Last night, President Trump’s 2005 1040 form (his tax return) was released to the public. From various reports, including the White House, the numbers contained in that report appear accurate. Assuming those numbers are accurate, let’s take a look at the taxes then “billionaire” businessman Donald Trump paid in 2005.
While you’ll see lots of stories touting the amount Trump paid in taxes, somewhere around $38 million, it is more informative to note the actual tax rate he paid which I’ll refer to as the effective tax rate. The top tax rate in 2005 was about 35%, but this rate only applies to income earned above $326,000. This means even if you make $500,000, your income tax as a percentage of income is about 31%. (all calculations derived from https://smartasset.com/taxes/virginia-tax-calculator#QmvdoR7JyL) Compare this to someone making $50,000 in 2005, the effective tax rate is about 18%. So even though the high earner is making 10 times as much income, their tax rate is only 13% higher. So President Trump paid around $38 million dollars on taxable income of approximately $150 million, for an effective tax rate of around 25%.
Note that an effective tax rate of 25% was only after imposition of the Alternative Minimum Tax. If that tax was abolished (as President Trump has advocated), he would only have paid approximately $5.3 million in income taxes, for a tax rate of less than 4%. We all know that the very wealthy pay less in taxes, on a percentage basis, than almost everyone, so why is this important?
For one, we often hear about how Social Security and Medicare are going broke. For someone earning close to the median income in Pulaski County ($46,000) or Town ($37,000) Social Security represent a significant amount of the overall tax bill at 6.2%. For higher earners, the amount is negligible, as Social Security taxes are capped at $118,500 in income in 2016 ($90,000 in 2005, for comparison). People like Donald Trump stop paying for social security at about 11 AM on January 1st. This means that the more income you earn, the smaller the amount Social Security makes up of your overall tax bill. For instance the $6,885 Trump paid in 2005 is only .0046% of his overall income. Some believe that we should completely abolish the cap on the Social Security Tax, but even a compromise position of doubling the cap amount (to say $250,000) would increase the lifespan on this important social safety net and mean a relatively small change in the tax rate for the wealthy.
Second, when discussing tax cuts we often hear much about how the marginal rates will go down. The Trump plan would consolidate the 7 current marginal tax rates to 3, of 12%, 25% and 33%. (http://www.businessinsider.com/who-will-save-money-lose-trump-tax-plan-2017-2) For the vast majority of taxpayers, much of the import of the proposed income tax changes comes down to what deductions and exemptions are changed depending on several factors. Single parents would likely pay more tax along with most families with children. The likely outcome for most tax filers in Pulaski would be a small drop in taxes or even an increase in taxes, especially if those taxpayers had children. In comparison, dropping the tax rate for the highest incomes from almost 40% to 33% would have the wealthiest Americans see an enormous 7% drop in their effective tax rates. If you were filing with, say, $150 million in income, that would mean an almost $10 million tax savings. Penalizing families with children while giving a massive tax break to the wealthiest Americans (mostly not in Pulaski) means that retaining and attracting young families with children would be even harder for places like Pulaski which already have relatively low wages.
Thanks for the breakdown of how the proposed tax cuts could affect everyday people. I am glad you all have started this blog and I look forward to reading more.
At what rate do people begin paying income tax? For it to truly be fair, shouldn't we all just pay the same rate?
Good question, Ben. Although a flat tax seems intuitively like a fair policy, my understanding is that there are two problems with it - (1) we won't ever actually see a true fair tax in our lifetimes because politicians are never actually going to get rid of deductions like mortgage interest or lower tax rates for things like capital gains and (2) a flat tax is a regressive tax meaning that it transfers burden from the wealthy to the middle class and below. All that said, I'm sure the Pulaski Mansplainer could give a better answer in his next column.
Correction: "We won't ever actually see a true *flat* tax in our lifetimes..." (Though the other statement "We won't ever actually see a true fair tax in our lifetimes" may also be true, sadly.)
