Alternative Measures of Income Poverty and the Anti-poverty

Effects of Taxes and Transfers

Presentation to

University of Maryland-AEI

Seminar on Poverty Measurement

Daniel H. Weinberg, Chief Economist

May 10, 2005

2

Request from Seminar Planning Group

Besharov and Green (AEI) worked with seminar planning group to develop alternative measures of income poverty and methods to gauge the impact of taxes and transfers

They asked the Census Bureau about which measures were feasible to compute with existing resources before the next seminar

3

Five Decisions Must be Made for Any Poverty Measure

• Income concept

• Unit of analysis

• Equivalence scale

• Inflation adjustment

• Data source

4

1. Five Income Variants• Money income (used in official measure)

• Pre-tax pre-transfer: money income excluding means-tested cash transfers

• Pre-tax pre-transfer plus return to home equity

• Post-tax, post-transfer: money income plus realized capital gains, plus non-cash transfers, plus EITC, minus income and payroll taxes

• Post-tax, post-transfer plus return to home equity minus property taxes

5

Income: Additional information

Non-means tested transfers like Social Security included in all measures.

Work expenses are not subtracted from income, nor are medical out-of-pocket costs.

John Coder (Sentier Research) computed other measures that include some unreported transfer income; these will be discussed at the end of the presentation.

6

2. Two Units of 3. Two Thresholds Analysis (Equivalence

Scales)

•Family•Household

Tabulations presented here do not include unrelated children under 15 in families or in households

•Official•Experimental three-parameter

3-parameter scale

1 adult: 1.00;

2 adults: 1.41;

Single parents: [1.8+0.5*(children-1)]0.7

Other families: [Adults+0.5*children]0.7

7

4. Two Ways to 5. Data SourceAdjust Thresholds for Inflation

•Published CPI-U: 1963-1982 CPI-U

1983-1999 CPI-U-X1

2000-2002 CPI-U-RS•CPI-U-RS:

1963-1977 CPI-U, 1978-2002 CPI-U-RS

2003 Current Population Survey Annual Social and Economic Supplement (CPS ASEC)

8

Measurement Issues

Unable to partition all income sources into means-tested and non-means tested parts.

Improved methods for valuing noncash benefits like housing have not yet been implemented.

9

Warnings

This is a work in progress.

No significance tests have been performed. Because all these estimates are from the same dataset, conventional measures of sampling error do not apply.

The Office of Management and Budget is responsible for any changes to the official measure of poverty.

10

Poverty Thresholds, 2002: Examples

Single non-elderly

2-adult 2-child

3-adult 3-child

Official-CPI $9,359 $18,244 $24,797

3 parameter-CPI $8,455 $18,244 $24,232

3 parameter-RS $7,460 $16,095 $21,378Note: The 3-parameter (CPI) threshold for a 2-adult 2-child family is equal to the official threshold for that family by design; others are lower.

11

Percent in Poverty : 2002Family Measures using Official Thresholds and CPI

Threshold and

Inflation Adjustment

Money income

Pre-transfer

Pre-transfer +HE*

Family Measures

Official-CPI 12.1 12.8 11.63 parameter-CPI

3 parameter-RS

Household Measures

Official-CPI

3 parameter-CPI

3 parameter-RS

HE*=imputed return to home equity

12

Percent in Poverty : 2002Money Income Measures for Families & Households

Threshold and

Inflation Adjustment

Money income

Pre-transfer, pre-tax

Pre-transfer, pre-tax +HE*

Family Measures

Official-CPI 12.13 parameter-CPI 12.03 parameter-RS 10.0Household Measures

Official-CPI 10.53 parameter-CPI 10.63 parameter-RS 8.6

HE*=imputed return to home equity

13

Percent in Poverty : 2002 Money Income and Pre-Transfer Measures

Threshold and

Inflation Adjustment

Money income

Pre-transfer, pre-tax

Pre-transfer, pre-tax +HE*

Family Measures

Official-CPI 12.1 12.8 11.63 parameter-CPI 12.0 12.8 11.63 parameter-RS 10.0 10.9 9.9Household Measures

Official-CPI 10.5 11.2 10.13 parameter-CPI 10.6 11.4 10.23 parameter-RS 8.6 9.5 8.6

