Income Inequality Analysis on Shaky Grounds

Those who have followed my discussions, have frequently heard me say something like, “The ends don’t justify the means – because the anticipated ends never occur as expected”.

A parallel guideline is: “Don’t make public policy recommendations based on aggregate economic statistics – because such statistics don’t accurately measure the economy”.

In a recent Wall Street Journal essay Piketty’s Numbers Don’t Add Up, Martin Feldstein explains the effect of data collection methods on income inequality statistics.

an excerpt:
” … problem with Mr. Piketty’s conclusions about increasing inequality is his use of income-tax returns without recognizing the importance of the changes that have occurred in tax rules. Internal Revenue Service data, he notes, show that the income reported on tax returns by the top 10% of taxpayers was relatively constant as a share of national income from the end of World War II to 1980, but the ratio has risen significantly since then. Yet the income reported on tax returns is not the same as individuals’ real total income. The changes in tax rules since 1980 create a false impression of rising inequality.”

Thanks to Jerry Bloom to alerting me to the referenced essay.