The Homa Files

In a prior post, I outlined an analysis that showed median real after-tax household income increased from 2000 (the last year of the Clinton presidency) to 2006 (the latest available data).

As luck would have it, the Commerce Dept released 2007 data immediately after my post.  Coincidence?

Median real household income increased in 2007 — for the 3rd consecutive year —  strengthening the argument.

Below is an updated summary of the analysis.

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From Clinton to Bush, after-tax household income is up !

It’s bipartisan: all politicians use economic data selectively to make their cases.

Senator Obama has been claiming that median real household income grew under President Clinton, and fell by over $1,000 because of President Bush’s policies. 

Recently reported data from the Commerce Department takes some of the wind out of Obama’s sails. Median real household income increased in 2007 – for the third consecutive year – to $50,223. That compares to an inflation-adjusted $50,553 in 2000 – the last full year of the Clinton era. So, there is, in fact, a decline — $330 or roughly ½ of 1 %. Advantage Obama.

But, median real household income is an incomplete and misleading measure of families’ economic well-being. It doesn’t include some items that contribute to household income and, most important, it doesn’t reflect the impact of income taxes. 

Specifically, Obama’s selected measure of household income — technically called  “money income” — doesn’t include common sources of income such as capital gains.  Based on Tax Federation estimates, when capital gains are counted, the median real household income gap more than goes away.

Even more important, the median real household income measure is misleading because it is pre-tax. 

Since families can only spend after-tax income,  it is somewhere between disingenuous and intellectually dishonest to ignore tax benefits in year-to-year comparisons.  This is particularly true in this case since the core of the Bush economic program is lower taxes. 

While the Bush tax plan is often demonized as being just for the rich, it also includes substantial benefits for folks in the lowest tax brackets.  For example,  the low bracket marginal income tax rate was cut from 15% to 10% , the personal exemption allowance was increased from $2,900 in 2000 to $3,400 in 2007, and  the standard deduction was increased from $7,350 in 2000 to $10,700 in 2007 (for joint filing married couples).

Median after-tax real household can be estimated by simply running the reported median real household income through each year’s tax tables. 

In 2000, nominal median household money income — unadjusted for inflation — was $41,990.  The Tax Foundation estimates that household capital gains in 2000 were $680, so nominal median household income (including capital gains) was $42,670.

There were an average of 2.6 people per household in 2000, so the estimated allowance for personal exemptions is $7,540 — 2.6 times the $2,900 allowance per personal exemption in 2000.

The standard deduction for married couples filing jointly in 2000 was $7,350 . Subtracting the personal exemptions allowance ($7,540) and the standard deduction ($7,350 ) from the median nominal household income ($42,670),  nets to a taxable income of $27,780. That amount would have fallen within the 15% marginal tax bracket in 2000, so the corresponding income tax liability is $4,167 and estimated median nominal after tax income is $38,503 — $42,670 pre-tax income less $4,167 in taxes. Adjusting for inflation — that is, expressing the answer in 2007 dollars –  estimated median real household after-tax income in 2000 is $46,354.

How does 2007’s median real household after-tax median income rack-up against 2000’s ?

Well, taking into account Bush’s higher personal exemption allowance, the higher standard deduction, and the lower marginal tax rate — the answer reverses.  

Estimated 2007 median real after-tax household income is $47,367. So, from the end of the Clinton administration in 2000 to the latest reported data, median real after-tax household income went up over 2%  – about $1,000 per household. The opposite of Senator Obama’s claim.

Some folks are already saying that 2007 data points aren’t relevant since the economy is in a slump. That argument carries less sway since recent reports that GDP grew by an estimated 3.3% second quarter of 2008.

The bottom-line: real after-tax household income went up between 2000 and 2007, and for Senator Obama’s to continue making claims to the contrary is, in the best light, deceptive.

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This entry was posted on August 29, 2008 at 6:29 am and is filed under Economics, Government & Politics, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.