The data are accurate. Taxpayers provide information under the threat of audit and there is third-party information reporting, so employers as well as recipients are reporting wage and salary information.
The definition of income that is reported is broader than that provided by unemployment insurance data, including, most importantly, self-employment income and in cases where a person is married and they file a joint return, spousal income.25
Several potential weaknesses are associated with using tax returns data to measure income and employment. We summarize several: Note that some of these weaknesses apply to the general population, while others are more relevant for low-income populations. First, the access by researchers to tax returns data is extremely limited and constrained because of Section 6103 of the Internal Revenue Code. Section 6103 explicitly states that tax data cannot be released, except to organizations specifically designated in Section 6103(j). The exceptions are the Department of Commerce, but only as it relates to the Census and National Income Accounts, the Federal Trade Commission, the Department of the Treasury, and the Department of Agriculture (for conducting the Census of Agriculture). Penalties for unauthorized disclosure are severe, including jail terms of up to 5 years.
Second, tax return data also contain only limited information on demographic characteristics of taxpayers. For example, the tax system does not collect information on the race or education of tax filers.
Third, tax-filing units differ from both families and individuals. Married couples can file either a joint return or separate returns (as “married filing separate”). Cohabiting couples, even if fully sharing resources, will file separate returns as individuals or head of household (generally meaning the filer is a single parent with dependents). In general we believe families pool resources so families are the best unit of analysis for assessing economic well-being. Hence, case units probably are the most useful unit of analysis.
Fourth, there also are differences between tax return data and other data sources in the frequency of reporting. Unemployment insurance wages are reported quarterly. Transfer program information is reported monthly. Tax returns are filed annually. Because shorter periods can be aggregated into longer ones and there can be major changes in family composition over time, the annual frequency of tax reporting is less appealing than monthly or quarterly reporting in other data sets. To the extent that family structure changes over these intervals, problems may arise when trying to link different data sets to assess well-being.