After Taxes, Economic Boom Reached Only a Few

Government Finance Review, February 2008 | Go to article overview

After Taxes, Economic Boom Reached Only a Few


Local governments that are considering tax increases should consider this: In recent years, post-tax income has been stagnant or actually dropped for many Americans. Only those earning the top 1 percent have seen a significant increase, according to the latest data from the Congressional Budget Office (CBO).

Post-tax income for the lowest earners dropped by more than 5 percent between 2000, the peak of the previous economic cycle, and 2005, the most recent year for which CBO data are available. Post-tax income for the top 1 percent of earners rose by almost 4.9 percent for the same period, while post-tax income for the top 20 percent of earners rose by 2.8 percent. There were no significant increases for any other group, according to the recent CBO report, Historical Effective Federal Tax Rates: 1979 to 2005.The calculations are based on the broadest version of the Consumer Price Index, the CPI-U, which includes food and energy prices (the CPI almost doubled in recent years when food and energy were added).

Households in the fourth quintile of earnings, with a 2005 average pre-tax income of $85,200, saw an increase of just 0.3 percent from 2000 to 2005.The middle quintile, with an average 2005 pre-tax income of $58,500, saw a 1.3 percent increase. For the second quintile, with an average 2005 pre-tax income $37,400, earnings dropped by 1.6 percent; and for the lowest quintile, earning $15,900 pre-tax, income dropped by almost 5.6 percent.

In other words, even during a period of considerable federal tax cuts, real-dollar post-tax incomes in the fourth quintile often cited as a typical family income rose by less than $300 a year for the average person. This minimal income growth for the middle class and actual decline for the working poor adds up to tremendous pressure not to raise taxes. …

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After Taxes, Economic Boom Reached Only a Few
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