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Relationship between personal income and adjusted gross income, 1990-91.

This article presents estimates of the reconciliation of two widely used measures of income of U.S. households, the Bureau of Economic Analysis (BEA) measure of personal income and the Internal Revenue Service (IRS) measure of adjusted gross income (AGI). It presents 1990-91 estimates by type of income of the reconciliation and of the "AGI gap"; the estimates for 1990 have been revised to reflect the annual revision of the national income and product accounts (NIPA's) and the revised IRS estimates of the AGI for 1990. The estimates of the reconciliation for total personal income for 1989-91 were published in the August 1993 Survey of Current Business (table 8.24 on page 119) as part of the annual NIPA revision.

Tables 1 and 2 show the reconciliation between personal income and AGI, by type of income, for 1990-91. In these tables, the reconciliation items that convert personal income to the IRS definition of AGI are shown in three groups. The first group (lines 3-9) consists of the portion of personal income that is not included in AGI; the largest items in this group are transfer payments (line 3) and other labor income except fees (line 4). The second group (lines 11-15) consists of the portion of AGI that is not included in personal income; the largest items in this group are personal contributions for social insurance (line 11), net gain from sale of assets (line 12), and taxable private pension payments (line 13). The third group (lines 17-22 and 26-28) consists of "intercomponent reallocations," which are needed to arrive at comparable BEA and IRS estimates of AGI by type of income. The reallocations affecting the BEA-derived AGI are shown in lines 17-22, and those affecting the IRS-reported AGI are shown in lines 26-28.

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The AGI gap for a type of income (line 30) is the difference between the BEA-derived AGI for that type of income (line 23) and the reallocated IRS AGI for that income (line 29). The AGI gap can be considered an indicator of noncompliance with the Federal tax code because the BEA-derived AGI is based on estimates of personal income that are adjusted to include income that is unreported on individual income tax returns, whereas the IRS measure of AGI is based entirely on unaudited tax return data. However, the noncompliance reflected in the AGI gap is limited to the types of income that are included in personal income, which excludes income such as unreported capital gains and unreported illegal income. Thus, the AGI gap is not a measure of the size of the underground economy.(1) In addition to reflecting noncompliance, the AGI gap includes income earned by low-income individuals who are not required to file income tax returns, the net effect of errors in personal income and in the IRS measure of AGI, and gross errors and omissions in the estimates of the reconciliation items.

The percent distribution of the AGI gap by type of income is shown in line 31, and the "relative AGI gap" for a type of income, which is the AGI gap for that type of income (line 30) as a percentage of the BEA-derived AGI by that income type (line 23), is shown in line 32. The relative AGI gap can be used as a rough indicator of the noncompliance rate in the reporting of income included in the IRS measure of AGI.

Revisions in the AGI Gap for 1990

The AGI gap for 1990 was revised down by $3.0 billion (table 3). Revisions in the AGI gap stem from three sources: Revisions in personal income that carry through to the AGI gap, revisions in the IRS measure of AGI that carry through to the AGI gap, and revisions in the reconciliation items that are unrelated to the revisions in personal income and the IRS measure of AGI.

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The reconciliation items shown in lines 3-6 and 11 are offsets to revisions in personal income and, thus, have no effect on the AGI gap. For example, the upward revision to the investment income reconciliation item (line 6) resulted from a revision to the interest component of personal income. The revisions in these items totaled $10.6 billion, about $1 billion more than the upward revision in personal income (line 1). Thus, the revisions in personal income that carried through to the AGI gap amounted to about - $1 billion.

The revisions shown in lines 9, 12, and 14-15 are offsets to revisions in the IRS measure Of AGI and, thus, have no effect on the AGI gap. For example, an upward revision to the net gain from the sale of assets item (line 12) resulted from a revision to AGI. The revisions in these items totaled $17.3 billion, about - $9 billion less than the downward revision in the IRS measure of the AGI (line 29). Thus, the revisions in the IRS measure of AGI that carried through to the AGI gap amounted to about $9 billion.

Revisions in the reconciliation items that are unrelated to the revisions in personal income and the IRS measure of AGI, which appear primarily in lines 7-8 and 13, reduced the gap by about $11 billion. The revision in investment income received by nonprofit institutions (line 7) resulted from the incorporation of new IRS data on taxexempt organizations. The revision in taxable private pensions (line 13) resulted from the incorporation of new data from IRS Form 5500, Annual Return/Report of Employee Benefit Plan.

The revision in differences in accounting treatment between the NIPA's and tax regulations (line 8) resulted largely from the incorporation of newly available IRS data on the depreciation of rental property of persons not primarily engaged in the real estate business. These data were used to estimate the accounting difference between the IRS and NIPA depreciation measures for rental income of persons.(2) Previously, a 1967 IRS estimate of depreciation of this property was extrapolated by depreciation of rental property of real estate operators and lessors of buildings. The incorporation of the new data resulted in a significant downward revision, beginning with 1990, in the gap between the NIPA and IRS measures of rental income. Because this updating of the reconciliation covers only 2 years, the new data were used only for 1990-91. As a result, there are discontinuities in the reconciliation; the extent of these discontinuities is quantified in table 4.

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(1.) See Carol S. Carson, "The Underground Economy: An Introduction," Survey 64 (July 1984): 109 (2) Estimates for 1968-89 of the accounting difference that are based on the new source data are available on request.
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Author:Park, Thae S.
Publication:Survey of Current Business
Date:Nov 1, 1993
Words:1105
Previous Article:Federal personal income tax liabilities and payments, 1990-92.
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