Depending on who you are listening to, it’s either financial Nirvana or Armageddon. The partisan new tax bill will have far reaching effects. What I’ve done this month is break down on how it will effect various income groups. I’ve calculated what various incomes will pay under the old tax structure and the new republican tax bill. The parameters I’ve chose are for married couples who make $55,000 (the national average), $150,000, and $750,000.
The attached chart is the old tax structure and the computations are as follows (the assumptions are that you don’t itemize deductions and you have 1 dependent child):
For $55,000 & married:
OLD RATE
The standard deduction is $13,000 and as a result, this is subtracted from your combined income and as a result, you are taxed on only $42,000 of income.
Tax Rate Tax paid Total Tax Liability
the 1st 17,850 is taxed at 10% 1,785
17,851-42,000 is taxed at 15% 3,622
Child tax credit -1000 4408
NEW RATE
The standard deduction is doubled to $24,000 and
as a result this couple is taxed on only $31,000 of
income.
Tax Rate Tax paid Total Tax Liability
the 1st $19,050 is taxed at 10% $1905
19051-42,000 is taxed at 12% 2754
Child tax credit is doubled -2000 $2659
This represents a decrease of 39.7%
For 150,000 & married:
OLD RATE
Tax Rate Tax paid Total Tax Liability
the 1st 17,850 is taxed at 10% 1,785
17,851-72,500 is taxed at 15% 8120
72,501-146,500 is taxed at 25% 18,500
146,501-150,000 is taxed at 28% 980
Child tax credit -1000 28,385
NEW RATE
the 1st 19,050 is taxed at 10% 1905
19,051-77,400 is taxed at 12% 7002
77,401-$150,000 is taxed at 22% 15972
Child tax credit -2000 22,879
This represents a decrease of 19.4%
For 750,000 and married
This becomes a little more difficult since many of the deductions the rich have are going to be decreased and this will hurt them (but not that much). As a result, I’m calculating the taxes on AGI, Adjusted Gross Income, i.e., income after deductions.
OLD RATE
Tax Rate Tax paid Total Tax Liability
the 1st 17,850 is taxed at 10% 1,785
17,851-72,500 is taxed at 15% 8,120
72,501-146,500 is taxed at 25% 18,500
146,501-223,050 is taxed at 28% 21,434
223,051-398,350 is taxed at 33% 57,849
398,351-450,000 is taxed at 35% 18,078
451,001-750,000 is taxed at 39.6% 118,800
Child tax credit -1000 244,566
NEW RATE
the 1st 19,050 is taxed at 10% 1,905
19,051-77,400 is taxed at 12% 7,002
77,401-165,000 is taxed at 22% 18,272
165,001-315,000 is taxed at 24% 36,000
315,001-400,000 is taxed at 32% 27,200
401,000-600,000 is taxed at 35% 70,000
601,000-750,000 is taxed at 37% 55,500
Child tax credit -2,000 213,879
This represents a decrease of 12.5%
As you can see, there are tax savings across the board with the largest % tax breaks going to the lower income groups. It will also simplify the tax code by increasing the personal tax deductions. As a result, more households will file the short form (i.e., they will not itemize deductions) and this can represent savings from a tax preparer. As an economist, I feel simplifying the tax code and lowering the tax rate is an excellent step. However, it is projected to increase the deficit by $1.5 trillion dollars which given our existing debt, over $20 trillion, is a move in the wrong direction. This tax cut should also have been accompanied by spending cuts.
How much do you have to make to be in the top 1%? This differs by web site, but the IRS states that to be in the top 1% for 2014, you had to have AGI of at least $465,246. Also from the IRS, the top 1% paid 45% of all income taxes collected by the federal government in 2015.
The attached chart is the old tax structure and the computations are as follows (the assumptions are that you don’t itemize deductions and you have 1 dependent child):
For $55,000 & married:
OLD RATE
The standard deduction is $13,000 and as a result, this is subtracted from your combined income and as a result, you are taxed on only $42,000 of income.
Tax Rate Tax paid Total Tax Liability
the 1st 17,850 is taxed at 10% 1,785
17,851-42,000 is taxed at 15% 3,622
Child tax credit -1000 4408
NEW RATE
The standard deduction is doubled to $24,000 and
as a result this couple is taxed on only $31,000 of
income.
Tax Rate Tax paid Total Tax Liability
the 1st $19,050 is taxed at 10% $1905
19051-42,000 is taxed at 12% 2754
Child tax credit is doubled -2000 $2659
This represents a decrease of 39.7%
For 150,000 & married:
OLD RATE
Tax Rate Tax paid Total Tax Liability
the 1st 17,850 is taxed at 10% 1,785
17,851-72,500 is taxed at 15% 8120
72,501-146,500 is taxed at 25% 18,500
146,501-150,000 is taxed at 28% 980
Child tax credit -1000 28,385
NEW RATE
the 1st 19,050 is taxed at 10% 1905
19,051-77,400 is taxed at 12% 7002
77,401-$150,000 is taxed at 22% 15972
Child tax credit -2000 22,879
This represents a decrease of 19.4%
For 750,000 and married
This becomes a little more difficult since many of the deductions the rich have are going to be decreased and this will hurt them (but not that much). As a result, I’m calculating the taxes on AGI, Adjusted Gross Income, i.e., income after deductions.
OLD RATE
Tax Rate Tax paid Total Tax Liability
the 1st 17,850 is taxed at 10% 1,785
17,851-72,500 is taxed at 15% 8,120
72,501-146,500 is taxed at 25% 18,500
146,501-223,050 is taxed at 28% 21,434
223,051-398,350 is taxed at 33% 57,849
398,351-450,000 is taxed at 35% 18,078
451,001-750,000 is taxed at 39.6% 118,800
Child tax credit -1000 244,566
NEW RATE
the 1st 19,050 is taxed at 10% 1,905
19,051-77,400 is taxed at 12% 7,002
77,401-165,000 is taxed at 22% 18,272
165,001-315,000 is taxed at 24% 36,000
315,001-400,000 is taxed at 32% 27,200
401,000-600,000 is taxed at 35% 70,000
601,000-750,000 is taxed at 37% 55,500
Child tax credit -2,000 213,879
This represents a decrease of 12.5%
As you can see, there are tax savings across the board with the largest % tax breaks going to the lower income groups. It will also simplify the tax code by increasing the personal tax deductions. As a result, more households will file the short form (i.e., they will not itemize deductions) and this can represent savings from a tax preparer. As an economist, I feel simplifying the tax code and lowering the tax rate is an excellent step. However, it is projected to increase the deficit by $1.5 trillion dollars which given our existing debt, over $20 trillion, is a move in the wrong direction. This tax cut should also have been accompanied by spending cuts.
How much do you have to make to be in the top 1%? This differs by web site, but the IRS states that to be in the top 1% for 2014, you had to have AGI of at least $465,246. Also from the IRS, the top 1% paid 45% of all income taxes collected by the federal government in 2015.
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