According to Investopedia. The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. or $31668. However, the maximum allowable benefit amount is only payable to those who had the maximum taxable earnings for at least 35 working years. Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits. No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. So in the example above, $26917.8 of the SS is also taxable at whatever final rate a person pays. It may be informative to also consider that many self employed individuals such as investors, plumbers and lawyers also pay the employer side of the FICA
Just as a reference, while the full retirement cost is as you describe above, the amount paid out by Social Security rises with inflation (as it has since 1975, see https://www.ssa.gov/news/cola/). I'm not sure if the above comment is intended to challenge the value of SS as a kind of retirement savings, as opposed to personal retirement savings invested in the stock market. I think that if you look at the actual numbers, effective contributions vs returns for individuals, especially in lower income brackets (like most here in Pulaski) would be higher with SS than with a 401(k) or equivalent. (see http://www.jameswrussell.com/?p=81 for an example) While certain higher income individuals, such as lawyers might receive a better rate of return, dumping trillions of dollars into the investment market would inevitably speed up inflation and therefore devalue whatever superior rates of return. Also, these types of calculations often do not take into account the fees and costs associated with private investment accounts. Finally, though some self-employed individuals do pay the employer side of FICA, they are also able to deduct far more of their business expenses which are not available to regular employees. Everything from car payments to the employer portion of FICA can be deducted from net income (for a high income individual that can be a multi-thousand dollar tax cut). (See http://www.investopedia.com/articles/tax/09/self-employed-tax-deductions.asp) In fact, self-employed individuals can deduct up to $53,000 in retirement savings potentially saving a high earner up to $15,000 in income taxes. Thanks for your comment.
I assume that the major point your original post intended to make was that Social Security was unfair to lower income folks. The unfairness was illustrated by the fact that even wealthy people get benefits (those who have more) and that it is unfair because they have extra money. Since SS is designed, in its current configuration to provide about 40% of lifetime earnings as a retirement income, it seems only fair that the people who would be required to make higher contributions should also receive the same 40% annuity. That said, what would be the advantage to the integrity of the SS fund? I assume you used the serendipity of Trump,s 1040 as a convenient example to illustrate any person of his wealth and not to imply sinister motivations to his filing. As it applies to Pulaski, a look at demographics shows a disproportionate level of reliance on government benefits. How would you measure the impact of those living benefits on the fairness of SS and the deleterious effect on local economy?
My point was not that SS taxes are unfair to lower income folks, it was simply showing the numbers that demonstrate just how unfair ti is. I don't think its unfair that wealthy people get benefits, they pay into the system just like everybody else, I'm not sure where you got that idea from in the piece. The advantage of the integrity of the SS fund is that its a guaranteed benefit system, and many people (especially in places like Pulaski) rely on that income to live in their later years. I'm not sure what you mean by "disproportionate reliance on government benefits", do you have some statistics to help illustrate that point? Do you mean the thousands of dollars that higher income people like me save on our employer sponsored health insurance (not taxed as income, probably about $5,000 per family)? Or do you mean the amount I can deduct for retirement savings (up to $3,000 per family)? Or the amount that someone can deduct for mortgage interest (another few thousand dollars)? Unlike these government subsidies, things like Social Security, Medicare and Medicaid not only provide tangible benefits to local people but also help power the local economy. People use the SS to pay for groceries and utilities. I'm guessing our local hospital would struggle to remain solvent without Medicare patients, along with a number of other local businesses. Please let me know what specific deleterious effects you're referring to, and the relevant statistics that support your conclusion. Thanks.
My apologies, the tax code is in need of major changes. Getting agreement on which ones is contentious, This is a problem which we in Pulaski can do little. To my mind,the lack of code enforcement efforts by the town is emblematic of the decay, dilapidation and town policies which encourage the continuation of our slumlord economy. The true value of the losses we incur is very difficult to calculate. A few questions to consider might include: What amount of income does the rental business generate which is lost.to potential taxation. The town has approximately 1700 rental units (2015 census estimates). What is the amount of uncollected delinquent taxes and fees the town currently carries and why are there no aggressive collection activities? Approximately 1,000,000 (town finance department). What monetary value can we put on our loss of of property values and potential rental prices ? And how do we calculate it? I would very much like to hear your thoughts on this topic Thanks `value