According to recently released data by the IRS, after adjusting for inflation, the income of all Americans fell over 9% from 2000 to 2002, the first time that has effectively happened since the modern tax system was introduced during World War II. Other conclusions from the IRS data are:
- Individual income taxes fell 19%, more than three times the decline in adjusted gross incomes.
- Falling incomes, rather than tax cuts, appear to account for the greatest share of the decline in income taxes paid.
- During the same two years the number of Americans reporting no income or that they actually lost money for tax purposes exploded, growing 48%, to 1.7 million in 2002.
- Those who reported negative incomes in 2002 reported being $65.6 billion in the hole for that year, 12% worse than in 2000.
Below is a chart that shows how our tax receipts have been declining (mostly due to lower average incomes):
These are very sobering statistics and I had argued in an article on the impact of offshoring on American economy just a month ago that we will see in the US what has been happening in Japan for many years, that is, falling incomes and general overall decline in living standards.
Impact of falling incomes on American businesses
- Since the income of the middle class has dropped, it means that products that fit the category of "luxury for the masses" will continue to drop as consumers shift their consumption patterns and opt for cheaper products. Which means that businesses that make pricey products will either need to find markets for those goods overseas (e.g. China, which is growing very rapidly as a market for high-end, luxury goods like cars and designer clothing) or change their portfolio by adding lower priced products.
- Americans will cut back on discretionary spending, such as vacations, and delay purchases of items that tend to become obsolete due to introduction of newer versions (e.g. cars, computers, electronic goods, software, etc.).
- As wages continue to fall, businesses will benefit due to lower costs though the impact on earnings may not be much as $ sales might actually decline unless companies can find new markets for their products.
- Federal deficit data does not present a very positive scenario, and while there is no consensus among experts on its impact on interest rates (and if tax increases will be needed in the future), businesses will need to carefully watch macro-economic trends on a global basis to identify growth opportunities and exit unattractive businesses/markets.
- While I do not expect government policy to have much impact on how global trends evolve, but turbulence in the stock market, rising oil prices, continued relocation of jobs from US to other countries, and lower consumption of goods and services will mean that businesses have to carefully monitor these developments to develop appropriate strategies.