John Iselin (The Budget Lab at Yale) and Daniel Reck (University of Maryland) have posted a new draft paper, “Misreported Income and the Dynamics of Income Inequality.” Here is the abstract:

We analyze how tax noncompliance modifies the dynamics of the income distribution. Relative rates of misreporting (RRMs) between the top 1% and bottom 99% are sufficient to answer this question. The essential unknown dynamically is the RRM for pass-through income. Reviewing available evidence, we argue that plausibly, this RRM is between 0.3 and 1.0 and constant over time. Including misreporting changes the difference in the top 1% share of fiscal (pre-tax national) income from 1962 to 2019 by -0.1 to 0.8 percentage points (0.2-0.8pp), compared to -0.7pp (-0.3) with Auten and Splinter’s approach and 1.0pp (0.6) with Piketty, Saez, and Zucman’s.