Your paycheck is not what you get to spend. Taxes take a bite first. What remains is disposable income: the money households have left after income taxes and mandatory deductions. It is the pool from which people pay rent, buy food, save, or splurge on a night out.

Economists watch disposable income closely because it drives consumption, and consumption drives most modern economies. When disposable income rises, spending usually follows, though not always one-for-one. People save part of any increase. The savings rate varies by country and era. Americans save relatively little. Japanese and German households tend to save more.

Governments can influence disposable income through tax policy. Cutting income taxes puts more money in people's pockets, at least in the short run. Raising them does the opposite. Transfer payments like unemployment benefits and child allowances also boost disposable income for recipients. During recessions, these automatic stabilizers help keep spending from collapsing.

What reduces disposable income

• Income taxes
• Payroll taxes
• Mandatory pension contributions
• Union dues and similar deductions
• Inflation, which erodes purchasing power