Measuring Income and Income Inequality

Abstract

Income inequality is important, but attempts to measure it arrive at strikingly different conclusions. Why? We use recent disputes over measuring United States income inequality to return to first principles about both the income concept and inequality measurement. We emphasize two broad points. First, no measure of the income distribution is truly comprehensive, or could attempt to be comprehensive without making controversial choices. We document the practical and conceptual problems that the standard ideal — comprehensive Haig-Simons income — raises. Second, much of the controversy in this area turns on the many tradeoffs between starting with individual tax data versus more expansive income concepts. Individual tax data reflect only a shrinking subset of a more comprehensive income concept — but they are individual data. More expansive alternatives, on the other hand, are harder to allocate to individuals. We document some of the most important and contestable assumptions that such an allocation requires.