Studies of Welfare Populations: Data Collection and Research Issues. Comparison of Income Reporting from UI Wage and IRS Tax Filings Data for a Low-Income Population

06/01/2002

In a recent study of the EITC for a sample of assistance units on the California caseload, Hill et al. (1999) compared UI wage data with linked data from the sample members' IRS tax returns. The study used data from the California Work Pays Demonstration Project (CWPDP), which was conducted in four counties (Alameda, Los Angeles, San Bernardino, and San Joaquin) starting in 1992. The data consisted of two sets of assistance units drawn from the caseloads in these counties. One set, which is used for the sample in Table 9-8, consisted of a random sample drawn from a caseload at a particular date in 1992. Although this sample is representative of the caseload at that time, recall that the study by Bane and Ellwood (1983) showed that random samples from the existing caseload of AFDC are disproportionately made up of assistance units that are "welfare dependent."

The second set of assistance units, which is the sample used for Table 9-9, is a random sample of new entrants to the caseload in 1993. Bane and Ellwood (1983) and others have found that a significant proportion of new entrants remain on welfare for only a relatively short period.(28) Furthermore, Gritz and MaCurdy (1991) find that most new entrants exit from AFDC to employment. We also break both samples up into female-headed households (Aid to Families with Dependent Children-Family Group AFDC-FG cases) and two-parent households (AFDC-U). We report on annual earnings information for the year after the samples were drawn, that is, 1993 for the random sample of the caseload and 1994 for the new entrants sample.(29)

The first two lines of each panel of each table give estimates of the employment rates of each sample of AFDC recipients. As expected, employment rates of the point-in-time caseload (Table 9-8) are lower than the sample of new entrants (Table 9-9). Employment rates of one-parent cases (AFDC-FG) are lower than the employment rates of two-parent cases (Aid to Families with Dependent Children-Unemployed Parent [AFDC-U]). What is striking and not necessarily expected, however, is that the implied employment rates using UI data and using tax return data are nearly identical. From Table 9-8, employment rates of the point-in-time AFDC-FG caseload were 26 percent using UI data and 22 percent using tax return data. The corresponding rates for AFDC-U cases were 31 percent for both data sources. Employment rates were 37 percent using UI data for the new entrant sample and 33 percent using tax returns. Employment rates were 48 percent using UI data for the AFDC-U new entrants and 49 percent using tax returns.

TABLE 9-8
Random Sample from Caseload in 1992, Information for Tax Year 1993
  Those Filing Tax Returns Full Sample
AFDC-FG cases
% of households with UI earnings   26
% of households that filed tax returns   22
Average UI earnings of adults in household $4,514 $1,242
Average adjusted gross earnings on tax returns $10,589 $2,378
Average wage & salary earnings on tax returns (Line 7) $9,748 $2,189
Average income reported to AFDC $1,222 $360
% of households with No UI earnings, but filed tax return   5.89
% of households with UI earnings, but filed no tax return   11.41
% of households for which AGI < UI wages   12.61
% of households for which AGI = UI wages   78.59
% of households for which AGI > UI wages   8.80
% of households for which AGI < UI wages, for UI wages > 0   3.39
% of households for which AGI > UI wages, for AGI > 0   40.47
Self-employment income reported on tax returns    
Fraction of filers reporting any 0.06  
Average amount reported $357  
AFDC-U Cases    
% of households with UI earnings   31
% of households that filed tax returns   31
Average UI earnings of adults in household $5,223 $1,792
Average adjusted gross earnings on tax returns $8,482 $2,595
Average wage & salary earnings on tax returns (line 7) $7,554 $2,311
Average income reported to AFDC $2,513 $894
% of households with no UI earnings, but filed tax return   7.07
% of households with UI earnings, but filed no tax return   8.21
% of households for which AGI < UI wages   9.26
% of households for which AGI = UI wages   78.39
% of households for which AGI > UI wages   12.05
% of households for which AGI < UI Wages, for UI Wages > 0   3.97
% of households for which AGI > UI wages, for AGI > 0   40.53
Self-employment income reported on tax returns    
Fraction of filers reporting any 0.12  
Average amount reported $562  
Source: Hill et al. (1999)

