PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Solid News on Personal Income

By at 31 July, 2019, 8:26 am

by Raymond J. Keating-

A July 30th report from the U.S. Bureau of Economic Analysis offered news pointing to improvement on personal income.

The topline story was solid, with personal income growing by 0.4 percent in June, matching the monthly rate for each of the previous three months.

But the important story when it comes to personal income is disposable (or after-current-taxes) income adjusted for population and inflation. Indeed, real per capita disposable personal income matters because those are the resources from which individuals invest, save and consume.

Revisions in previous data and the June numbers point to some improvement on disposable income in recent months. As noted in Chart 1, growth has been positive, though uneven and underwhelming, over the past four months. Some acceleration in the monthly growth rate over the past two months certainly is welcome.

Chart 1: Percent Change in Real Per Capita Disposable Income, June 2014 to June 2019

Source: Federal Reserve Bank of St. Louis, FRED

 

Chart 2 tracks real per capita disposable income (2012 dollars) over a longer run, with the most recent steps up in growth occurring at the start of 2017, and again, at the start of 2018, with the passage of the federal tax cut in December 2017.

Chart 2: Real Per Capita Disposable Income, June 2009 to June 2019 (2012 Dollars)

Source: Federal Reserve Bank of St. Louis, FRED

 

Positive Impact of Tax Relief

From a policy perspective, tax relief obviously matters in terms of boosting disposable income – and tax increases are a negative, as one can see what occurred to disposable income in Chart 2 with the major tax increase at the start of 2013.

Other measures that remove barriers to and provide enhanced incentives for entrepreneurship and investment, which are the sources of economic and income growth, are critical as well.

In terms of the current policy debate, it would be important to repeal recent tariff measures and shift focus to advancing free trade agreements that reduce or eliminate tariffs; push ahead with deregulatory and regulatory reform efforts; and reduce tax burdens where possible, such as providing capital gains tax relief by adjusting gains for inflation.

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

 

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