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Relationship between personal income and adjusted gross income, 1983-85.

Relationship Between Personal Income and Adjusted Gross Income, 1983-85

THE reconciliation of the Bureau of Economic Analysis (BEA) measure of personal income with the Internal Revenue Service (IRS) measure of adjusted gross income (AGI) by type of income for 1983 is revised and extended to 1984-85 in this article.1 The reconciliation incorporates personal income estimates for 1983-85 published in the July 1986 national income and product accounts revision, final estimates of AGI for 1983-84, and a preliminary estimate of AGI for 1985. The personal income estimates for 1984 and 1985 will be subject to further revisions.

1. Estimates for earlier years are in "Relationship Between Personal Income and Adjusted Gross Income: Revised Estimates, 1947-83,' SURVEY OF CURRENT BUSINESS 66 (May 1986): 34-40. In the National Income and Product Account Tables, the reconciliation appears in table 8.14.

The reconciliation items (lines 3-9 and 11-15) in tables 1-3 allow the construction from personal income (line 1) of a BEA-derived AGI (line 22) that conforms to the IRS definition of AGI (line 23). The difference between the BEA-derived AGI and the IRS measure of AGI is called the AGI gap (line 29). The AGI gap can be viewed as evidence of noncompliance with the tax code, but with the following caveats: The AGI gap includes income earned by low-income individuals who are not required to file income tax returns, unreported income identified by IRS audit programs that is included in personal income, gross errors and omissions in the estimate of reconciliation items, and the net effect of errors in personal income and AGI of IRS.2

2. For a discussion of why the AGI gap is not a measure of the size of the underground economy, see Carol S. Carson, "The Underground Economy: An Introduction,' SURVEY 64 (July 1984): 107.

For 1984 and 1985 a new type of income is shown. The addition results from provisions of the 1983 Social Security Amendments and Railroad Retirement Solvency Act, which--beginning in tax year 1984--made portions of old-age, survivors, and disability insurance (OASDI) benefits and railroad retirement benefits subject to income tax. In 1984 and 1985 personal income includes $177.6 billion and $188.0 billion of these benefits, respectively, of which BEA estimated that the taxable portion was $26.8 billion and $27.9 billion. (These amounts are shown in tables 2 and 3 in line 1 of the newly added column called "taxable social security benefits.') In both of those years, however, taxpayers reported $51.8 billion and $65.6 billion, respectively, in total benefit payments on tax returns, of which $7.9 billion and $9.7 billion were included in AGI. Consequently, the AGI gap for taxable social security and railroad retirement benefits as a percentage of the corresponding BEA-derived benefits is large--70.6 percent and 65.1 percent for 1984 and 1985, respectively. A recent IRS study indicates that the gap is mostly accounted for by nonreporting of benefits by recipients who are not required to file a tax return.3 In addition, it is likely that many recipients did not report the benefits because they were unaware of the law change.

3. U.S. Department of Treasury, Internal Revenue Service, "Age and Tax Filing, 1981,' by Ralph B. Bristol, Jr., in Statistics of Income Bulletin, Vol. 5, No. 2 (Washington, D.C.: U.S. Government Printing Office, Fall 1985), pp. 29-37.

Table: 1.--Reconciliation of Personal Income and Adjusted Gross Income, by Type of Income, 1983

Table: 2.--Reconciliation of Personal Income and Adjusted Gross Income, by Type of Income, 1984

Table: 3.--Reconciliation of Personal Income and Adjusted Gross Income, by Type of Income, 1985
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Author:Park, Thae S.
Publication:Survey of Current Business
Date:May 1, 1987
Words:607
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