New IRS inflation adjustments unfair for low income Americans, should be recalculated

November 2, 2019

Adjustments released today fail to account for higher inflation rates faced by low income families 

Washington, DCToday, Groundwork Collaborative Executive Director Michael Linden released the following statement on the new IRS tax inflation adjustments for tax year 2020. 

“Rising inequality has caused inflation to increase more for low income families than for the rich, but because of the recently enacted tax law, the IRS has to use inflation adjustments that understate price increases for low and middle income families. Congress should instruct the IRS take inflation inequality into account.”

Today’s announcement by the IRS comes after the Groundwork Collaborative released a new report by Christopher Wimer and Sophie Collyer from the Center on Poverty and Social Policy at Columbia University, along with Xavier Jaravel of the London School of Economics, that upends the conventional view of inflation rates and poverty in America and reveals that there are 3.2 million more Americans living in poverty than official numbers suggest. The report also outlines how inequality is causing the cost of living to increase faster for low income families and that real household income for the bottom 20% has declined by nearly 7% from 2004 to 2018, rather than the 1% decline reported in official statistics.

The IRS inflation adjustment doesn’t account for this new information, which means that the size of the tax credits aimed at low-income families will not keep up with the rising prices those families face.

Key findings from the report include:

  • Skyrocketing inequality in recent decades—driven almost exclusively by soaring incomes for the wealthiest Americans—has undermined the strength of our economy and our democracy.
  • New research shows that income inequality itself is causing prices to rise more quickly for people at the bottom of the income distribution than at the top, a phenomenon known as “inflation inequality.”
  • This means that we are underestimating the true levels of income inequality and poverty, since both are measured using uniform inflation rates that do not account for the faster price increases faced by poorer and middle-income households.
  • Because income inequality is causing prices to rise faster for low-income people, there are at least 3.2 million additional people in poverty in 2018 than the official metrics suggest. That’s more than the entire population of the state of Iowa.  
  • Household income, adjusted for inflation and inflation inequality, for the bottom 20 percent declined by nearly 7 percent from 2004 to 2018, rather than the 1 percent decline reported in official statistics. As a result, income inequality between the top and bottom quintiles grew by more than 20% (a 35% increase from the official statistics).
  • Working families are really getting squeezed. The average middle-income household lost about $1,250 in 2018 due to higher prices caused by inflation inequality. More than one-third of adults cannot afford a $400 emergency and are one health scare away from financial ruin. That $1,250 could have been used to pay for prescription drugs, pay off credit card debt, or save for retirement.
  • While incomes for low and middle-income families declined, incomes for the rich continued to grow, widening the gap between the rich and everyone else.
  • This new inflation inequality means that working families are bearing the brunt of income inequality both in terms of stagnating wages and higher prices. In other words, they are at a double disadvantage when it comes to their “real” income growth.   
  • But income inequality isn’t a fact of nature. It’s the result of deliberative policy choices and policymakers can choose to make different choices.  Policies that reduce income inequality and put working people first—like raising the minimum wage to $15/hr and higher marginal tax rates at the top—could also reduce inflation inequality, resulting in lower prices, and higher “real” income growth for working families.

About the Groundwork Collaborative

The Groundwork Collaborative is an initiative dedicated to advancing a coherent, persuasive progressive economic worldview and narrative. We are committed to collaborating with a diverse array of partners to advance an economic system that produces strong, broadly shared prosperity and abundance for all people, and not just a wealthy few. Our work is driven by one core guiding principle: we are the economy.

We work with economic policy experts, progressive movement leaders, and activists on the front lines of progressive causes in communities across the country to:

  • Develop and advance a progressive economic worldview.
  • Collaborate and foster new ideas, and develop new pathways to share information.
  • Break down issue silos, support and amplify each other’s work, and show up for one another on critical economic issue campaigns.

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