Taxes & Generational Equity in 2020: An Updated Turbo Tax Analysis of Three Prototypical Brooklyn Couples

It’s tax time, and it has been six years since I last compared the federal, state and local tax burden on two prototypical Brooklyn couples using Turbo Tax and other information:  the Senior Voters, home-owning former NYC public employees who got to retire at age 56, and the Young Hopefuls, a couple trying to get by while renting and working.  Now that the Senior Voters are age 69 and receiving Social Security, and the Young Hopefuls are age 41 (with Baby Hopeful reaching age 15), it’s time to find out what has changed.  

In the past I showed that the Young Hopefuls, despite much being poorer, would pay a much higher percent of their income in taxes.  A large share of those taxes would go to pay for the pensions and senior benefits of senior voters.  When the cost of health care, child care and housing were included, the Senior Voters would have enough money left for a very affluent, high consumption lifestyle.  The Young Hopefuls would have barely enough money to get by, despite matching the median income of NYC households.  Worse, given soaring public and private debts, the Young Hopefuls will not be getting the same benefits when they are old themselves. Poorer than the Senior Voters had been in young adulthood, and also now in middle age, they will be even worse off at the end of their lives, due to deals a generation of senior voters cut with themselves to put in less and take more out.

As a new twist I have added a third couple:  Chad the Private Equity Guy and his new wife Trixie, originally from metro Chicago and the Chicago Merc, but now working in private equity in NYC while living in a luxury condo in Dumbo.  While the difference in the tax burden on the Young Hopefuls and Senior Voters shows how harshly work income is taxed compared with retirement income, especially public employee retirement income in New York, Chad and Trixie’s tax bill shows how much investment income is favored at the federal level.   And the deals for seniors and the rich have just kept getting richer, even as later born generations of ordinary Americans, on average, keep getting poorer and deeper in debt.   Both political parties have contributed to the trend, a reality that belies their alleged increasing partisan warfare.

So what percent of income would these three couples pay in taxes?

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The previous analysis of taxes and generational equity, with data for 2014, started with this post.

It found that…

The Young Hopefuls would end up paying 26.5% of their income in federal, state and local taxes in 2014, or $21,160. The richer Senior Voters would pay just 18.9% of their income in taxes, or $25,053. If the two couples had equal incomes, the Young Hopefuls would pay far more than the Senior Voters. Even at $130,000 in income for the Senior Voters and just $80,000 for the Young Hopefuls the latter would pay more in taxes if they were self employed, as many young workers choose to or are forced to these days. In that case the Young Hopefuls would pay $27,160 in federal, state, and local taxes, or 34.0% of their income.

More detailed analyses followed of the two couples’ federal tax burden…

And their state and local government tax burden in New York City.

Then, as now, sales and excise taxes are excluded from the analysis.

A spreadsheet with all the charts used in this post is here.

And a table with the information above and the tax information is below. The spreadsheet also has notes above and alongside the table.

For 2020 the Young Hopefuls are, as mentioned, age 41 – not so young anymore and probably not quite as hopeful.  Especially if they read my blog.  Baby Hopeful is 15 – no longer a baby.  So the couple no longer has child care expenses, but don’t have much money for Baby Hopeful to do much of anything in the summer either. Not that this mattered in 2020, when everyone was locked down.  Perhaps they even saved a little, and are no longer just living paycheck to paycheck.

Both of the Young Hopefuls have been ejected from the formal labor force, but by piecing together $18,000 from a job prior to a layoff, $10,000 in unemployment insurance payments, $50,000 in gig economy self employment income, and $3,600 in stimulus checks, they actually had slightly higher income in 2020 than they had in 2014 in straight dollars – albeit not adjusted for inflation.  The $81,600 in 2020 income compares with a NYC median family income of $78,000 in 2019, according to the American Community Survey.

