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July 27, 2010

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I wish they weren't going to retain the cuts for the under $200/250k crowd - we can actually afford it - but on the other hand I guess we have to grab for progressivity wherever we can find it.

See, if this were Red State, the title would have been "Danger Maos."

Style points for the title.

I must say, as a single guy making 60k a year. I'm the last person that needs a tax cut. I can only buy so much booze and videogames.

I can only buy so much booze and videogames.

Clearly, an amateur.

Clearly doesn't live in NYC as well.

Fascinating. So the traditional nuclear family - one earner, married, two kids - is taxed at the moment but would get a net benefit under Obama's plans? People advocating the retention of Bush's tax plans are actually calling for a tax on traditional families, and Obama plans to subsidise them? HELLO MASSIVE CULTURE WAR WEDGE ISSUE?

Married couple with two kids earning 500K pays only 130K in income taxes? That's news to me. And my CPA. It's a lot higher than that. Which leads to the thought that maybe this table is built on a house of assumptions that is geared to produce a result, not reflect reality.

Well, McK, I would get a new CPA if I were you.

I had a look at the IRS' online income tax calculator and told it that my spouse and I each earned $250k as salary. Ran through the numbers (no kids, no charities, no deductibles, etc etc)
and it said "Based on your responses, your anticipated income tax for 2010 is $138,763."

That's a bit over the figure that the Tax Foundation gave - maybe they make different assumptions about deductibles or something - but it's not wildly over.

Off the cuff, it doesn't seem at all unusual that a "typical" return for a $500k AGI household would result in a total tax of 26% of AGI (as opposed to taxable income), considering itemized deductions, even if limited at this income level, and capital-gains rates (that's a big one).

But those commies at the WSJ are probably massaging the numbers. And it's not like you can dispute what's presented with available data if you wanted to.

Right.

The graph is from a WSJ piece bemoaning the high level of taxation.

It is unlikely they skewed the numbers down for the sake of...weakening their argument?

Unless McTex is being too clever by half, suggesting total tax (with state and local added in?). But even then, it's a non-sequitur in a discussion about relative "Federal Income Tax Rates."

Well, McK, I would get a new CPA if I were you.

I've done that once. It helped some.


And it's not like you can dispute what's presented with available data if you wanted to.

Not a problem. I calculated the tax myself, using 2009 tax tables.

Here are the numbers:

Income Tax on $500,000 = $152,684
Self Employment Tax = 12,420
Medicare Tax = 11,368
Total = $176,472

Simply because something appears in the WSJ doesn't make it right.

Simply because something appears in the WSJ doesn't make it right.

No, but given its provenance, it's extremelely unlikely that "this table is built on a house of assumptions that is geared to produce a result, not reflect reality." Unless you're prepared to argue that The Tax Foundation is a bunch of DFH's looking to soak the rich.

Wait, wouldn't the 2009 tables not apply considering the Obama admin changes?

Further, you're adding in a self-employed tax, which is a bit of an anomaly. Ditto the Medicare Tax.

Check the 2010 tables, and leave out those two taxes as anomalies, and the numbers add up.

Note, also, that it says "Taxes owed on typical returns." Does the typical return for the category about which you're calling foul include $12,420 in self employment tax?

Actually, the table is for the 2011 rates, if Obama's changes go into effect!!!

Also, this: Married couple with two kids earning 500K pays only 130K in income taxes?

The graph actually is married with "No Children" not two.

I calculated the tax myself, using 2009 tax tables.

Based on what inputs? What makes them typical? I'm sure I could use the tables and come up with something much higher than $130k in Income Tax, but I might have not any idea whether or not it was typical in terms of itemized deductions, percentage of income from capital gains, etc. And why are you adding in Medicare and Self-Employment (which is SS)? We're talking about Income Tax here. And the 2009 tables are based on Bush rates (and margins?), so you'd need to use the Clinton rates to compare the two, even if your calculation wasn't typical.

The question I have, which I will attempt to find the answer to, is what is meant by Bush-era tax policies still being in effect in 2011. Does that just means the rates or does it mean rates AND margins? If so, it would make the numbers look worse for Bush because the rates would kick in at lower incomes.

