National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Adjusting Income, Not Thresholds

« Previous: Resources as Disposable Income
Suggested Citation:"Adjusting Income, Not Thresholds." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 207
Suggested Citation:"Adjusting Income, Not Thresholds." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 208

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DEFINING RESOURCES 207 expenses include out-of-pocket costs for medical care (including insurance premiums), expenses necessary to earn income (e.g., child care, commuting costs), and child support payments to another household. By not taking account of taxes and other nondiscretionary expenses or the value of (nonmedical) in-kind benefits, the gross money income definition does not adequately characterize the extent of poverty overall or the extent of poverty among various population groups. Moreover, the gross money income definition cannot capture the effects on poverty of important government policy changes, some of which are designed explicitly to combat poverty. For example, the Earned Income Tax Credit (EITC), which operates as a type of negative income tax, was recently expanded with the explicit goal of eliminating (or greatly reducing) poverty for the working poor. Yet it cannot have any effect on the official poverty count because the current measure does not take account of either positive or negative taxes. For example, prior to expansion of the EITC, a working family that paid taxes might have sufficiently low gross income to be classified as poor by the current measure. But if in the next year the family received a tax refund due to the expanded EITC that moved it above the poverty line, the current measure would still classify the family as poor. Another working family that paid taxes might have sufficiently high gross income to be classified as not poor under the current measure although its disposable income (after-taxes) was below the poverty line. If in the next year the second family's taxes were offset by the EITC, both the current measure and a measure that uses a disposable income definition would classify the family as not poor. The current measure would show no change in the family's poverty status across the 2 years, but a measure using disposable income would show the family as poor in the first year and as having moved out of poverty in the second. A disposable money and near-money income definition estimates the amount of resources a family actually has available for consumption. It includes the value of in-kind benefits that support consumption and excludes taxes and other nondiscretionary expenses that are not available for consumption. Such a definition provides a much better basis for comparing the extent of poverty across population groups—for example, distinguishing between working and nonworking families. It also provides a much better basis for identifying trends in poverty over time and the effects of public policy initiatives and societal changes on poverty trends. Adjusting Income, Not Thresholds Some analysts have proposed to attain a consistent poverty measure, not by changing the resource definition from gross to disposable income, but by constructing a larger array of thresholds: for example, higher thresholds for families with children in which the parents work than for other families with

DEFINING RESOURCES 208 children, or higher thresholds for elderly people with higher expected out-of- pocket medical care costs.4 We rejected this approach for a number of reasons. Clearly, the poverty thresholds need to vary by family composition in order to represent (at least approximately) equivalent levels of need for such basic consumption items as food, clothing, and shelter. We have also argued that the thresholds should reflect the substantial differences that are evident in the cost of housing across geographic areas. However, proliferating the number of thresholds to account for other circumstances raises concerns of feasibility (as well as some concerns about presentation). It would require a large number of added thresholds to properly account for the variations among families in their expected nondiscretionary expenses, such as out-of-pocket medical care costs, taxes, or work expenses. Not to account for such variations would be to assume that different kinds of families— e.g., families with different numbers of earners or families with or without members in poor health—face average costs when this is not the case. But the sample size of the Consumer Expenditure Survey (CEX), the basic source of data on spending, is too small to produce reliable estimates of all the needed thresholds. It might be possible to use other data sources to develop amounts for nondiscretionary expenses by which to adjust the basic thresholds derived from the CEX, but such an approach would be complicated and imprecise. A preferable approach, we believe, is for the survey that measures families' incomes to measure their actual nondiscretionary expenses at the same time. Depending on the scope of the income survey, some imputations from other data sources may be necessary to implement this approach (see below), but, overall, it seems more feasible to annually estimate disposable income than all the various thresholds.5 Another though less important problem with proliferating the number of thresholds concerns presentation: it would be difficult to have a reference threshold to use in public discussion of the poverty level. Thus, instead of citing the poverty line for a family of four, as is common practice, one would have to cite the poverty line for a family of four with, say, one earner—not nearly as intuitive a concept. Still another less important problem is that, as Watts (1993) argues, the use of different thresholds for such characteristics as work status can distort comparisons 4 Renwick and Bergmann (1993), for example, would use an income definition net of taxes and including values for in-kind benefits, but would account for out-of-pocket medical care costs, child care, and other work expenses in the thresholds rather than by adjusting income. 5 Indeed, adjusting the thresholds rather than estimating disposable income does not wholly reduce the data demands on the income survey. For example, the income survey will need to ascertain such characteristics as health status of family members and whether the family pays child support in order to select the appropriate threshold for determining the family's poverty status.

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Measuring Poverty: A New Approach Get This Book
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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of:

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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