From the Greek meaning 'heavy with wine'
A blog devoted to science and reason
Written after a glass or two of Pinot Noir.

Friday, January 20, 2012

Math and Taxes

There's been quite a lot of news coverage on what Presidential candidates pay in income tax.  This got me to thinking about what I pay in taxes, not because I don't like paying taxes.  I really do enjoy it. My money paves the roads I drive on. It makes the skies safe when I fly (it also pays the salaries of the sometimes surly TSA agents).  It provides affordable education to the nation's students, and it provides a little financial security and healthcare to seniors.  These are a few of my favorite things.

Mitt Romney says that his effective tax rate is about 15% while Newt Gingrich's tax returns shows his is 32%.  Calculating  the effective tax rate is easy, but before I cover that, let's explore the federal tax rates for 2011.  Here are the federal tax rates for 2011.

I remember an urban myth about these tax rates.  I haven't heard it recently so maybe this is one myth that has finally died.  The myth says that if a person was near the top of one tax bracket and got a raise that bumped that person into the next bracket, the person would end up taking home less pay than before.  But that's not how these brackets work.  UPDATE: USA Today published an article on Sept. 2, 2011 that contained this error.

Let me illustrate.  Suppose a single woman earns $34,100 in 2011.  I mean for this amount to represent her taxable income; basically, taxable income is your income minus personal exemptions and deductions.  The first $8,500 is taxed at 10%, so she pays $850 to the IRS.  She is taxed at 15% for only the difference between $34,100 and $8,500.  So, the tax on $25,600 is $3,840.  Her total tax liability is then $4,690.

To find her effective tax rate is really simple.  Take the total amount of taxes paid and divide by her taxable income.  Here, $4,690/$34,100 = 0.138 = 13.8%.

Now suppose she gets a raise (in this economy?), and her 2012 taxable income rises to $35,700.  The 2012 tax brackets have been inflation adjusted.

So next year she can expect to pay $870 (10%) on $8,700, $3,997.50 (15%) on $26,650, and $87.50 on $350.  Her 2012 taxes will then be $4954.50, and her effective tax rate will be $4954.50/$35,700 = 0.139 = 13.9%

According to my 2010 return, my effective tax rate was 19.1%.  

With all the talk about the 99% and the 1%, I wonder where I am.  I earn a 'nice dime.'  I found a % calculator on the Kiplinger website.  Kiplinger is a financial advice and forecast business.  It figures that I'm in the top 10% of American wage earners.

So I played around with it.  To be in the top 5%, you need an income of $175,000.  The 1%?  $350,000.  

When I was much younger, I would tell people that I wanted to earn a comfortable living.  They'd asked what comfortable was.  The smartass that I am replied that if I could lose half of my income and still be comfortable, that was a comfortable living.  If I earned $350,000 and lost half of that, could I still be comfortable?  

Wouldn't I like to try!

[N.B. Here are the tax brackets from 1919 to 2011.]