Unexpectedly Intriguing!

In 2010, the median income of U.S. households very likely dropped from the $49,777 recorded in 2009 to a level roughly $2,500 lower: $47,211.

We know that's the case given a remarkably strong correlation we've found between the nominal level of U.S. median household income and the total tax receipts the U.S. federal government has taken from U.S. households and businesses since 1967, when median household income data was first reported.

Our chart reveals the correlation. Here, we've shown the amount of total federal tax collections against U.S. household median income since 1967 on a log-log graph.

The results are stunning - the coefficient of determination between these two variables is 0.9957, just a bit shy of a perfect correlation of 1.0000.

This result makes sense when you realize that households are the principal target of taxation in the United States, whether directly through income taxes or payroll taxes, such as those for Social Security and Medicare, or indirectly through corporate income taxes (since most U.S. corporate income is derived from the revenue companies earn from selling their products or services in the United States, the U.S. corporate income tax is really a kind of sales tax on both goods and services that is indirectly imposed on U.S. consumers.)

Because the median household represents the most heavily populated portion of the distribution of taxable household income in the United States, falling right in the middle by definition, changes in median household income play a very large role in driving what the federal government's total tax collections will be in any given year.

U.S. Federal Tax Collection Data Input Data Values Federal Tax Receipts [billions USD]



U.S. Household Median Income Projected Results Values Household Median Income [USD]

But better than that, this correlation is so strong that we can use it to reasonably predict what the U.S. household median income will be based upon how much money the federal government collected from all U.S. taxpayers during the past year! We've built a tool to do that math for 2010, using the information the U.S. Treasury has recently released for Fiscal Year 2010.

What we find is that the median household income that would produce total federal tax receipts of $2,161.745 billion ($2,161,745 million) is $47,211. Since the median household income was $49,077 in 2009, this result strongly suggests that household median income fell rather dramatically in 2010.

And that brings us to today, just a day before mid-term elections in the United States. Here, most polling and prediction markets indicate that the current majority Democratic Party will lose control of the U.S. House of Representatives and will lose a significant number of seats in the U.S. Senate.

If our household median income projection for 2010 is any indication, a major reason why these political events will occur is because of the elected members of the Democratic Party's collective decision to pursue President Barack Obama's poorly considered health care reform legislation, which derailed the recovery in jobs, and a number of extraordinarily ineffective economic stimulus and bailout plans.

Their pursuit of these schemes have come at the expense of pursuing more effective alternatives that could generate both genuine economic growth and jobs, which we would recognize in the form of a median household income that grows robustly from year to year.

In other words, they are destined to lose on 2 November 2010 because they have led the United States down the wrong path and worse, have shown no signs that they intend to get on the right one, much less any real willingness to even recognize that they're on the wrong one.

Previously on Political Calculations

Labels: economics, income, income distribution, politics, tool