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A Presentation to the Committee on National Statistics of the
National Academy of Sciences, Engineering, and Medicine
May 16, 2022
Bilal Habib
Tax Analysis Division
How CBO Analyzes the Distribution
of Household Income, Means-Tested
Transfers, and Taxes
For more information about the conference, see https://tinyurl.com/4t82ejf9 (accessed May 1, 2022).
1
CBO’s Distributional Analyses
2
Over 30 Years of Distributional Analyses
The Congressional Budget
Office regularly produces a
report on the distribution of
household income, means-
tested transfers, and federal
taxes.
The most recent version
produces those distributions
for 1979 to 2018.
3
▪ Market income consists of the following:
– Labor income,
– Business income,
– Capital income (including realized capital gains),
– Income received in retirement for past services, and
– Income from other nongovernmental sources.
▪ Social insurance benefits consist of benefits provided through the following:
– Social Security,
– Medicare,
– Unemployment insurance, and
– Workers’ compensation.
CBO’s Income Measures
Market
Income
Social
Insurance
Benefits
Income
Before
Transfers
and Taxes
For details, see Kevin Perese, CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Income,
Working Paper 2017-09 (Congressional Budget Office, December 2017), www.cbo.gov/publication/53345.
4
1 Eligibility to receive means-tested transfers is determined primarily on the basis on income, which must be below certain thresholds.
▪ Means-tested transfers are cash payments and in-kind services provided through federal, state,
and local government assistance programs.1 The largest such programs include the following:
– Medicaid,
– Supplemental Nutrition Assistance Program (SNAP),
– Supplemental Social Insurance (SSI), and
– Housing Assistance.
▪ Federal taxes consist of the following:
– Individual income taxes,
– Payroll taxes,
– Corporate income taxes, and
– Excise taxes.
CBO’s Income Measures (Continued)
Income
Before
Transfers
and Taxes
Means-
Tested
Transfers
Federal
Taxes
Income
After
Transfers
and Taxes
5
Source: Congressional Budget Office, The Distribution of Household Income, 2018 (August 2021), www.cbo.gov/publication/57061.
Average Income, Means-Tested Transfers, and Federal Taxes,
2018, and Cumulative Growth in Average Income, 1979 to 2018
CBO reports household
income, means-tested
transfers, and federal taxes
by quintile.
Means-tested transfers and
federal taxes significantly
increase the cumulative
growth of income after
transfers and taxes among
households in the lowest
quintile.
6
CBO’s distributional analyses are based on annual, cross-sectional data, which are
drawn from two sources.
▪ Administrative tax data from the Statistics of Income (SOI) provide information about:
– Market income and Social Security for tax filers, and
– Federal taxes.
▪ The annual March Supplements of the Current Population Survey (CPS) provide
information about:
– Market income and Social Security for non-filers,
– Medicare, and
– Means-tested transfers.
The SOI and CPS are statistically matched to produce a single data set. Tax units are
created in the CPS, matched with their counterparts on the SOI on the basis of total
income, and then reconstructed into households.
Data Sources
7
▪ Information from the SOI is used to estimate federal taxes using CBO’s microsimulation
tax model.
▪ Determining administrative totals for certain sources of income (such as means-tested
transfers) requires calculations by CBO experts.
▪ CBO must also assign incidence to certain sources of income and taxes. For example:
– CBO assigns 25% of the corporate tax to labor income and 75% to capital income.
– The full cost of benefits is assigned to recipients of in-kind transfers, such as those
for SNAP, Medicaid, and Medicare.
▪ Excise taxes are allocated to households on the basis on information reported in the
Consumer Expenditure Survey.
Methodological Choices
8
Three reports describing this work are The Distribution of Household Income, 2016 (July 2019), Projected Changes in the Distribution of Household Income, 2016–2021 (December
2019), and The Distribution of Household Income, 2018 (August 2021). Those reports and related work are available at https://go.usa.gov/xudXy.
