An Overview of Gross Domestic Income in the U.S.
Thursday, May 28th, 2015
The Tax Foundation has released an overview of the BEA's data on Gross Domestic Income (GDI), the lesser-known cousin of Gross Domestic Product (GDP). While GDP measures what gets purchased, GDI measures who gets paid and is useful for determining how Americans earn their incomes and maintain their standards of living.
Using this data series has some distinct advantages. Unlike almost any other income data, it is complete; it adds up to the total value of all economic production. Additionally, the BEA has put together data on American GDI going back to the start of the Great Depression, making it a very long-running data series.
The report examines the full length and breadth of the data series. It walks through each component and describes how its share of national income has changed over time. In other words, it is a comprehensive survey of 84 years’ worth of American income.
The key findings include:
- About half of all income is labor compensation, in the form of wages, salaries, and benefits.
- Benefits account for a growing share of labor compensation.
- A quarter of income goes to business-level taxes and the replacement of worn out machinery.
- A quarter of income is returned to owners of capital, including business owners and private homeowners.
- The shares of income returned to workers and to owners of capital remain constant over time once benefits, taxes, and depreciation are properly accounted for. Two-thirds of net income goes to labor and one-third goes to capital.
“These findings suggest that the study of income inequality should remain focused on compensation,” said Tax Foundation Economist Alan Cole. “Overall, inequality among wages and salaries – the largest source of income – is a far more important contributor to overall income inequality than any kind of change in the labor share.”
To the extent that wages are falling as a portion of national income, it is due to the rise of other kinds of income that are mandated through or favored by the tax code – like contributions to entitlement programs, employer-provided health insurance, and returns to owner-occupied housing.
“Voters should consider whether these policies are worthwhile. They should also temper their expectations on the ability to raise taxes from capital income; it’s not nearly as large a pool of money as lawmakers promise it to be,” added Cole. “Americans should also consider the collaborative nature of our economy, where labor and capital work together to create output, and their incomes rise and fall together. In light of that fact, the best avenue for improving welfare is to enact growth-oriented policies that increase the incomes of labor and capital alike.”
Read the full study: A Walkthrough of Gross Domestic Income