The Composition of Income over the Long Term
The Administration's economic forecast is used to estimate future government revenues, a purpose that requires a projection of the components of taxable income. The income-side projection is based on the historical stability of labor compensation as a share of gross domestic income (GDI). During the first half of 2006, the labor compensation share of GDI was 56.7 percent (according to the preliminary data available when the projection was finalized), slightly below its 1963-2005 average of 58.1 percent. From this jump-off point, the labor share is projected to slowly rise to 57.8 percent by 2012.
The labor compensation share of GDI consists of wages and salaries (which are taxable), non-wage compensation (employer contributions to employee pension and insurance funds-which are not taxable), and employer contributions for social insurance (which are not taxable). The Administration forecasts that the wage and salary share of compensation will be approximately flat between 2007 and 2012. Employer contributions to defined-benefit pension plans rose by almost 1 percentage point of total compensation between 2001 and 2002, boosting the growth of non-wage compensation. Contributions leveled off and then edged lower in subsequent years.
The capital share of GDI is expected to edge down from its currently high level before eventually reaching its historical average in 2012. Within the capital share, private depreciation is expected to increase (as a result of the strong growth of investment during the past 3 years). Profits during the first three quarters of 2006 were about 12.2 percent of GDI, well above their post- 1959 average of roughly 9 percent. Book profits (also known in the national income accounts as profits before tax) are expected to decline as a share of GDI.
The GDI share of other taxable income (rent, dividends, proprietors income, and personal interest income) is projected to edge up slightly over the next 2 years.