A modest first-quarter rebound, but not enough to lift the middle class.The U.S. economy hit a new milestone in the first quarter of 2013: Annual output of goods and services eclipsed $16 trillion. The 2.5% growth pace in GDP through March seems like a wild night on the town after the 0.4% slog at the end of 2012.
That's the good news. The bad news is that this recovery is still half the pace of the normal expansion. The Joint Economic Committee reports that if the economy had grown at the typical pace coming out of recession, at this stage GDP would be closer to $17.4 trillion. This $1.4 trillion growth deficit is roughly the size of the combined annual production of Michigan, Ohio and Pennsylvania in 2011.
The national income data, also released on Friday, explain a lot about the initial impact of the tax increases that hit in January. By the middle of last year, the White House made it known that it would insist on letting the Bush era tax cuts on dividends, capital gains and personal income rise for individuals earning more than $200,000. The health-care law also raised payroll taxes by another 0.9% on higher income earners, on top of the two-percentage-point increase that hit all wage earners.
The result seems to have been one of the largest shifts in the timing of income in American history. From the third to the fourth quarter of 2012, personal income soared by $262 billion despite anemic 0.4% GDP growth. Then in the first three months of 2013 incomes fell $109 billion.
Some of the first quarter's decline in personal income (about $30 billion) was due to the expiration of the payroll tax holiday in January. But individuals and businesses clearly accelerated income into 2012 to evade the higher tax rates arriving in 2013.
This effect is evident in reported dividend income. That figure rose to $862 billion in 2012's fourth quarter as many corporations cut special dividends at the end of the year to pay the expiring 15% dividend tax rate. In the first three months of this year, dividends fell to $740 billion even as the tax rate rose to 23.8%. Those who claim that taxes don't affect behavior should explain that one.