Bush Tax Cuts not just for the 'Rich'

So who did benefit from the tax cuts? Which group of taxpayers fill the US Treasury with $s? Who is paying the bills? What’s the bottom line on Federal employment and payrolls? This article will address each of those questions. I’ll separate and deal with the employment figures at the end and explain the tax cut effects first. I know many of you get bleary-eyed at lists of numbers, but there are some interesting things to think about that might help you make an informed choice in the Fall. For those who want the cliff notes version, see the table at our website www.panusatsvc.com (the .txt format to submit to p-g.com doesn’t translate tables very well). (more)

There has been a lot of political attention paid to the “Bush Tax Cuts” lately with the spin doctors from both sides taking their positions. We’ve heard a lot about job losses, and deteriorating economics too.

As an accountant with exPat business clients and an interest in economics, I started out to write a factual comparison of the tax rates with a couple of easy to follow examples. But then I decided to compare that to CPI and that lead me to the US Bureau of Labor and the Census Bureau statistics, plus of course, the IRS - Department of Treasury statistics

As for tax rates for individuals, the changes aren’t dramatic. In 1999 there were 5 tax brackets ranging from 15% at the bottom to 39.6% on the top. In 2007 there are 6 brackets ranging from 10% to 35%.

Some politicos like to say the benefits all went to the rich; and those who earned over $250,000 did get a big $ cut in their tax bill, but there are far fewer folks with taxable incomes above $250k than taxpayers with taxable income of $25k. In fact, according to the IRS the top 10% of individual taxpayers break at Adjusted Gross Income (AGI) of $103,912 (for 2005, the latest stats available). The top 1% had an AGI above $364,657. That’s the good news: more of you are “rich” than you may have thought.

So what was the tax liability for a ‘rich’ person? A single taxpayer with an AGI of $100k in 1999 who took the standard deduction (63.1% of individual returns don’t itemize) had a tax bill of $23,933; and a married couple with 2 dependents had a tax bill of $17,490. In 2007 the single taxpayer with $100k AGI will pay $19,668, a saving of $4,328 or 18%. The married couple with 2 additional dependents will pay $11,779, a drop of $5,711 or 33%.

The top one percenters? Single taxpayers with taxable income of $364,657 would have a tax liability of $106,704 in 2007 versus $120,510 in 1999 for a saving of $13,806, a saving of 11.5%. A married couple with that taxable income would have paid $115,580 in 99 but only pays $97,836 in 07, a saving of $17,784 or about 15.3%)

But what about the other end of the scale? What was the tax difference to someone making $25k? In 1999 a single taxpayer with no dependents and a simple return had a tax liability of $2,816. In 2007 the same taxpayer will have only $2,050 bill, a saving of $766 or 27% decline in tax.

The most dramatic benefit goes to a married couple with 2 dependents and $25,000 AGI. In 1999 they would have paid $1,069 in tax, but in 2007 will pay only $71 – a decline of $998 or 93% less tax to pay.

Those who want to paint the savings as going to the ‘rich’ only look at the dollars saved not the size of the tax bill nor the percentage of taxes saved, and generally ignore the fact that the top 20% of the taxpayers pay 80% of the taxes.

Which group of taxpayers fill the US Treasury with $s?

According to the IRS in 2005 there were 134 million individual returns filed who paid a total of $1,236,259 million (that’s: $1,236,259,000,000 – $1,236 Billion or $1.2 Trillion). The individual taxes represented about 49% of the total tax revenues. One definition of rich is $1 million a year: in 2005 there were 308,361 individual returns filed with more than $1 million in AGI (47,366 of them in California).

As a comparison, there were 2.4 million corporate returns filed that paid $380,925 million – that’s $381 Billion, or about one third as much as the individual taxpayers. There were only 12,444 corporations with assets over $250 million; those 12 thousand very large corporations reported 70.9% of the corporate net income. Employment taxes – the employers share put another $815,819 million or $814 billion. Estate taxes and gift taxes are relatively small collections just $2.6 Billion and $1.97 billion.

Who is paying the bills?

The top ten percent of taxpayers with incomes above $100k are paying the vast majority of the bills. For example, in 1999 one unmarried tax payer with $100k income paid more taxes than 22 families who had income of $25k. In 2007 that single taxpayer with $100k income paid more tax than 277 families with incomes of $25k!

What is likely to happen if the politicians do what they say they want and roll back taxes to the 1999 levels?

I have no crystal ball, but it won’t be pretty or painless. And the folks at the bottom end will pay more and they’re the group the politicos who want to do away with the ‘tax cuts for the rich’ say they want to help. The US Treasury would do better if they would help more single taxpayers to earn that $100k and cover another 277 families’ taxes.

