Income – Donald Marron

The 47% is Now 43% and Falling

Remember the 47%? Well, my colleagues at the Tax Policy Center just updated the numbers. For 2013, they estimate that the fraction of Americans not paying any federal income tax is down to 43%. Why? Because the economy is recovering and tax cut stimulus has ebbed. A decade from now, they predict, it will be 34%.

Bob Williams, the Sol Price Fellow at the Urban Institute, explains the number in this video. Key point: the 43% may not pay any federal income tax, but that doesn’t mean they don’t pay taxes:

A Great Introduction to Economic Inequality

Over at the Browser, Sophie Roell interviews MIT economist Daron Acemoglu on the economics of inequality. In the course of discussing five books on the topic (one of which is actually a research paper), Acemoglu hits many of the high points — technology, skills, and education; the increase in income at the tippy-top of the wage distribution in the United States (and elsewhere); and the importance of politics, power, and rent-seeking.

Well worth your time.

Why Do Half of Americans Pay No Federal Income Tax?

You may have heard the claim that about half of Americans pay no federal income tax. That’s a true fact. My Tax Policy Center colleagues estimate, for example, that 46% of households either will pay no federal income tax in 2011 or will receive more from the IRS than they pay in.

Today, TPC released a new study that examines why these people end up paying no federal income tax.

The number one reason should come as no surprise. It’s because they have low incomes. As my colleague Bob Williams notes:

A couple with two children earning less than $26,400 will pay no federal income tax this year because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero. The basic structure of the income tax simply exempts subsistence levels of income from tax.

Low incomes (or, if you prefer, the standard deduction and personal exemptions) account for fully half of the people who pay no federal income tax.

The second reason is that for many senior citizens, Social Security benefits are exempt from federal income taxes. That accounts for about 22% of the people who pay no federal income tax.

The third reason is that America uses the tax code to provide benefits to low-income families, particularly those with children. Taken together, the earned income tax credit, the child credit, and the childcare credit account for about 15% of the people who pay no federal income tax.

Taken together, those three factors — incomes that fall below the standard deduction and personal exemptions; the exemption for most Social Security benefits; and tax benefits aimed at low-income families and children — account for almost 90% of the Americans who pay no federal income tax.

For further details and info about the other 10%, please see the study.

P.S.: The true fact — about half of Americans do not pay federal income taxes — often gets transmogrified in public discourse into the decidedly untrue claim that half of Americans pay no taxes. That simply isn’t so. There are many other taxes in our fair land, including payroll taxes, excise taxes, sales taxes, state income taxes, and property taxes. Most people who don’t pay federal income taxes still encounter some of these other taxes.

State and Local Pay vs. Private Pay

Do state and local workers get paid more or less than their private sector counterparts?

That old question has taken on renewed life with the budget and labor disputes raging in Wisconsin and other states. Unfortunately, it’s not an easy question to answer.

As Ford Fessenden notes in a nice set of graphics at the New York Times,one reason is that observers disagree on what “paid” and “counterpart” mean.

If you simply compare average pay and benefits, for example, state and local workers come out well ahead:

But the two workforces differ. State and local workers are more educated, on average, than private ones. About 50% of state and local workers have a college degree, for example, while only 29% of private workers do. Controlling for that reduces the compensation differential.

But then you need to consider other factors as well, such as the generally longer hours and lower job security in the private sector.

Fessenden doesn’t reach a firm conclusion. Some data suggest that public employees are indeed paid more. But some narrower (and therefore more precise or less representative) comparisons show parity (hospital workers) or higher private pay (higher education).

Well worth flipping through the charts if you are interested in this issue.

The Changing Distribution of Worker Earnings

On Friday, the Congressional Budget Office released a new study examining how worker earnings changed from 1979 through 2007. The report is full of important facts about the evolution of earnings throughout the earnings distribution and, in particular, among the highest earners.

For example, the following chart illustrates how the earnings of men and women (age 25-54) have changed at different points in the earnings distribution:

The chart confirms two well-known findings: men, on average, earn more than women, and high-earners have seen the largest earnings gains in recent decades. Other takeaways include:

In real terms (i.e., adjusting for inflation), men at the 10^th and 50^th percentiles (of the male earnings distribution) in 2007 earned about the same as similarly situated men back in 1979.
Women’s earnings have been growing faster than men’s. Women at the 10^th and 50^th percentile (of the female earnings distribution), for example, had higher earnings in 2007 than their counterparts in 1979.
Women at the 90^th percentile in 1979 earned a bit less than the median man. In 2007, however, a woman at the 90^th percentile earned 66% more than the median man.

