Are you better off .. NR readers' post-tax income has stalled, courtesy of government

A special finance issue of NR? Very nice -- but how much, exactly, can NR subscribers finance?

Quite a lot, according to our stout-hearted publisher Ed Capano. Over a tenth of you (11 per cent) have annual incomes above $200,000. Over a quarter (26.4 per cent) have household net worth above $1 million.

But look at the story over time -- since NR began in 1955 [See chart, below right]. We're estimating the inflation-adjusted income of the current median NR household (half of you above, half below): four persons, one earner, 1995 earnings $88,500 -- nearly twice the national average. And we're showing that income before and after federal taxes (income tax, Social Security, and Medicare).

One obvious conclusion: what NR subscribers are in fact financing is the Federal Government. Since 1955, the gap between the median NR household's pre-tax and post-tax income has just less than doubled.

Remember -- this doesn't include state and local income taxes, or the effect of indirect taxes on the prices of goods NR subscribers want to buy.

Or taxation's effect on economic growth. This is the second obvious conclusion from our chart: Something is Going On Out There. Inflation-adjusted after-tax income for the median NR household is now only about where it was in early Nixon years -- and significantly below the peaks it reached in the late Nixon years and under Reagan.

Some conservative commentators seem to regard talk of an inflation-adjusted income stall as a stain on the honor of capitalism. They argue that by some measures per capita income has increased over the period. (It has -- but apparently because a higher proportion of the population is now working).

Or they insist we should look at "total compensation," which includes non-cash benefits like health insurance. (But we calculate that about 30 per cent of these "benefits" are actually taxes paid by the employer on the employee's behalf, like Social Security contributions. This just doesn't leave employees with the same warm feeling as a dollar in the pocket. In 1955, only 19 per cent of non-cash "benefits" were actually taxes.

(And anyway, the median NR household's total compensation in 1995, $123,812, was significantly below 1988's $127,790 and only some $10,000 above the 1973 peak.)

The truth is that any income stall is not the fault of capitalism but of socialism. Or at least of government, which has increased its spending (including state and local) from about a quarter of the economy in 1955 to just under 35 per cent now. Public debate has changed a lot since NR came on the scene. But not, as yet, this aspect of public policy.

Further evidence of the government grab: our chart [below right] of the marginal tax rate faced by the median NR household. This is the tax, in a progressive tax system, on the last dollar you earn. It has a powerful influence on your willingness to work and invest to earn that next dollar.

Under President Carter in the late 1970s, these marginal tax rates were increasing very rapidly. This was because of "bracket creep" -- inflation was pushing the median NR household into tax brackets originally designed for millionaires, in effect an unlegislated tax increase. By 1982, Washington was taking 42 cents out that last dollar.

The great achievement of Ronald Reagan was to reverse the Carter marginal rate increases. And the economy did rebound, taking real incomes up with it . . . until the advent of what can only be called the Bush-Clinton years. Note, however, that Reagan was really moderate. He only rolled back marginal rates to levels that prevailed in the early 1970s. Maybe that's why real incomes are back to 1970s levels. The 22 per cent marginal rate that prevailed when NR was first published now seems in retrospect part of a Golden Age.

COPYRIGHT 1996 National Review, Inc.
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