Let’s test your knowledge. Rank the following from largest to smallest for the average household during the first four months of the year:
A. How much take-home pay was boosted by the tax cuts passed late last year
B. How much more was spent on gasoline (and motor fuels more generally)
C. How much worker compensation increased, which was mostly a result of the strong job market so far this year
The correct answer is: C ($307), A ($199), and B ($116).
That’s right. Even with higher prices at the pump, the average American household has still come out ahead thanks to the tax cuts enacted by this administration and higher wage income. Way more.
Let’s start with the tax cuts. The net effect of changes in tax policy bolstered disposable personal income per household by $199 during the first four months of the year. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 lowered required contributions for social insurance (i.e., lowered social security withholding by 2 percentage points). However, this increase was tempered by the expiration of the Making Work Pay provisions of the Recovery Act, which resulted in a net tax change of $199 per household; not too shabby.
However, the biggest boost to average household income so far this year has been due to the job market. More people working means more people are earning higher incomes. During the first four months of the year, the private sector added 854,000 jobs, and coupled with mild increases in wages, the average household brought in $307 more in “compensation,” most of which is from higher pay.
Also helping American households is income from other sources, including interest, dividends, etc. These other sources have added a little more than $152 to household spending power. Finally, government benefits, such as Old Age, Survivors, Disability and Health Insurance, have increased the pot by another $20 per household. Alas, some taxes have to be paid on this extra income, about $245 on average (note: the timing of tax receipts is complicated and this increase could reflect taxes paid on income accrued last year). Taken together, these components yield about $432 in total additional income per household for the first four months of the year.
Where did this extra money go? As we have written before, higher gas prices have led to increased spending on gas [1]. So far this year, that extra spending on gasoline alone has totaled $116 per household, and that is directly due to higher prices, not because we are buying more gas. Outside of gasoline, households have also been increasing their spending on a wide variety of goods and services, totaling about $398. The final adjustment needed to make all of these numbers align is savings. Americans are still saving (the personal savings rate was 4.9 percent in April), but at a slightly lower rate than they used to, perhaps because folks are feeling more optimistic. How much less are we saving? About $82 over the first four months of 2011.
So, the bottom line is that for the average household, wages and tax cuts have far outweighed extra spending on gas this year, and that’s a good thing.
Mark Doms, Chief Economist, US Department of Commerce
May 27, 2011
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