We Make More Than We Think

By :: August 1st, 2013

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.

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. This chart tells the story:


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.

(NOTE: The table in this post has been corrected. Thanks to regular reader Vivian Darkbloom for noting that the columns did not add to 100 percent)


  1. Michael Bindner  ::  9:52 pm on August 1st, 2013:

    Non-taxed inheritances are another example for those of us below the “Death Tax” limit. It won’t show up on my taxes but it was certainly income. Public education is another source of “income” for families – although it is a cost for others. Bastiat had a quote about this. He thought of it as a bad thing – but I would rather think that we all tax and support each other. It is the essence of civilized society. Also, I am not sure most employers would spread the additional income from dropping subsidized health insurance evenly in terms of salary. Poorer workers would get little or nothing while the CEO or owner would likely give himself a larger bonus than the amount he earned from the transition.

    This measure is good when considering economic issues – however it is mixing apples and oranges when considering effective tax rates. In a cooperative society where the cooperative takes over all financial and governmental functions, cash income would be rather low – however economic income would be even higher – especially if the taking on of social costs, like education, are included.

    Another source of income is publicly provided mental health care. One week of free hospitalization is probably more of a benefit than a year’s wage. The individual is the beneficiary of this charity care, however there is no way taxes could be paid on it – especially if the care leads to a permanent disability finding.

  2. Steven  ::  1:57 pm on August 3rd, 2013:

    This is literally the least useful graph I’ve seen all day. It’s almost like a silent majority statement, that somehow simply by saying something exists makes if take on a value. You should add the cost of the subsidy on fuel, milk, and blueberries to this. Why not? Maybe include a little bit of the cost of police/fire to it, because, you know, you are paying for it.

  3. Vivian Darkbloom  ::  2:57 pm on August 3rd, 2013:

    The graph “Source of Expanded Cash Income by Percentile” is rather odd—none of the columns add up to 100 percent even with the inclusion of an “other” category. It seems to bear little resemblance to Figure 1 (with same title) of the source document, where the percentages indeed foot to 100 percent.

  4. Joseph Rosenberg  ::  3:00 pm on August 5th, 2013:

    Thank you for pointing out the error. The figures have been corrected.

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