Alright, so this question has been tossed around in my head a lot lately. Does the current tax code encourage people to remain in poverty and discourage people from succeeding (or more correctly put, earn more money)? Now we all know that the US tax code has a progressive, tiered system whereby taxpayers pay a higher percentage of income the more they make. But is that exactly true in all cases....hardly. I offer two scenarios to consider when considering the above question. Case 1 - A married taxpayer with 2 children under 17 in a low income situation (minimum wage, PT, no benefits). Family rents home and uses standard deduction. Both parents work an hourly W2 job, earning the equal amount of pay. They live and work in the City of Kansas City Missouri. For purposes of this calculation, we will use 2012 tax tables, limits, rates, and phaseouts with the exception of the OSADI (RATE ONLY) which we will use the 2013 rate because the 2012 tax holiday wis an anomaly. Below, I will show 5 income levels. The first figure will show the total tax owed in Federal Income, State Income, City Earnings, and FICA Taxes. The second figure, the delta in tax from the previous income level, the third the blended overall tax burden (as a percentage). Numbers in parentheses indicate a negative. $20k - ($5,484) * N/A * (27.4%) $30k - ($2,413) * $3,071 * (8.0%) $40k - $2,106 * $4,519 * 5.3% $50k - $6,325 * $4,219 * 12.7% $60k - $9,209 * $2,884 * 15.3% Initial analysis notes 2 large items. First, this case doesnt effectively pay any tax until somewhere around roughly $35k of income. Second, the INCREMENTAL tax rate from 30 to 40 and 40 to 50 is OVER 42%. That means for a person earning $30k a year, they will only net $5,500 if they were to have the ability to earn $40k. But strangely, that incremental tax rate is lower both in the 20-30 band and the 50-60 band. In effect, making it harder to increase ones income in a practical way if they are making 30k, but not as bad if they are making 50k. Case 2 - Same family. Spouse works a $30k a year job. Primary taxpayers job will be used as the variable. All other variables consistent with case 1, with following exceptions: family 2 earns more, owns their home and through mortgage interest, taxes, and some charity deducts $22k in itemized deductions. Income figure includes both H&W income. $100k - $18,306 * N/A * 18.3% $110k - $21,346 * $3,040 * 19.4% $120k - $25,673 * $4,327 * 21.4% $130k - $30,104 * $4,431 * 23.2% $140k - $34,529 * $4,425 * 24.7% $150k - $38,365 * $3,836 * 25.6% $160k - $41,701 * $3,336 * 26.1% You will notice the same trend here as in Case 1. The incremental tax rate from 110-140k is roughly 44%, while above and below, it is in the low 30s. You will also note that the incremental tax rate for Case 1 from $30k-40k is the highest of any band on the chart. Which means, in effect, a taxpayer moving from 30-40k in income will pay more additional tax than someone making 130 going up to 140. So, you can see, there are significant break points in the tax code in which the overall tax rate goes up sharply and drops down again. The question is, does the existence of these rate bands discourage people from making more money and getting over the hump so to speak. And additionally, does it help to keep low income families in poverty by giving a person such little benefit in after tax dollars. Comments welcome....
Posted on: Thu, 05 Dec 2013 03:37:39 +0000
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