The Measurement Issue with Inequality

August 13, 2014

Wealth inequality has surged into public discourse this year with the release of works such as Thomas Piketty’s popular Capital in the Twenty-First Century. However, the data social scientist use to measure inequality isn’t an effective tool for the job.

To add to the conversation, we’ve released a new report that examines why using IRS and Census income data can produce skewed results and doesn’t accurately portray wealth inequality in the U.S.

The Flaws with Income Data

The IRS collects data on the incomes of individual taxpayers, and releases some of this data for social science research each year. Piketty and others have used this data to draw conclusions about inequality which they use as cause to call for higher progressivity in the tax code, global wealth taxes, and other solutions to the inequality they perceive.

While it may be true that inequality exists, our report explains why the IRS and Census data used by many are poor measures of one’s overall wellbeing, and therefore not necessarily well-suited for measuring equality in our society.

One issue with using this data is that income over one year is simply a very poor proxy for standard of living. This is in part because of lack of context and in part due to the weaknesses of income measurement itself.

For example, the average taxpayer’s income changes dramatically throughout his lifetime. Students have extremely low incomes, and are therefore mischaracterized by one-year income data. Those same students will possibly be high-income earners by the time they reach their fifties.

Instead of trying to use the IRS to define inequality and administer solutions for it, we should leave it to do the job it's meant to do. Economist Alan Cole writes:

“As an instrument of the federal government, the IRS is best when used for its intended purpose: collecting revenue. It is considerably less effective at creating social justice, which is not something easily determined using a Form 1040 alone. Efforts to fight social inequality would be best undertaken by humane institutions with well-defined purposes and local knowledge of the problems they are designed to handle—not a large centralized bureau built to extract revenue on a mass scale.”

To read the full report: click here

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