Friday, December 28, 2012

Tax Rates in 2002 and 2012

With but three days to go until the Bush tax cuts sunset, it might be well to look at the change in taxes that would occur. For this purpose I am comparing marginal tax rates, and the incomes to which they apply, for 2002 and for 2012. Here they are:

Tax Rates in 2002
At least
But no more than
Tax Rate
0
12,000
10%
12,000
46,700
15%
46,700
112,850
27%
112,850
171,950
30%
171,950
307,050
35%
307,050
Sky's the limit
38.6%

Tax Rates in  2012
At least
But no more than
Tax Rate
0
17,400
10%
17,400
70,700
15%
70,700
142,700
25%
142,700
217,450
28%
217,450
388,350
33%
388,350
Sky's the limit
35%

These rates are for a married couple filing jointly. Please note that these structures are not comparable—even if we ignore the tax rates. The rates apply to differently sized increments of income. To illustrate this, let’s calculate the taxes due on an income of $69,677, which just happens to be the average household income in 2011.

Income of $69,677 Taxed at 2002 and 2012 Rates
2002 Rates Applied
2012 Rates Applied
Increment
Tax due
Increment
Tax due
12,000
1,200
17,400
1,740
34,700
5,205
52,277
7,842
22,977
6,204
69,677
12,609
69,677
9,582

Notice that in 2002, a portion of the total income was taxed at 27 percent, not so in 2012. In 2012 the maximum of the 15 percent increment was higher than  the $69,677. If 2002 tax rates come into effect next year, the tax bite on this income, a national average, increases by 31.5 percent, by $3,027 a year, and $252 per month.

Let me now look at a range of incomes. For this purpose I’ve selected the top or maximum earnings of the first four quintiles (fifth) of households, the lowest income of the fifth or top quintile, and then, for good measure, an income of $250,000 and one of $1 million. First the tabular results:

Earnings
2002 Tax
2012 Tax
Difference
Top of lowest quintile
20,262
2,439
2,169
270
Top of Second quintile
38,520
5,178
4,908
270
Top of Third quintile
62,434
10,653
8,495
2,158
Top of Fourth quintile
101,582
21,223
18,073
3,150
Bottom of Fifth quintile
186,000
46,913
42,165
4,748
Earning $250,000
250,000
69,313
62,993
6,321
Earning $1 million
1,000,000
356,759
347,512
9,247

These results, graphed, bring home why it is that the political battles rage about the top layers—which are the last three groupings in the table and the chart. To be sure, $270 is a huge amount of money for a household earning a shade over $20,000. And a shade over $9,000 could not possibly bother a millionaire very much. But you get the picture:


Both in terminology and in likely effect, that phrase, Fiscal Cliff, is fear mongering. There is pain here, to be sure, but it is much more like slipping and falling on an icy sidewalk than a drop off a cliff. And, let us not forget, most millionaires do not get their income in earnings, taxable at these rates, but in capital gains, taxed at a much lower percent.

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