Household Incomes in Tax Data: Using Addresses to Move from Tax-Unit to Household Income Distributions

A limitation of tax return data is the inability to identify members of separate tax units living in the same household. We overcome this obstacle and present the first set of entirely tax-based household income and inequality measures. We find using tax units as a proxy for households overstates household income inequality, as measured by Gini coefficients, by 13 percent. Consistent with previous findings, we also estimate that the CPS understates household income inequality by 5 percent. Compared to conventional tax-unit measures, the federal income tax code and earned income tax credit are less progressive when measured at the household level.