US Income Tax Rate Increase: Fact or Fiction?

[CRGreathouse]

I heard from a source I would usually consider reliable on this matter that the top US income tax rate was going to be increased from 35 to 39% (not this year but in a few). Is this true? I wasn't able to find anything online in a brief search.

 

[Astronuc]

I heard from a source I would usually consider reliable on this matter that the top US income tax rate was going to be increased from 35 to 39% (not this year but in a few). Is this true? I wasn't able to find anything online in a brief search.

One is referrrig to the expiration of the tax rates established during the recent Bush administration.

Background - http://www.cato.org/pub_display.php?pub_id=6621

Obama proposes end to Bush-era tax breaks for wealthy
Fiscal 2011 budget has cuts for small businesses but hits top earners
http://www.marketwatch.com/story/obama-budget-lets-bush-tax-cuts-expire-2010-02-01

WASHINGTON (MarketWatch) -- Facing a gaping deficit but aiming to spur job creation at the same time, President Barack Obama's fiscal year 2011 budget would hit top earners, oil companies and others while giving tax breaks to small businesses to help them hire new workers.

Obama submitted the $3.8 trillion budget plan to Congress on Monday, beginning an annual process of hearings and setting off a debate over spending priorities with newly emboldened congressional Republicans.
. . . .

Unless things have changed, I believe the top this year will be 35%, same as 2009. Apparently the rates will increase next year, if the so-called 'Bush tax cuts' expire at end of 2010.

http://www.moneybluebook.com/2010-federal-income-tax-brackets-irs-tax-rates/

http://www.taxpolicycenter.org/taxtopics/2010_budget_high-income.cfm

 

[pallidin]

That's disturbing. Didn't realize it was that high.

 

[Klockan3]

You realize that it is still one of the lowest in the western world?

 

[zomgwtf]

You realize that it is still one of the lowest in the western world?

Not us up here in the good ole' North! However we also have provincial taxes which pushes our taxes up to around the same amount depending on which tax bracket your in. The more money you make the more you pay.

Actually how do Americans pay their taxes?

This is Canadian taxes:
http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

 

[BishopUser]

Not us up here in the good ole' North! However we also have provincial taxes which pushes our taxes up to around the same amount depending on which tax bracket your in. The more money you make the more you pay.

Actually how do Americans pay their taxes?

This is Canadian taxes:
http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

Isn't Canadian sales tax something like 20%? Compared to around 6%-8% in america. Income taxes are deducted from each paycheck (as a best guess for the total amount we will owe). At the end of the year we have to send a form to the government that calculates the total amount of tax we owe for the year. We either get a refund or a bill depending on how much has already been deducted from our paychecks over the course of the year.

 

[mgb_phys]

Isn't Canadian sales tax something like 20%?

Federal sales tax is 5%, provincial is 5-7% and applies to different things - most provinces combine them into a single 13% tax, in the EU VAT is 17.5-20%

At the end of the year we have to send a form to the government that calculates the total amount of tax we owe for the year.

Biggest difference to the US is probably that there aren't quite as many special interest exemptions that reduce the higher rate of tax and make the US tax forms such an absorbing read.

 

[Jack21222]

That's disturbing. Didn't realize it was that high.

That isn't for your entire income. That's only on the part that fits in the bracket. For example, I don't make much money as a college student. Last year, I was in the 15% tax bracket. Does that mean I paid 15% in federal income tax? NO! Only the last few thousand were in that bracket. I actually only paid about 1% overall.

 

[BobG]

That isn't for your entire income. That's only on the part that fits in the bracket. For example, I don't make much money as a college student. Last year, I was in the 15% tax bracket. Does that mean I paid 15% in federal income tax? NO! Only the last few thousand were in that bracket. I actually only paid about 1% overall.

True. Real federal income tax rates paid:

Top 5% - 20.53%.
6 - 10% - 12.66%
11-25% - 9.43%
26 - 50% - 7.01%
bottom 50% - 2.99%

With flat rate deductions, the tax rates for get pushed substantially lower than advertised for lower incomes, while the ability to itemize deductions pushes higher income tax rates lower.

The top 5% in incomes earn $3.3 trilion dollars (37% of the nation's AGI) and pay $676 billion in taxes (61% of income taxes). Whether fair or not, increasing or decreasing the tax rates on the highest incomes has a huge impact on tax revenues, size of the budget deficit, etc.

Federal tax rates also have another impact. It allows money to be shifted from one state to another. States with large populations, high wages, and high cost of living (California, New York, Illinois, etc) tend to subsidize the states with small populations, low wages, and low cost of living. (Federal Spending Received per Dollar of Taxes Paid)

Logically, red states should be proposing higher federal tax rates while blue states propose lower federal tax rates. It never works out like that, though. Probably because federal money always comes with strings attached.

