Disposable personal income

Understand the idea

A change can arise from income, taxes or both. Holding personal income constant, lower personal current taxes raise disposable income. Real disposable income additionally adjusts for price changes, helping distinguish extra dollars from extra purchasing power. National figures aggregate across people and relevant institutions, so they do not directly describe any one household’s financial position.

An example

Suppose a household in a simplified hypothetical example has income of 60,000 and personal current taxes of 10,000. Disposable income is 50,000. If its ordinary spending is 45,000, the remaining 5,000 is a separate after-spending amount; disposable income is still 50,000. If prices rise while income and taxes remain unchanged, that same disposable income buys less.

Sources

• BEA: disposable income and current taxes

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