS.

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. . . .

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Richard Burkhauser is a visiting scholar at AEI.

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