Smart. Sharp. Funny. Fearless.
Friday, September 30, 2016

You’re Not Paying The Tax Rate You Think You Are

If you make more than about $33,500 a year, your federal income tax burden is probably lighter than you think.

The portion of your income that you pay in taxes is your “effective tax rate.” But when politicians and pundits talk about effective tax rates, the data they typically use relies on an incomplete measure for income. Use an incomplete measure for income and your tax rate calculation comes out high.

In a new analysis the Tax Policy Center, a nonpartisan Washington research organization, used a wider measure of income to calculate effective tax rates. The rates are much lower using this broader measure of income.

The Tax Policy Center computer model of the tax system, which estimates how changes in the law would affect tax burdens, has repeatedly made projections that subsequent events showed were accurate. The center is a joint project of two Washington research organizations, the Urban Institute and the Brookings Institution. The George W. Bush administration went out of its way to praise the reliability of the center findings even when they were not helpful to administration policy.

The incomplete measure is called “adjusted gross income,” or AGI. This is the number on the last line of the front page of the standard tax return.

To get a fuller picture, the Tax Policy Center used what it called “cash income” to calculate effective tax rates. This included municipal bond interest, government benefits and many of the other items that are excluded from AGI. Use this fuller measure of income and the share of income that goes to taxes falls.

SIGNIFICANT VARIATIONS

In its new analysis, the Tax Policy Center found that the discrepancy between these two ways of measuring tax rates varies significantly between different income groups.

  • PatrickHenry

    All this talk of economic fairness & make the wealthy pay more, when the lowest income pay nothing and middle class pay less. This class warfare needs to stop, and the fairest way of all is for everyone to pay a flat tax based on their income. The Federal Government doesn’t MORE taxes, it needs to spend LESS!

  • Fearfull Ralph

    You state that those with an income between $59,486 and $103,465, the average federal income tax is 8.2 percent of AGI but I am in that range with an AGI of $81,949 with my tax being $12,959 but even after getting my huge deduction for being 76 and my discount on my cap gains I am still paying 14.5% (I’m in the 25% tax rate range). I have no idea what the amount of my “cash income” is since I do not have any tax exempt investments nor do I collect any Social Security nor Medicare since I spent too many years in military, LEO, and other exempt jobs. I do remember when the top tax rate was over 90% and there were plenty of good jobs and when the top tax rate dropped to 50% there were more jobs than there were applicants but now that the top rate is 35% there are hundreds of applicants for every job and most of those jobs do not pay a living wage.

  • Common Sense Patriot

    The real problem with our tax system is that it is so huge (70,320 pages) and complex that not even tax attorneys and CPAs understand it, much less the Congress or the President who passed it into law (along with their predecessors). It needs to simplified with only 3 to 5 rates with no decutions of any kind for anything. That’s the problem with the tax code – it’s not a tax document, it’s a political document, used to push or retard certain behavior and/or benefits to specific people and corporations. The tax attorneys and CPAs find loopholes all the time, and more and constantly added because Congress keeps passing laws with exemptiosn and incentives and rewards and penalties that benefit either their particular political ideology or their contributors or the voters in their districts/states. That’s not going to change as long as the present system is allowed to go forward. We need a Constitutional Amendment that phases in a Balanced Budget and prevents any deductions or credits for anything. If a given action or enterprise can not stand on it’s own without tax help, or it’s not liked so it gets negative tax treatment, then it shouldn’t be allowed in the first place. If you want to have more kids, then have them. If you want to drill for oil or pursue green energy, then do it. If you want to research and find cures for certain diseases, then do it. If you want to buy a house then do it. It you want to make investments, then do it. If you want to espand your business then do it. Etc. etc. But don’t let the tax code incent or retard your decisions. Count all income, including capital gains, as ordinary income, with no special tax breaks for drilling for oil or contributing to chairity. Social Security should not be taxed, as that is just giving with the right hand and taking away with the left. Let’s simplify it and in so doing get rid of all the loopholes and special interest provisions. And do it by Constitutional Amendment so Congress can’t immediately began to dismantle what is done and find ways around it so that ultimately we end back up where we are today. Only then will the tax system be “fair” and honest and not end up with the inequities that allow some people and corporations to pay nothing or very little, while others pay through the nose. A flat tax sounds like a good idea, but without a Balanced Budget Amendment, the rate would have to be so high that it would break most Americans. There’s no reason why the system shouldn’t be graduated, but with only a few tax brackets. No special treatment for capital gains or other investments. If the investment is good and will make money, then it will draw investors. If not, then the government shouldnt’ be subsidizing it with our money. Until these measures are taken, it will continue to be unfair, distorted, subject to all sorts of evasions and inequities, and continue to employ and make rich literally hundreds of thousands of tax attorneys, CPA’s, regular accountants, tax preparation services and others involved in the “tax evasion” industry. Aside from that, the IRS can be downsized nd the whole process would take less time and easily understood by all. Right now, not even the courts agree on what it means. You can’t even call or write the IRS and get a binding answer to a tax question. It’s pathetic and outrageous.

  • scareygary

    “Class Warfare”? What did you ‘patriots’ call it when the top tax rate was slashed from 92% to 74% to 39% and now down to 35% while capital gains were cut to a paltry 15%? I agree with much of that was stated in a following post which speaks to the complexity of the tax code, when those (including many huge corporations) with a stable of tax attorneys and lobbyists can influence politicians and take advantage of every tax break, thereby sometimes paying NO federal tax while making profits in the billions! I completely disagree with the notion that balancing the budget needs to come from CUTs that hurt the middle class and the poor; it’s a kind of hypocrisy to claim to be ‘patriotic’ while avoiding paying taxes that benefit the entire country, not to mention funding the largest military on the face of the earth. Somebody needs to pay the freight, and it seems to me like the very richest are making off with more and more of the country’s wealth and paying less and less. “Class Warfare”? It’s a great ploy by the right to convince you that it’s true, but money gushing UP while taxes have decreased has been going on since Reagan. It was going to ‘trickle down’. Remember that? Ha Ha. Class warfare? Where do I go to surrender???

  • scareygary

    “Class Warfare”? What did you ‘patriots’ call it when the top tax rate was slashed from 92% to 74% to 39% and now down to 35% while capital gains were cut to a paltry 15%? I agree with much of that was stated in a following post which speaks to the complexity of the tax code, when those (including many huge corporations) with a stable of tax attorneys and lobbyists can influence politicians and take advantage of every tax break, thereby sometimes paying NO federal tax while making profits in the billions! I completely disagree with the notion that balancing the budget needs to come from CUTs that hurt the middle class and the poor; it’s a kind of hypocrisy to claim to be ‘patriotic’ while avoiding paying taxes that benefit the entire country, not to mention funding the largest military on the face of the earth. Somebody needs to pay the freight, and it seems to me like the very richest are making off with more and more of the country’s wealth and paying less and less. “Class Warfare”? It’s a great ploy by the right to convince you that it’s true, but money gushing UP while taxes have decreased has been going on since Reagan. It was going to ‘trickle down’. Remember that? Ha Ha. Class warfare? Where do I go to surrender???

  • Downhearted Patriot

    I recall when Ronnie Reagan rewrotwe the tax code and the media reported there wasone paragraph reducing taxes that applied to only one person in the ENTIRE COUNTRY! None of us complained. That is the reason the tax code is so long. Plus of course, the fact it was written by lawyers.