Sooo….How Will The Economy Improve In 2014 If Almost Everyone Has Less Money To Spend?

Posted By on January 1, 2014

Just wondering…..Is the U.S. consumer tapped out? If so, how in the world will the U.S. economy possibly improve in 2014?  The bottom 50 percent of AGI (Adjusted Gross Income) households have an income cutoff of $34,823 meaning that over 68 million US households now live on an AGI of $35,000 or less.

Most Americans know that the U.S. economy is heavily dependent on consumer spending. If average Americans are not out there spending money, the economy tends not to do very well. Unfortunately, retail sales during the holiday season appear to be quite disappointing and the middle class continues to deeply struggle. And for a whole bunch of reasons things are likely going to be even tougher in 2014. Families are going to have less money in their pockets to spend thanks to much higher health insurance premiums under Obamacare, a wide variety of tax increases, higher interest rates on debt, and cuts in government welfare programs. The only consumer debt sectors to boom in 2013 came from student loans and auto debt. 

The IRS tax data is one of the best sources to mine for information since all US households are required to file a tax return short of a tiny group.  This is no survey data but actual raw data based on real incomes.  It helps to shine a light on what is really being generated in the US economy based on income.

The data highlights a complicated tax system that doesn’t really show the entire picture.  The below data is a reflection of income taxes and does not capture the full scope of taxes including FICA, state taxes, sales taxes, and property taxes that tend to be more regressive.  Income tax by its nature is a progressive tax; the more you earn the bigger your share:

irs tax data

The chart highlights the widening gap from the top to the bottom.  Even within the top, the gap is growing dramatically.  For example, to be in the top 10 percent of households you would need an AGI of $120,136.  To be in the top 5 percent, you would need an income of $167,728.  Not a major difference here.  However, to reach the top 1 percent you would need an AGI of $388,905.  The top 10 percent of households pay 45.4 percent of all income taxes.  Since many of these households control the bulk of stocks and wealth, a banner year for 2013 will mean tax collections should be healthy for the upcoming year.

What is startling is the lower range of the curve.  The bottom 50 percent of AGI households has an income cutoff of $34,823.  Over 68 million US households live on an AGI of $35,000 or less.  This is telling given the rising costs of college education, healthcare, real estate, and food.

Sources: ZeroHedge, Wise Dog Research

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