I ran the numbers and didn't come up with that result:
Message 19915242
Maybe you can tell me where the analysis is wrong:
I ran the numbers assuming Taxpayer A and Taxpayer B live in California (which has a graduated state income tax with exemption phaseouts for high income -- it also happens to be where the author of that post is located). And I didn't come up with 40 percent for Taxpayer A and a 40/32 blend for Taxpayer B. I came up with a maximum of 34% for Taxpayer A and 36%
Here's the math:
There are three components of taxation she is referring to:
1. Federal income taxes
2. Federal Social Security and Medicare taxes (which are supposed to be an insurance program anyway, not a tax strictly speaking)
3. State income taxes (some places have a local income taxes but not many, so we'll leave that out of it for now)
Her taxpayer A make 80,000 per year. If taxpayer A takes the standard deduction of $4,750 for single taxpayers, and has no other exemptions other than herself, her line 40 taxable income is reduced by $4,750 + $3,050 for that one personal exemption. This makes Taxpayer A's line 40 taxable income $72,200 ($80,000-$4750-$3050=$72,200). The federal income tax on $72,200 in line 40 taxable income on Form 1040 is $14,969, which comes out to 18.7 percent of Taxpayer A's income. The deductions set forth in this example are the minimum deductions and exemptions somebody can take. In many instances, for example if Taxpayer A pays mortgage interest, property tax, or relatively high state income tax, her itemized deductions would drive this number lower.
Now let's look at Taxpayer A's Social Security and Medicare taxes (called FICA for Federal Insurance Contributions Act, a name which suggests this is compulsory insurance rather than a tax). The rate for FICA is 6.2% of the first $87,000 of wages (not line 40 taxable income but actual wages paid before standard deduction and exemption) and 1.45% of all wages. Assuming Taxpayer A earned the entire $80,000 in wages, her FICA would be 7.65% of that or $6,120.
State taxes can vary widely. Let's use California as an example. In California, $80,000 of state wages for a single person combined with the standard state deduction of $3,070 would leave Taxpayer A with a taxable income of $76,930. The tax on that (before the personal exemption) is $6,235. The personal exemption for a single person is $82, subtracted from the $6,235 to get a state tax of $6,153. (This assumes no renter's credit or other special credits that are available. Source: ftb.ca.gov
So let's recap Taxpayer A's tax situation:
Income: $80,000
Federal Income Tax: $14,969
FICA: $6,120
State Income Tax: $6,153
Total Taxes and FICA Contributions: $27,242
Total Percentage Tax and FICA Contribution Combined: 34.0525%
It should also be noted that Taxpayer A is eligible for various education credits, Individual Retirement Accounts, and other credits which may further reduce her tax liability.
Now let's look at Taxpayer B. She makes $150,000 per year. If she takes the same standard deduction and personal exemption as Taxpayer A, that $150,000 is reduced by $4,750 + 3,050. Wait, not so fast. Taxpayer B is considered wealthy, so she does not get to keep her personal exemption in total. She must complete the worksheet in the tax instructions (page 35 of the booklet from the IRS), which will result in her personal exemption being reduced to $2,745. (If she made more that exemption would disappear entirely). So Taxpayer B's taxable income is $150,000 - $4,750 - $2,745 = $142,505.
The federal income tax on an single person's income of $142,505 is $14,010 + 28% of the amount exceeding $68,800.
The amount exceeding $68,800 is $73,705. 28 percent of $73,705 = $20,637. Therefore, Taxpayer B's total federal income tax liability is $34,647, or approximately 23.1% of her income.
Taxpayer B's FICA insurance contributions are 1.45% of the entire $150,000 plus 6.2% of the first $87,000 she makes. This works out to $2,175 + $5,394 = $7,569 in FICA contributions.
Taxpayer B's California state tax picture is as follows. In California, $150,000 in wages minus the single person's standard deduction of $3,070 would leave Taxpayer B with a taxable income of $146,930. California state tax rates on that income are calculated as $1,722.94 + 9.3 percent of of the amount exceeding $39,133. This works out to $1,722.94 + $10,025.12 ($146,930-39,133=107,797 * 9.3% = $10,025.12). Then, we must deduct the personal exemption from this tax liability to get the final number. But wait.... California also limits the application of the personal exemption for the "wealthy". So, Taxpayer B's personal exemption is reduced from $82 to $46 using the worksheet in the California state tax instructions.
This leaves Taxpayer B's California state tax liability at $1,722.94 + $10,025.12 - $46 = $11,702.06.
Taxpayer B's total tax and federal insurance picture is:
Income: $150,000
Federal Income Tax: $34,647
FICA: $7,569
State Income Tax: $11,702.06
Total Taxes and FICA Contributions: $53,918.06
Total Percentage Tax and FICA Contribution Combined: 35.9453%
So, even if you mischaracterize FICA as a tax and not as a compulsory insurance program, Taxpayer B still pays a higher rate than Taxpayer A. If you remove that distortion, the gap is more significant:
Taxpayer A Income: 80000
Taxpayer A state/federal income taxes: $21,122
Percentage: 26.4%
Taxpayer B Income: 150000
Taxpayer B state/federal income taxes: $46,349
Percentage: 30.9%
Taxpayer B pays at a rate 17% higher than Taxpayer A under that analysis.
One factor which would narrow that gap is the fact that under this particular scenario, Taxpayer A and Taxpayer B are paying more in state income taxes than the standard deduction for federal taxes. This would lower the tax bill for both, though by more for B since B is paying more in state income taxes than A. But all that does is lower both taxpayers' effective tax rate and narrow the gap a bit; it doesn't bump A's effective tax rate to Lizzie's claimed 40 percent, nor does it make A's effective tax rate higher than B's.
So I am mystified where she is getting her numbers from. If we have any tax experts out there, I'd love to here how her example works. Thanks in advance....
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