For the exPats, you’ve already seen the effect of a Democrat controlled Congress changing the tax code. The Foreign Earned Income exclusion went from $72,000 in 1999 to $82,400 in 2007. But in 2006 Congress changed the law in two significant ways. First, the exclusion includes the housing allowance, which previously was in addition to the exclusion on earned income. But the worst part for exPats who might have other income, is the tax law now calls for any remaining taxable income to be taxed as if the FEI was not deducted – that is at the higher bracket.

For the handful of you interested in economics here are some facts:

At the beginning I mentioned I looked at CPI, employment and wages statistics published by various US agencies. Anyone who shops and pays their own bills knows everything is more expensive than a few years ago. About the ONLY thing that has declined is the federal income tax bill!

The cost of living is different and wages have a tendency to adjust for inflation. There are two methods of determining the CPI: one calculation uses 1967 as a base of 100, the other uses 82-84 as 100. The currently quoted CPI uses the ‘newer’ base which the government likes because the number is smaller. Many of my clients – and probably most of the exPats living in Panamá – are ‘older baby boomers’ so I’m going to use the 1967 base numbers for comparison. The CPI in the second half of 1999 was 477.6 (that is the basket of goods that cost $100 in 1967 cost $478 in 1999). In the 2nd half of 2007 the CPI was 609.04 – so the basket of goods you paid for went up by $122 or 26% between 1999 and 2007.

Please permit me a brief editorial observation. Perhaps now you understand why we old-timers have a hard time comprehending the current price of things. The basket of goods that cost $100 when many of us graduated from college now costs $609. It does help explain the difference in starting salaries for recent college graduates, though. Unfortunately, the recent graduates think they’re so much better off with their $45k starting pay than their parent’s starting salary of $10 or $12k. It’s not so good when you look closely. And if the current salaries are so hot, then why are so many young couples both working? The devil is in the details, as they say, and you need to have a taste of history to get a clearer perspective. Yes, I know the basket of goods is different, and the quality has improved and all that. But it still annoys me see the price tag of a Volkswagen at $25,000 for an $1800 car or a new Corvette at $60k when I bought one in 77 for $12k.

I digress, back to the facts.

According to the Bureau of Labor Statistics (bls.gov) in 1999 there were 207.8 million people of working age in the USA and 133.5 million of them employed in civilian jobs In 2006 there were 228.8 million of working age, and 144.4 million employed in the civilian sector an increase of 11 million people.

In 2002 the biggest increases in jobs had been in information, finance, professional, scientific and technical services where the increase in the numbers employed far exceeds the manufacturing jobs lost at higher average pay levels. There are no published BLS statistics currently available about recent job changes in the information services, although the politicos would have you believe that most of those jobs have gone to India. Some of them have come to Panamá, with several highly visible call center operations.

The Census Bureau data provides the following comparison regarding government employment: in March 1999 there were 2.8 million federal employees who were paid 10,477 million dollars that month. In December 2006 there were 2.7 million federal employees who were paid $13,896 million that month.

What’s the bottom line on Federal employment and payrolls?

There were roughly 78,000 fewer people on the federal payroll, but the average monthly pay has jumped from $3,743 to $5,108.

According to the BLS which compares business stats every 5 years, the most recent set is 1997 vs 2002 (the 2007 stats wont be available until 2009 or 10). The only civilian employment areas that showed a decline in the number of civilian employees were mining (-4.2%), utilities (-5.6%), manufacturing (-12.7%), and surprisingly, management of companies and enterprises (-0.4%).

However, as with the federal employment, gross payrolls in all sectors went up. The average wage in manufacturing went from $33,907 in 99 to $39,222 in 2006.

As a CPA I know that a lot of small business enterprises show little or no profit, and this affects the average wage of the Census group of ‘management of companies and enterprises’ sector, but with that caveat here’s the Census Bureau data: the average manager comp went from $58,902 in 99 to $68,698 in 2002.

So what’s it all mean?

For one thing, $13.9 billion a month of federal taxes go to pay 2.7 million federal workers who are taxpayers too. Of that, 170 thousand are employed in Homeland Security – that includes the US Coast Guard, the Secret Service, Customs & Border Protection, FEMA and TSA (your friendly airport security folks) and others. They were paid $867 million in Dec 2006.

It also means that unless you’ve got the curiosity of an economist, the analytical skills of an accountant, and the research skills of a university professor the reality of the business of government is a mystery shrouded in numbers so large as to not make any sense.

Maybe I can help put it into perspective: A person earning $50k a year, who works for 40 years will earn $2 million in their lifetime. One billion dollars is a thousand millions, or 500 well paid worker’s lifetime earnings! A trillion is a thousand billion and most of us can’t count that high.