Taxes Are Adding To Income Disparity

by: Steven Hansen

Last week, the Census Bureau, as part of their 2012 American Community Survey, published median income data for 2012. One question comes to mind: Is income tax widening the income gap which is slowing growth for the USA consumer driven economy?

This week we also published August 2013 median income data (which uses a slightly different methodology). This provides a similar conclusion - the median household is not getting richer.

Also, Friday's personal income data reports that incomes continue to show a rise in per capita income (red line in figure 1). Yet, the median incomes (blue line) have been falling steadily since 2007. When averages are rising whilst medians fall, it says the poor are poorer, or the rich are richer - or in the current situation, both are occurring simultaneously.

Figure 1 - Real median income (blue line, left axis) versus Per capita real disposable income (red line, right axis)

And the shift away from consumer based economy is confirmed from the falling share of the economy from wages (figure 2 - blue line).

Figure 2 - Wages portion of economy

Graph of Shares of gross domestic income: Compensation of employees, paid

Could the tax codes be partially to blame for the rich getting richer? The tax codes favor those who have non-employment income (as capital gains are taxed at lower levels), and can afford accountants and tax attorneys (aka 0.6%). [0.4% of taxpayers in the $500k to $1 million strata plus the 0.2% in the $1 million plus strata = 0.6%]

It is one thing for someone (like me) to despise income redistribution, but it is quite another to have the tax codes take money from the lower end of the households when they are under duress.

However, there is no question the 0.6% contribute a disproportionately significant portion of the USA tax revenue.

Figure 3 - Breakdown by Income Strata by Type of Income (tax year 2011)

[click on the above and below graphs to enlarge]

Table 1 - Average income and taxes paid per income strata (tax year 2011) - data from IRS

As shown in table 1, it is also true that the 0.6% pay a significantly higher proportion of their incomes in taxes. Progressive taxation does tax higher incomes more, but almost half the tax contributions to the government come from two stratas encompassing AGIs between $100,000 and $500,000.

This is 2013 - and what we know about fiat currency operations tells us that, in general, taxing income is synonymous with bloodletting. No tax system is fair for all - and if all state and local taxes as well as FICA is included, the USA has a very regressive tax system which severely taxes incomes under $100,000 compared to all higher incomes. Incomes below $40,000 get some relief when children are involved because of the earned income tax credits.

It also should be pointed out that the poverty level for a family of two is $15,510 (mixed government interpretation whether this is a before or post tax income). But it is illogical that the lower two income stratas should be paying 7% plus in income taxes.

The income tax system could be used to add additional income to the lower stratas by simply not taxing.

In any event, it is difficult to prove the tax codes per se are the proximate cause of the weakening of the middle class. Yet, the median family is in distress, and growing income disparity is dangerous in a democracy.

During the recent financial crisis, the government stepped in and supported banks to keep the economy from collapsing. At this point, it seems the median needs more money in their pockets to ease the decline in their income, and in the process help the economy.

My instablog takes a second look at Friday's personal income and expenditure data which is good but far from excellent.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.