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.
Subscribe to Marotta On Money and receive free access to the presentation: Last Chance for a Massive Roth Conversion.
Photo by Megan Marotta