Although tax return data and UI data would give similar perspectives about employment patterns of the 4-county California sample, it is clear that each sample covers workers that the other misses. For example, in the top panel of Table 9-8 (AFDC-FG cases from the point-in-time sample), roughly one-quarter of people (5.89/22) who filed tax returns had no corresponding UI record.(30) Over 40 percent (11.41/26) of those with positive UI earnings did not file taxes.(31) Of those with both UI and tax return earnings, more than 40 percent reported more earnings on tax returns than would be expected based on UI data. Similar figures apply to each other group, though for AFDC-U cases, only about 20 percent of the cases with UI earnings do not file tax returns.

TABLE 9-9
Random Sample of New Entrants to AFDC Caseload in 1993, Information for Tax Year 1994
  Those Filing Tax Returns Full Sample
AFDC-FG cases
% of households with UI earnings   37
% of households that filed tax returns   33
Average UI earnings of adults in household $6,769 $2,868
Average adjusted gross earnings on tax returns $13,185 $4,342
Average wage & salary earnings on tax returns (Line 7) $12,575 $4,141
Average income reported to AFDC $1,625 $709
% of households with no UI earnings, but filed tax return   8.34
% of households with UI earnings, but filed no tax return   13.55
% of households for which AGI < UI wages   15.69
% of households for which AGI = UI wages   71.31
% of households for which AGI > UI wages   13.00
% of households for which AGI < UI wages, for UI wages > 0   4.21
% of households for which AGI > UI wages, for AGI > 0   39.88
Self-employment income reported on tax returns    
Fraction of filers reporting any 0.04  
Average amount reported $95  
AFDC-U cases    
% of households with UI earnings   48
% of households that filed tax returns   49
Average UI earnings of adults in household $8,516 $5,138
Average adjusted gross earnings on tax returns $12,970 $6,360
Average wage & salary earnings on tax returns (Line 7) $11,421 $5,601
Average income reported to AFDC $3,264 $1,831
% of households with no UI earnings, but filed tax return   10.45
% of households with UI earnings, but filed no tax return   7.94
% of households for which AGI < UI wages   11.77
% of households for which AGI = UI wages   64.71
% of households for which AGI > UI wages   23.51
% of households for which AGI < UI wages, for UI Wages > 0   6.12
% of households for which AGI > UI wages, for AGI > 0   46.83
Self-employment income reported on tax returns    
Fraction of filers reporting any 0.11  
Average amount reported $512  
Source: Hill et al. (1999)

The fact that across all four groups (two samples, and AFDC-FG and AFDC-U cases), tax return income exceeded UI income in at least 40 percent of the cases with positive earnings from both sources, is consistent with households from this welfare-based population having earnings that are not from covered employment. The fact does not seem to be explained by people leaving welfare (through changes in family structure). Among AFDC-FG cases, only 1 to 13 percent of these households had no months on AFDC during the tax reference year and between 56 and 83 percent were on welfare for 9 to 12 months during that year. There is also little evidence that self-employment income plays an important role in earnings differences between tax return and UI income.

Based on comparisons between UI and tax return data, we offer several tentative conclusions:

  • Tax return and UI data appear to give very similar information on employment rates of the four-county California caseload. There are good reasons, however, to think that both data sources will lead to underestimates. UI data will miss independent contractors and possibly other "flexible workers." Tax return data will miss families who do not file tax returns.
  • The two data sources appear highly complementary . Each appears to capture a significant number of families that the other misses. Using them together, therefore, should result in more accurate measures of the employment experiences of the caseload than using either separately.
  • Tax return data have a broader definition of income and, if the household unit is married, will cover both spouses and hence are likely to offer more accurate income information.
  • UI data are much easier to access than tax returns.

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