What Should Be Included In Income Inequality?

Like many other concepts in economics, "income" is an idea that is only simple if you don't think about it too much. Moreover, one's measure of the inequality of income will depend to some extent on the measure of income that is chosen. 

One well-known example is whether income inequality is measured before taxes or after taxes. Another is whether income inequality is measured after including benefits of government programs, including not just cash payments like Social Security or Temporary Assistance to Needy Families or unemployment insurance, but also the value of non-cash programs like Medicare, Medicaid, and food stamps. The Congressional Budget Office publishes regular reports showing income inequality-adjusted in these various ways. 

As one either digs into these questions (or is slowly dragged into the swamp of these questions, depending on one's perspective), you are forced to face an overall question: In a very big-picture economic sense, what is produce in an economy in a given year as measured by gross domestic product is equal to the total income received in a year by parties throughout the economy. But when we measure inequality of "income"--even when we use a broad measure that includes taxes and the value of government transfers--it represents only a part of the economy. 

For example, if we start counting noncash government benefits as income, what about non-cash benefits received by workers, like the value of employer-provided health insurance, employer-provided contributions to a pension or a retirement account, or an employer-provided life insurance plan. Economists point out that if you live in a house you own, you are--in effect--renting that house to yourself, and one could in principle count the "imputed income" you receive from yourself as part of your personal income, just like any other landlord is required to count rental income. After all, living rent-free because you own a house is a form of the capital income that you receive from homeownership. Or what about business owners who receive a benefit both from the annual salary they receive, but also from reinvesting company profits in a way that leads to a rising value of their business? 

With all of these ideas in mind, economists have been trying to develop "distributional national accounts," which try to figure out what income inequality would look like with everything included. Two leaders in this effort are Emmanuel Saez and Gabriel Zucman, and they lay out the state of play in this effort "The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts" (Journal of Economic Perspectives, Fall 2020, 34:4, pp 3-26). Saez and Zucman have been leaders in using tax data to estimate income inequality (instead of using data from household surveys), but they are now focusing more on forms of income that the tax data leaves out. They write: 

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