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Tax VOX

We make more money than we think

Wages account for less than half of a US household's income. Surprised? Gleckman breaks down where the rest of your money comes from.

By Contributor / August 5, 2013

Dr. Raymond Martins, chief medical officer of Whitman-Walker Health, welcomes patient Eddie Jones in Washington, D.C., in July 2013. Employer-paid health insurance and other benefits can add almost seven percent to the average income of an American household, according to Gleckman.

Larry Downing/Reuters/File

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How much money do you make? Many Americans know what their wages and salary are. But they might be surprised to know that, on average, wages account for less than half the income of a U.S. household.

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Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)

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Others might pull Adjusted Gross Income off their income tax return. That adds sources such as business income; interest, dividends, and capital gains; alimony; and taxable Social Security benefits and pension distributions. Combined, they generate another 25 percent, but still leave out almost one-quarter of income.

Where does the rest come from? My colleagues at the Tax Policy Center have just completed a project that aims to better define income, which they call Expanded Cash Income, or ECI. It includes a lot of money that many of us might not consider income, but should. 

For instance, employer-paid health insurance and other non-retirement fringe benefits add almost 7 percent to the average income of an American household. The employer share of payroll taxes bumps it up by more than 3 percent and employer contributions to retirement plans adds roughly another 1 percent. Combined, those employer-paid benefits and contributions boost our incomes about 11 percent, even though we don’t pay tax on that compensation.    

Gross compensation is total comp before your employer subtracts benefits including payroll taxes. If your boss didn’t have to pay those taxes, your wages would be higher.       

The composition of income varies widely depending on who you are. For retirees, non-taxable Social Security benefits and IRA and pension distributions are major sources of income. For low-income people, a lot of ECI comes from Social Security benefits—including that portion not subject to income tax–Supplemental Security Income (SSI), Food Stamps, and other government transfers.

Not surprisingly, the income mix is very different for the highest earning households. TPC figures that, for the top 0.1 percent of households (who make an average of $7.7 million), wages and salaries represent less than 30 percent of income, while investment returns account for more than one-third and business income another 22 percent.

For a middle-income household (making about $60,000 on average), wages and salaries represent more than half of expanded cash income while investment returns outside of retirement accounts total less than 5 percent. Distributions from retirement funds generate about 10 percent of income for middle-income households but less than 3 percent for those in the top 1 percent.

The story for bottom 20 percent of households (those making an average of about $14,000) is different-still. Wages and salaries represent about 40 percent of their income while another 40 percent comes from government transfers. Because so many of those in the bottom 20 percent are over 65 or disabled, almost one-third of their ECI comes from non-taxed Social Security benefits and SSI.

Keep in mind that TPC’s estimate of expanded cash income still excludes some sources of income such as Medicare and Medicaid benefits.       

The bottom line: You probably make more money than you think. And even if it is not taxed, it is still income.

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