Sam Sellers, Research Assistant
Recently
released data from the Franchise Tax Board (FTB) illustrate that the wealthiest
Californians started to recover from the Great Recession in 2010, while
middle-income Californians continued to lose ground. The average income of
middle-income Californians reached a more-than-two-decade low in 2010,
according to the FTB data. That year, the middle fifth of California taxpayers
earned $34,621, on average, more than $800 (2 percent) less than in 2009, after
adjusting for inflation, and nearly $7,000 (17 percent) less than in 1987 – the
first year for which data are publicly available. In fact, the average income
of middle-income Californians has declined every year since 2004, after
accounting for inflation.
In contrast, the average income
of the wealthiest Californians, which lost purchasing power during the Great
Recession, has started to bounce back. Between 2009 and 2010, the average
inflation-adjusted income of the top 1 percent of taxpayers grew by an
astonishing $250,000 (21 percent) – to over $1.4 million. This substantial
increase in the aftermath of the recession partly reflects strong growth in
investment earnings, which make up a large share of the incomes of the wealthy.
These trends
indicate that the gap between the incomes of the wealthy and those of middle-income
Californians began to grow again in 2010, after narrowing briefly during the
downturn. This is troubling. Some experts suggest that widening income gaps
could make it harder for low-income children to move up the income ladder as
adults because the rungs of the ladder are farther apart. And as we illustrated
in a CBP report
on inequality released last fall, mobility up the income ladder is far less
common than many people realize. Two out of five US children who grow up in
families in the bottom fifth of the income distribution remain in the bottom
fifth as adults. In addition, children who grow up in low-income families in
the US are less likely to move up the income ladder as adults when compared to
children in many other industrialized countries.
The continued
decline in the incomes of middle-income families is also a troubling trend –
one that could have significant consequences for the pace of California’s
economic recovery. Consumer spending is a key driver of the economy. But with
their incomes losing purchasing power, many middle-income families cut back
their spending in recent years, according to national data from the US Bureau
of Labor Statistics. Middle-income families tend to spend a large share of
their incomes. This means that as their earnings increase, so does their
spending, which helps to spur job creation and fuel economic growth. With
declining incomes for middle-income families, our economy is likely to grow
more slowly.
Given the
continued struggles of middle-income Californians in the wake of the most
severe economic downturn since the Great Depression, policymakers should avoid
more devastating budget cuts to programs that help families make ends meet. As
policymakers work to close the state’s budget gap before the constitutional
deadline at the end of this week, we urge them to take a balanced approach that
preserves the public services and structures that provide the foundation for a
strong economy.
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