The Senior Voters, two retired NYC teachers who stopped working after a 2008 New York State political deal allowed them to retire at 55 or older instead of the promised 62, had $111,600 in pension income in 2020.  That figure has been increasing gradually as a result of an inflation adjustment they had not been promised when they were hired either, but one that was added retroactively in another political deal in 2000. NYC teachers also get a guaranteed 7.0% return on their own separate retirement savings account, with taxpayers making up any difference.  They took $38,400 out of that account to spend in 2020.  As a result of these deals, and more and more out of classroom assignments, public education hasn’t gotten much better in New York City despite a doubling of per student spending over two decades, to a level in excess of places such as Greenwich, Westport and Darien, Connecticut. 

This year the Senior Voters also started collecting Social Security, adding another $50,000 to their income.  But since the 2020 federal stimulus payments were based on how much income people had in 2019, they also received $3,600 in federal stimulus checks, bringing their total 2020 income to $203,600, or nearly 2 1/2 times the income of the Young Hopefuls. 

https://www.marketwatch.com/story/i-earned-100000-last-year-but-i-did-not-make-as-much-in-2020-why-did-i-not-get-a-stimulus-check-do-you-think-thats-fair-2020-12-22

Some time in the future the Young Hopefuls will have to pay for their stimulus checks, with interest, in federal taxes or lost services and benefits as part of the national debt.  They will also have to pay for the Senior Voters stimulus checks.

Now, as in 2009 and 2014, the Senior Voters have far more wealth and non-cash income than the Young Hopefuls.  The Senior Voters have pensions with remaining values, based on their life expectancy, totaling $1.79 million, plus $750,000 savings in their personal retirement accounts.  The Young Hopefuls have no retirement savings, and are facing retirement based on Social Security alone – with their future benefit payments depressed by their generations’ own lower incomes compared with the generations collecting today, and the fact that the program is nonetheless 25 percent underfunded even taking that into account, as I noted at the end of this post.  

Thus the average young hopeful is facing a 40 percent cut in Social Security payments compared with today’s senior voters, despite having paid much higher Social Security taxes during their lifetime as part of the 1983 deal to “save Social Security.”  Like all the pension increases for NYC teachers, that deal and its promises are never spoken of in the media.  Why talk about the past?  Say those who benefited from 40 years of deals to sacrifice the future and those who will live in it.  On the other hand, instead of expensive orthopedic surgeries and oncology, the Young Hopefuls will at least be allowed to spend their (much briefer) senior years stoned on weed to dull the pain, as I predicted years ago.   Apparently in New York, unlike New Jersey, they’ll be able to growth weed themselves rather than pay high taxes for weed grown by someone else.

The Senior Voters live in a rowhouse whose theoretical value has soared to $2.1 million.  It is located in the kind of neighborhood were average couples such as the Young Hopefuls could once have expected to live, paying three times their income for a house.  But that $2.1 million is nearly 26 times the Young Hopefuls’ income, and nearly 27 times the median family income in NYC.  Federal policies to keep housing prices (and other asset prices) inflated at all costs have clearly benefitted all the senior voters – existing owners (and eventually sellers) of housing — at the expense of all of the young hopefuls – who might want to buy but would be foolish to do so at these prices.  

For now, the Senior Voters are also paying $3,600 in non-tax ownership costs — $1,800 for insurance, $558 for water and sewer, and $1,242 for heat and hot water.  Their mortgage, a small one from back when Brooklyn (and U.S.) housing was more affordable, has been paid off.  Given their affluence they probably own another home somewhere else.  That is probably where they spent much of their time in 2020.

The Young Hopeful live in a one-bedroom apartment in a tenement built 130 years ago.  The good news is that with so many of their fellow Millennials fleeing New York City, they were able to downsize from their prior two-bedroom apartment and move to a one-bedroom apartment, cutting their rent from $27,600 in 2014 to $21,600 in 2020.  The teenaged Baby Hopeful now sleeps in the living room.  As they are living in a smaller apartment in a worse location, and a rent bubble may be deflating, the property taxes included in their rent have also fallen – from $2,160 in 2014 to $1,602 in 2020.  

