Paul L. Caron

Tuesday, October 26, 2010

Johnston: Scary New Wage Data

Tax AnalystsDavid Cay Johnston has published Scary New Wage Data, 129 Tax Notes 481 (Oct. 25, 2010):

Now for some really scary breaking news from the latest payroll tax data. ... Total wages, median wages, and average wages all declined, but at the very top, salaries grew more than fivefold. ...

The new data hold important lessons for economic growth and tax policy and take on added meaning when examined in light of tax return data back to 1950. The story the numbers tell is one of a strengthening economic base with income growing fastest at the bottom until, in 1981, we made an abrupt change in tax and economic policy. Since then the base has fared poorly while huge economic gains piled up at the very top, along with much lower tax burdens.


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The income disparity doomsayers fail to mention that the same person making a high wage in 1981 is often not the same one making a high wage in 2009. Those who earn the most do not stay on top for decades. Moreover, those on the bottom are often young and inexperienced with starting, low-paying jobs.

The wider the disparity, the greater the incentive to get a college education, work hard and acquire the experience necessary for a high paying job. Higher taxes on higher salaries will only diminish these incentives and create more high-paying government jobs.

Posted by: DLN | Oct 26, 2010 7:07:48 AM

Damn straight, DLN. Let's properly incentivize education by eliminating taxes for college graduates. Hell, lets rejigger the EITC so that the credit goes to those with advanced degrees.

I'm sure a genius like you can figure out how to balance the budget by taxing only poor and working-class Americans.

Posted by: Anonymous | Oct 26, 2010 9:17:15 AM

The graph does not include non-taxable benefits, like defined benefit vesting and health care, only making an exception for defined contribution plans. Its more accurate to list after tax compensation than pre-tax comp, if you're measuring income received.

Because of these biases, millions of middle class taxpayers are having their true compensation under counted in that graph.

Posted by: guy in the veal calf office | Oct 26, 2010 12:25:34 PM

I really doubt the "fivefold increase" in wage income among the $50 million-plus club means anything. It's a small sample size of people, and it only covers one element of income.

I took a look at the IRS's statistics of income, to the table that tracks average adjusted gross income for the filers with $10 million or more of federal adjusted gross income. Here's from 2000 through 2008:

2000 -- 26,715,314
2001 -- 25,598,155
2002 -- 24,377,736
2003 -- 25,375,533
2004 -- 26,550,867
2005 -- 27,313,795
2006 -- 28,357,677
2007 -- 30,532,386
2008 -- 29,671,274,,id=96981,00.html

Yes, they're raw numbers not indexed for inflation, but you can see there haven't been any major changes.

There weren't any changes in tax law or the overall health of the economy that could explain the jump in wages for these 74 individuals. My guess is that the amounts on these W-2s largely represent distributions from the nonqualified retirement plans.

Posted by: Dan | Oct 26, 2010 2:35:51 PM

Blame globalization. Trade with the US has helped the world's poor people become a lot less poor, while negatively affecting our middle class to a much smaller extent. Massive immigration (both legal and illegal) has helped millions of poor people find better lives here and feed their families back home. These are real benefits for the world, but they carry a cost.

Or does progressive compassion stop at the border? That can't be the case, because progressives favor an open border. Oh wait, I get it: Open the border, bring in all the poor people, then use that poverty to justify soaking the rest of us with taxes. Studies like this one just might be part of that plan.

Posted by: AMTbuff | Oct 26, 2010 10:11:52 PM

You could just as easily argue from the graph above that the 2000's were better for all since both average and median wages were significantly higher after 2000 than before. My guess is the data is cherry-picked to make 1980 and Ronald Reagan a bogeyman.

And where is the graph/data that supports the 1980 allegation?

Also I believe this is W-2 'family' income, and with far fewer traditional families, the data will skew downward as well.

Posted by: Rick | Oct 27, 2010 7:28:24 AM

I think the author has got it backwards, the rich create jobs, which, in my mind, makes them the foundation.

Posted by: EBW | Oct 27, 2010 8:23:36 AM

Rick, your guess is wrong. I do careful long-term analysis of data to make sure the numbers I present are rounded, not cherry picked.

The data to compare the 1950 to 1980 and then 1980 to 2008 income growth rates is posted at, one of a number of charts and tables with my Oct. 25 column on the payroll data.

Posted by: David Cay Johnston | Nov 2, 2010 11:55:41 PM