To be fair to McK, the table doesn't explicitly say that it's income tax only. Although, since the context is a discussion of changes to income tax, that's kinda grokable from context.

To counter McK, if you want to include SE and Medicare, the overall tax regime will be less progressive than what is shown here, either before or after Obama's proposed changes.

Depending on where you live, if you include state and local taxes, even less progressive still.

Nobody likes paying taxes, they kinda suck.

Every day I have to shave, brush my teeth, and take a shower. Every week I have to mow the lawn and make a run to the dump. When it snows, I have to shovel my walk.

A lot of life is just a PITA.

I don't mean to ignore legitimate questions about what we spend money on and how much, I'm just pointing out that some kind of tax regime, and a fairly hefty one at that, is more or less inevitable unless we want to go back to living the life of sturdy, independent yeomen farmers.

Think "Amish country". Not a bad way of life, just not one folks sign up for much anymore.

Eric, I checked the 2010 tax tables (http://taxes.about.com/od/preparingyourtaxes/a/tax-rates_2.htm) and ran taxes at 500K. they are $152,643.

Self employment tax is what I and everyone else who is self employed pays. Employees pay half that amount and are matched by the employer (i.e. me). Same with medicare (I match).

It all goes into the general revenue fund, it's all a tax and it's all paid by people who make that much money.

Having kids or not makes no difference over about 150K, because the exemptions for self, spouse, kids go away at that level. The only meaningful deductions allowed over roughly 150-200K are for state and local taxes, interest on real estate and charitable deductions. You spend a dollar and save 35 cents.

Typical is entirely subjective. Anyone can jigger numbers, declare them to by typical and make any kind of argument they wish. I have the tax returns and returned checks that show otherwise.

Again, the source for these numbers is The Tax Foundation, which is a pretty conservative organization, to put it lightly. (They're the ones that publicize Tax Freedom Day every year.) You really think they're trying to massage the numbers to make it look like people pay less than they do? Then make that case. But you're not going to do it by citing one - one! - counterexample.

McTex,

As noted, the table you would need to use are the 2011 tables.

The graph says typical. There is no way the graph could cover every single instance.

Regardless, what you should then do is compare YOUR particular tax under Bush with the tax you would pay under Obama.

The point of the graph was not that "this is the tax that every tax filer with that level of income pays"

The point of the graph was "these are what typical rates look like for earners within these ranges under each tax regime."

You pointing out that your rates differ because of your particular quirks is kind of beside the point.

The takeaway here McK is that *your* tax liability is higher because you pay SE.

And that will be true for self-employed people across the whole spectrum of income earners. Except that, for folks who earn less than you, the effect will be greater, because SE is flat rather than progressive.

The point of the table, and of Eric's post, is that the change in *income tax* before and after Obama's proposals is, in fact, not that great.

Not nothing, but not that big, either.

The actual numbers appear to support that conclusion.

Typical is entirely subjective. Anyone can jigger numbers, declare them to by typical and make any kind of argument they wish.

Again, this is entirely beside the point beacuse the graph's intent was not to show what the tax rates are per se.

It is used to compare the rates under Bush and Obama. So it picked a certain point of comparison, and compared.

And given that it was a conservative, anti-tax group that picked the points of comparison, I have a REALLY hard time accepting that they "jiggered" the numbers to make the taxes look lower.

That would weaken, not strengthen, their argument.

Counselor, people don't generally jigger to hurt their argument. You know this.

Typical is entirely subjective.

Not necessarily. Typical can mean average in each category of income, deduction, credit, etc. for returns in a given AGI range. There is plenty of empirical data from returns filed upon which to base this, which would be my default assumption of what they did.

Even with that aside, how much difference could the expiration of the Bush cuts make? We're talking a few percentage points on some marginal amount of taxable (earned) income.

There is no way the graph could cover every single instance.

Absolutely it could. Every tax payer has gross income. A graph could show taxes exclusive of deductions. It could go on straight numbers.