(American Community Survey data shows the median gross rent of NYC apartments increased 40.0% from 2000 to 2019 after adjustment for inflation, despite the many NYC households who live in subsidized and rent regulated housing and had far lower increases).

The bad news is that with the Federal Reserve now owning one-third of the mortgages backed by those overinflated for-sale housing prices…

https://www.cnbc.com/2021/03/30/federal-reserve-under-fire-as-home-prices-soar.html

If those prices ever do fall, the Young Hopefuls will be on the hook as taxpayers for paying off the rich and financial sector bondholders. Perhaps by not getting Social Security and Medicare in old age.  Or paying another 10 percent of their income in taxes.

The Senior Voters also have their health care paid for by Medicare, and by a retiree health insurance benefit from the City of New York. Compared with prior generations of senior voters, they also have the Medicare Prescription Drug benefit that was added in the 2000s, funded mostly by having the federal government borrow money the Young Hopefuls will have to pay back.  The Young Hopefuls are paying $616 per month for Obamacare, based on a subsidy calculator from Kaiser Family Foundation.  Their subsidy isn’t higher because by U.S. and even NYC standards, they are not poor.  Health insurance costs them $7,392 per year, net of the subsidy.  Back in 2009 I had made them un-insured.  In 2014, had they paid just $2,693 for Obamacare, based on my research at the time – despite a higher inflation-adjusted income.  

All this reminds me of a conversation I had decades ago with my father-in-law about Brooklyn in the 1940s and 1950s.  Unlike today, he said, back then there were fathers who were able to raise a family on one lousy job, like working in a store.  Oh yeah, I responded, how big a house did they own?  The whole family lived in one-bedroom apartments, he said.  What kind of car did they drive?  They didn’t have a car. Where did they go on vacation? They had the seashore and mountain vacation – at Coney Island and in Prospect Park.  How about their health insurance?  They didn’t really go to doctors, he said, just to Kings County Hospital if they were really sick.  

Here it is 70 years later and the Young Hopefuls are in nearly the same situation, but with both of them working, and an above average income.  Except for Obamacare and, of course, smartphones, Starbucks, and avocado toast.  And the ability to run up their credit cards and other consumer debts to live a lifestyle that is marketed to them, until they can’t afford the payments anymore.

I was motivated to add Chad, the 63-year-old Private Equity Guy, by this article, showing that there is now zero tax on the first $78,000 in capital gains income.  

https://www.marketwatch.com/story/heres-the-formula-for-paying-no-federal-income-taxes-on-100000-a-year-2019-11-22?mod=home-page

I was already aware, and had written about the fact that, capital gains income is exempt from the federal payroll tax and also taxed at a lower rate than work income by the federal income tax.  So rich people arrange to have most or all of their income paid to them in the form of capital gains, so they could pay far less in federal taxes as a percent of their income than lower-paid workers.

They can also decide what years that income will show up.  When stock and bond values plunged early in 2020, as the COVID-19 death toll soared, Chad sold investments – booking large capital losses – and bought others.  Those others soared in value once the federal government once again went $trillions in debt to inflate them.  Even though Chad is richer than ever, with $80 million in financial assets, his 2020 net income for tax purposes – all in the form of realized capital gains – was just $200,000.  That isn’t much of a return on $80 million for a private equity guy, but his typical income is more than $5 million, so he just cashed in an extra $950,000 to spend rather than crimping his high-consumption lifestyle.

Part of that lifestyle is the 29-year-old Trixie, a former self-employed yoga instructor Chad met on Rush Street in the Viagra Triangle.   She stopped bothering to work after the wedding.  In most years, when Chad’s income is higher, it doesn’t make sense for her to do so.  

