U.S. Personal Income Runs $15.6 Trillion Per Year

Includes: SPY
by: Jason Cawley


The latest BEA release has PI running $15.6 trillion per year in November 2015, up 4.4% year on year.

Compensation is 63%, government transfers 17%, investment 18%, proprietors 9%, FICA -8% of PI.

Personal savings are running $748 billion per year, 5.5% of after tax income.

Income growth has been steady, but shows strong tax change effects at the start of 2013 that reduced the savings rate.

In real disposable income per capita terms, the impact of those tax changes roughly matched the size of the previous recession.

The Bureau of Economic Analysis (BEA) site reports monthly on the personal income account within the National Income and Product Accounts (NIPA). This article will review the contents of that account, the current figures, and recent history of major elements within it. Personal income (PI) is the major component of the factor incomes side of the overall economy, the major driver of personal consumption expenditures (PCE). This account is also where personal savings and the personal savings rate are calculated, showing the net input increment to household balance sheets out of earned income.

Personal income is much broader than income from wages and salaries, though that is the majority of income. It includes income from rental property, interest and dividends, proprietor's income from non-corporate business, and government transfer payments. There are deductions against it, within the account, for the social insurance payments that fund some of those transfers, and the "disposable" line item (DPI) also takes out personal income taxes. We will run through the account in some detail below, our goal being a full understanding of the meaning, levels and proportions among all the line items of this account.

After examining the state of personal income, we will look at times series over the last 10 years for some of its major elements, as well as adjusted versions that account for changing prices and population. Among other things, I will point out the increase in the portion of PI coming from government transfer payments, from 14.7% to 17.4% over 10 years. I will then draw attention to a significant change at the end of 2012 and beginning of 2013, when a large number of tax law changes took effect. Income shifting into late 2012 for tax management reasons is clearly evident in the data. Less appreciated, there was also a significant reduction in the savings rate across that tax change, and the tax hit to growth in real disposable income per capita is comparable to the previous recession in scale.

The BEA's site where this information is reported can be found here:

Click the button on the right labeled "full release and tables," PDF or txt, to get the table we will be discussing. The press releases itself focuses on the latest changes in percentage terms and does not go into the actual level figures, which are of the greatest interest here. Let's have a look at the full table:

Personal Income Account

The first 30 lines of this table report the major sources of personal income. The next few lines deduct taxes, then explain where the income goes, by major categories of spending. The unspent remainder of income is then the measure of personal savings, on line 43, and the account as a whole can be regarded as trying to arrive at that figure. The remaining lines report measures and adjustments based on the previous lines, including the "headline" personal savings rate, which is the line 43 "personal savings" total divided by the line 32 "disposable personal income" total. Adjustments for changes in prices and population make up the last few lines, including a figure for DPI per capita in current or in 2009 dollars.

Let's focus now on the first 30 lines of the table where the sources of PI are described. The biggest component, $9.9 trillion, is compensation of employees, which is collective payroll of all paid workers in the country, pretty much. In turn that has two unequal parts - the actual wages and salaries $8 trillion, and $1.9 trillion of pension contributions, both the employer side of FICA (line 13) and private pension plan contributions, 401(k) contributions withheld, and the like. Collectively those are forms of deferred compensation. Notice that just over half of overall PI is wages and salaries proper. That ratio tends to lead to subjective underestimates of overall income in the US, as people think of typical "take home" pay as all there is in "personal income."

The next important category is proprietor's income, line 14, at $1.4 trillion. Conceptually, this is the intermediate between labor income and capital income. Organizationally, if reflects the income earned by sole proprietors, partnerships, and non-corporate business that use personal income reporting and filing.

Then we get to the true capital sources of personal income. Rental income, $677 billion, is 4.3% of personal income. Two things to note about this figure. First, much real estate in the US is owner occupied and doesn't generate any income in the sense used in this account. Second, most of the remainder is corporate held, and will not appear here under rent, though dividends paid by a corporation that owns real estate may appear under "dividends," and S corp. held property may even appear under "proprietors' income".

Third, easiest to miss if you aren't familiar with accounting practices here and as the line item says, the figure includes a capital consumption adjustment. That means it is the figure after deducting depreciation, as owners of rental property are entitled to do on their income tax returns. Most real estate is depreciated as 27.5-year property, which straight line means that the first 3.64% of cash flow on its price is regarded as return of capital, not return on capital, and therefore not as a true income. The point is that owners of real estate probably have a cash flow from it considerably higher than the $677 billion "income" line item reported here - perhaps twice as high.

The next 3 lines of capital income are much more straightforward - $1.331 trillion in interest and $869 billion in dividends received, totaling $2.2 trillion. Two qualifications should be borne in mind for these line items. The first is that the interest received is a gross figure across all individuals, not "netted" into a sector total. Line 39 on the expenditures side of the ledger shows that $274 billion in interest is also paid directly by persons. The second is that the dividends received are going to be "C" corporation dividends, since corporate forms that use individual income tax accounting will be classified under "proprietors' income" above, instead. Those forms - "S" corps and LLCs for example - pay income tax on full earnings whether distributed or retained.

Then we have a major line item, $2.7 trillion or 17.3% of total PI, for government transfer payments. Line items below give a breakdown of those for the major categories. Note that only a third to half of this item are in direct cash payment form, with social security the biggest component of that nature. Medical benefits paid are considered part of personal income, and items like food stamps will appear within the "other" category. A portion of the smaller "veterans benefits" line item is also medical care, while much of it is cash pension benefit.

