Almost every year since the U.S. Bureau of the Census first defined the poverty level, observers have been concerned about the accuracy of the estimated poverty level. The figure had been based on the finding that the average family in the mid-1950s spent about one-third of its income on food. That figure was multiplied by three to allow for expenditures on all other goods and services. This represented the after-tax money income of an average family relative to the amount it spent on food. Since
FIGURE 3.4 The Federal Earned Income Tax Credit in tax year 2003
1965 the poverty threshold has been adjusted each year only for inflation.
Since that time, living patterns have changed, and food costs have become a smaller percentage of family spending. For example, the U.S. Bureau of Labor Statistics, in its Consumer Expenditures in 2000 (Washington, DC, 2001), reported that in 2000 the average family spent 13.6 percent of its total expenditures on food, while housing accounted for about one-third (32.4 percent) of family spending. Based on these changes in buying patterns, should the amount spent on food be multiplied by a factor of seven instead of three? Or should the poverty level be based on housing or other factors? What about geographical differences in the cost of living?
The proportion of family income spent on food is not the only change in family living since the 1950s. Both parents in a family are far more likely to be working than they were a generation ago. There is also a much greater likelihood that a single parent, most likely a mother, will be heading the family. Child-care costs, which were of little concern during the 1950s, have become a major issue for working mothers and single parents at the beginning of the twenty-first century.
Critics of the current poverty calculations tend to believe that the poverty levels have been too low, since they are based on a fifty-year-old concept of American life that does not reflect today's economic and social realities. Most feel the poverty level should be raised, probably to about 130 to 150 percent of the current levels. A 1989 study prepared by the Joint Economic Committee of
Congress cited the example of a working mother with two children earning an income at the poverty level who spends $50 per week on child care and no more than 30 percent of her earnings on housing. (This is the proportion that the U.S. Department of Housing and Urban Development [HUD] has established as the basic affordability standard.) In this particular example, 30 percent of her income would equal about $226 a month for rent and utilities. Unless this woman lived in public or subsidized housing (more than two-thirds of the poor do not live in public or subsidized housing), finding an apartment for her family under this budget would be very hard. If she spent a bare minimum on food, she would have about $30 left after taxes. This $30 would have to cover medical care, clothing, personal care items, and an occasional ice cream cone for her two children.
Some are concerned because the poverty threshold is different for elderly and non-elderly Americans. When the poverty threshold was first established, it was thought that older people did not need as much food. Therefore, the value of their basic food needs was lower. Consequently, when this figure was multiplied by three to get the poverty rate, it was naturally lower than the rate for non-elderly people. (The U.S. government, however, uses the poverty rate for non-elderly Americans when determining the eligibility for welfare services for all people, including the elderly.) Critics point out that while the elderly might eat less than younger people, they have greater needs in other areas, which are not considered when their food needs are simply multiplied by three. Probably the most notable difference between the needs of the elderly and non-elderly is in the area of health care. The Bureau of Labor Statistics, in Consumer Expenditures in 2000, found that while the total population interviewed spent about 5.4 percent of their income on health care, those over sixty-five years of age spent 12.2 percent. These critics feel that the poverty level should be the same for everyone, no matter what their age.
A 1995 report prepared by the National Research Council's Panel on Poverty and Family Assistance raised several important issues regarding poverty thresholds or measurement of need. The panel recommended that new thresholds be developed, using consumer expenditure data to represent a budget for basic needs: food, clothing, shelter (including utilities), and a small allowance for miscellaneous needs. This budget would be adjusted to reflect the needs of different family types and geographic differences in costs. Research and discussion continue on these issues.
How Should Income Be Defined?
The Panel on Poverty and Family Assistance also recommended that family resources be redefined to reflect the net amount available to buy goods and services in that budget for basic needs. Critics have pointed out that the definition of income used to set the poverty figure is not accurate because it does not include the value of all welfare services as income. If the value of these services were counted as income, they believe the proportion of Americans considered to be living in poverty would be lower.