It seems that even including the standard deduction of $24,000 or so, the federal income tax rate is 32.0% on any income earned in excess of $350,000.   The New York State income tax on that level of income is 6.85%, and the New York City income tax is 3.876%.  You count Chad’s income first, and Trixie’s income is on top of that.  Therefore as long as Chad’s investment earnings are at least $350,000, the federal, state and local income taxes would absorb 42.76% of anything extra she earned.  And assuming that she was self employed and earned less than the maximum $137,700 for FICA, all of her earnings would also be taxed at 15.3% by the payroll tax, for a total of 58.0% of anything she earned going to taxes, from the first dollar to the last.  

Moreover, if Chad and his investments earned more than $440,000 or so, the combined federal, state, local and FICA taxes on Trixie’s work earnings would rise to 61.0% of the total, based on the higher federal income tax rate of 35.0%. If he earned more than $650,000 or so, then all of Trixie’s work income would be taxed at 63.0%.  In good years Chad earns more than $2.2 million, pushing the tax on Trixie’s work income to 65.0% due to a higher New York State “$millionaires” rate.  (New York’s public unions and contractors will make sure that sooner or later we are all paying that “$millionaire rate and more, due to “fairness.”  No one will dare complain because doing so would mean that one was in favor of Donald Trump). 

In addition, anything Trixie earned in excess of $50,000 would also be subject to the 0.34% MTA payroll tax, while anything she earned in excess of $85,000 would be hit with the 4.0% NYC unincorporated business tax.  And who knows (I couldn’t figure it out)? Perhaps as a self-employed person, she also would also have to pay for the NY Family Leave Act payroll tax, introduced not long ago at 0.27% but now up to 0.511%.   “Progressives” just love taxing private sector work income, but not investment income, benefit income (vastly higher for unionized public employees), and retirement income (also higher for former public employees).  

And remember, there are many proposals for some or all of these percentages to go up.

Therefore, like the Senior Voters Trixie doesn’t work, while the Young Hopefuls have to both work (or try to) to pay for, among other things, their federal, New York State and New York City taxes.  I’d bet there are a lot of would-be workers in Trixie’s position in Metro New York in general and New York City in particular, with a high earning spouse in finance, business, law or the other professions (or even the head of some unions) that drives the total tax on anything they earn in addition by working to a sky high percentage. 

Chad and Trixie live in a luxury condo in Dumbo supposedly worth $4.5 million (based on one I saw on Zillow).  They decided to buy with cash, given that Trump’s tax changes limited mortgage interest deductibility, but they have $16,776 in home insurance expense per year, and $19,980 in homeowners’ association fees.  All told they have $38,556 in housing costs other than taxes per year, or more than $3,200 per month.  Not including taxes.   At their high level of spending, they presumably also have a second home where they presumably spent most of 2020.   They haven’t arranged to have their income taxed at that second home to avoid New York City (and perhaps New York State) taxes – yet.

They also purchase a high quality private health insurance plan for $24,000 year, based on some online research.  That isn’t much more than the Young Hopeful’s Obamacare plan, without the subsidy.  

So what about those taxes?

The data shows that the Young Hopefuls paid 25.1% of their income in taxes in 2020.  That is down from the 26.5% of income they paid in 2014, thanks to living in a cheaper place with lower property taxes, but their income has fallen when adjusted for inflation. 

The Senior Voters only paid 17.3% of their much higher income in taxes.  That is down from 18.9% in 2014, despite a large increase in income.  They are privileged over the Young Hopefuls by 7.8% of income – that is up from a difference of 7.6% of income back in 2014.

As for Chad and Trixie, their federal, state and local government taxes totaled 30.7% of their income, but only because they live in an expensive place with high property taxes.  They paid just 7.1% of their income in federal taxes, compared with 13.6% for the Senior Voters and 15.1% for the Young Hopefuls.  But they paid 23.6% of their temporarily lower income in state and local government taxes, compared with 3.7% for the Senior Voters and 10.0% for the Young Hopefuls.

