Relationship between personal income and adjusted gross income: revised estimates, 1985-87.
THE reconciliation of the Bureau of Economic Analysis (BEA) measure of personal income with the Internal Revenue Service (IRS) measures of adjusted gross income (AGI) by type of income is revised for 1986 and extended to 1987 in this article. (1) The reconciliation incorporates personal income estimates for 1986-87 released in the July 1989 national income and product accounts revision, a final estimate of AGI for 1986, and a preliminary estimate of AGI for 1987.
The reconciliation items (lines 3-9 and 11-15) in tables 1 and 2 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 reallocations of personal income and of the IRS measure of AGI necessary to show the reconciliation by type of income are shown in lines 17-21 and lines 25-27. The difference between the BEA-derived AGI and the IRS measure of AGI, called the AGI gap, is shown in line 29. The percent distribution of the AGI gap by type of income and the AGI gap as a percentage of the BEA-derived AGI are shown in lines 30 and 31, respectively.
The AGI gap can be viewed as evidence of noncompliance with the tax code because BEA-derived AGI is based on estimates of personal income that are adjusted to include income unreported on individual income tax returns, while the IRS measure of AGI is based entirely on unaudited tax return data. (2) The noncompliance reflected in the gap is limited to that associated with types of income included in personal income; the gap does not reflect noncompliance associated with other types of income, such as unreported capital gains and unreported illegal income. (3) In additon 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 AGI of IRS, and gross errors and omissions in the estimates of reconciliation items.
Beginning in 1985, the size of the AGI gap has been affected by the lack of information needed to estimate two reconciliation items. The first relates to employee contributions through salary reduction to deferred compensation agreements, such as those allowed under Internal Revenue Code section 401(k). All such contributions, including those made prior to 1985, are excluded from AGI, but an unknown amount has been included in the BEA-derived AGI for wages and salaries since 1985. These contributions are included in BEA's estimate of wages and salaries because the estimates are based on tabulations of wages and salaries of employees covered by the Federal Unemployment Tax Act (FUTA), as reported by Their employers; beginning in 1985, employers in 32 States were required to include these contributions in wages for FUTA purposes. (However, noncompliance with this reporting requirement may be widespread because the amount of unemployment insurance tax for most employers is not affected.)
The second omission from the reconciliation relates to the change in the tax code introduced by the Tax Reform Act of 1986 that affected the deductibility of passive activity losses beginning in 1987. The AGI of IRS reflects the change, but the BEA-derived AGI for proprietors' and rental incomes does not.
As a result of these omissions, changes in the AGI gap in recent years should be interpreted with caution. Increases in the AGI gap in 1985 and 1986 may reflect the omission related to salary reduction contributions; the decrease in 1987 may reflect the omission related to passive activity losses.
(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, "Relationship Between Personal Income and Adjusted Gross Income. 1983-85," SURVEY 67 (May 1987): 18-20, and "Relationship Between Personal Income and Adjusted Gross Income, 1984-86," SURVEY 68 (August 1988): 23-27. In the national income and pruduct accounts tables, the reconciliation appears in table 8.14.
(2.) See Robert P. Parker, "Improved Adjustments for Misreporting of Tax Return Information Used to Estimate the National Income and Product Accounts, 1977," SURVEY 64 (June 1984): 17-19.
(3.) 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): 109.
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|Author:||Park, Thae S.|
|Publication:||Survey of Current Business|
|Date:||Aug 1, 1989|
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