Before-tax income is income measured before direct taxes such as income tax are deducted.
What it includes
For households, before-tax income can include wages, salaries, self-employment income, interest, dividends, and other gross receipts before tax payments are taken out.
For firms, the analogous idea is often pre-tax profit: earnings before corporate income tax is paid.
Why the distinction matters
Economists separate before-tax income from after-tax or disposable income because taxes change incentives and purchasing power. The same gross earnings can translate into different spending or saving behavior once tax rules are applied.
A simple household relationship is:
$$ \text{Disposable income} = \text{Before-tax income} - \text{Direct taxes} + \text{Transfers} $$
Policy context
Before-tax income is important in:
- income-distribution analysis,
- tax-incidence debates,
- labor-supply models,
- discussions of inequality before and after redistribution.
Two countries can have the same before-tax inequality but very different after-tax inequality if their tax and transfer systems differ.