3.3.2. Net Income and Adjusted Gross Income (from 1944 on)

The IRS definition of income has varied over time. The IRS used the term ‘net income’ until 1943, and ‘adjusted gross income’ from 1944 on. In the net income definition, the various deductions (charitable gifts, interest paid, local taxes, etc.) taken into account underestimated the 1913-1943 series compared to the 1944-2003 series. In consequence, the final series from 1913 to 1943 had to be adjusted upward. The sharpest correction concerned the top percentile, inflated by up to 20 percent. To a lesser extent, the 1944-2003 series also had to be adjusted upward (for the same reasons as explained by Piketty and Saez, 2004, p. 33, iii).

As in Piketty and Saez (2004), income is here defined as the annual gross income reported on tax returns, excluding capital gains and government transfers (such as social security pensions, unemployment benefits, welfare payments, etc.) and before individual income taxes and employees’ payroll taxes.