AGI and Income Inequality

When you look at the form Instructions on Filing 1040, there is a lot of information that goes into filing a 1040 and taxes in general. AGI is calculated from what you list and claim as your Gross Income, therefore what you have listed as your Gross Income will affect your AGI. If your Gross Income is incorrectly given, then the AGI could be incorrect as well. When you read the instructions for filling out the 1040 form, most of the lines specifically say If you and refer to checking boxes on your status on a certain piece of information. For example, under filing status, under Married Filing Jointly it says, If you file a joint return, both you and your spouse are generally responsible for the tax and interest or penalties due on the return…, and gives instructions to check the filing status that applies to you. In a lot of cases, especially cases that people feel that they won’t be audited by the IRS, they will try to manipulate the tax system even if it’s just slightly to affect their tax returns. Overall, with millions of people also having this idea, this, in my opinion, would probably affect the inequality measurement in the United States. While AGI gives some type of measurement for inequality in the United States, I don’t think that it completely gives an accurate measurement of income inequality. In my opinion, it could go either way with incomplete given tax form data. If everyone were to fill out the forms correctly and truthfully, then we could be surprised at a decrease in income inequality or be not as surprised at an increase of income inequality. We have witnessed in our Lorenz curve graphs gini coefficients that income inequality is real and that it’s surprisingly extremely high towards the richer portion of the population versus the poorer portion of the population. I expected this, but not at the extent that the Lorenz curve showed.

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However, our gini coefficients and our Lorenz curves showed data for only one year. Each year is different for every US citizen in calculating AGI. Another thing to point out, if you look at the 1040 instructions towards the bottom, it will show you how citizens and households are grouped into quintiles based on income. When measuring income inequality, it doesn’t take into account change over time and how households can have positive or negative mobility in their incomes. The statistics do not reflect the reality that income for many households changes over time – i.e., incomes are mobile. For most people, income increases over time as they move from their first, low-paying job in high school to a better-paying job later in their lives (Thomas A. Garrett, The Federal Reserve Bank of St. Louis). A measurement of all households AGI changes over time, instead of looking at household quintiles each year, would be a better measurement of income inequality because it would show income mobility; however, it still might not show that households can choose to exclude some data and income sources from their tax documents. In my opinion, the tax system is a flawed system, which means the AGI is a flawed representation of income inequality in the United States. I think that further research is needed in order to calculate income inequality instead of solely looking at AGI. On the other hand, I do think that, according to Adjusted Gross Income and our constructed Lorenz curves, that the upper class is most definitely seeing an increase in income more quickly than everyone else. I think that the poorer portion of the population is underrepresented as far as the 1040 documents and AGI states. This over and under representation could be what is leading us to believe that income inequality is very high compared to earlier years.

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