Personal income per capita has grown nationwide over the last ten years by 5.7 percent, according to the Bureau of Economic Analysis (BEA). Yet, Americans are not really any better off, because that growth is due to an increase in tax-exempt benefits. That’s what Donald Grimes, an economist at the University of Michigan Institute for Research on Labor, Economics, and the Economy has found. For a look at how Wisconsin, Illinois, Indiana, Michigan and Ohio residents are faring, scroll to the graphs below.
Tax exempt benefits, also known as nontaxable transfer payments, include programs like Social Security, Medicare and Medicaid, health insurance, unemployment, welfare and disability benefits provided by the government and employers. It you subtract those nontaxable transfer payments from the equation, U.S. income actually decreased. In fact, U.S. taxable income per capita fell by 3.4 percent, from $32,403 in 2000 to $31,303 by 2010.
Grimes said the personal income data as calculated by the BEA is misleading, “because it’s including all of these transfer payments and so it’s essentially artificially inflating our sense of well-being.”
Grimes said the bad news does not end there. Nontaxable transfer payments continue to grow, while taxable income continues to shrink. Essentially, more and more people are relying on programs like Medicare and Medicaid, while the population paying for those programs is shrinking.
He said if this trend continues, “we would eventually end up in a crisis where all of the earned income is taxed in order to pay for the transfer benefits. At some point the benefits that people are getting in terms of transfer payments has to grow at a much smaller rate. It’s sad, but it’s just a mathematical inevitability.”
Grimes said even returning to 2000 level tax rates, before the tax cuts imposed by former President George Bush and extended by President Barack Obama, would not be enough.
The situation may be even worse in the Midwest. Even before the recession, the region has struggled with attracting and keeping its youth, while the older population is increasingly relying on those nontaxable transfer payments like Medicare and Medicaid. Around our region, that disparity between the number of people relying on nontaxable transfer payments and the number people paying for those programs is growing especially quickly.
Grimes predicts some painful decisions have to be made on the Federal level very soon to answer his question, “where are we going to get the money to pay these transfer payments?”
You can see some of the data Grimes collected in some maps below. “Modified personal income” equals personal income with social insurance taxes (such as social security, Medicare, Medicaid) added back in. Be sure to play around with the data through time by changing the year in the bottom left drop down menu.