Tax Return Data Could Skew Wealth Gap, Researchers Say

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By Colleen Murphy and Allyson Versprille

May 13 — Relying on available tax return data could overstate income inequality, researchers say.Aparna Mathur, a resident scholar in economic policy studies at the American Enterprise Institute, said tax researchers must remember that tax return data “might be skewed” because some of the highest earners, like corporate executives, may only report a portion of their income and leave off compensation such as stock options or defer it to a lower tax year. Mathur spoke at a May 13 panel discussion hosted by the National Tax Association and the American Tax Policy Institute.

“If you’re trying to look at the overall behavioral response to taxes, which is pretty concentrated at the top of the income distribution, then we want to see more than just the taxable incomes,” Mathur said during the session.

Mathur also said many people with low incomes may not file taxes, so the available data skips them. It is hard for researchers to get the full picture, she said, because reporting cash and supplemental nutrition assistance program (SNAP) or Medicaid benefits isn't required in a return. She said about 145 million of the 161 million estimated tax units filed returns in 2012.

“The use of administrative tax return data overstates wealth inequality and the trends in wealth inequality,” Mathur said.

Reasons for the Skew

Joel Slemrod, director of the University of Michigan's Office of Tax Policy Research and professor of economics, said while the availability of returns over the last few years has “sparked an explosion of fascinating research,” there are other caveats to consider on top of what may be missing from returns.

Slemrod said “laziness and sloppiness of taxpayers” could impact the quality of a return—some taxpayers may overstate their tax liabilities and others may evade taxes completely.

“Let's face it folks, there are people out there who are cheating on their tax returns,” he said.

Slemrod also said changes in definitions and reporting requirements can make it hard for researchers to compare the data year to year. And because the data is only available to certain researchers, findings may be hard to replicate, he said.

Dodging Estate Tax

In very high-end income classes, there is a lot of elasticity in terms of the options those families can choose to minimize tax liability, James Poterba, president of the National Bureau of Economic Research and professor of economics at the Massachusetts Institute of Technology, said during the panel discussion.

He used the case of estate taxes in 2010 to demonstrate his point. The 2001 Economic Growth and Tax Relief Reconciliation Act made major revisions to estate, gift and generation-skipping transfer tax regimes.

Under the legislation, the estate tax expired in 2010. Congress reinstated the tax at the end of the year, but for estates with decedents who died in 2010, executors had two options for filing tax returns.

“They could either choose to pay the estate tax on the total value of what these folks had minus a threshold exemption,” which was $5 million in 2010, Poterba told Bloomberg BNA. “If they did that, they would still be able to take advantage of the basis step-up in death for any assets that were worth more than what the decedents had paid for them.”

However, they could also choose not to pay the estate tax,” he said. “If they didn’t pay the estate tax then, the beneficiaries—the children—would receive these assets but they would carry over the purchase price, the basis.”

For estates with very few assets that were worth more than what was paid for them, there was no reason to try to use the step-up basis, he said.

“The basis is equal to the market value, so if you didn’t have to pay estate tax now, hey, that’s great, you’re done.”

If the estate had a lot of appreciated stock, or a building purchased years ago that was now worth a lot, then “the capital gains reduction could be worth something.”

In other words, if the total value of the estate wasn’t much greater than the tax exemption threshold, the executor might decide to pay the estate tax because the capital gains saving was worth it, he said.

For that year, “it’s a little hard for us to tell whether people did the tax minimizing thing in each case, but what we do know from the data is that very few estates paid any estate tax for 2010.”

For estates valued at more than $5 million, total estate tax return filings decreased from 7,948 in 2009 to 2,788 in 2010, and then went back up to 9,285 in 2011.

To contact the reporter on this story: Colleen Murphy in Washington at and Allyson Versprille in Washington at

To contact the editor responsible for this story: Brett Ferguson at