In recent years, CBO has expanded the scope of its analyses of the distribution
of household income in various ways, including the following:
▪ In 2018, CBO removed means-tested transfers from its base income measure
and began adjusting CPS data for underreporting in the four largest means-
tested transfer programs.
▪ In 2019, CBO developed a method to make projections of the distribution of
household income in accordance with its baseline projections for federal
revenue and spending.
▪ In 2021, CBO published its estimates of the distributional effects of the 2017
tax act.
Recent Expansions of CBO’s Analyses of the Distribution of
Household Income
9
1 See Congressional Budget Office, How Changing Social Security Could Affect Beneficiaries and the System's Finances, www.cbo.gov/publication/54868.
2 See Dorian Carloni and Terry Dinan, Distributional Effects of Reducing Carbon Dioxide Emissions With a Carbon Tax, Working Paper 2021-11 (Congressional Budget Office,
September 2021), www.cbo.gov/publication/57399.
In addition to its analyses of the distribution of household income, CBO also
undertakes a broad array of distributional analyses that use a variety of data
sources. For example:
▪ In 2019, the agency used administrative data on earnings to produce an
interactive tool that allows users to estimate the effect of various policy options
related to Social Security on beneficiaries and the system’s finances.1
▪ In 2021, the agency used survey data on consumption to estimate the
distributional effects of implementing a tax on carbon dioxide emissions.2
▪ Currently, the agency is preparing a report on trends in the distribution of
household wealth by wealth, income, education, race and ethnicity, and age.
That report uses survey data on consumer finances.
CBO’s Other Distributional Analyses
10
Adjustments to
Means-Tested Transfers
11
CBO makes adjustments to administrative totals to make them compatible with how data are reported in the CPS. For details on how those adjustments are made, see Bilal Habib,
How CBO Adjusts for Survey Underreporting of Transfer Income in Its Distributional Analyses, Working Paper 2018-07 (Congressional Budget Office, July 2018),
www.cbo.gov/publication/54234.
Recipients Reporting Means-Tested Transfers in the CPS as a
Share of Recipients in the Administrative Data, 1979 to 2019
The underreporting of
means-tested transfers in
the CPS has increased
over time.
Without adjustment, CPS-
based analyses would
understate income growth
at the bottom of the
distribution and the role of
means-tested transfers in
reducing income
inequality.
0
20
40
60
80
100
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Percent
Housing Assistance
Medicaid
SSI
SNAP
Overreporting
Underreporting
12
▪ Administrative matching
– This method offers near-perfect accounting, but administrative microdata
are not widely available.
▪ Rules-based simulation
– This approach offers precise estimates at the micro level but requires a
significant research investment.
▪ Regression-based estimation (CBO’s approach)
– This method offers tractability for multiple programs over a long time series
but is less precise at the micro level.
Common Approaches to Adjusting for Underreporting
13
1 Average monthly receipt refers to the average number of households or individuals who receive benefits in a month, point-in-time receipt refers to the number of households or
individuals who receive benefits on a particular day, and ever-on receipt refers to the number of households or individuals who receive benefits at any point during a given year.
Because many people receive benefits for only part of the year, point in time and average monthly totals are typically lower than ever-on totals.
▪ First, CBO uses administrative data to set targets that are consistent with the CPS
sampling frame by
– Subtracting program participants who are institutionalized, and
– Converting average monthly receipt and point-in-time receipt to “ever-on” receipt.1
▪ Then, CBO uses CPS data to estimate the probability of receipt.
– It uses a separate probit regression for each year and population subgroup.
– Independent variables include income level and composition, labor force
participation, demographics, and household characteristics.
▪ Finally, CBO imputes transfer receipt on the basis of estimated probabilities until the
target is reached.
– An algorithm assigns receipt to individuals or households in proportion to their
predicted probability of receipt.
CBO’s Regression-Based Imputation Method
14
CBO makes adjustments to administrative totals to make them compatible with how data are reported in the CPS. For details on how those adjustments are made, see Bilal Habib,
How CBO Adjusts for Survey Underreporting of Transfer Income in Its Distributional Analyses, Working Paper 2018-07 (Congressional Budget Office, July 2018),
www.cbo.gov/publication/54234.
