TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, February 1, 2013

2013 Tax Hike Spurred 2.6% Income Spike in December 2012

New York Times:  Staying Ahead of the Tax Man, by Catherine Rampell:

The one bright spot in Wednesday’s dim gross domestic product report was a large jump in household income, welcome news given that incomes have been relatively flat in recent months after falling sharply in the previous few years. ...

Most of the 2.6% increase in incomes last month involved companies that accelerated dividends, bonuses and other payments into 2012 before higher tax rates kicked in for 2013. Personal dividend income, for example, rose at a seasonally adjusted monthly rate of 34.3% percent in December versus 4.5% in November.

That’s the second-fastest monthly personal dividend income growth on record, after a huge spike of 54.8 percent in December 2004 (when Microsoft threw the whole trend out of whack by offering a one-time special dividend totaling $32 billion):

The Bureau of Economic Analysis estimated that in the quarter companies paid special or accelerated dividends of $39.5 billion, of which $26.4 billion was paid to individuals and so is included in personal income. The bureau also estimated that accelerated bonuses and “other types of irregular pay” probably gave a one-time boost to wages and salaries in the quarter totaling about $3.75 billion (or $15 billion at an annual rate).

WSJWall Street Journal, Early Payouts of Dividends, Bonuses Spur a Windfall:

Many Americans got a happy financial surprise at the end of last year, as companies pulled forward payouts of dividends and bonuses to beat anticipated January tax increases.

The rush was so big it spiked the nation's personal-income figures. On Thursday, the Commerce Department reported personal income rose 2.6% in December from the month before and revised upward the number for November, citing the dividend and bonus rush. ...

Any injection of cash is good medicine for the economy, which is caught in a mode of slow growth and high unemployment. But this one largely represented income pulled forward from early 2013. The impact on the larger economy will be minimal: Most of the dividends and bonuses go to upper-income households who put the money in savings

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Watch closely as the State of California spends this windfall and builds its recurrence into the spending baseline. That's what they've done after every other revenue bubble. One year from now the governor will claim to be shocked that revenues fell so far short of expectations. Naturally, his only solution will be a tax increase.

This is how revenue bubbles ratchet up state spending. There's a similar but weaker effect at the federal level.

Posted by: AMTbuff | Feb 2, 2013 8:37:58 AM