HE*=imputed return to home equity

14

Measuring the Distributional Effect:The “Poverty Shares Change Index”

Example: People in poverty in California

Official measure: 4.605 of 34.570 million (13.32%)Pre-transfer pre-tax income including imputed return to

home equity, for people in households, using the 3-parameter thresholds adjusted for inflation using the CPI-U-RS [PreT+HE*-H-3p-RS] measure: 3.305 of 24.418 million (13.54%)

Ratio=13.54/13.32=poverty shares change index of 101.6

Interpretation: People in poverty in California are a larger percentage of all those in poverty when the PreT+HE*-H-3p-RS measure is used than when the official poverty measure is used (their share is 1.6% larger)

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Pre-Transfer Poverty Shares by Measure for Four Largest States: 2002

80.0

90.0

100.0

110.0

120.0

F-O-CPI F-3p-CPI F-3p-RS H-O-CPI H-3p-CPI H-3p-RS

California

Texas

New York

Florida

[Official=100]

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Pre-Transfer Poverty Shares incl home equity by Measure for Four Largest States: 2002

80.0

90.0

100.0

110.0

120.0

F-O-CPI F-3p-CPI F-3p-RS H-O-CPI H-3p-CPI H-3p-RS

California

Texas

New York

Florida

[Official=100]

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Pre-transfer Poverty Shares by State: Largest Changes (versus share of official poverty)

Families-3 parameter-RS• share increased 10% or more:

– DC, Connecticut, Hawaii (115.4)

• share decreased 10% or more:– Missouri, Idaho (88.6)

Households-3 parameter-RS• share increased 10% or more:

– South Carolina, Alabama, Connecticut, Louisiana, Mississippi, DC, West Virginia (118.8)

• share decreased 10% or more:– Wisconsin, Nevada, Colorado, Delaware, Alaska, Idaho,

Minnesota (75.7)

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Pre-Transfer Poverty Shares by Age and Measure: 2002

60.070.080.090.0

100.0110.0120.0130.0140.0

fmly-offl-CPI

fmly-3prm-CPI

fmly-3prm-RS

hh-offl-CPI

hh-3prm-CPI

hh-3prm-RS

pre-transfer <18pre-transfer 65+pre-transfer+HE* <18pre-transfer+HE* 65+

HE*=imputed return to home equity

[Official=100]

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Percent in Poverty : 2002Addition of Post-transfer, Post-tax Measures

Threshold &

Inflation Adj

Money income

Pre-tsfr pre-tax

Pre-transfer pre-tax +HE*

Post-tsfr post-tax

Post-transfer post-tax +HE

Familes

Official-CPI 12.1 12.8 11.6 10.2 9.43 parameter-CPI

3 parameter-RS

Households

Official-CPI

3 parameter-CPI

3 parameter-RS

HE*=imputed return to home equityHE=imputed return to home equity minus property taxes

20

Percent in Poverty : 2002Official and 29 alternative measures

Threshold &

Inflation Adj

Money income

Pre-tsfr pre-tax

Pre-transfer pre-tax +HE*

Post-tsfr post-tax

Post-transfer post-tax +HE

Families

Official-CPI 12.1 12.8 11.6 10.2 9.43 parameter-CPI 12.0 12.8 11.6 9.9 9.13 parameter-RS 10.0 10.9 9.9 7.9 7.3Households

Official-CPI 10.5 11.2 10.1 8.7 7.93 parameter-CPI 10.6 11.4 10.2 8.6 7.83 parameter-RS 8.6 9.5 8.6 6.6 6.0

HE*=imputed return to home equityHE=imputed return to home equity minus property taxes

(PostT and PostT+HE household estimates from Sentier Research.)

