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Are your finances better off now than in 2000? Let's see

By John F. Wasik
Bloomberg News

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In his 1980 debate with President Carter, Ronald Reagan used this line like a political smart bomb: "Are you better off now than you were four years ago?"

Let's pose this as a personal economic question. Do you get most of your income from wages? If so, it's likely that a bevy of increases in the cost of living from local taxes to health care negated the positive stimulus of the tax cuts passed during the past four years.

If most of your income is derived from dividends and capital gains, you did very well because the top rate on those items was pared by more than half to 15 percent.

"The tax cuts stimulated the economy a little bit," says Joseph Stiglitz, a Nobel Prize winner in economics and a professor at Columbia University.

"But you would have had a much bigger impact if you spread the cuts around. The dividend tax cut was the most egregious and provided no [economic and job-producing] stimulus."

Stiglitz is one of 10 Nobel Prize-winning economists who have pledged support to Democratic presidential challenger Sen. John Kerry. The group claims President Bush's tax program has created deficits that have engendered "a fiscal irresponsibility that threatens the long-term economic health of our nation."

Measure your prosperity

Set aside the gnarly tax-cut debate for a moment to consider how your household fared. Like the families of the fictional Lake Wobegone, none of us is average. You need to create a customized personal-prosperity index by comparing yourself with some guidelines:

• Are you beating the cost of living? In general, inflation as measured by the U.S. Consumer Price Index — now at a 3.5 percent annual rate versus a 2.6 percent increase last year — outpaced personal-income growth for more than two years (25 months) during the past four years, from Nov. 31, 2000, through Aug. 31 of this year, according to Bloomberg data.

• A key component of your prosperity index would be housing costs, the single-largest consumer expenditure tracked by the U.S. Department of Labor. Housing accounts for one-third of all household expenses and increased an average 3 percent from 2000 to 2002 (the 2003 numbers aren't available yet), close to the overall inflation level.
 
Housing costs

How much did your total housing costs go up? Although millions of homeowners were aided by the lowest mortgage rates in a generation, in many areas property taxes (up an average 10 percent in the past year) and homeowner's insurance increases (about 5 percent during the period) offset lower mortgage payments.

• Also figure in rising utilities, maintenance and repair costs. Residential natural-gas prices alone climbed 16 percent in the past four years and are headed higher this winter along with heating oil, according to the U.S. Department of Energy.

• While there may be a residential real-estate bubble forming on the East and West coasts, the sizzling market has generally added wealth for most U.S. homeowners with prices rising an average 7 percent nationally in the past four years. Did you tap this windfall in refinancing, a sale or through a home-equity loan? If so, did you invest your equity in something that appreciates or loses value?

Health-care costs

While health-care expenses account for about 5 percent of average consumer spending, employees will continue to pay much more for medical bills.

• Employer-sponsored health-care premiums rose 60 percent for family coverage between 2003 and 2004, reports the Kaiser Family Foundation, a health-research organization. The Census Bureau estimates 5.2 million lost health coverage since 2000.

• If your employer absorbed health-care cost increases and didn't pass them along to you in the form of reduced coverage or higher out-of-pocket expenses, you're doing well. If not, the failure of the government, employers and insurers to rein in health-care costs is reducing your income.

Did your federal tax burden retreat enough to make a difference? There's little question that the top 1 percent of wage earners — those making more than $1 million annually — reaped the greatest benefits from the tax-cut laws promoted by the Bush administration.

Debt concern

The top-income bracket saw a 5.3 percent increase in after-tax income due to the tax relief versus 1.5 percent to 2.8 percent for the other 99 percent of taxpayers, according to the nonpartisan Congressional Budget Office.

When you add all taxes and increased personal health-care spending, though, the bloom is off the rose a bit.

Even with the 2001 and 2003 tax breaks, "all [middle-income] fixed-family types except single mothers experienced a drop in after-tax income: a decline of 0.2 percent for two-parent families and of 1.4 percent for young singles and elderly couples," reports the Economic Policy Institute, a Washington-based group that conducts economic research that focuses on low- and middle-income workers.

Personal bankruptcies hit a record 1.1 million — up 37 percent from 2000 — with "some households stretched to their limits," according to U.S. Federal Reserve Chairman Alan Greenspan, speaking Oct. 19.

If debt is an oppressive burden in your household, it certainly impairs your prosperity.

Are you ahead?

Because of the tax legislation, less federal revenue — about $4 trillion over the coming decade — is being shared with states for programs like Medicaid, education and state homeland security.

Congress owes the states a minimum of $50 billion for fiscal 2004 and 2005 for federally mandated programs that were not fully funded by Washington, according to the National Council of State Legislatures. That means state and local taxing bodies were forced to pare services and increase taxes to balance their budgets.

What's your prosperity index look like? Total each expense category and weigh it against your annual salary and bonus (if you got one) after taxes and inflation. Did you come out ahead?