Net Income, Gross Income, and Bias in Child Support Awards in Gross Income-Shares States

In this study I discuss the pros and cons of using net income vs. gross income in gross income-shares states. It is argued that the “standardized net” approach is the best approach in determining child support awards based on the combined principles of equity and accuracy. However most states use gross income approaches for the sake of simplicity. Such gross income approaches can generate biases in support awards. Using 2004 tax structures and taking into consideration Earned Income Tax Credit and child tax credit, I estimate the direction, magnitude, and distribution of such biases under three different scenarios of “gross income” approaches. Results show that these biases can be either positive or negative depending on the particular assumptions made in the gross-tonet income conversion process. In some income combination cases, the biases can be quite substantial.