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Good news – in fact, terrific news – permeates the newest government report on the incomes Americans report on their federal tax returns.

After more than a decade in the economic doldrums, with too few jobs and stagnant wages afflicting the vast majority of Americans, average incomes rose significantly in 2014, though the average income remains below the level in 2000. Investors did especially well.

Overall, Americans reported significantly more income in 2014 than in 2012 and 2013, my analysis of a new Internal Revenue Service report shows. The number of tax returns also grew.

Total adjusted gross income – the last line on the front page of a Form 1040 tax return – was almost $9.8 trillion, up 5.7% over 2013 after adjusting for inflation. It was also higher than in 2012, the last year that the George W. Bush tax cuts applied to the top 1%.

Other economic data suggest that income growth continued in 2015 and this year. Through last month America has enjoyed a record 78 months in a row of private-sector job growth with 15.1 million jobs added since early 2010. Wages, after years of stagnating, have begun growing again, Bureau of Labor Statistics and other reports show.

Other economic data suggest that income growth continued in 2015 and this year. Through last month America has enjoyed a record 78 months in a row of private-sector job growth with 15.1 million jobs added since early 2010. Wages, after years of stagnating, have begun growing again, Bureau of Labor Statistics and other reports show.

Note that this analysis is based on average income. Since high-income taxpayers raise the size of the national average income, it's also useful to pay attention to median income. The median for 2014 was $38,171, up $733 or 1.9% from $37,438 in 2013, when adjusted for inflation. (Median income means that half of taxpayers made less and half made more.) All the same, measuring changes in average income helps track where the economy is moving. And moving up is what it's doing.


The real average income in 2014 was $65,761, an increase of $3,036, or 4.8%, over 2013. The average increase is smaller than the increase in total income because the number of taxpayers increased by almost 1%, dividing the income pie into more slices.

The Post-2000 Income Drop

Despite this rise in average income, it was still, in both 2013 and 2014, well below the year 2000 average, measured in 2014 dollars, of $67,973.

The year 2000 is an important benchmark for measuring total and average incomes because candidate George W. Bush promised that his tax cuts, the first of which took effect in 2001, would lead to broad prosperity and rising incomes. His campaign told me in October 2000 that this promise came with no ifs, ands or buts about economic conditions beyond the control of any president – such as the recession that began in March 2001, just weeks after he took office, and lasted eight months.

Since 2000 average incomes rose above that year only twice, in 2006 and 2007, and then only slightly.

The net effect from 2001 through 2014 is that the average taxpayer household reported $55,412 less income than if incomes had just stayed at the level that President Bush chose as his base year in his campaign promises.


That $55,412 shortfall over those 14 years is the equivalent of Americans getting no income in 2014 from February 27 to the end of December.

Here’s a way to think about how much money that is.

Assume that all of that $55,412 was wages. After paying income taxes on that money at the average federal tax rate plus Social Security and Medicare taxes, there would be enough money left to pay off every car loan, every credit card balance and every student loan. That’s a bit more than $3 trillion of debt that would be gone, great news for borrowers, but for bankers not so much.

And after paying the taxes and paying off those debts, the average household would still have more than $20,000 cash.

So had America just stayed at the average income level of 2000 – the year that President Bush said was not good enough and that his policies would make incomes rise – today we would see far more consumer spending and savings, and less debt.

Without those Bush tax cuts the economy might have done worse (if you believe taxes restrain economic growth) – or it might have done better (if you believe government investment and reducing federal debt spur growth). But, by any measure, the promise that the 2001 tax cuts would result in broad prosperity did not prove out.

Who's Earning More Money

Now back to the good news in the new incomes report, starting with the good news at the bottom of the income ladder.

That bottom is now less crowded. The number of people reporting incomes of less than $25,000 declined, down by more than 1.1 million taxpayers to 55.7 million. That’s still more than a third of the 148.6 million taxpayer households.

Over time as this number of low-income households shrinks – both in absolute terms and as a share of all taxpayers – we should see declines in both demand for social services and the cost of the Earned Income Tax Credit, which benefits the working poor and phases out sharply once incomes rise above about $14,000.

The number of people reporting incomes of more than $25,000 grew. However, those making from that sum up to $100,000 saw little growth in income, which comes almost entirely from work rather than investing. Mostly this was a story of people moving into slightly higher income brackets.

Wages together with deferred wages – such as pensions and withdrawals from retirement savings plans – plus Social Security benefits account for nearly all income among those reporting incomes of less than $100,000. Capital gains account for just 1% of income for the nearly 123 million taxpayer households reporting incomes of less than $100,000.

Most of the growth in the numbers of taxpayers and average incomes benefited the 16% of taxpayer households with incomes of more than $100,000. The higher the income group, the greater the growth.

That tells us that people with valuable job skills and investors are enjoying ever better household incomes while those with few skills (and those who work at jobs, rather than in careers), continue to struggle.

These income figures could auger well for improving the education system, since it could provide more funding for getting more young people advanced job training and helping more of them earn postgraduate degrees. The problem is, people prefer having lower taxes now compared to paying more to provide for economic growth in the future.

How Millionaires Are Doing

The biggest income growth was among those in the $1-million-and-up class. There were 410,298 taxpayer households reporting seven-figure-or-larger incomes. The number of such rich households rose by almost a fifth and their average income rose by almost a fourth to $3.3 million.

Investors did well, too, as the Dow Jones Industrial average has soared from under 7,000 in 2009 to more than 18,000 today with other indices also showing large gains. The number of people making $10 million or more reached nearly 17,000 with dividends and capital gains making up a significant share of their incomes.

One last good bit of news. The number of $1-million-plus households who pay no income taxes plummeted.

In 2012 there were 1,693 such households who lived income-tax free. In 2013 they numbered 658. And in 2014 the ranks of tax-free million dollar households fell to just 444.

Maybe, just maybe, an era when everyone making $1 million or more pays income taxes is coming.


Pulitzer Prize winner and recipient of an IRE medal and the George Polk Award, David Cay Johnston is author of five books. His new book, The Making of Donald Trump, was published on August 2, 2016. His next one will be The Prosperity Tax: A New Federal Tax Code for the 21st Century Economy. Johnston is a Distinguished Visiting Lecturer at Syracuse University College of Law and Whitman School of Management, and also writes for The Daily Beast and Tax Notes.


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