Economic Review
Fourth Quarter 2006 

Middle-Income Tax Rates: Trends and Prospects - (PDF 186K)
By Troy A. Davig and C. Alan Garner

The federal tax liabilities of different income groups change constantly in response to new tax laws and shifting economic circumstances. For example, in recent years, Congress has lowered individual income tax rates, increased child and dependent care credits, and reduced taxes on dividends and capital gains. Much of the economic analysis and political debate about these federal tax changes concerns the impact on upper- or lower-income groups, while the impact on middle-income taxpayers sometimes gets forgotten.

The trends in tax rates can be difficult for middle-income taxpayers, themselves, to discern. Modest revisions to the federal tax code may hardly be noticed in any given year; yet these revisions could build over time into a large change in the middle-income tax rate. Some taxpayers may also find it difficult to determine whether changes in their tax liability are due to legislated changes in the federal tax code or shifts in their own circumstances.

Davig and Garner define the effective federal tax rate for middle-income households and discuss the problems in computing this measure. They find that the effective federal tax rate facing middle-income households has trended downward over the last 25 years and is currently low by historical standards. Moreover, the composition of middle-income tax liabilities over this period has shifted away from individual income taxes toward payroll taxes. Finally, they show that under current tax law middle-income taxes are projected to rise in the future.

Minority Workers in the Tenth District: Rising Presence, Rising Challenges - (PDF 204K)
By Chad R. Wilkerson and Megan D. Williams

The population of the Tenth Federal Reserve District has become increasingly diverse in recent decades. Since 1970, the share of ethnic and racial minorities in the district has nearly doubled, reaching 25 percent of the area’s population in 2005. Minority job situations and earnings have long been topics of national interest for economic researchers and public policymakers. Further, minority workers are a rapidly growing part of the district’s labor force and thus a vital resource for district businesses.

Wilkerson and Williams consider the jobs and earnings of Tenth District minority groups, both for today and over the next five to ten years. After detailing the growth, location, and size of minority groups, they examine the current pay and occupations of minority workers. Next, they explore the five-to-ten-year outlook for jobs held by minorities and compare it with projections for the future supply of minority workers in the district. Finally, they address implications of the findings for minority workers.

The authors find that the district’s three largest minority groups—Hispanics, blacks, and Native Americans—are much less concentrated in high-paying occupations than are non-Hispanic whites. High-paying jobs generally require higher skill and educational levels—advantages that these three minority groups often lack. Moreover, the five-to-ten-year outlook for jobs held by these groups is not as bright as the outlook for jobs held by non-Hispanic whites, when both expected quantity and quality of future job growth are taken into account. More education will be needed to boost both the long-term and short-term job prospects for minorities in the Tenth District.


Shifts in Economic Geography and Their Causes - (PDF 164K)
By Anthony J. Venables

Recent decades have seen momentous changes in the economic geography of the world. Political transitions and economic liberalization have brought formerly closed countries into the world economy. Such changes have challenged our understanding of the location of economic activity and of the determinants of changes in the pattern of location.

In a presentation at the Federal Reserve Bank of Kansas City’s 2006 economic symposium, “The New Economic Geography: Effects and Policy Implications,” Venables explored how a new economic geography perspective provides a number of additional insights into existing patterns of activity and into the forces driving future changes.

His discussion focused on three key propositions. First, proximity to other economic agents—workers, consumers, and firms—is good for productivity. Second, large income disparities are a perfectly natural outcome of a world in which proximity matters. And, third, the effects of increased trade are potentially ambiguous—there are circumstances in which cheaper spatial interactions cause inequality, not convergence.

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