Share of Households Receiving SNAP Benefits, by Income, 2019
Most CPS households
reporting SNAP benefits
are below 150 percent of
the Federal Poverty Line,
and most of the households
that CBO imputes as being
SNAP recipients have
similar incomes.
0
10
20
30
40
50
60
70
80
0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450
Household Income as a Percentage of the Federal Poverty Level (FPL)
CBO (Imputed Plus Reported)
CPS (Reported Only)
Percent
15
After the total number of recipients matches the administrative targets, each
recipient is assigned a benefit amount.
▪ SNAP and SSI: CBO determines the average benefit per recipient on the basis
of income and demographic groups and assigns those averages to new
recipients.
▪ Medicaid: CBO determines the average cost to the government per recipient
from administrative data (by eligibility category) and assigns those averages to
all recipients.
▪ Housing assistance: CBO estimates benefits for each reporting household on
the basis of location, household size and structure, and fair-market rents
determined by the Department of Housing and Urban Development. (No
additional households are imputed to be recipients.)
Assigning Benefit Amounts
16
1 See Michael Davern and others, “A Partially Corrected Estimate of Medicaid Enrollment and Uninsurance: Results From an Imputational Model Developed Off Linked Survey and
Administrative Data,” Journal of Economic and Social Measurement, vol. 34, no. 4 (2009), pp. 219–240, http://doi.org/10.3233/JEM-2009-0324; and Sheila Zedlewski and Linda
Giannarelli, TRIM: A Tool for Social Policy Analysis (Urban Institute, May 2015), https://tinyurl.com/TRIMurban2015 (PDF, 729 KB).
▪ The method is straightforward to implement, and it doesn’t require a team of
researchers to code specific program rules over the entire time series.
▪ It is easily scalable across multiple programs over a 40-year time series, and it
can be extended to other transfer programs, such as the National School
Lunch Program.
▪ At the quintile level, the distributional results of CBO’s method are similar to
those of other methods, including Davern (Medicaid) and TRIM (SNAP).1
Strengths of CBO’s Adjustment Method
17
▪ In CBO’s imputations, individuals and households who receive means-tested
transfer benefits but who do not report those benefits have the same
characteristics as those who do report those benefits.
▪ CBO’s method does not account for false positives: Although it assigns benefits
to high-probability individuals who do not report receiving benefits, it does not
remove benefits reported by low-probability individuals and households.
Limitations of CBO’s Adjustment Method
18
These results differ from those published in CBO’s Distribution of Household Income reports because they use CPS data only, whereas those reports use a combination of CPS and
SOI data.
The Gini coefficient is a measure of income inequality that ranges from zero (the most equal distribution of income) to one (the least equal distribution of income).
The Effects of CBO’s Transfer Adjustments on
CPS Measures of Income Inequality, 1979 to 2019
Adding imputed transfers
significantly reduced
income inequality in
CBO’s analysis in 2019.
The effects on inequality
of imputing transfers
have increased over time
as reporting rates have
decreased.
0.36
0.38
0.40
0.42
0.44
0.46
1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Gini Index
Income Before Transfers
and Taxes (Base income)
Base Income Plus Imputed
Means-Tested Transfers
Base Income Plus Reported
Means-Tested Transfers
More Inequality
Less Inequality
19
1 For details, see Congressional Budget Office, “CBO's Model to Adjust for Survey Underreporting of Receipt and Income From Selected Means-Tested Transfer Programs” (GitHub
repository, November 4, 2021), https://tinyurl.com/2p8z6j3k.
In 2018, CBO released a working paper describing its method for imputing
means-tested transfers, which included CPS extracts and Stata code to allow
researchers to replicate CBO’s results for 1979 through 2016.
Since then, CBO has released new versions of the data and code with the
following updates:
▪ CBO released imputations for additional years (currently through 2019), and
▪ CBO made methodological improvements to imputations and target totals.
