example, a DC pension plan. The employer makes periodic contributions to the employee’s account. Each year the account earns interest or dividends or both. After many years, the employee begins to withdraw funds from the account. If income is counted as it is accrued, then the employer’s contributions will be counted in the year that they are made, and the interest and dividends will be counted in the year that they are credited to the account. If income is counted when it is realized, neither the employer’s contributions nor the interest and dividends will be counted until they are withdrawn. The purpose for which income is being measured determines which of these approaches is more appropriate. For macroeconomic applications, counting income as it accrues is equivalent to counting income as it is generated by the economy, and that will generally be the preferred approach. For applications to measuring the adequacy of income to meet recipients’ needs, however, counting income as it is realized may be more appropriate. The distinction between accrual and realization of income will be important when we consider what to do about assets when defining resources for the purpose of measuring MCER.

Haig-Simons Income

A frequent starting point for discussions of alternative income concepts is the notion advanced by Haig (1921) and later Simons (1938) that economic income is consumption during a period plus the change in net worth. Stated somewhat differently, economic income is the amount that can be consumed (over a specified period of time) without changing net worth. Implicit in this notion is the idea that a net growth in assets—or a net reduction in debt—is as much a part of income as a salary or wages. Haig-Simons income provides a useful framework for thinking about the broad range of resources that might be included in a measure of MCER.

Tax-Based Income

Providing a sharp contrast to the accrual focus of Haig-Simons income is the concept of income that is applied to individuals by the federal tax code. This tax-based concept, which recognizes income only when it is realized, for the most part, is important to the discussion in this chapter not only to highlight the differences that exist in how income is defined, but also because major household surveys—including some that we discuss in Chapter 5—sometimes refer their respondents to their tax returns when collecting data on income. Tax-based concepts of income have become more relevant to medical expenditures with the passage of the Affordable Care Act, which imposes a uniform income concept defined in the tax code for determining eligibility for Medicaid, the Children’s Health Insurance Pro-



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