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Shrinking U.S. Incomes

Posted By Barry Ritholtz On July 29, 2004 @ 11:07 am In Finance | Comments Disabled


Fascinating story in today’s Times regarding the drop in Americans’ incomes. The surprising culprit? “Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid.”

graphic courtesy of New York Times

This two year consecutive drop, like the tech bubble that preceded it, is unprecedented in post war America:

“The overall income Americans reported to the government shrank for two consecutive years after the Internet stock market bubble burst in 2000, the first time that has effectively happened since the modern tax system was introduced during World War II, newly disclosed information from the Internal Revenue Service shows.

The total adjusted gross income on tax returns fell 5.1 percent, to just over $6 trillion in 2002, the most recent year for which data is available, from $6.35 trillion in 2000. Because of population growth, average incomes declined even more, by 5.7 percent.

Adjusted for inflation, the income of all Americans fell 9.2 percent from 2000 to 2002, according to the new I.R.S. data.”

That is some nasty data. While we all have anecdotal tales as to how the public gets impacted by economic recessions, its certainly stark when you see it in black and white.

Interestingly, the greatest loss of income was felt by the wealthiest Americans:

click for larger chart
tax_declines_for_wealthy.chart [1]

I’m trying to decipher if this bodes well for John Edward’s Two America’s argument. On the one hand, any drop in income accrues negatively to President Bush’s stewardship of the economy. But the flip side of the argument — Hey, it hit the wealthiest the hardest – creates a bit of a quandry. Was this merely the vast artificial wealth of the bubble deflating? Was Bush’s top rate loaded tax cuts the appropriate response?

Watch for the issue this data point raises to erupt later in the campaign, with both sides touting this as supporting their economic plans.

Here’s an additional excerpt:

“Before the recent drop, the last time reported incomes fell for even one year was in 1953. The only other time since World War II that the I.R.S. reported an interruption in income gains was from 1947 to 1949, but that was because of changes in the tax law at the time that affected how income was reported rather than an actual fall.

From 2000 to 2002, individual income taxes fell 18.8 percent, more than three times the decline in adjusted gross incomes, the I.R.S.’s latest statistical reports show. (Adjusted gross income is the broadest category of income taxpayers report to the government, excluding only a small portion of income in other forms, notably interest on tax-free bonds.)

To some extent, taxes fell more than incomes because of tax cuts championed by President Bush and approved by Congress in 2001. But in that year and in 2002 the cuts applied primarily to those making less than $100,000, especially families with children, and to capital gains from the sales of appreciated assets like stock.

The major tax rate reductions for highly paid Americans did not take effect until 2003, when – it is clear from spending patterns, general income data and the performance of the stock market – more affluent taxpayers regained some of the losses they experienced in the earlier years of the decade.

Falling incomes, rather than tax cuts, appear to count for the greatest share of the decline in income taxes paid. That is because the higher one stood on the income ladder the greater the impact was likely to be from the stock market crunch.

At the same time many of those whose incomes fell the most – those reporting $200,000 to $10 million in income – paid at the highest rates, which meant that the drain on revenues was even greater when their incomes shrank.”

How this shakes out relative to the tax cuts, campaign, and yes, the economy, will help determine who’s in the Oval Office on January 21st, 2005.

I.R.S. Says Americans’ Income Shrank for 2 Consecutive Years [2]
NYTimes, July 29, 2004


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[1] Image: http://bigpicture.typepad.com/comments/images/tax_declines_for_wealthy.chart.html

[2] I.R.S. Says Americans’ Income Shrank for 2 Consecutive Years: http://www.nytimes.com/2004/07/29/business/29tax.html?ex=1248753600&en=32659f74a96df017&ei=5090&partner=rssuserland

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