News on family incomes

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In a recent study, "Changes in the Economic Resources of Low-Income Households with Children," the Congressional Budget Office (CBO) reported a series of startling family income statistics. Some were quite encouraging. Others, however, go a long way explaining why, according to the latest Washington Post/ABC News poll, only 25 percent of respondents believe the United States is "generally going in the right direction," while 73 percent agree that "things have gotten pretty seriously off on the wrong track"; why the most cited reason for the "wrong track" involves the "economy, jobs, gas prices, low income, debt, finances"; why President Bush has a 35 percent overall approval rating; why, by a margin of 57-40, respondents disapproved the way he was handling the economy; and why Democrats enjoyed their largest advantage over President Bush on the economy (54-36), compared to Democratic advantages on immigration issues (48-31), the situation in Iraq (51-35) and the U.S. campaign against terrorism (46-40).

The CBO report reviewed changes from 1991 to 2005 in average household incomes among families that had children under age 18. The data were broken down according to five income quintiles for the years 1991, 2000 and 2005.

The most encouraging income trend for the entire 15-year period was this: The average household income for the lowest quintile of families with children increased from $12,400 in 1991 to $16,800 in 2005. These figures reflect inflation-adjusted dollars and are expressed in 2005 purchasing power. That 14-year change represented a total real increase of 35.5 percent, which reflects an yearly average of 2.2 percent.

The CBO attributed this favorable trend in the lowest quintile to four developments: (a) a very strong economy during the second half of the 1990s; (b) the creation in 1996 of a new family-assistance program (Temporary Assistance for Needy Families), which replaced the general welfare program (Aid to Families with Dependent Children) and also "placed a much greater emphasis on work"; (c) an expansion of the earned income tax credit (EITC), a refundable tax credit (available mainly to parents with low earnings) that significantly increased the payoff for working; and (d) the creation of the State Children's Health Insurance Program (SCHIP) and an expansion of Medicaid, both of which "made it more likely for children to retain eligibility for health services even if their parents' income increased."

The other four income quintiles experienced significant gains between 1991 and 2005 as well. Compared to 1991, average family income for the second-lowest quintile increased by $5,900 (18.7 percent) to $37,500 in 2005. The third quintile increased by $8,500 (17.5 percent) to $57,200 in 2005. The fourth quintile increased by $14,800 (21.4 percent) to $83,900 in 2005. The highest quintile increased by $61,100 (53.3 percent) to $175,800 in 2005.

The most striking trends were the differences in income changes for all quintiles between the 1991-2000 period and the 2000-2005 period. In the earlier period, incomes soared across the board, including gains of 51.6 percent (4.7 percent per year) in the bottom quintile; 24.7 percent (2.5 percent per year) in the second-lowest quintile; and more than 21 percent (2.2 percent per year) in both the third and fourth quintiles. The top quintile increased by 53.7 percent (4.9 percent per year) for the 1991-2000 period.

After 2000, however, incomes at the top two quintiles (the top 40 percent of this family-related income distribution) stagnated. During the same 2001-2005 period, incomes for the bottom three quintiles experienced significant declines (10.6 percent in the bottom quintile, 4.8 percent in second-lowest quintile and 3.2 percent in the middle quintile). Measured in 2005 purchasing power, average incomes of families with children in the lowest quintile declined by $2,000, falling from $18,800 in 2000 to $16,800 in 2005. For both the second and third quintiles, the average incomes of families with children were $1,900 lower in 2005 than they were in 2000.

Thus, whereas income in the lowest quintile increased 4.7 percent a year throughout the Clinton administration, it fell 2 percent a year during President Bush's first five years. After increasing 2.5 and 2.2 percent per year over the nine years preceding Mr. Bush, average incomes in the second-lowest and middle quintiles, respectively, fell nearly 1 percent a year and 0.6 percent annually during the first five years of the Bush administration. Undoubtedly, the trend of falling incomes for the bottom 60 percent of families with children under age 18 during the first five years of the Bush-Cheney era explains a large part of why the president's approval ratings for the economy are so low.

Supply-siders must be scratching their heads. The top income tax rate increased from 28 percent to 31 percent in 1991 and then to 39.6 percent in 1993. In 1994, the $135,000 wage-and-salary ceiling for the Medicare payroll tax was eliminated, effectively adding another 2.9 percentage points to the top wage-and-salary income bracket, which became 42.5 percent, more than 50 percent higher than its 1990 level of 28 percent. Contrary to the predictions of Republicans and supply-siders, the economy zoomed ahead, and average incomes of families with children soared across all quintiles during the second half of the 1990s. Affected by the 2001 recession, family pre-tax incomes began to decline from their 2000 levels after the first tax cuts were implemented in 2001. By 2003, income tax rates were reduced between 3 and nearly 5 percentage points, but the average pre-tax income of families with children in the top quintile was actually $500 less in 2005 than it was in 2000.

True, tax cuts, which began to take effect in January 2001, offset the income declines in some of the quintiles. But the national debt increased by more than $2.5 trillion during the first five years of the Bush administration.