BTW, I found the 2011 tax tables. The tax on 500K goes up to $160,019. Plus FICA/Self Employment tax, plus medicare tax, plus 65% of state and local taxes (the result of deducting state and local taxes from gross income).

A tax is a frigging tax. Whether its a conservative or liberal group doing the number crunching, the only real issue that matters is: how much is left over after the taxes are paid?

Looking at typical income tax burden in isolation is totally artificial. It is the total tax burden that matters, especially when we are talking about tax increases which are inherently marginal and therefore add to the existing mass. OT-- Before I ever file a personal return, I pay matching FICA on a 800K payroll and a raft of city, county and state taxes that I don't even know what the hell they are because I haven't had time to figure them out.

Back on topic--I went back and did the taxes on a married couple filing jointly and making 70K. Exclusive of deductions, in 2010, the couple will pay $9862. In 2011, the couple will pay $10,500. This is simple math using the published tax tables.

The table above is crap, regardless of who did it.

Self employment tax is what I and everyone else who is self employed pays. Employees pay half that amount and are matched by the employer (i.e. me). Same with medicare (I match).

It all goes into the general revenue fund, it's all a tax and it's all paid by people who make that much money.

While this is all true, what does it have to do with the comparison the graph is making or the validity of the numbers? And if you want to compare payments to SS and Medicare that you're making through the Self-Employment Tax, that's fine, but then you have to include Payroll Taxes paid by people who aren't self-employed. Just because you have to account for it on your return doesn't make it any more valid for you to include it than for people who automatically have it taken out of their paychecks.

Absolutely it could. Every tax payer has gross income. A graph could show taxes exclusive of deductions. It could go on straight numbers.

What do you mean? Are you suggesting that they should just assume your gross income will be taxed at the marginal rates? If so, which marginal rates? Earned income tax rates or capital gains rates? In what proportion? I don't see how this makes any sense or how it would be more illuminating than comparing typical returns based on an average of actual returns recently filed. Almost no one pays taxes based on their gross income, so how is that worth showing?

A tax is a frigging tax.

Yeah, but they're trying to show the difference that will be caused by what has changed. No one is suggesting that Income Tax is the only one that counts for any and all purposes. It's just the one that will be changing as the Bush cuts expire, so that's what they're looking at. How hard is that to understand?

The table above is crap, regardless of who did it.

McTex, you COMPLETELY missed the point.

The graph is not supposed to show what everyone's tax will be, with exactitude for all scenarios.

It shows the CHANGE in tax rates for each regime.

Your comments entirely miss the point, repeatedly.

The point is, your tax will be X1 amount if Bush's cuts are extended, and X2 amount if not, and with Obama's other policies enacted.

I don't care about the particular numbers of each X1 or x2 because they matter not for this conversation.

What I care about is "Y" which is the difference between X1 and X2.

Point being, that the Y is not very large.

Please.

Just because you have to account for it on your return doesn't make it any more valid for you to include it than for people who automatically have it taken out of their paychecks.

I never said it did. What I said was the table doesn't accurately reflect actual tax impact on actual dollars earned. It's a construct, and as far as I can tell, its a BS construct.

Yeah, but they're trying to show the difference that will be caused by what has changed.

But it doesn't even show that. As I showed above, a married couple making 70K and filing jointly pays less under Bush than under Obama yet the table above implies otherwise. I call that crap.

Are you suggesting that they should just assume your gross income will be taxed at the marginal rates? If so, which marginal rates? Earned income tax rates or capital gains rates?

This is pretty much exactly what I am saying. It is crap to make a bunch of unstated assumptions about who has X amount of cap gains and losses, who gives Y amount to charity, etc. Compare actual gross rates to actual gross income and see who pays more tax. From that point, each person looks at their own circumstances. I can make two sets of assumptions and produce two different tables, neither of which tell me anything useful.

Here is what is useful: after all of your deductions, what tax bracket are you in and how do your taxes in 2011 compare to 2010?

The chart appears to come from this pdf at the Tax Foundation website (scroll to the tables at the end). Under Bush they estimate the "typical tax return" for $500k with no kids gets $90k in itemized deductions and $7.4k in personal deductions for taxable income of $402.6k. Obama is $82.6 in itemized and no personal for taxable income of $417.3.