Excluding property taxes, Chad and Trixie’s total income tax burden is much lower as a percent of income than the Young Hopefuls, despite being more than double.   It is nearly as low as the highly-privileged (thanks to their control of the New York State legislature) Senior Voters.

In a more typical year, their property taxes would be a much lower percent of their much higher ($6 million) in income, but their income taxes would be higher.  At that income level, their total tax burden would have been 36.6% of income.

But in the 2020 example of $200,000 in capital gains income, they actually end up paying more in NY State and NYC income taxes than they do in federal income taxes, according to Turbo Tax.

With slightly more than $200,000 in income, the Senior Voters pay no New York City and New York State income tax. Or, according to TurboTax, get a $125 refund.

So there you have it.  Despite having less than half the income, the Young Hopefuls end up paying more in taxes as a percent of that income than the Senior Voters, who also have more public benefits and personal wealth.  They would also pay a higher share of their income than Chad the Private Equity Guy and Trixie if they lived in the same place, rather than living in a tenement while Chad and Trixie live in a luxury condo.

The benefits the Senior Voters get that the Young Hopefuls do not (and almost certainly will not get in the future when they are old themselves), and the differences in housing wealth and other wealth, lead to a much different lifestyle.

Thanks to a house owned free and clear, government-funded health insurance, and a lower tax burden, the Senior Voters have $164,699 to spend on other things.  

By spending $950,000 from their accumulated wealth, over and above the mere $200,000 recorded as income in 2020, Chad and Trixie were able to spend more than $1 million on other things, despite expensive housing and health care.  Some of that additional $1 million would be spent on a second home somewhere else.

 Meanwhile the Young Hopefuls, net of their taxes, rent (with property tax deducted), health insurance, and child care (which they no longer need) have only $33,700 left to spend, or about $650 per week.  On the electric bill, transportation, food, clothing, furnishings, communications/internet, entertainment, stuff for Baby Hopeful, everything.  That is not bad by U.S. standards because the Young Hopefuls are, as noted, not poor.

And were it not for Obamacare, one of the few policies and trends of the past 40 years that actually made young hopefuls slightly better off rather than even worse off (thus drawing the ire of senior voters across the country), they’d have even less left to spend, or else be uninsured (as I made them in the 2009 analysis).

Leaving the really rich – Chad and Trixie – out of it, the data shows that the Senior Voters are far richer in terms of what they spend than the Young Hopefuls — nearly five times as rich, in fact.  And yet their tax burden is lower.  Their health insurance is better, and their housing is five times the size, in a better neighborhood, and better in quality.  They are clearly richer, yet are taxed as though they are poorer, because senior voters get special tax deals almost everywhere, and retired public employees get even richer privileges in New York.  

Many of these deals date from a time when the U.S. standard of living was rising generation by generation, and the old – who had worked and sacrificed to make this possible – were poorer than the young.  Today the reverse is true.  And from a time when public sector wage and salary income was so much lower than in the private sector that it offset richer public sector benefits.  That is still true in some places, and for some occupations.  But not for most public sector workers in New York.

There are state and local sales taxes on much of this additional spending, and federal excise taxes on some of it, but not enough to alter the picture. In fact the main difference between the tax structure of the United States and developed countries is how little consumption is taxed here, compared with work.

The Young Hopefuls are doubly, triply, quadruply disadvantaged, and will really be harmed when they are old themselves, and no longer have the advantages of youth as an offset.  It won’t matter that they have become senior voters if prior generations have left the federal, state and local governments broke.

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The following posts will once again discuss federal taxes, and then New York State and New York City taxes, in detail.  But I am not a tax accountant, do not have the knowledge to discuss these things in all that much detail, and probably will not say all that much different than I said in 2014.  So if you can’t wait, you can read those posts now.

2 thoughts on “Taxes & Generational Equity in 2020: An Updated Turbo Tax Analysis of Three Prototypical Brooklyn Couples

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