The Most Productive Will Owe An Average $119,878 More In Taxes

with 5 Comments

Calculations

In Sunday’s column, The Fiscal Cliff Is Almost Everything the Democrats Want, I wrote:

Obama claims tax increases on the middle class may cause a recession. He has said the taxes on a family of four will go up by $2,200. Meanwhile taxes for those earning over $500,000 will rise $119,878. And those earning over $200,000 will pay an extra $39,880. Obama would have you believe that $2,200 is a fiscal cliff, but $119,878 is just paying their fair share.

to which I received this reply from a reader:

With tax rates scheduled to rise by just 10%, your number is just baloney. I would like to see how you calculated this.

I expect these kinds of lies to be repeated by politicians with an agenda. However, I think these are unethical for a financial adviser who has the responsibility for accurate presentation of the actual financial data.

When your data is so very far away from accurate, then the conclusions you make from that data are also far off-base. You owe your readers a retraction.

There’s never enough room in the newspaper column for the math. Instead I leave the next blog post open to show my work. Here is the math:

(1) The data comes from the IRS government site SOI Tax Stats – Individual Statistical Tables by Size of Adjusted Gross Income. I used the latest year, which is 2009.

(2) The IRS site breaks their data down by adjusted gross income. This is slightly higher than taxable income, but that only makes my point better.

(3) The IRS site does not break the data at $250,000. It breaks the data at $200,000 and $500,000 so I used those two numbers.

(4) My calculation is for everyone above those numbers, not for someone exactly at those numbers. I made that very clear in my use of the word “over” although some readers ignored that word. My calculation for everyone over $200,000 included everyone over $200,000. It was not a calculation for people who earned exactly $200,000. Neither was it a calculation for people earning between $200,000 and $500,000.

(5) The total number (N) of all tax returns over $200,000 was 3,898,310. Over $500,000 was 723,191.

(6) The total taxable income (T)  (in thousands) of all tax returns over $200,000 was $1,619,441,376(,000). Over $500,000 was $903,069,315(,000).

(7) The Average Taxable Income (A) is computed by T * 1000 / N. The Average Taxable Income for tax returns with an AGI over $200,000 was $415,421. For AGIs over $500,000 it was $1,248,728.

(8) The top tax bracket is experiencing at least three different tax increases. First the rate is going up from 35% to 39.6%, an increase of 4.6%. Second there is a 3.8% Obamacare tax. And finally there is a 1.2% deduction phaseout. These result in a 9.6% tax increase. That number does not include the marital penalty which returns. And it does not fully capture the way in which taxes can interact with each other. “It depends.” is always the correct answer to any tax question, but for our purposes this is the right ballpark for tax computations.

(9) Taxes for those earning over $500,000 will rise $119,878. All those with an AGI over $500,000 average $1,248,728 in taxable income. At a 9.6% additional tax this will result in them owing $119,878 more in 2013 taxes.

(10) Those earning over $200,000 will pay an extra $39,880. All those with an AGI over $200,000 average $415,421 in taxable income. At a 9.6% additional tax this will result in them owing $39,880 more in 2013 taxes.

These are not trivial numbers which is why I wrote:

Obama claims tax increases on the middle class may cause a recession. He has said the taxes on a family of four will go up by $2,200. … Obama would have you believe that $2,200 is a fiscal cliff, but $119,878 is just paying their fair share.

This is why it is especially important for small business owners to engage in tax management.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818…)

5 Responses

  1. David John Marotta
    |

    These calculations are not as exact as they could be. Of the $1,248,728 only $860,378 would be above the $388,350 at the full 9.6%. The remainder is also experiencing a tax increase in the lower tax brackets as the 25% is rising to 28% and the 28% is rising to 31% and the 33% is rising to 35%.

    I also did not specify if they were married filing jointly, single or head of household. Nor did I calculate the marriage penalty being in place again. The tax code is incredibly complex and “it depends” is nearly always the correct answer. Finally, I did not raise the brackets (nor did I raise their adjusted gross income) for inflation. Here is a revised calculation for married filing jointly:

    Married Filing Jointly Taxable at this rate 2012 Rate 2012 Tax 2013 Rate 2013 Tax
    $0 to $17,900 $17,900 10.0% $1,790 15.0% $2,685
    $17,900 to $60,550 $42,650 15.0% $6,398 15.0% $6,398
    $60,550 to $146,400 $85,850 25.0% $21,463 28.0% $24,038
    $146,400 to $223,050 $76,650 28.0% $21,462 31.0% $23,762
    $223,050 to $398,350 $26,950 33.0% $8,894 36.0% $9,702
    $250,000 to $398,350 $148,350 33.0% $48,956 41.0% $60,824
    $398,350 and up $850,378 35.0% $297,632 44.6% $379,269
               
    TOTAL     $406,593   $506,676
    DELTA         $100,083

    So after raising the brackets for inflation (but not their taxable income) instead of $119,878 more in tax, $100,083 is a slightly more accurate guestimate. More if they are single.

  2. Luis
    |

    I realized taxes are not so progressive yesterday. Those making over $113,000 get a 6.2% cut as Social Security payroll is Maxed.

    • David John Marotta
      |

      Greetings Luis,

      It is true that someone with a taxable income of $1.2 million doesn’t have to pay Social Security tax on anything over $113,000. But they also don’t get any increase in their Social Security for having a higher salary or having contributed more.

      If there were a way of opting out of Social Security (both benefits and taxes) there would be few who would opt to stay in the system. My grandmother never paid a dime into the system and collected my grandfather’s benefits to age 99 1/2. Those earning over $1.2 million get one of the worst returns on their investment, somewhere around -7% annually. Yes they lose money in real dollars, not just adjusted for inflation.

      Hard to call that a “tax cut” when they have such a larger benefit cut.

  3. Andrew Everett
    |

    When you note this:

    Obama claims tax increases on the middle class may cause a recession. He has said the taxes on a family of four will go up by $2,200. … Obama would have you believe that $2,200 is a fiscal cliff, but $119,878 is just paying their fair share.

    It seems clear to me that he means $2200 X tens of millions of taxpayers. That is all money that will likely be spent back into the economy. Thus it makes them the real job creators. Higher demand = more jobs.

    The same cannot be said of folks at the high end – especially well above $500k. That money is not as likely to flow back. It may be invested or saved – neither bad things. But the $2200 will be much more likely to be put to use reigniting the economy.

    • David John Marotta
      |

      Greetings Andrew,

      I understand the arguments for Keynesian economics. The idea is that the country’s economic health is better when people are spending money buying things rather than saving and investing in the means of greater productivity. That idea doesn’t work for countries any better than it works for families.

      Yes. there is a short term effect. Some of the money spent will be spent on goods and services in the United States. There will be a blip of income, half of which will flow overseas to China. On the other hand, those who would save and invest would be the small group who would look for ventures where making profits and employing people is more sustainable for the long term.

      Also, there is no blip of income coming for anyone. There is only a wave of higher taxes. So there will be no higher demand, job creation or economic shot in the arm. There are no tax decreases being proposed for anyone.

      Finally, you could set the tax rate on employees to zero percent make employers pay all the taxes for everyone. The result would be employers would reduce everyone’s salary by the tax they aren’t paying and raise their own salary to compensate for the additional tax they are forced to pay for the entire business. A new equilibrium would be found with a greater discrepancy between the gross salary of owner and employees in order to keep the same ratio of net pay.

      My experience with small business owners is that we punish US economic growth by taxing their ventures at a higher rate per dollar than everyone else’s. We are the losers for such economic discrimination of dollars from different entrepreneurs.