Tag Archives: federal payroll tax

Taxes & Generational Equity: Federal Taxes in 2020

For the past four decades, the retired, the rich and (in some states such as New York) selected public employees and unionized employees of government contractors have become richer and richer, while ordinary workers in the private sector have become poorer and poorer.   It is estimated, for example, that the average Millennial is paid 25 percent less than the average Baby Boomer had been at the same age. 

https://www.wsj.com/articles/playing-catch-up-in-the-game-of-life-millennials-approach-middle-age-in-crisis-11558290908

At the same ages, Gen X men working full time and who were heads of households earned 18% more than their millennial counterparts, and baby boomer men earned 27% more, when adjusting for inflation, age and other socioeconomic variables.  Among women, incomes were 12% higher for Gen Xers and 24% higher for baby boomers than for millennials, using the same measures.

If one ignores the rising level of education, labor force participation and pay of women since 1980, this is a trend that actually started with those at the back end of the Baby Boom, who have been disadvantaged compared with earlier-born generations, those now in retirement, for their entire lives. After I called for a study of Social Security records some years ago, one found this.

Adjusting for inflation, the median male worker born in 1958 earned just 1 percent more during his career compared with the median man born 27 years earlier, in 1932. In fact, the median male born in 1958 earned 10 percent less during his career compared with the median male born 16 years earlier, in 1942. The lack of progress of mid-level male earners is not a surprise, of course. We know the median real hourly wage received by men reached a peak sometime in the 1970s. It has not surpassed that peak in any year since the 1970s, and in many years it has been far lower.

And yet it is work income that has been taxed more heavily over the past four decades.  Retirement income has received the same exemptions, and in fact even more exemptions, compared with the time when each generation was richer than the one preceding, rather than poorer, and seniors were more likely than working-age adults to be poor, rather than less likely to be poor.   And investment income has come to be taxed far less than work income.  At the federal level, one by one, both political parties have supported most or all of these tax deals to benefit the retired, rich, and the other organized selfish.  What does it add up to?  Let’s fire up the Turbo Tax and find out.

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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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Federal Revenues: Recent History

The past 35 years or so have seen a persistent history with regard to federal tax revenues. Republicans, who have dominated the federal government for most of that time, have cut the taxes that fall more heavily on businesses and the wealthy, the personal and corporate income tax. And then following a fiscal disaster and soaring deficits, Democrats increased those same taxes. In the end the personal income tax ended up, as a percent of GDP, about where it was – at 8.1% of GDP in FY 2014 compared with 7.9% of GDP in FY 1978. While the corporate income tax ended up lower, at 1.9% of GDP compared with 2.6%. This is true even though profits account for a higher share of GDP today than they did in 1978, and work earnings at the top account for a much higher share of total earnings, factors that should have increased personal and corporate income tax revenues as a percent of GDP even with the exact same rules.

Payroll taxes, meanwhile, were substantially increased by the Republicans and never reduced, save for a special exemption in the Great Recession. These taxes fall exclusively on work income in the United States, and more heavily on the working and middle classes. The wealthy pay less, as a percent of their income, the retired do not pay at all and, with regard to international trade, work done in the United States is subject to the tax whereas goods imported from abroad are tax-free. The payroll tax burden increased from 5.3% of GDP in FY 1978 to 6.5% in FY 2001. Before falling to 5.9% in FY 2014, after the share of Americans working and average work income plunged in the Great Recession. Other federal revenues, such as excise taxes, estate taxes, and customs duties totaled 1.7% of GDP in FY 1978 and 1.6% of GDP in FY 2014, although the composition of this category has changed. These trends are discussed in more detail below.

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