A month ago, the IRS released their preliminary summary of 2008 returns, including tables of incomes and taxes for the past 18 years.
In the first chart below we can see wage and salary income averages per return are returning to trend after catapulting way above trend during the nineties. (Click graph to enlarge)
In the second chart is a comparison of income reported on K1 forms, largely professional and business owner income, with wages and salaries. Professionals and business owners enjoyed a large increase in income compared to the flat earning of many workers.
In the 3rd chart is the total tax liability reported to the IRS. Although some claim that reducing tax rates increases tax revenues and vice versa, the IRS data simply doesn’t support a strong correlation between tax rates and total income taxes paid to the IRS. Tax revenues go up and they go down when tax rates go up. They go up and they go down when tax rates go down.
In the 4th chart is the average tax liability, with the overall trend of up, up, up.
What accounts for the increase or decrease in tax revenues? It is a general increase in adjusted gross income per tax return, as the following chart shows. Income may go up or down when tax rates increase. They may go up or down when tax rates decrease. Again, there is little correlation between income and tax rates.
There is a lot of talk about the “New Normal” but what the latest downturn shows is a return to Normal, the same old normal trend line of income averages. We got way ahead of the trend during the tech and housing bubbles. We bought big cars and ever bigger houses, and ran up our credit cards using the equity in our homes. “Normal”, that is, the average of the trend, will always pull us back to the trend line.