Under Bush you pay $110.7k + $13.2k in AMT = $123.9k. Obama is $130.3k + 0 in AMT = 130.3K.

And the obvious comparison in the chart is income taxes to income taxes because that's the subject of the difference between Obama and Bush. AFAIK social security and medicare taxes are exactly the same.

But it doesn't even show that. As I showed above, a married couple making 70K and filing jointly pays less under Bush than under Obama yet the table above implies otherwise. I call that crap.

Using the 2011 tables? Are you sure? Even after changes to the law have taken effect?

That is what the graph says. 2011 tables.

Not, simply, "under Bush, under Obama."

It shows the CHANGE in tax rates for each regime.

With respect, I am not missing anything. If the table is flat wrong in how it calculates taxes in the first place, it cannot then accurately and usefully reflect any change.

The table, in my view, understates actual tax liability on earned income by substantial margin and misrepresents not only the current regime but the one to come, if it does.

BTW, I've done every tax calculation you've suggested and keep coming up with numbers that support my position. This ought to indicate that maybe there is something to what I am saying.

With respect, I am not missing anything. If the table is flat wrong in how it calculates taxes in the first place, it cannot then accurately and usefully reflect any change.

Sigh.

The table is correct using the inputs used by the table. It is not correct using your inputs.

Are you using the 2011 tables? If not, you are not using the correct calculator.

Upthread, you said that you used the 2009 tables, then the 2010 tables.

The table, in my view, understates actual tax liability on earned income by substantial margin and misrepresents not only the current regime but the one to come, if it does.

Regardless, the changes are insignificant!

And what a hoot, that an anti-tax conservative group in the WSJ went out of their way to...undercount taxes and make the changes seem smaller.

McTex: You missed the AMT factor.

See Ugh's comment above.

Not sure what you're using, McT, but are you basing it on the below (from the PDF Ugh linked)?

Below, see a selected list of the tax increases that could occur on January 1, 2011. These are only the most well known provisions of the Bush tax cuts that, if allowed to expire, would come to the
immediate attention of the nation's taxpayers.

• The two "marriage penalty elimination" provisions will expire, so that:

o The standard deduction for married couples will fall, no longer double what it is for single filers; and
o The ceiling of the 15% bracket for married couples will fall, no longer double what it is for single filers
• The 10% tax bracket will expire, reverting to 15%
• The child tax credit will fall from $1,000 to $500
• The tax rate on long-term capital gains earned by middle- and upper-income people would rise from 15% to 20%
• The tax rate on qualified dividends earned by middle- and upper-income people would rise from 15% to ordinary wage tax rates
• The 25% tax rate would rise to 28%
• The 28% rate would rise to 31%
• The 33% rate would rise to 36%
• The 35% rate would rise to 39.6%
• The PEP and Pease provisions would be restored, rescinding from high-income people the value of some exemptions and deductions
• The estate tax would be restored with an exemption level of $1 million and rates that top out at 55%

The plan outlined in the Obama administration's budget is to allow only one of those 12 provisions to revert exactly to what it was in early 2001:

• The top tax rate will revert from 35% to 39.6%

Five of those dozen major provisions will change, but they won't go back to exactly what they were in 2001:

• Estate tax law will revert to 2009 instead of 2001: exemption of $3.5 million and top rate of 45%
• Rate on long-term capital gains will revert to 2001 law (rate of 20%) but only for couples with over $250,000 in AGI the year the gain is realized ($200K threshold for singles)
• Dividends will be taxed just like long-term capital gains
• The 33% tax rate will revert to 2001 law (rate of 36%) but the income threshold where that bracket starts will shift up to $250,000 in taxable income (couples) and $200,000 for singles
• The PEP and Pease provisions will be restored, rescinding from high-income people the value of some exemptions and deductions, but the income threshold where they start to pay more will shift up to $250,000 in taxable income (couples) and $200,000 for singles

The other 6 of the 12 major Bush tax cut provisions for individuals listed above will be preserved as enacted during the Bush years.