In the 1990s the Census Bureau developed several experimental methods of estimating income for evaluating poverty levels, but the bureau has had considerable difficulty determining the value of many of these subsidies. For example, the bureau first tried to consider Medicare and Medicaid at full market value (this meant taking the total amount of money that the government spent on medical care for a particular group and then dividing it by the number of people in that group). The value often was greater than the actual earnings of the low-income family, which meant that, although the family's total earnings may not have been enough to cover food and housing, adding the market value of Medicare or Medicaid to its earnings put the family above the poverty threshold.
This did not make much sense, so the Census Bureau began trying a "fungible value" (giving equivalent value to units) for Medicare and Medicaid. When the bureau measures a household's income, if the earners cannot cover the cost of housing and food, Medicare and Medicaid are given no value. However, if the family can cover the cost of food and shelter, the Census Bureau figures the difference between the household income and the amount needed to meet basic housing and food costs. It then values the health services at this difference (up to the amount of the market value of the medical benefits). This is very complicated, but the Bureau of the Census believes it gives a fair value to these services. Similar problems have developed in trying to determine the value of housing subsidies, school lunches, and other benefits.
Still other observers point out that most income definitions do not include assets and liabilities. Perhaps the poor household has some assets, including a home or car, that could be converted into income. One experimental definition of income includes capital gains on earnings, although it seems to make little difference—about 90 percent of all capital gains are earned by those in the upper fifth of the earnings scale. Including assets generally means little, since the overwhelming majority of poor families have few financial assets. The Bureau of the Census reports that more than half the poor have no assets at all and about four-fifths have assets of less than $1,000, a relatively insignificant amount from which to earn income.
Another major issue is the question of income before and after income taxes. While the Tax Reform Act of 1986 (PL 99-514) removed most poor households from the federal income tax rolls, many poor households still pay state and local taxes. Naturally, some critics claim, the taxes paid to local and state governments are funds that are no
TABLE 3.8 Median household income, by various definitions of income, 2001 and 2002 (Income in 2002 dollars)
Definition of income
Percent change in real income 2002 less 2001
Percent of official definition of income
Money income excluding capital gains (losses) (MI)
Definition 1 plus realized capital gains (losses) less taxes (MI Tx)
Definition 1 less government cash transfers
Definition 2 plus realized capital gains (losses)
Definition 3 plus health insurance supplements to wage or salary income
Definition 4 less social security payroll taxes
Definition 5 less federal income taxes (excluding the EIC)
Definition 6 plus the earned income credit (EIC)*
Definition 7 less state income taxes
Definition 8 plus nonmeans-tested government cash transfers
Definition 9 plus the value of medicare
Definition 10 plus the value of regular-price school lunches
Definition 11 plus means-tested government cash transfers
Definition 12 plus the value of medicaid
Definition 13 plus the value of other means-tested government
noncash transfers less medicare and medicaid (MI Tx NC MM)
Definition 14a plus the value of medicare and medicaid (MI TxNC)
Definition 14 plus imputed return on home equity (MI Tx NCHE)
*Thirteen states (Colorado, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, Vermont, and Wisconsin) and the District of Columbia have an earned income credit (EIC) that uses federal eligibility rules to compute the state credit. The remaining states do not have such a program.
SOURCE: Carmen DeNavas-Walt, Robert W. Cleveland, and Bruce H. Webster, Jr., "Table 6. Median Household Income by Income Definition: 2001 and 2002," in Income in the United States: 2002, Current Population Reports, Consumer Income, U.S. Census Bureau [Online] http://www.census.gov/prod/2003pubs/p60-221.pdf [accessed January 3, 2004]
longer available for feeding and housing the family and, therefore, should not be counted as income.
Table 3.8 lists the various experimental definitions for income that the Bureau of the Census has considered. Table 3.9 shows the effects of selected definitions on the poverty rate.
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