August 30, 2006

The Paradox: Working Americans See Their Wages Fall, The Rich Get Richer and the White House Reports Increased Revenues

Census data released yesterday shows the median income for working-age Americans declined in 2005 and poverty was basically unchanged. The median income for non-elderly households fell by about $275, or 0.5 percent while the poverty rate was 12.6 percent. As the Center on Budget and Policy Priorities points out, this rate of poverty is actually higher than the 11.7 rate that held during the lowest point of the recent downturn in 2001. Historically, the fourth year of an economic recovery usually is far kinder to Americans than it is this time.

But hasn't there been talk lately of federal revenues looking better than expected? If so many people are worse off, how can the government be collecting more tax money?

The Office of Management and Budget published their mid-year review in July that said revenues were unexpectedly high and the 2006 deficit would therefore be "only" $290 to $296 billion in 2006. Then in August the Congressional Budget Office put out numbers projecting a 2006 deficit of "only" $260. (The differences between the two figures actually just has to do with the CBO being better able later in the summer to see what agencies will actually spend). Even the lower deficit number represents a major deterioration in our fiscal health over the years that President Bush has been in office (from a surplus of 2.4 percent of GDP in 2000 to an estimated deficit of 2.0 percent of GDP).

Whatever revenue surge there is may have several causes, but increased wages paid to middle-income or low-income people is certainly not one of them. As the Center on Budget and Policy Priorities points out, half of the revenue surge results from an increase in corporate taxes paid. Increased capital gains and dividends are another factor. These are all clearly enjoyed by people at the higher end of the income scale. As for income taxes, some argue that increased income polarization is actually a cause of increased income tax revenue. If some Americans become very poor and an equal number become very rich, taxes may go up because the richer Americans pay taxes at higher rates than middle or low-income families.

We see today that wages are a smaller percentage of the economy than in any time in post-World War II economy, while corporate profits are a higher percentage of the economy than any time in the past 40 years.
It almost seems like we're living in two different economies. In one, working people see their wages fall in real terms, while in the other, stockholders and those with very high salaries see their incomes rise faster than ever. The taxes paid by the latter group are causing a small short-term boost in revenues even while the former group stagnates.

Does the revenue boost mean that supply-side economics is working, at least partially? No way. For one thing, both personal taxes and corporate taxes are very low as a share of the economy compared to other similar points in our history.
For another, as you look back in American history there is clearly no connection between tax breaks and revenue surges. For example, in the late 1990s, after taxes were increased the economy, and revenues, surged, resulting in a budget surplus.


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