Proposed Taxes May Gorge on Consumer Incomes

American consumers have worked hard to diversify income sources and boost their levels of income.  Their conventional wage and salary income is often supplemented by benefit packages that include retirement-oriented plans.  Many consumers earn rents, interest payments, stock dividends and capital gains.  Some unemployed consumers receive unemployment insurance, but some do not.  A growing number of consumers lean on social security disability payments, food stamps and other transfer payments from government.  Most retired consumers receive social security old-age payments, employer pension payments, and/or IRA disbursements.  But budget plans at federal, state and local levels may severely reduce consumer’s income progress.

The table below shows major sources of consumer income, the number of Americans receiving payments from the source, and the average annual payment to recipients.   

Annual Total

Recipients

$ / yr per

Consumer Income Source

($ bill)

(millions)

Recipient

  Employee Compensation

8,441

140.8

59,957

  Proprietors’ income

1,119

25.2

44,402

  Rental income

201

9.3

21,629

  Personal interest income

974

21.0

46,354

  Personal dividend income

812

15.2

53,409

  Social security (OASDI)

722

55.6

13,001

  Medicare

555

47.7

11,648

  Medicaid

408

50.0

8,166

  Unemployment insurance

100

7.5

13,348

  Suppl. Nutrition Assistance

75

21.9

3,402

 

Sources notes: Employee compensation is from 2011 BEA National Income.  Proprietor, interest, rents, and dividend income are from 2009 IRS Statistics.  Social Security and Medicare headcounts are from 2011 SSA and Kaiser Family Health, respectively, while their dollar totals are from BEA National Income.  Medicaid dollars are from BEA National Income and the headcount is from a CNN Money estimate.  Unemployment insurance dollars are from BEA National Income, and headcount is from Dept of LaborSupplemental Nutrition Assistance Program (SNAP, aka Food Stamps) is from USDA.

In 2011, employee salary, wages, and benefits were $8.4 trillion and proprietor income was $1.1 trillion in 2009.   The number of employees grew by 1.5 million to 140.8 million at year end 2011.  The number of proprietors was 25.2 million at the end of 2009.    Unemployment has dropped from more than 10% to 8.4% but 5 million people left the labor force during the Oct. 2007 to Dec. 2011 period and 8 million work part-time because they cannot find fulltime work.  

Many retirees worked hard to accumulate assets that could produce retirement income, rather than rely entirely on government for income.  As a result, the average retiree is neither a 1%-er nor destitute, but somewhere in the middle.  The net worth of all retirees (median value in 2002) was $455,000 with $125,000 tied up in home equity, leaving $330,000 for income and other assets.  But in the last 3 years, the interest yields from annuities, CDs, muni- and investment-grade bonds did not match retirement plan expectations.   Most had to reallocate their portfolios to riskier assets; dividend producing stocks and junk bonds.  The income from rents, interest, and dividends claimed on IRS 1040 returns by 9 million, 21 million, and 15 million people resp. often goes to small business owners and moderate income retirees, and not just to the rich that our populist politicians vilify.     

Employee and proprietor compensation, rents, capital gains, dividends and interest are the easy pickings that politicians will seize for government tax revenues.  The President’s Fiscal Year 2013 Budget Proposal, calls for more limits on personal deductions and higher marginal rates.  The budget shows annual personal income tax receipts increasing by 103% or 7.4% compound growth in the decade FY 2013 to FY 2022.  In that decade, corporate income taxes increase 78%, or 6.0% compound growth.   The steep personal tax ramp is at odds with any assertion that only those earning above $200,000 (singles) or $250,000 (couples) will see tax increases.  In the President’s plan for personal income tax:

  • Capital gains tax would jump from 15% to 20%
  • Dividend taxes jump from 15% to ordinary income tax rates (up to 39.6%)
  • Medicare contributions double to 3.8% of income
  • For those in 33% and above tax brackets, the tax benefit of deductions reduces by 20% for home mortgage interest, charitable contributions, tax-exempt interest on municipal bonds, employer payments for health insurance, contributions to 401(k) accounts, traditional IRAs, and health savings accounts.

A decade of 7.4% increases in personal tax payments would be harsh, but mitigated if income increased at the same pace.  No one that we can find is suggesting that.  During 2011, wage rates grew by 2.7% for production and non-supervisory workers.  And, long term income growth and inflation are likely to offset each other to produce a 0.8% real income growth – which means the annual 7.4% tax increase will be painful.   

Fidelity Investments assessed how likely it is that the President’s proposed tax hikes will be imposed.  It concluded that both parties know passage is unlikely in the short run and ultimately it depends on who controls the Congress and White House after the election.   Any consumer who wants some control over his or her income security has a big stake in that outcome.

Alan Daley is a retired businessman living in Colorado.  He follows public policy from the consumer’s perspective.

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