Family Income Lags Inflation - First Time in 7 Years

ACCELERATION in inflation and direct federal taxes will outpace the growth in the United States family's income, reducing its purchasing power in 1989. A typical family - a household with two earners employed full time, year round with two dependent children - will experience a net decrease in real income of $152 in 1989 after adjusting for direct federal taxes. This is the first decline seen in seven years. Real family income after direct federal taxes had been increasing an average of $633 a year since 1982.

The two-earner family making $29,627 in 1980 is now earning an estimated $49,326. However, when direct federal taxes and inflation are taken into account, the $19,699 increase in this family's income between 1980 and 1989 results in only a $3,639 net gain. More than 80 percent of increased income has been eroded by direct federal taxes and inflation.

Since 1980, the federal income tax paid by this family has risen 52.2 percent, despite two major income tax reduction laws in 1981 and 1986. These legislative tax reductions have helped lighten the burden, but have not nearly offset income growth and inflation. The federal income tax, which claimed 13.7 percent of this family's total income in 1980, fell to a low of 11.8 percent in 1985 but now has quickly climbed back up to 12.5 percent.

The bite that Social Security takes out of this family's income has increased more steadily - at $3,684 in 1989 it is more than double the $1,816 paid in 1980. Social Security will claim 7.5 percent of this family's 1989 earnings, up from 6.1 percent in 1980. Direct federal taxes will absorb 20 percent of this family's 1989 income, down only slightly from the 1981 peak of 20.3 percent.

The most significant reason for the decline in the typical family's purchasing power in 1989 is the upswing in inflation. Inflation that stood at 13.5 percent in 1980 had declined fairly steadily to a low of 1.9 percent in 1986, giving the growth rate in family income a chance to outpace inflation during this period.

Subsequently, inflation accelerated, exceeding 5 percent in the first half of 1989. If inflation had just remained at its 1988 level of 4.1 percent, this family would realize a $178 net increase in real income instead of a $152 loss.

The sizable 66 percent nominal income gain the two-earner family has made since 1980 has been reduced to only a 10.2 percent gain after direct federal taxes and inflation are taken into account.

Other indirect federal taxes and state and local tax increases, not shown here, have further offset the family's increased earnings.