 

[mgb_phys]

The top 5% in incomes earn $3.3 trilion dollars (37% of the nation's AGI) and pay $676 billion in taxes (61% of income taxes)

Ironically that doesn't mean that those people pay the highest rate of tax.

If you are in a high income bracket then you pay a lot of income tax in absolute $ terms, but taxes on other items are relatively small to you.
On low income you pay less $ of income tax, but you spend a larger proportion of your income on things like food and gas which are taxed. So although you pay little of the nations overall income tax take you pay a higher effective tax rate.

 

[CRGreathouse]

Thank you, Astronuc, for answering my question.

Interesting table, Bob G. I notice that I pay substantially more federal income tax than the rest of my cohort. [I happened to have a copy of my 1040 nearby.] Bad for me, I guess.

I don't imagine you have a table handy that has the effects of EIC and the like?

Ironically that doesn't mean that those people pay the highest rate of tax.

The top 5% certainly pays the highest rate of income tax of any group. But for overall taxes, I don't know.

 

[Jack21222]

Thank you, Astronuc, for answering my question.

Interesting table, Bob G. I notice that I pay substantially more federal income tax than the rest of my cohort. [I happened to have a copy of my 1040 nearby.] Bad for me, I guess.

I don't imagine you have a table handy that has the effects of EIC and the like?



The top 5% certainly pays the highest rate of income tax of any group. But for overall taxes, I don't know.

Warren Buffet says he pays a lower rate than his secretary, and that's without using any kind of tax sheltering or avoidance.

 

[russ_watters]

As another member recently pointed out, unless there is something very odd about him and/or his secretary, that's unlikely to really be true:

Except Warren Buffett saying it doesn't make it true. He probably knew how much he, personally, paid in federal income tax, but his estimate for his secretary wouldn't be true even if he she were single and he were talking just about the last dollar she earned. Tax rate for a single person at $60k is 25%, but there will at least be a pesonal exemption, etc, before her income starts being taxed. Worst case, with nothing being saved in 401k, health plan, etc would be about 21% (she'll at least have her personal deduction).

https://www.physicsforums.com/showpost.php?p=2626720&postcount=27

[edit] Oh, I found the reason for the discrepancy: Warren Buffett includes both halves (the employer and employee) of the FICA tax for his secretary, 12.6%. Since his pay is vastly higher, he's only taxed (and only eligible) up to $108k for Social Security. It is not an apples to apples comparison. So worst case, she's actually paying 17.4% compared to the 17.7% he's claiming for himself.

That said, the upper middle class (which his secretary is part of) and most of the upper class are the ones most burdened by taxes. The uber-rich, like Buffett derive their income differently than the rest of us, which is why they end up with lower taxes. An easy way to fix that would be to tax capital gains that are consistently used as income - as income. Or just increase the "fire sale" time limit from 1 year to, say, 5 years. That way you don't put a big hit on young people saving to buy a house or old people living off their investments in retirement by just raising the capital gains tax rate.

And the lower two brackets, of course, contribute nothing to the federal income tax burden (or pull negative taxes).

 

[WhoWee]

As another member recently pointed out, unless there is something very odd about him and/or his secretary, that's unlikely to really be true: https://www.physicsforums.com/showpost.php?p=2626720&postcount=27

[edit] Oh, I found the reason for the discrepancy: Warren Buffett includes both halves (the employer and employee) of the FICA tax for his secretary, 12.6%. Since his pay is vastly higher, he's only taxed (and only eligible) up to $108k for Social Security. It is not an apples to apples comparison. So worst case, she's actually paying 17.4% compared to the 17.7% he's claiming for himself.

That said, the upper middle class (which his secretary is part of) and most of the upper class are the ones most burdened by taxes. The uber-rich, like Buffett derive their income differently than the rest of us, which is why they end up with lower taxes. An easy way to fix that would be to tax capital gains that are consistently used as income - as income. Or just increase the "fire sale" time limit from 1 year to, say, 5 years. That way you don't put a big hit on young people saving to buy a house or old people living off their investments in retirement by just raising the capital gains tax rate.

And the lower two brackets, of course, contribute nothing to the federal income tax burden (or pull negative taxes).

The Buffet discussion is nonsense - when you factor in the $Billions of taxes his companies pay. Here's a quick link to an old 10Q
http://www.berkshirehathaway.com/qtrly/2ndqtr07.pdf
I doubt that secretary will ever match his $3,005,000,000 in taxes for the first 6 months of 2007.


