We use a new, large, and confidential panel of tax returns to study the persistent-versus-transitory nature of rising inequality in male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2009. We apply various statistical decomposition methods that allow for different ways of characterizing persistent and transitory income components. For male labor earnings, we find that the entire increase in cross-sectional inequality over our sample period was driven by an increase in the dispersion of the persistent component of earnings. For total household income, we find that most of the increase in inequality reflects an increase in the dispersion of the persistent income component, but the transitory component also appears to have played some role. We also show that the tax system partly mitigated the increase in income inequality, but not sufficiently to alter its broadly increasing trend over the period.

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, U.S. Department of the Treasury or the Office of Tax Analysis. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, U.S. Department of the Treasury or the Office of Tax Analysis. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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