In 2020, CBO moved data and code to Github to facilitate public access.1
Public Release of CBO’s Means-Tested Transfer Imputations

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How CBO Analyzes the Distribution of Household Income, Means-Tested Transfers, and Taxes

  • 1. A Presentation to the Committee on National Statistics of the National Academy of Sciences, Engineering, and Medicine May 16, 2022 Bilal Habib Tax Analysis Division How CBO Analyzes the Distribution of Household Income, Means-Tested Transfers, and Taxes For more information about the conference, see https://tinyurl.com/4t82ejf9 (accessed May 1, 2022).
  • 3. 2 Over 30 Years of Distributional Analyses The Congressional Budget Office regularly produces a report on the distribution of household income, means- tested transfers, and federal taxes. The most recent version produces those distributions for 1979 to 2018.
  • 4. 3 ▪ Market income consists of the following: – Labor income, – Business income, – Capital income (including realized capital gains), – Income received in retirement for past services, and – Income from other nongovernmental sources. ▪ Social insurance benefits consist of benefits provided through the following: – Social Security, – Medicare, – Unemployment insurance, and – Workers’ compensation. CBO’s Income Measures Market Income Social Insurance Benefits Income Before Transfers and Taxes For details, see Kevin Perese, CBO’s New Framework for Analyzing the Effects of Means-Tested Transfers and Federal Taxes on the Distribution of Income, Working Paper 2017-09 (Congressional Budget Office, December 2017), www.cbo.gov/publication/53345.
  • 5. 4 1 Eligibility to receive means-tested transfers is determined primarily on the basis on income, which must be below certain thresholds. ▪ Means-tested transfers are cash payments and in-kind services provided through federal, state, and local government assistance programs.1 The largest such programs include the following: – Medicaid, – Supplemental Nutrition Assistance Program (SNAP), – Supplemental Social Insurance (SSI), and – Housing Assistance. ▪ Federal taxes consist of the following: – Individual income taxes, – Payroll taxes, – Corporate income taxes, and – Excise taxes. CBO’s Income Measures (Continued) Income Before Transfers and Taxes Means- Tested Transfers Federal Taxes Income After Transfers and Taxes
  • 6. 5 Source: Congressional Budget Office, The Distribution of Household Income, 2018 (August 2021), www.cbo.gov/publication/57061. Average Income, Means-Tested Transfers, and Federal Taxes, 2018, and Cumulative Growth in Average Income, 1979 to 2018 CBO reports household income, means-tested transfers, and federal taxes by quintile. Means-tested transfers and federal taxes significantly increase the cumulative growth of income after transfers and taxes among households in the lowest quintile.
  • 7. 6 CBO’s distributional analyses are based on annual, cross-sectional data, which are drawn from two sources. ▪ Administrative tax data from the Statistics of Income (SOI) provide information about: – Market income and Social Security for tax filers, and – Federal taxes. ▪ The annual March Supplements of the Current Population Survey (CPS) provide information about: – Market income and Social Security for non-filers, – Medicare, and – Means-tested transfers. The SOI and CPS are statistically matched to produce a single data set. Tax units are created in the CPS, matched with their counterparts on the SOI on the basis of total income, and then reconstructed into households. Data Sources
  • 8. 7 ▪ Information from the SOI is used to estimate federal taxes using CBO’s microsimulation tax model. ▪ Determining administrative totals for certain sources of income (such as means-tested transfers) requires calculations by CBO experts. ▪ CBO must also assign incidence to certain sources of income and taxes. For example: – CBO assigns 25% of the corporate tax to labor income and 75% to capital income. – The full cost of benefits is assigned to recipients of in-kind transfers, such as those for SNAP, Medicaid, and Medicare. ▪ Excise taxes are allocated to households on the basis on information reported in the Consumer Expenditure Survey. Methodological Choices