Last, we have a line item of $1.2 trillion that is a deduction from PI rather than a portion of it - contributions for social insurance, meaning FICA and Medicare. This figure includes the amounts recorded in line 13 in the other direction, for the employer portion of FICA and Medicare payroll taxes. Basically, the amount the employer pays is added to PI within the employee compensation section, keeping that account in line with everyone's W-2s and with actual disbursements by businesses. Then on line 30, the full FICA cost is taken back out, both that employer's half and the personally paid half. Notice that the PI contributions at $1.2 trillion do not cover the transfer line item of $2.7 trillion. They are also coming from and going to different persons.

To get to DPI from PI, we then have to deduct personal income taxes paid, at $1.987 trillion. (Notice, now we have covered transfer payments, with half a trillion to spare. The rest of the government costs more than half a trillion a year, alas). This leaves us with $13.6 trillion in after tax income. This is the first of 3 places where all of PI "goes" - taxes, consumption, and savings.

The PCE line comes next, showing that the major thing disposable income funds is the purchase of goods and services, $12.4 trillion worth as an annual rate. Breakdowns show that is $8 trillion services and $4.4 trillion goods, with another 1/3 to 2/3 split in favor of non-durable vs. durable goods. Note that for items like medical expenses paid by Medicare and Medicaid, they appear on the income side of the ledger under "transfers" and under the "outgo" side of the ledger under personal consumption, "services." There is no requirement that money touch the individual consumer's hands implied in that accounting. It is still income and spending, both, if it was paid for and done on the individual's behalf.

Deducting taxes and PCE, we arrive at $748 billion in personal savings, available to fund paying down debt, net acquisition of financial assets, retained earnings within S corporations and partnerships building equity of non-corporate business, and the like. Note that this is not the only source of domestic investment funding in the US. Retained corporate earnings are another major source, that does not pass through the PI accounts. Continued savings out of income by households, however, are a major way ongoing investment is financed. Gross investment in the US runs at $3 trillion a year, including some by government (military equipment, government construction, etc). The 5.5% savings rate is better than the very low figures seen just before the last recession, but is lower than is healthy in the long run; up around 9% would suffice to cover our trade deficit.

Now that we have a good understanding of everything in this account, the current figures and the relations among the different measures, I want to look at the history of elements of this account over the last 10 years. Let's start with the top line, the history of PI in the US since 2005:

Personal Income History

We see consistent growth, with a step down and delay in the shaded region of the last recession, effectively "losing" 3 years of progress. And we see another strange "kink" at the end of 2012 and beginning of 2013. As we will see in more detail below, that reflects the large changes in tax law that took effect at the start of 2013, with significantly higher rates, and "income shifting" moves by individuals and businesses to "front run" the rate changes by moving income into calendar 2012, if they could.

Before looking at that kink, though, I also want to present the time series of the "government transfers" component of personal income, which shows a jump in the recession period, and a 75% increase overall in this 10-year period, compared to just under 50% for overall PI. Here is the graph:

Government Transfer Payments

Next, let's look at what happened with the personal savings rate over the same time period, and especially around that end of 2012 "kink":

Personal Savings Rate History

Notice the dramatic spike at the tax change event, as well as the "step function" increase during the recession, from very low levels under 3% before it hit. Savings so thin were dangerous, and a sign that households were overextended especially on mortgage debt. After sharp rises within the period when GDP was actually falling, the savings rate stabilized in the 5-6% range by 2010. It then rose gradually to above 7% in most of 2012, a healthy development. The tax law changes then drove it below 5%, and it has only recently risen above that line once again.

As a reminder, here is a review of the major tax changes that took effect at the start of 2013:

- Payroll tax increased 2 to 6.2%, sunset of previous "holiday."

- Payroll tax for medical increased 0.9% for over $250/200K income.

- Top marginal rate 39.6 up from 35, on incomes over $400/450.

- Dividends and capital gains 20 up from 15 over $400/450K.

- Death tax to 40 from 35 on estates over $5 million.

- Exemption and itemization phase outs over $300/250K.

- New Obamacare 3.8% tax on investment income for over $250/200.

- Sunset removed immediate expensing for business investment.

- 2.3% excise tax on medical devices.

- Reduced medical expenses deductions.

- Eliminate corporate deduction for Medicare part D expenses.

- Capped expense deduction for health company executive pay.

Clearly, all those changes had a significant impact on personal income, shifting income into late 2012 to front-run, and then reducing savings left after paying all taxes in 2013 and beyond.

It was not PCE that took the hit, it basically keeps going on trend.

Overall, PI also continues to rise, but less of it is available for savings. Next, I present the DPI picture, adjusted for prices and growing population, which together make the impact of the 2013 changes stand out:

Real DPI Per Capita

Notice that we are back on a reasonable uptrend, even with all of those adjustments, with a gain of about $2500 per year overall since the start of 2013, which works out to a 2.25% annual rate of increase, in real and per capita terms. However, we can see that the 2013 changes basically "undid" the rise achieved during 2012, putting the early 2013 level about the same as the start of 2011. The 2012 to 2013 drop was comparable in scale to the decline caused by the previous recession, though more abrupt. There was little net progress on a real per capita basis from the mid-2007 level around $36000 (in 2009 dollars), to a similar early-2013 level.

The upward trend from the 2010 low shows the underlying strength of the economy. A large amount of the "fiscal stimulus" of the recession period was basically taken away by the tax changes of 2013, which cut federal budget deficits from trillion dollar annual figures to half that or less. That public fiscal change, however, left its mark on the personal savings rate, and delayed the rise of real incomes by a year or two.

I hope this is interesting, and as always questions and comments are most welcome.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long US financials, long general US stocks