Amounts excluded as pretax deductions are not reported on the tax return, so a survey questionnaire that asks respondents to report amounts from their tax returns will exclude these amounts from wage and salary income unless they are collected separately. These exclusions can add up to a sizable fraction of gross income over much of the earnings distribution, although there is age variation in the use of these different deductions. Younger families are more likely to use the dependent care deduction, whereas older families and individuals are more likely to set aside large amounts for flexible spending.
Social Security benefits may be wholly or partially excluded from taxation, depending on the total amount of the benefits and the taxpayer’s other income.3 Unlike other nontaxable income or the nontaxable portion of wage and salary income, all Social Security benefits must be reported on the tax return so that the nontaxable portion can be calculated. A survey questionnaire that asks respondents to report their Social Security benefits could request either the total or taxable amount (or both). If the questionnaire is not explicit about which one should be reported, a respondent could report either the total or taxable benefits, and which one was reported might not be evident from the response.
AGI also includes sources that are not included in Census money income. AGI includes capital gains except for the one-time exclusion of gains from the sale of a principal residence and the exclusion of capital gains that occur within a tax-deferred retirement account until they are withdrawn from the account. AGI also includes state income tax refunds received in the prior year, gambling winnings, and all withdrawals from retirement plans—not just regular withdrawals—except when such withdrawals are rolled over into another tax-deferred plan.
Consumption-Based Resource Measures
A number of economists argue that for the purpose of measuring the adequacy of resources for people at low-income levels, a measure based on consumption is more appropriate than a measure based on income (see, for example, Meyer and Sullivan, 2003). Income, it is said, understates
3 Railroad Retirement benefits are treated the same way, but we focus on Social Security benefits because they cover far more people.