"FORM 10-Q Q/E 6/30/07
4
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
Second Quarter
First Six Months
2007
2006
2007
2006
Revenues:
(Unaudited)
(Unaudited)
Insurance and Other:
Insurance premiums earned............
$ 5,950
$ 5,836
$19,464
$11,358
Sales and service revenues............
14,758
12,736
27,981
24,728
Interest, dividend and other investment income........
1,284
1,124
2,404
2,155
Investment gains/losses.............
605
167
1,047
609
22,597
19,863
50,896
38,850
Utilities and Energy:
Operating revenues..............
3,003
2,617
6,227
4,672
Other.................
57
71
106
209
3,060
2,688
6,333
4,881
Finance and Financial Products:
Interest income..............
429
402
850
800
Investment gains/losses.............
4
101
5
108
Derivative gains/losses.............
319
191
462
545
Other.................
938
940
1,719
1,764
1,690
1,634
3,036
3,217
27,347
24,185
60,265
46,948
Costs and expenses:
Insurance and Other:
Insurance losses and loss adjustment expenses......
3,176
3,517
14,035
6,867
Life and health insurance benefits..........
380
381
815
796
Insurance underwriting expenses..........
1,420
1,361
2,713
2,607
Cost of sales and services............
11,985
10,437
22,850
20,420
Selling, general and administrative expenses........
1,761
1,440
3,402
2,818
Interest expense..............
37
46
80
90
18,759
17,182
43,895
33,598
Utilities and Energy:
Cost of sales and operating expenses.........
2,408
2,147
4,896
3,741
Interest expense..............
280
263
552
444
2,688
2,410
5,448
4,185
Finance and Financial Products:
Interest expense..............
152
137
300
274
Other.................
932
854
1,734
1,676
1,084
991
2,034
1,950
22,531
20,583
51,377
39,733
Earnings before income taxes and minority interests......
4,816
3,602
8,888
7,215
Income taxes................
1,617
1,208
3,005
2,450
Minority shareholders’ interests............
81
47
170
105
Net earnings................
$ 3,118
$ 2,347
$ 5,713
$ 4,660
Average common shares outstanding *.........
1,545,206
1,541,641
1,544,008
1,541,286
Net earnings per common share *.........
$ 2,018
$ 1,522
$ 3,700
$ 3,023
* Average shares outstanding include average Class A common shares and average Class B common shares determined on an equivalent Class A common stock basis. Net earnings per share shown above represents net earnings per equivalent Class A common share. Net earnings per Class B common share is equal to one-thirtieth (1/30) of such amount.
See accompanying Notes to Interim Consolidated Financial Statements"

 

[Astronuc]

I believe Buffer was referring to the rate he pays on capital gains as opposed to what his secretary pays on her income tax rate. I would think she's in the 25% bracket.

Note: These tax rate schedules are provided for tax planning purposes. To compute your actual income tax, please see the 2009 instructions from the IRS for Form 1040, 1040A, or 1040EZ as appropriate.


Single Filing Status
(Tax Rate Schedule X)
10% on income between $0 and $8,350
15% on the income between $8,350 and $33,950; plus $835
25% on the income between $33,950 and $82,250; plus $4,675
28% on the income between $82,250 and $171,550; plus $16,750
33% on the income between $171,550 and $372,950; plus $41,754
35% on the income over $372,950; plus $108,216

Married Filing Jointly or Qualifying Widow(er) Filing Status
(Tax Rate Schedule Y-1)
10% on the income between $0 and $16,700
15% on the income between $16,700 and $67,900; plus $1,670
25% on the income between $67,900 and $137,050; plus $9,350
28% on the income between $137,050 and $208,850; plus $26,637.50
33% on the income between $208,850 and $372,950; plus $46,741.50
35% on the income over $372,950; plus $100,894.50

Source: http://taxes.about.com/od/2009taxes/qt/2009_tax_rates.htm
It easier than trying to find it on the IRS site.

 

[CRGreathouse]

So if she was single and took only the standard deduction, her overall tax rate would be 16.27%.

 

[mheslep]

I heard from a source I would usually consider reliable on this matter that the top US income tax rate was going to be increased from 35 to 39% (not this year but in a few). Is this true? I wasn't able to find anything online in a brief search.

Yep, the top Federal two income tax bracket rates increase as of Jan 1, 2011, unless some action is taken to change the current law. As Astronuc's http://www.taxpolicycenter.org/taxtopics/2010_budget_high-income.cfm" shows:
taxable income for single filers above-below
$192k-$376k goes from 33% to 36%,
$376k and up goes from 35% to 39.6%

then there are the other taxes: payroll (SS), inheritance (death) , state income , local sales and property, capital gains ...

 

[mheslep]

You realize that it is still one of the lowest in the western world?

The federal income tax is comparatively low among OECD countries, but when one counts the amount of money left in your pocket (ie disposable income) after all federal and local incomes taxes + payroll , then several OECD countries leave you with a little more: at least Australia, Czechs, New Zealand, Portugal, Switzerland, Japan, S. Korea, Ireland.
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=306