Taxes higher than pre-tax income

#1

I have noticed that there are several households for which the value of tax liabilities is higher than pre-tax income. This does not make sense. Could you please explain me why this happens?

Thank you,

Vanda

#2

The ASEC tax variables are not determined by direct questioning of respondents. Rather, values for these variables come from the Census Bureau’s tax model, which simulates tax returns. If you compare taxable income amount (TAXINC) with federal tax liability (FEDTAX), the tax liability is always smaller than the taxable income. In other words, the tax variables are internally consistent.

The cases where tax liability is higher than reported household income (HHINCOME) are mostly instances of negative household incomes and a zero tax liability. The remaining cases account for well under 1% of the sample from 2007-2011 and zero instances from 2012-2014. It is up to the researcher to determine how to handle the limited number of cases where the Census’ tax model conflicts with self-reported income. You might also consider contacting the Census Bureau directly for more information on why these discrepancies occur.

Hope this helps.