Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money than at the peak of the last economic expansion, new government data shows.
While incomes have been on the rise since 2002, the average income in 2005 was $55,238, still nearly 1 percent less than the $55,714 in 2000, after adjusting for inflation, analysis of new tax statistics show. The combined income of all Americans in 2005 was slightly larger than it was in 2000, but because more people were dividing up the national income pie, the average remained smaller.
Total adjusted gross income in 2005 was $7.43 trillion, up 3.1 percent from 2000 and 5.8 percent from 2004. Total income listed on tax returns grew every year after World War II, with a single one-year exception, until 2001, making the five-year period of lower average incomes and four years of lower total incomes a new experience for the majority of Americans born since 1945.
The White House said the fact that average incomes were smaller five years after the Internet bubble burst "should not surprise anyone." The growth in total incomes was concentrated among those making more than $1 million. The number of such taxpayers grew by more than 26 percent, to 303,817 in 2005, from 239,685 in 2000. These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000.
People with incomes of more than a million dollars also received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003, according to a separate analysis by Citizens for Tax Justice, a group that points out policies that it says favor the rich. The group's calculations showed that 28 percent of the investment tax cut savings went to just 11,433 of the 134 million taxpayers, those who made $10 million or more, saving them almost $1.9 million each.
Over all, this small number of wealthy Americans saved $21.7 billion in taxes on their investment income as a result of the tax-cut law. The nearly 90 percent of Americans who make less than $100,000 a year saved on average $318 each on their investments. They collected 5.3 percent of the total savings from reduced tax rates on investment income. The I.R.S. data showed that the number of Americans making less than $25,000 a year shrank, down by 3.2 million, or 5.5 percent.
Nearly half of Americans reported incomes of less than $30,000, and two-thirds make less than $50,000. The number of taxpayers making more than $100,000 grew by nearly 3.4 million and accounted for more than two-thirds of the growth in the number of returns filed in 2005 compared with those in 2000. The fact that average incomes remained lower in 2005 than five years earlier helps explain why so many Americans report feeling economic stress despite overall growth in the economy.
Many Americans are also paying a larger share of their health care costs and have had their retirement benefits reduced, adding to their out-of-pocket costs. The White House noted that during the same five years, income tax rates have been cut under a series of laws sponsored by President Bush. Mr. Bush has delivered a steady stream of upbeat assessments of the economy, saying last fall, for example, "I'm pleased with the economic progress we're making." Tony Fratto, a White House spokesman, attributed the drop in average incomes to "the significant wrenching hits that our economy took in 2001 and 2002, so no one should be surprised that what a bubble economy created in the late 1990s and 2000, where economic data were skewed, would take some time to recover." Mr. Fratto said the fact that nearly all of the growth in incomes was among those in the upper reaches of the income ladder and that the majority of investment tax breaks went to those making more than $1 million "is not a very interesting story." "There is no question that you will always have distributional concerns with a tax rate, a broad-based tax rate, at the very top of the income scale," Mr. Fratto said.
He said the more significant issue was the reduction in taxes for middle-class Americans that Mr. Bush won from Congress. Robert S. McIntyre, the director of Citizens for Tax Justice, said that even though he expected a few very wealthy people to reap most of the tax savings generated by lower tax rates on dividends and capital gains, the size of the savings "still takes your breath away." He said the tax savings at the top, combined with lower average incomes after five years, "shows that trickle down doesn't work."