21HE*=imputed return to home equity

HE=imputed return to home equity minus property taxes

Poverty Rates Under Alternative Definitions: 2002

0.0

5.0

10.0

15.0

fmly-offl-CPI

fmly-3prm-CPI

fmly-3prm-RS

hh-offl-CPI

hh-3prm-CPI

hh-3prm-RS

moneyincome

pre-transfer

pre-transfer+HE*

post-transfer

post-transfer+HE

22HE*=imputed return to home equity

HE=imputed return to home equity minus property taxes

Anti-poverty Effects of Means-Tested Transfers, Taxes, and Home Equity on Poverty Rates of Children: 2002

0.02.04.06.08.0

10.012.014.016.018.0

fmly-offl-CPI

fmly-3prm-CPI

fmly-3prm-

RS

hh-offl-CPI

hh-3prm-CPI

hh-3prm-

RS

pre-transfer

pre-transfer+HE*

post-transfer

post-transfer+HE

23HE*=imputed return to home equity

HE=imputed return to home equity minus property taxes

Anti-poverty Effects of Means-Tested Transfers, Taxes, and Home Equity on Poverty Rates of Seniors: 2002

0.02.04.06.08.0

10.012.014.016.018.0

fmly-offl-CPI

fmly-3prm-CPI

fmly-3prm-

RS

hh-offl-CPI

hh-3prm-CPI

hh-3prm-

RS

pre-transfer

pre-transfer+HE*

post-transfer

post-transfer+HE

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Post-transfer Poverty Shares by State:

Largest Changes (versus share of official poverty)Families-3 parameter-RS• share increased 10% or more:

– Nebraska,Indiana,Illinois,Ohio,New Mexico (113.2)

• share decreased 10% or more:– Nevada,Mass.,Maine,Alaska,Kansas,Connecticut (83.1)

Households-3 parameter-RS• share increased 10% or more:

– Ohio, N Carolina, Indiana, Tennessee, S Carolina, Illinois, New Mexico, Louisiana (122.6)

• share decreased 10% or more:– Kansas, Hawaii, Utah, Wash., Nevada, Idaho, Mass., Maine, Vermont,

Delaware, Conn., Minnesota (70.1)

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Extent of CPS Unreported Income(from October seminar)

Ruser, Pilot, and Nelson (2004) study compared BEA State Personal Income (SPI) with CPS ASEC money income for 2001

BEA: $8.670 trillionCPS: $6.446 trillion

Difference: $2.233 trillion

However, adjustments to BEA SPI are needed to derive a concept consistent with CPS ASEC.

Remaining gap is $806 billion.

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Key Areas of CPS Response Error

Wages and Salaries: 3 percent underreporting accounts for $158 billion of the gap

Self-Employment income: 48 percent underreporting accounts for $302 billion of the gap

Interest and Dividends: 32 percent underreporting accounts for $132 billion of the gap

Transfer Programs: 23 percent underreporting accounts for $199 billion of the gap

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Transfer Income Imputation

Census Bureau analysts are unfamiliar with the adjustment methods used in the Urban Institute’s TRIM model so these adjustments were implemented by Sentier Research using the CPS ASEC public use file.

Imputations were done for underreported Temporary Assistance for Needy Families, Food Stamps, Supplemental Security Income only.

We also have a concern that undercoverage of the low-income population by the survey might affect the reliability of such an imputation.

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Effects of Adjusting for Unreported TANF, SSI, FS Income on Household Poverty Rate Measures: 2002[Official poverty rate= 12.1 percent]

All estimates from Sentier Research.TANF=Temporary Assistance for Needy Families; FS=Food Stamps, SSI=Supplemental Security Income

Money Income

Post-transfer, post-tax

Post-transfer, post-tax, +imp'd ret to home equity

Official-CPI 10.5 8.7 7.93param-CPI 10.5 8.6 7.83param-RS 8.6 6.6 6.0Official-CPI-adj 10.2 7.9 7.13param-CPI-adj 10.2 7.8 6.93param-RS-adj 8.3 5.6 5.0

29All estimates from Sentier Research.

Household Poverty Rates under Alternate Definitions: The Effect of Including Unreported TANF, SSI, FS Income:

2002

0.02.04.06.08.0

10.012.014.0

money income post-transfer post-transfer+HE

Official-CPI

3param-RS

Official-CPI-adj

3param-RS-adj

30All estimates from Sentier Research.

Poverty Shares for Children by Household Measure, adjusted for unreported income: 2002

80.0

90.0

100.0

110.0

120.0

official-CPI 3parameter-CPI 3parameter-RS

money income

post- transfer

post- transfer+HE

money income adj

post- transfer adj

post- transfer+HE adj