The business situation - 1st quarter, 1987

Survey of Current Business, July, 1987

Among the remaining components of personal income, other labor income, rental income of persons, and personal dividend income registered somewhat larger increases than in the first quarter. The second-quarter increase in other labor income included a $ 1/2 billion initial payment by the Federal Government to a savings fund established by the Federal Retirement System Act of 1986; the payment was largely for Government employees hired after December 31, 1983, and equaled 1 percent of their earnings for 1984 through 1986. Personal contributions for social insurance, which are subtracted in deriving the personal income total, increased considerably less than in the first quarter, when they had been boosted $2 billion by increases in the taxable wage base for social security and in the monthly premium for supplementary medical insurance.

Personal tax and nontax payments surged $42 billion in the second quarter, following a $4 billion increase in the first; this pattern was the result of direct and indirect effects of the Tax Reform Act of 1986. In the second quarter, taxes were increased more by the act than by the growth in the taxable earnings base (table 8). In the first quarter, the act largely offset an increase in taxes due to growth in the earnings base.

Federal tax payments increased $34 billion in the second quarter, following a $5 billion increase in the first. Federal withheld income taxes added to the change in taxes in the second quarter after reducing them in the first quarter. In the first quarter, a large reduction occurred in withheld income taxes due to the tax act; this reduction came about as the act, on balance, lowered withholdings and as underwithholding occurred because most employees had not yet filed a new Form W-4 (see the April "Business Situation'). As more new forms were filed, the amount of underwithholding was reduced as employers adjusted withholdings to match expected liabilities more closely. Declarations (estimated tax payments) and net settlements (final tax payments less refunds of the preceding year's taxes) continued to add, on balance, to tax payments in the second quarter, reflecting the acceleration of capital gains realizations into 1986; they were partly offset by lower payments due to income deferral and deduction accelerations.

State and local tax payments increased in the second quarter, following a small decline in the first. In the first quarter, payments were lowered to the extent that taxpayers deferred income and/or accelerated deductions to minimize their tax liability in 1986. In the second quarter, as in the first, payments were raised to the extent that taxpayers shifted realization of capital gains into 1986 to take advantage of the lower tax rate.

Reflecting the changes in personal income and in personal tax and nontax payments, disposable personal income (DPI) increased $12 1/2 billion in the second quarter, following a $64 1/2 billion increase in the first. Without the special factors affecting income and taxes in the two quarters, DPI would have accelerated to a $47 billion increase in the second quarter from a $35 billion increase in the first.