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Measuring Poverty: A New Approach
taxes, such as sales, excise, or property taxes. These taxes are an integral part of consumption, and the CEX expenditure data that we recommend be used to develop the reference family poverty threshold include them (e.g., clothing expenditures in the CEX include the applicable sales taxes). It is true that such taxes vary from locality to locality, so that the average amounts included in the thresholds may not be completely appropriate for specific areas (even with the housing cost adjustments by region and size of place). Yet it is clearly not feasible to develop the large number of thresholds that would be needed to take account of different levels of property and other consumption taxes across areas. It might be possible for people with above-average values of consumption taxes to subtract the difference from income (and vice versa for people with below-average values). However, the costs of obtaining the necessary data would be high and the measurement problems would be great.
Census Bureau Tax Estimation Procedures
For more than a decade, the Census Bureau has published experimental poverty estimates that deduct payroll and federal and state income taxes from annual income as measured in the March CPS (see, e.g., Bureau of the Census, 1993a). The current procedure for imputing Social Security payroll taxes is straightforward. CPS-reported wage and salary earnings are multiplied by the Social Security payroll tax for the employee portion up to the specified limit; CPS-reported net self-employment earnings are multiplied by the (higher) payroll tax rate for the self-employed up to the specified limit; and certain employees (based on unpublished statistics from the Social Security Administration) are assigned noncovered status (e.g., federal government employees and proportions of workers in certain occupation groups).
For imputing federal income taxes, including the refundable Earned Income Tax Credit, the current Census Bureau procedure involves a complex series of operations. The Bureau first assigns members of CPS households to tax filing units, using a set of rules to try to approximate Internal Revenue Service (IRS) filing provisions. Next, the Bureau calculates adjusted gross income by summing reported amounts for wages and salaries, net farm and nonfarm self-employment income, net rental and property income, dividends, interest, income from estates and trusts, private and government pensions, unemployment compensation, and alimony; plus a portion of Social Security income and imputed amounts for net realized capital gains; minus imputed contributions to Individual Retirement Accounts (IRAs). Statistics of Income (SOI) data from the IRS are used for the capital gains and IRA imputations; the May 1983 CPS pension supplement is also used to estimate probabilities for IRA contributions. No attempt is made to adjust for other exclusions from income, such as moving expenses or alimony paid.
Second, the Census Bureau determines which tax filing units itemize