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.

Taxes Through a GDP Lens: Revisited

I’m showing today an updated version of a graphic I showed on  December 21 of last year. Results for 2011 have been added to it, thus it is more up to date. Also shown on this graphic is the top marginal tax rate over the 1960-2011 period. A key point of the last posting (link) was that the tax rate appears to influence tax revenues and Social Security contributions not at all, but tax rates are certainly influenced by other events in the economy. I said:

Recessions, booms, and busts, however, do show an influence. Booms and busts? Well, the biggest rise in tax collections as percent of GDP came during the dot-com boom, the biggest drop in the dot-com bust. And the next up-then-down is the housing bubble.

The interesting things to note here is the up-turn of tax revenues from 2010 to 2011, signaling recovery—if not massive growth—and the down-turn in contributions to social security in the last year. That dip was caused by a law passed in 2010 but effective in 2011—lowering payroll taxes.

What with top tax rates having no visible effects on taxes, the hullabaloo about rates today are entirely off the mark. They represent political realities, not economic. The notion that raising rates will cause the economy to dive are belied by this chart. Taxes rose sharply from the 1988 to 1992 level. So that happened? Tax revenues went for the sky—for an entirely unrelated reason.

The data I am using comes from the BEA using the facility located here. Following links from there, I used Table 2.1 for Personal Income and Its Disposition and Table 1.1.5 for Gross Domestic Product.