  • 9. 8 Three reports describing this work are The Distribution of Household Income, 2016 (July 2019), Projected Changes in the Distribution of Household Income, 2016–2021 (December 2019), and The Distribution of Household Income, 2018 (August 2021). Those reports and related work are available at https://go.usa.gov/xudXy. In recent years, CBO has expanded the scope of its analyses of the distribution of household income in various ways, including the following: ▪ In 2018, CBO removed means-tested transfers from its base income measure and began adjusting CPS data for underreporting in the four largest means- tested transfer programs. ▪ In 2019, CBO developed a method to make projections of the distribution of household income in accordance with its baseline projections for federal revenue and spending. ▪ In 2021, CBO published its estimates of the distributional effects of the 2017 tax act. Recent Expansions of CBO’s Analyses of the Distribution of Household Income
  • 10. 9 1 See Congressional Budget Office, How Changing Social Security Could Affect Beneficiaries and the System's Finances, www.cbo.gov/publication/54868. 2 See Dorian Carloni and Terry Dinan, Distributional Effects of Reducing Carbon Dioxide Emissions With a Carbon Tax, Working Paper 2021-11 (Congressional Budget Office, September 2021), www.cbo.gov/publication/57399. In addition to its analyses of the distribution of household income, CBO also undertakes a broad array of distributional analyses that use a variety of data sources. For example: ▪ In 2019, the agency used administrative data on earnings to produce an interactive tool that allows users to estimate the effect of various policy options related to Social Security on beneficiaries and the system’s finances.1 ▪ In 2021, the agency used survey data on consumption to estimate the distributional effects of implementing a tax on carbon dioxide emissions.2 ▪ Currently, the agency is preparing a report on trends in the distribution of household wealth by wealth, income, education, race and ethnicity, and age. That report uses survey data on consumer finances. CBO’s Other Distributional Analyses
  • 12. 11 CBO makes adjustments to administrative totals to make them compatible with how data are reported in the CPS. For details on how those adjustments are made, see Bilal Habib, How CBO Adjusts for Survey Underreporting of Transfer Income in Its Distributional Analyses, Working Paper 2018-07 (Congressional Budget Office, July 2018), www.cbo.gov/publication/54234. Recipients Reporting Means-Tested Transfers in the CPS as a Share of Recipients in the Administrative Data, 1979 to 2019 The underreporting of means-tested transfers in the CPS has increased over time. Without adjustment, CPS- based analyses would understate income growth at the bottom of the distribution and the role of means-tested transfers in reducing income inequality. 0 20 40 60 80 100 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Percent Housing Assistance Medicaid SSI SNAP Overreporting Underreporting
  • 13. 12 ▪ Administrative matching – This method offers near-perfect accounting, but administrative microdata are not widely available. ▪ Rules-based simulation – This approach offers precise estimates at the micro level but requires a significant research investment. ▪ Regression-based estimation (CBO’s approach) – This method offers tractability for multiple programs over a long time series but is less precise at the micro level. Common Approaches to Adjusting for Underreporting
  • 14. 13 1 Average monthly receipt refers to the average number of households or individuals who receive benefits in a month, point-in-time receipt refers to the number of households or individuals who receive benefits on a particular day, and ever-on receipt refers to the number of households or individuals who receive benefits at any point during a given year. Because many people receive benefits for only part of the year, point in time and average monthly totals are typically lower than ever-on totals. ▪ First, CBO uses administrative data to set targets that are consistent with the CPS sampling frame by – Subtracting program participants who are institutionalized, and – Converting average monthly receipt and point-in-time receipt to “ever-on” receipt.1 ▪ Then, CBO uses CPS data to estimate the probability of receipt. – It uses a separate probit regression for each year and population subgroup. – Independent variables include income level and composition, labor force participation, demographics, and household characteristics. ▪ Finally, CBO imputes transfer receipt on the basis of estimated probabilities until the target is reached. – An algorithm assigns receipt to individuals or households in proportion to their predicted probability of receipt. CBO’s Regression-Based Imputation Method
