Tax Cuts to the Quick

October 15, 2004)
I hold no brief for either "Dubya" Bush or John Kerry, but I ran my own spreadsheet on the tax bill a couple of years ago.  The thing got passed thru the Congress before I could send it out!  It was a rocketship piece of legislation, and no one at the time was discussing the very thing I figured out:

there is an almost straight-line progression with regard to the INCREASE in net after-tax income (comparing pre-change and post-change net incomes) as gross income increases.  In other words, and depending on whether the FICA rate is stated as 6.2% or 12.4%, low-income brackets barely broke even after the tax change or got a tiny increase in net after-tax income, while at a gross income of $250K, the net after-tax income increases by at least 11% over the pre-cut net income!!!

The comparison makes sense if one asks who now has more money in their pocket than before.

I ran the numbers in a spreadsheet for probable taxes and net after-tax income for families earning $20K, $40K, $60K, $80K, $100K, $150K and $250K.  I included EIC for the lowest bracket, and I made certain arbitrary assumptions, such as renting and no deductible mortgage for the two lowest brackets, figuring they had no means to buy a home.  I assumed mortgages on homes for the 3 middle brackets as a given percentage of gross income (I don't remember what it was) and I assumed a 2d-home mortgage for the two upper brackets at 80% of the first mortgage.  These itemized writeoffs give upper income-earners a big boost over the std. deduction for lower brackets.

I assumed the same numbers for basic costs like food, utilities, etc., and I assumed the same modest percentage for charitable donations.

I have argued that the full FICA rate of 12.4% should be fully assessed against wage earners since the employer-half share surreptitiously suppresses the ability or willingness of employers to hire workers at those levels.  All self-employed folks like myself must pay a full 12.4%, though we can deduct half of it as may an employer.

Thus, a family of four earning the national household median income of around $50K (both spouses working at $30K and $20K respectively) will likely be in a federal marginal bracket of 28%.  That, plus 12.4% of ALL earned income up to $82K (and paid with after-tax dollars since it is NOT deductible for income-tax purposes), with likely no cap. gains or dividends, totals a net marginal bracket of over 40%, not counting state taxes!  How does that square with a marginal bracket of no more than 35% for wealthier taxpayers on all "earned" income above $82K PLUS only 20% on cap. gains and 15% on dividends where FICA is inapplicable!!!

Working stiffs are getting hosed under the present tax laws, and NOBODY is talking about these patent inequities.  Most folks who cover the tax "beat" are incapable of coherently presenting the facts.  It is hard for lawyers to understand.  And what we wind up with is rhetoric about the poor vs. the rich, which is distracting and inexact.

Finally, why may the wealthier deduct TWO mortgage payments, even on their cabin cruiser or Winnebago or beach cottage, but Joe and Rayette Sixpack can't deduct their measely rent payments?

There is a lot of complexity to the tax changes, but nobody is learned enough to discuss them or even report on them.  I am really disgusted that no politician or journalist sat down and really thought about what in the Hell was going on.

[2/25/07--I can make available the 2002 spreadsheet file formatted in MS Works if desired.  It should be updated, but isn't.  The income data and brackets have since changed somewhat, but the core principles are the same.]

There is another totally undiscussed issue raised by the more recent [2004] tax changes reducing the bite on dividends: since dividends are now taxed at 15% and cap. gains are taxed at 20%, why would an investor want stock to hopefully appreciate (& be taxed at 20%) in lieu of being paid a dividend to be enjoyed now and taxed at only 15%?  They wouldn't!  And why would influential investors NOT call  up the senior managers within a company and DEMAND payment of dividends rather than having net income reinvested at the corporate level in R&D, etc. that could only inflate cap. gain profits if there were any benefit derived at all?

Why did no one discuss the possible negative effect of the change in dividend taxation on R&D and other reinvestment that has no immediately enjoyable tax benefit?

This change in dividend taxation will cause American businesses to eventually eat their seed corn, and we will rue the consequences one day.

The silence is deafening.