PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

July Personal Income is Up, But America Needs a Big Tax Cut

By at 1 September, 2017, 9:00 am

by Raymond J. Keating-

On August 31, the U.S. Bureau of Economic Analysis released some positive news regarding personal income for the month of July.

Specifically, personal income in July was up by 0.4 percent versus June. In fact, growth has been solid in two out of the last three months.

While the media, and many economists and policy people focus on these numbers – and yes, they do matter – the real story when it comes to income is the change and level of real per capita disposable personal income, that is, after-tax income after inflation and population are accounted for. This is the key measure of income to look at because it’s the money that individuals use for investing, saving and consuming.

Real per capita disposable income has lagged badly going back to 2001, and especially since the Great Recession and the subsequent underwhelming recovery/expansion period.

As for a little background (see Chart 1), real per capita disposable income grew at an annual average rate of 2.2 percent from 1950 to 2016, and a 2.4 percent rate from 1950 to 2000. Compare those numbers to an average growth rate of 1.3 percent from 2001 to 2016, 0.95 percent from 2008 to 2016, and post-recession, from 2009 to 2016, at an average rate of 0.99 percent. In effect, in recent years, the growth rate in real per capita disposable income has been running at less than half of what it should be doing.

In September of last year, SBE Council did a report on this phenomenon of lost income, and concluded that “if per capita real personal disposable income grew at the average historic rate since 2009, real per capita personal disposable income would have registered $40,322 in 2015 versus the actual amount of $38,368 (both in real 2009 dollars). So, real average disposable personal income would have been $2,000 higher (2009 dollars) on average for individuals, and $8,000 higher for an average family of four.”

Unfortunately, the gap has since widened. Real per capita disposable income grew at a woeful 0.69 percent in 2016. And comparing this July’s level to a year earlier, growth was an anemic 0.57 percent. And over the last two years – July 2017 vs. July 2015 – total growth came in at only 1.68 percent.

What would help? Most notably, Americans need a big, across-the-board tax cut.

Consider that disposable income took a big hit – dropping by 2 percent – in 2013 due to a significant tax increase that year. In comparison, for example, in the 1980s, once the Reagan tax cut was fully phased in, the U.S. experienced a seven-year period of strong disposable income growth.

The key is to both put money back in the pockets of individuals and businesses, and structure tax relief so that pro-growth incentives for entrepreneurship and investment are enhanced. In fact, without that second part of tax relief, the impact of any tax cut will be relatively weak.

If taxes are cut in a pro-growth way via tax reform and relief in 2017, the news will be better regarding income growth going forward.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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