  • 15. 14 CBO makes adjustments to administrative totals to make them compatible with how data are reported in the CPS. For details on how those adjustments are made, see Bilal Habib, How CBO Adjusts for Survey Underreporting of Transfer Income in Its Distributional Analyses, Working Paper 2018-07 (Congressional Budget Office, July 2018), www.cbo.gov/publication/54234. Share of Households Receiving SNAP Benefits, by Income, 2019 Most CPS households reporting SNAP benefits are below 150 percent of the Federal Poverty Line, and most of the households that CBO imputes as being SNAP recipients have similar incomes. 0 10 20 30 40 50 60 70 80 0 25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400 425 450 Household Income as a Percentage of the Federal Poverty Level (FPL) CBO (Imputed Plus Reported) CPS (Reported Only) Percent
  • 16. 15 After the total number of recipients matches the administrative targets, each recipient is assigned a benefit amount. ▪ SNAP and SSI: CBO determines the average benefit per recipient on the basis of income and demographic groups and assigns those averages to new recipients. ▪ Medicaid: CBO determines the average cost to the government per recipient from administrative data (by eligibility category) and assigns those averages to all recipients. ▪ Housing assistance: CBO estimates benefits for each reporting household on the basis of location, household size and structure, and fair-market rents determined by the Department of Housing and Urban Development. (No additional households are imputed to be recipients.) Assigning Benefit Amounts
  • 17. 16 1 See Michael Davern and others, “A Partially Corrected Estimate of Medicaid Enrollment and Uninsurance: Results From an Imputational Model Developed Off Linked Survey and Administrative Data,” Journal of Economic and Social Measurement, vol. 34, no. 4 (2009), pp. 219–240, http://doi.org/10.3233/JEM-2009-0324; and Sheila Zedlewski and Linda Giannarelli, TRIM: A Tool for Social Policy Analysis (Urban Institute, May 2015), https://tinyurl.com/TRIMurban2015 (PDF, 729 KB). ▪ The method is straightforward to implement, and it doesn’t require a team of researchers to code specific program rules over the entire time series. ▪ It is easily scalable across multiple programs over a 40-year time series, and it can be extended to other transfer programs, such as the National School Lunch Program. ▪ At the quintile level, the distributional results of CBO’s method are similar to those of other methods, including Davern (Medicaid) and TRIM (SNAP).1 Strengths of CBO’s Adjustment Method
  • 18. 17 ▪ In CBO’s imputations, individuals and households who receive means-tested transfer benefits but who do not report those benefits have the same characteristics as those who do report those benefits. ▪ CBO’s method does not account for false positives: Although it assigns benefits to high-probability individuals who do not report receiving benefits, it does not remove benefits reported by low-probability individuals and households. Limitations of CBO’s Adjustment Method
  • 19. 18 These results differ from those published in CBO’s Distribution of Household Income reports because they use CPS data only, whereas those reports use a combination of CPS and SOI data. The Gini coefficient is a measure of income inequality that ranges from zero (the most equal distribution of income) to one (the least equal distribution of income). The Effects of CBO’s Transfer Adjustments on CPS Measures of Income Inequality, 1979 to 2019 Adding imputed transfers significantly reduced income inequality in CBO’s analysis in 2019. The effects on inequality of imputing transfers have increased over time as reporting rates have decreased. 0.36 0.38 0.40 0.42 0.44 0.46 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 Gini Index Income Before Transfers and Taxes (Base income) Base Income Plus Imputed Means-Tested Transfers Base Income Plus Reported Means-Tested Transfers More Inequality Less Inequality
  • 20. 19 1 For details, see Congressional Budget Office, “CBO's Model to Adjust for Survey Underreporting of Receipt and Income From Selected Means-Tested Transfer Programs” (GitHub repository, November 4, 2021), https://tinyurl.com/2p8z6j3k. In 2018, CBO released a working paper describing its method for imputing means-tested transfers, which included CPS extracts and Stata code to allow researchers to replicate CBO’s results for 1979 through 2016. Since then, CBO has released new versions of the data and code with the following updates: ▪ CBO released imputations for additional years (currently through 2019), and ▪ CBO made methodological improvements to imputations and target totals. In 2020, CBO moved data and code to Github to facilitate public access.1 Public Release of CBO’s Means-Tested Transfer Imputations