That $1,700 Gap Is Not the Same as a Pay Cut

That $1,700 Gap Is Not the Same as a Pay Cut

BBC News reports that the real median household income in the United States rose 2.6 percent in 2025 to a record $87,460. This number comes from official data adjusted for inflation, which shows what households could actually buy with their earnings compared with earlier periods. Inflation stood at 3.7 percent for the year, above the 3 percent rate when the current presidential term began but below the 9 percent peak reached in 2022. The overall U.S. economy continued expanding, with GDP growing at a 2.2 percent annualized rate and more than 3.2 percent since the end of 2024. AI-related business investment in data centers also remained strong, supporting the broader backdrop.

The Institute on Taxation and Economic Policy (ITEP) offers a separate estimate that adds important context. ITEP calculates that, on average, the middle fifth of households—those in the middle income range—are roughly $1,700 worse off in 2026 than they would have been under a scenario that excludes certain policy changes and price movements. The poorest fifth are estimated at about $750 worse off, while the richest 1 percent are roughly $12,560 better off, mainly because of tax cuts. These are averages across many households, not the experience of any single family.

This $1,700 figure is not a recorded pay cut. It is a counterfactual comparison that estimates what household situations would look like without the combined effects of the tax changes, the expiration of extra health-insurance subsidies, and higher-than-expected price increases. It answers a different question from the recorded median-income growth.

Recorded Median Income Growth After Inflation

The median income statistic marks the middle point on the household income distribution. Half of households earn at or below this level, and half earn at or above it. Unlike the mean (average), which can be pulled higher by a few very high earners, the median gives a clearer picture of typical household earnings. When economists adjust it for inflation, the result shows changes in what money can actually buy.

In 2025 the adjusted median reached $87,460. This growth occurred even though inflation was 3.7 percent, driven in part by new import tariffs and disruptions from the US-Israel conflict with Iran that raised energy prices. The recorded rise therefore reflects both nominal income gains and the net effect of price changes over the year. It does not automatically mean every household’s budget improved by exactly that percentage.

ITEP’s Counterfactual Estimates by Income Group

ITEP models the net impact of three main factors on household purchasing power:

1. Trump’s tax cuts, which reduce the amount of income paid in taxes and benefit higher earners more.

1. The expiration of additional government subsidies that had lowered health-insurance premiums for millions of Americans.

1. Higher prices linked to tariffs on imports and energy-cost pressures from the Iran conflict.

The middle fifth of households, whose incomes fall between the 40th and 60th percentiles, end up with an estimated $1,700 less in real purchasing power than they would have had without those changes. The poorest fifth, below the 20th percentile, feel the subsidy expiration and price rises more directly, leading to the $750 estimate. The richest 1 percent, whose incomes sit well above the 95th percentile, gain from the tax cuts that lower their effective tax rate.

These calculations treat the $1,700 as an average shift in household budgets after taxes and prices are taken into account. They do not measure wage or salary changes from individual paychecks.

Components of the ITEP Analysis

The tax-cut component primarily helps households in the top income brackets by reducing the share of income sent to the government. The expired-subsidy component raises health-insurance costs, a major fixed expense for lower- and middle-income families. The price component includes higher grocery staples, fuel (with diesel reaching a record $6.52 per gallon in September), and other goods influenced by tariffs and energy markets.

ITEP’s tariff-related estimates align with similar work by the Tax Foundation. The analysis separates these effects from other factors such as job growth, which is reported separately. Average monthly job gains slowed to 34,000 in the period covered, compared with 122,000 in the final year of the prior administration. The unemployment rate held at 4.2 percent, close to the level when the term began, partly because immigration enforcement reduced the size of the available workforce.

What the Distinction Means for Households, Workers, and Businesses

For middle-income households the $1,700 estimate signals a potential squeeze on what remains after taxes and living costs. It does not mean their take-home pay fell; it means the net budget after policy adjustments and price changes is smaller than a no-policy, no-extra-price scenario would have produced. Workers may see nominal wage growth, but real purchasing power depends on how prices and subsidies move.

Businesses can use the recorded median-income figure when planning sales forecasts, but they should also note that price pressures and subsidy changes can slow consumer spending in lower- and middle-income segments. The overall economy’s growth and AI investment support continue, yet the ITEP view highlights that policy and price effects are not uniform across income groups.

Evidence to Watch Next

Several concrete data releases will help clarify the picture. The Bureau of Labor Statistics releases the next Consumer Price Index report, which will show whether the 3.7 percent inflation rate continues to be driven by energy or other components. ITEP is expected to update its estimates with any new tax or subsidy legislation. Household income revisions from the Census Bureau and changes in the unemployment rate will provide further context on labor-market trends. Monitoring these releases will show whether the counterfactual gap narrows, widens, or remains stable as 2026 progresses.