Tax Policy and Personal Income

My friend Deanna’s supply-side economics tribute had it’s share of whoppers. But she did set an interesting metric: “The real test of an economic policy is whether or not it can produce a rising tide that lifts all boats.” This is a a great way to judge recent history and shed some light on what a McCain or Obama tax policy might mean for our futures.

Let’s look at annual changes in average personal income (constant dollars) by quintile -- plus the top 1, 5, and 10 percent of incomes -- for the Reagan, Clinton, and G.W. Bush terms.

Average annual percent change in average income

Percentile	Reagan (1981-1988)	Clinton (1993-2000)	GW Bush (2001-2005*)
1st Quintile (0-20)	-0.4%	1.2%	-0.8%
2nd Quintile (20-40)	0.04%	1.9%	-0.4%
3rd Quintile (40-60)	0.8%	1.6%	0.3%
4th Quintile (60-80)	1.2%	2.2%	0.6%
5th Quintile (80-100)	4.3%	5.6%	3.7%
Top 10 percent	5.5%	7.0%	4.7%
Top 5 percent	7.0%	8.8%	6.1%
Top 1 percent	11.3%	13.1%	8.7%

*The latest year with available data.

Personal earnings grew faster during the Clinton presidency than during either the Reagan or George W. years. But more importantly, that increased prosperity was shared by all income groups. The Clinton tax policy, which raised the top marginal rates, created both higher growth and a more even income distribution.

Source Congressional Budget Office (http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_tables_toc.xls)