Measuring Inequality from Top to Bottom
This paper presents a new methodology to measure inequality that optimally combines household survey information and tax records to construct a complete income distribution. Combining the two data sources is necessary because, on the one hand, hous...
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| Format: | Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2015
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| Online Access: | http://documents.worldbank.org/curated/en/2015/04/24353317/measuring-inequality-top-bottom http://hdl.handle.net/10986/21851 |
| Summary: | This paper presents a new methodology to
measure inequality that optimally combines household survey
information and tax records to construct a complete income
distribution. Combining the two data sources is necessary
because, on the one hand, household surveys do not
accurately represent the wealthiest segment of the
population, while tax records do; on the other hand, the
opposite is true for the lower end of the income
distribution: tax records only include incomes above a
certain threshold. The key innovation of the proposed
methodology—and the main difference from the existing
literature—is the choice of an optimal income threshold b.
The Gini coefficient for the population is then computed
combining the conditional income distributions for incomes
below b (using household survey data) and above b (using tax
records). Central to this methodology is the fact that b is
not chosen arbitrarily: it should be determined in such a
way as to minimize reliance on household survey data to
compute the top of the income distribution. In practice, the
optimal b corresponds to the minimum income level that
triggers mandatory tax filing. The proposed methodology is
applied to the case of Colombia. |
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