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1 William McBride, The Great Recession and Volatility in the Sources of Personal Income 1 (2012)

handle is hein.taxfoundation/ffdbgxz0001 and id is 1 raw text is: FOUNDATION iscalI c June 13, 2012 No. 316 The Great Recession and Volatility in the Sources of Personal Income By William McBride Introduction Personal income tax collections are the largest component of federal revenue. However, these revenues come from many different sources of personal income, some of which fluctuate dramatically from year to year and are highly dependent on the business cycle, i.e. systematic variations in economic activity. Illustrating the impact of the business cycle, the newest IRS data reveals that the recent collapse of income tax revenues is largely the result of the Great Recession in combination with increasing reliance on business and investment income within the individual code. This also means we can expect collections to return to normal as soon as the economy does. Historical Look at Sources of Personal Income Table 1 shows IRS data on the sources of personal income from 1990 to 2009, in billions of dollars. Table 2 shows the same data presented as shares of total income. Figure 1 graphs the major sources of income over this period. Total personal income grew steadily between 1990 and 2000, from $3.4 to $6.4 trillion, an increase of 87 percent. As a result of the 2001 recession, it then fell to $6.1 trillion by 2002, a decrease of 5 percent. Economic growth pushed personal income to $8.8 trillion by 2007, an increase of 44 percent, but the recent Great Recession cut personal income to $7.7 trillion by 2009, a decrease of 12 percent. Wages and salaries make up the largest source of personal income, averaging about 73 percent of total income over the last 20 years, as illustrated in Figure 2. In nominal terms, they grew steadily between 1990 and 2001, leveled off, and then began increasing again until they peaked in 2008 at $5.95 trillion, an increase of about 130 percent since 1990. In 2009 they decreased about 4 percent to $5.71 trillion. As Figure 2 demonstrates, wages and salaries as a share of personal income are relatively stable from year to year. To the extent that wages and salaries fluctuate as a share of personal income, it mostly reflects fluctuations in capital gains, which is the most volatile source of personal income. Capital gains income has fluctuated wildly as a source of personal income over the years. In 1990, capital gains were 3.3 percent of total income. By 2000, a bubble year for the stock market, capital gains peaked at

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