There seems to be an unwritten journalistic rule that all economic news must be bad news. The stories we read and hear tend to be negative. Good economic news, if it makes it into print at all, is usually buried behind the crossword puzzle, the comics and the horoscopes.
Consider a recent New York Times story about how much American workers earn. “While incomes have been on the rise since 2002, the average income in 2005 was $55,238, still nearly 1 percent less than the $55,714 in 2000, after adjusting for inflation,” wrote David Cay Johnston on Aug. 21.
The article makes it sound as if workers are losing ground. But the full story is more complicated, and the real economic outlook much brighter for American workers.
First, it’s critical to note that Johnston looks only at certain types of income, not at the whole picture. When all is said and done, employees are actually paid quite a bit more than the amount shown on their paycheck.
If we want to understand how much someone earns, we need to look at salary and benefits. After all, the money employers spend to provide benefits is money that’s spent for the worker but no longer available for cash compensation.
Recently The Heritage Foundation reviewed the cost of the benefits we provide our staff. Some of these are voluntary; many are mandated by law. We pay one employee (let’s call him John Q. Sample) $50,000 in salary. He’s enrolled in the family health-care plan and doesn’t contribute to a pre-tax retirement account.
When the costs of his benefits are totaled, we pay Mr. Sample $70,768 in total compensation. Turns out 38 percent of Sample’s compensation is in the form of non-cash benefits.
This is something of an atypical case, since if Sample enrolled in the individual health-care plan, he’d get a much smaller benefit. Still, for our staff, the average benefit ratio was 26 percent. (Nationwide, it’s 30 percent.) That’s a lot of compensation that goes to the benefit of the employee but never shows up in a bank account.
The Times story is also skewed because it focuses only on Adjusted Gross Income, a number shaped by what Congress chooses to tax. For example, alimony payments are income but aren’t included in AGI. Earnings from mutual funds are income as well, but most aren’t counted in AGI because they occur through 401(k)-type plans.
All told, federal tax policy ends up limiting the choices available to workers and families. Because lawmakers choose not to tax benefits while taxing regular pay at high rates (often 40 percent or more), employers are encouraged to shift more and more of their compensation into benefits.