Our three examples highlight the importance of understanding both the theory and the practice of capital and income measurement. Analysts have often used statistics to make statements about U.S. savings behavior and inequality, without understanding some important causes of the observed outcomes. This article will help the reader to avoid such pitfalls and interpret the empirical evidence more knowledgeably. In particular, changes to the tax code in the 1980s drastically altered the reporting of various types of income, even though the underlying income levels probably did not change nearly as much. This fact is highly relevant in today’s policy disputes, because a pioneering indicator of growing wealth inequality is based on income tax data. It is entirely possible that the apparent surge in wealth inequality is largely spurious, reflecting large changes in the tax code but not large changes in the underlying economic reality.

This is from Robert P. Murphy, “Accounting for Capital and Income,” one of the two Featured Articles on Econlib for July.

In the piece, Bob lays out nicely the concepts of capital and income and goes on to show that although we economists have a pretty good theoretical handle on both concepts, when it comes to linking those concepts up with available data, it becomes complicated. He also argues, as Alan Reynolds had done earlier, that the 1986 Tax Reform Act dramatically changed reporting of individual income, and shows that this matters for recent discussions of rising wealth inequality in the United States.