Monday, July 16, 2012

"Discretionary" vs "Disposable" income

I admit to being careless in using these terms (taking them as synonyms), so I should clarify the distinction.


disposable income = total income - tax liability
discretionary income = disposable income - cost of necessities

The point of all this, of course, is that many people have little control or discretion about what they do with the money they earn, since there may be very little left after taxes and necessities such as food and shelter are deducted. This is main reason why we have a graduated rather than a flat income tax in this

Note that savings -- say for children's college tuition or job retraining -- is considered discretionary spending. So is medical and dental insurance.

In areas of the country (e.g. New England) where government services are good, tax money paid provides services such as medical care or transportation. Thus, though taxes may be higher, some expenses for necessities may be defrayed by public services. Or, discretionary spending may be freed up by taxpayer funded services such as public (higher) education.

Thus, without taking disposable and discretionary spending into account, as well as the tax structure, simple talk about income is largely meaningless.  Poorer people have little or no discretionary spending, while wealthy ones have great freedom in purchasing things. Adding even a little extra salary at the low income levels can boost discretionary spending many times, adding a great deal to a family's qualtity of life and to the economy as well.

I can't recall reading or hearing Republicans ever talk about this. Have you?

1 comment:

  1. The differences in discretionary income is the reason why policymakers (including Republicans) propose a graduated tax rate. Yes, I do have more discretionary income than a lot of people which is why I am in the 35% bracket and others are in the 10% bracket.

    Proponents of a flat tax include in their plans a baseline of income that wouldn't be taxed. The reason for doing this is because that income is needed for "necessities". So they are addressing your discretionary income point.