There are many other provisions that will expire, including EITC eligibility levels, Roth IRA provisions, and others, not to mention Obama's biggest tax cut, the making-work-pay credit, which was a one-year
tax cut in 2009 that was renewed for 2010.

Even better.

Back on topic--I went back and did the taxes on a married couple filing jointly and making 70K. Exclusive of deductions, in 2010, the couple will pay $9862. In 2011, the couple will pay $10,500. This is simple math using the published tax tables.

Why are you calculating that "exclusive of deductions"? Why wouldn't they take the standard deduction and personal exemption, reducing their gross income from 70k?

IOW, the standard deduction and personal exemption are available to every married couple filing jointly making $70k in gross income, so we don't have to factor in personal circumstances like itemized deductions to compare Obama to Bush.

Also, where are the 2010 and 2011 federal income tax tables, if someone could provide a link?

Yes!

Compare like to like, and you get...to the conclusion that Obama's rates on high earners aren't that much higher, and are lower for lower income earners.

Wow.

Ugh--as I've been saying, change the input, change the outcome. Go with actual numbers, compare like to like, and see where the changes fall and what they are.

Well, the Tax Foundation #s in the chart above for the first 3 lines assume no itemized deductions under either Bush or Obama, only standard deduction + personal exemption (which are exactly the same under either system), and in those three lines people come out ahead under Obama (due to the Making work pay and/or Earned income tax credits, which I think do not get reflected in the tax tables). They then start making assumptions about how much people take in itemized deductions (they assume 18% of gross income split evenly between state taxes and mortgage interest, subject to phaseouts), but again the assumption is the same under Bush and Obama.

Feel free to look at income tax in isolation. For what that is worth.

That's what we're doing because that's what's changing under the Obama proposal! If you want to add in $20k+ for self-employed/medicare to come to the "true" tax burden for $500k plus earners under the Obama proposal, you have to add the same amount to the Bush total too. But the delta is still the same.

So, Ugh, what you're saying is that they looked at the Income Tax because it was the Income Tax rates that were changing? That they wanted to see how the Income Tax to be paid under two different Income Tax regimes would compare? That things not affected by the change in Income Tax rates weren't relevant because they wouldn't change, those unaffected things being things other than Income Tax?

Do I have this right? It seems awfully confusing.

I mean, why don't you care about the birth rates of elephants or the iron content in paper clips or snakehead-fish populations in the Chesapeake Bay or supermarket shelf-stocking practices?

Why do you only care about the Income Tax?

Also, Magnets! How the @#[email protected]#* do they work?

McTx: Back on topic--I went back and did the taxes on a married couple filing jointly and making 70K. Exclusive of deductions, in 2010, the couple will pay $9862. In 2011, the couple will pay $10,500. This is simple math using the published tax tables.

Ah, I see the problem here. The 2011 tax table in your 1:36pm comment is (an estimate) of what the 2011 brackets would be if everything reverted back to the pre-Bush tax cut era. However, that table does not take into account what happens under the Obama proposal, which specifically retains some of the Bush changes and has other provisions not accounted for in the table.

But the chart Eric posted compares Bush vs. Obama proposal, not Bush vs. Pre-Bush, which is what you were doing. For example I think Obama's proposal retains the 10% tax bracket due to expire next year, but the table you used doesn't take that into account (assuming I'm right about the Obama proposal).

My 1PM comment contains an excerpt from your earlier link, Ugh. It explains the Obama proposal, which only entirely rescinds one of the twelve elements of the Bush tax cuts, modifies five others, and leaves the other six unchanged.

Simply going back to the federal income-tax regime before the Bush cuts would give quite different results than would using Obama's tax proposal. For the most part, if you make less than 250k, you'd see almost no difference under Obama's proposal than if the Bush cuts didn't expire except under very unusual conditions, like all of your income being from capital gains or dividends.

You are right about the 10% bracket. In fact, the only brackets that will change are the top two, going back to the old Clinton rates, but the second highest will kick in at a higher income, offsetting some of the effect of the rate increase.

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