Alex Potemkin

Economy grows, incomes shrink

Americans continue to lose money while corporate profits soar

January 30, 2015 2:00AM ET

The first data on 2013 incomes show continuing bad news for Americans, my analysis of a new Internal Revenue Service report shows.

Average income fell 2.6 percent in 2013, even though the economy grew 3.2 percent in real terms over 2012.

Average inflation-adjusted income in 2013 was 8 percent lower than in 2007, the last peak economic year, and 6.9 percent less than in 2000, the year President George W. Bush set as the standard to evaluate the effect of his tax cuts and regulatory policies.

This is the latest sign of a disturbing trend. An ever-shrinking share of national income flows to individuals while corporate profits expand. 

Capital over labor

In fact, profits hit a record high in 2013 both in absolute terms and as a share of the economy. By both measures, profits have continued rising.

By contrast, labor’s share of national income has been trending downward since 1980, except for a spike during the second term of President Bill Clinton. The decline accelerated after the Bush tax cuts took effect, retroactively, to the first day of 2001.

Labor share of national income falls

Note: Index with 2009 at 100.

Source: Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics.

This redistribution of national income away from labor and toward capital flows from policies initiated by President Ronald Reagan and followed to varying degrees by every president since.

The decline in compensation for workers at every level below the handful of jobs paying $50 million or more tracks the decline in union membership among private-sector workers. Lacking bargaining power, most workers have had to accept flat to falling pay, a trend that has spurred local drives nationwide to raise the minimum wage to $15 per hour.

For his part, President Barack Obama signed a trade deal with South Korea in 2011 that has cost thousands of American manufacturing jobs. The previous administration bailed out Wall Street banks while the Obama administration failed to prosecute bank executives and managers whose incomes soared because of the mortgage and securities frauds that sank the economy in 2008. Those banks again enjoy huge profits.

So long as government policy favors the richest among us, shields bankers from criminal and personal civil liability and removes regulatory controls on corporations, the trend line that began 34 years ago is likely to continue even with upswings in the economy.

The massive and growing taxpayer subsidies to the wealthiest Americans and corporations, which I have documented for years in my books and columns, are also a factor in declining average incomes.

Average income reported on tax returns in 2013 was $61,668, down from $63,297 in 2012.

A look at the numbers

Total income reported by America’s almost 145 million taxpayers was $9.11 trillion, down seven-tenths of 1 percent from 2012 when measured in 2013 dollars. 

Average income fell by an even larger figure, 2.6 percent, because the number of taxpayers increased because of population growth.

Average income reported on tax returns in 2013 was $61,668, down from $63,297 in 2012 — a difference of $1,629 — my analysis of the latest IRS Statistics of Income report shows. 

Along with the startling decline in average income, average wages also fell, although the number of taxpayers reporting income from work grew by almost 2.8 million or 1.9 percent. The average wage declined $576, or 1.1 percent, to $53,797.

This drop is larger than the average $79-per-worker decline shown in Social Security Administration data that I was the first to report on three months ago. No other news organization, my search of databases shows, has analyzed that data.

The IRS and Social Security data differ in part because the IRS figures are preliminary. Very high-income taxpayers tend to get extensions of the April 15 deadline for tax filing until Oct. 15. 

A taxpayer can also be a single person or a married couple, while Social Security counts each worker. So while total wages should be virtually the same in reports of both agencies, the distribution among income groups is not.

Declines at the top

Americans at the top experienced the biggest income declines in 2013. The number of taxpayers with incomes of $250,000 or more — roughly the top 2 percent — rose by 4.8 percent, to almost 3.2 million taxpayers. Their total income, however, fell by 8.6 percent, and their average income declined by 12.4 percent to $659,103, probably reflecting the number of people moving into this group by joining its bottom ranks.

The major reason average and total incomes at the top slid was a 6.7 percent decline in average real wages at the top, to $400,687.

The number of sole proprietors — people who file a Schedule C — rose by 2.6 percent, to just under 18 million. The growing number of sole proprietors illustrates how many people who have lost their jobs create ones for themselves.

The average income of sole proprietors fell 3.4 percent, to just under $19,000.

Average income also fell for those in partnerships and related forms of business where tax liabilities flow through to the owners. It was down 5.4 percent, to an average $108,282.

And even though 2013 was a very good year for the stock market, dividends that qualify for reduced tax rates fell by 26.6 percent, and capital gains fell by more than 30 percent. These last two figures may be revised upward in the final IRS report, which is due in the fall, but suggest that the narrowing of asset ownership since 2000 that I have tracked continues.

The news here, overall, is this: The American economy is getting bigger, but average incomes are shrinking. If that trend continues, it will eventually spell economic, social and political trouble for the country.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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