The following chart illustrates how earnings have evolved among the top 10% of men and the top 10% of women from 1989 to 2007:

Continue reading “The Changing Distribution of Worker Earnings”

Latest Data on Transfers and Income

In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:

The increasing importance of transfers reflects both short-run developments and long-run trends. In the past year, the importance of transfers has grown because of (a) weakness in other forms of income, (b) the natural expansion of transfers due to economic weakness (e.g., increases in unemployment insurance payments), and (c) policies to expand benefits (e.g., as an attempt at stimulus). Over the longer run, however, the growth of transfers has been driven by the expansion of entitlement programs.

Continue reading “Latest Data on Transfers and Income”

Health Insurance and Labor Markets

Health insurance is not just a health issue. It’s also a jobs issue. Why? Because about 60% of non-elderly Americans get their health insurance through an employer or a labor union. As a result, health insurance and employment are closely related.

As lawmakers consider changes to our system of health insurance, they should therefore keep an eye on the potential implications for jobs and wages. To help them do so, the Congressional Budget Office yesterday released a very helpful brief (see also the accompanying blog entry) that discusses many of the linkages between health insurance and the labor market.

Among other things, CBO reiterates a point I’ve made previously: that the costs of health insurance are ultimately born by workers through lower wages and salaries:

Although employers directly pay most of the costs of their workers’ health insurance, the available evidence indicates that active workers—as a group—ultimately bear those costs. Employers’ payments for health insurance are one form of compensation, along with wages, pension contributions, and other benefits. Firms decide how much labor to employ on the basis of the total cost of compensation and choose the composition of that compensation on the basis of what their workers generally prefer. Employers who offer to pay for health insurance thus pay less in wages and other forms of compensation than they otherwise would, keeping total compensation about the same.

CBO then goes on to discuss a range of potential policies, including ones that would impose new costs on employers. Such policies might require employers to provide health insurance to their workers (an employer mandate), for example, or might levy a fee on employers who don’t provide health insurance (play or pay). CBO concludes that, consistent with the argument above, employers would generally pass the costs of such measures on to their employees through lower wages and salaries. Such adjustments won’t happen instantly, so there may be some short-term effect on employment, but over time the cost will primarily be born by workers through lower compensation.

One exception, however, would be workers who currently earn low wages. As noted on the blog:

Continue reading “Health Insurance and Labor Markets”

House Prices and Productivity

Many economists, myself included, refer to the recent boom and bust in house prices as a bubble, whose foundation lay in a combination of credit market excesses and human imperfections. Fundamentals certainly played a role as well, but bubble forces were particularly important.

In a short paper recently published by the New York Federal Reserve, Jim Kahn makes a very different argument: that the boom and bust in house prices can largely be explained by a boom and bust in productivity growth:

The housing boom and bust of the last decade, often attributed to “bubbles” and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.

Jim’s argument depends on several related lines of reasoning:

First, he notes that productivity drives long-term income growth and that incomes determine how much families can pay for homes. He then argues that the demand and supply for housing are inelastic and, as a result, rising incomes imply rising house prices. Putting these pieces together, he concludes that faster productivity growth implies faster house price appreciation.

Second, he notes that productivity growth accelerated in the mid-to-late 1990s and then slowed around 2004. The productivity acceleration thus began shortly before house price took off, and the productivity slowdown began shortly before house prices began to collapse.

Continue reading “House Prices and Productivity”

Stimulus Lifts Government Transfers

A few weeks ago, I posted some charts showing that Americans are increasingly reliant on government transfers as a source of income. Friday’s data on personal income for May confirmed that the trend is continuing. Government transfers made up a record 18% of personal income in May:

In interpreting this increase, it’s important to keep several points in mind:

May’s increase was driven entirely by the recent stimulus act. The act provided for one-time payments of $250 to a range of Americans who are beneficiaries of various other programs, including Social Security, SSI, and veterans’ benefits. Those payments more than account for the increase in transfers from 16.9% of personal income in April to 18.0% in May. Continue reading “Stimulus Lifts Government Transfers”