The Schrug

Does the average voter care how much the average voter pays in taxes? I don’t think so. I think the Smiths care how much the Smiths think the Smiths pay in taxes compared to what the Smiths think the Joneses pay in taxes, and compared to what the Smiths think the Smiths used to pay in taxes. (I put the “think” qualifier in there because I believe that most people don’t really have a very good sense of what the actual numbers are. I, for example, have recently filed my tax returns and the only number that sticks in my head was how much of a refund I qualified for. I have no idea what percentage of my income went to taxes.)

Consequently, I think reports of what the median-income family of four pays in taxes now compared to years past have little impact. People like stories with characters they can relate to, and how many people live next to a family that has been making the median income for the last sixty years?

So with the help of the awesome tax and spending calculator from USA Today, I’ve put together a few stories about “real” taxpayers and how they’ve fared since the Reagan era. Each of these taxpayers files individually, uses the standard deduction instead of itemizing, and has one exemption.

Paula Pooriskova. Paula has spent her entire adult life earning the federal minimum wage, working 2,080 hours a year. Paula earned $6,448 in 1980 and $15,080 in 2010. Her tax rates have gone up as well, from a total (income + payroll) tax of 8% thirty years ago to 11.5% today. She was hit hardest by the Reagan-Bush years. By 1992, her total tax rate had jumped to 12.64%, and at the end of the Clinton administration it was essentially unchanged. Since then, it’s fallen by about one percentage point, with her marginal tax rate – the tax rate on the last dollar earned — dropping from 15% to 10%. (Note: the calculator does NOT factor in the Earned Income Tax Credit, so her actual tax bill may be overstated.)

Mandy Mediate. Mandy has been doing average, which is to say better than Paula. She was making the median family-of-four income when Reagan was elected: $24,332. She’s gotten raises every year since then, but only three percent each year – less than the average rate of inflation over that time. (Her income climbed to $59,000 in 2010, but to keep pace with inflation, she would have had to reach $64,000.) Unlike Paula, Mandy has seen a slight but steady decline in her tax rates. She went from an effective rate of 24.74% in 1980, with a marginal rate of 34%, to an effective rate in 2010 of 22.26%, with a marginal rate of 25%. As a percentage of income, Mandy’s payroll tax rate has been the same as Paula’s: 6.14% in 1980, and 7.65% today. Mandy’s total tax rates went down by two percentage points under Reagan-Bush, up a hair under Clinton, and down another percentage point under Bush II.

Tim Toomedian. Tim is probably a typical Tea Party member. His income in 1980 was $48,664 – twice the median income for a family of four that year. Since 1980, his income has kept pace with inflation, so he now makes $127,908. Paul’s tax burden, however, is much lower now than it was thirty years ago. His federal taxes have gone down from over 35% to less than 28%. And the marginal rate fell from 55% to 28%. Paul’s income tax went way down, from 32% to 21%, but that cut was offset slightly by an increase in payroll tax for Social Security and Medicare, which went from 3.26% to 6.63% – which is still less in percentage terms than Paula’s and Mandy’s. (Social Security taxes apply only to the first $106,800 earned.) The decline in Paul’s tax rate has been pretty steady. During the Reagan-Bush years, his rate dropped from 35% to 29.15%. During the eight years of the Clinton administration, the rate stayed nearly constant, going up to 29.67%. They came down again under Bush II, although they actually went up by hair between 2004 and 2008.

Ricky Richardson. Ricky is living the life. He was making $100K way back in 1980, and his income has grown at a steady 10% clip ever since, far outpacing inflation. Today, Ricky makes a cool $1,744,940. While Paula, Mandy, and Tim have seen mild to moderate changes over time in their tax rates, Ricky’s rates have shifted wildly along with the political winds. When Reagan took office, Ricky was paying nearly 50% of his income in federal taxes and the marginal rate was a whopping 68%. Eight years later, Ricky’s tax rate was all the way down to 29% and the  marginal rate had been cut by forty percentage points. Under George H. W. “Read My Lips” Bush, Ricky suffered a setback and his effective and marginal rates went up to 31%. Then Clinton came along and Ricky’s marginal rate shot up to 39.6%, with his effective tax rate close behind (38%). Next came the “Bush Tax Cuts” and Ricky’s marginal and effective rates went back down to about 35%. One thing that hasn’t changed much is Ricky’s payroll tax burden. That’s because of the cap on wages that are subject to Social Security tax. Ricky paid 1.59% of income to payroll taxes in 1980, and pays 1.83% today. (Of course, few people in Ricky’s tax bracket are taking the standard deduction, so Ricky’s tax liability is likely overstated here.)

In brief: Only one of our four taxpayers has seen an increase in federal tax rates since 1980, and that’s poor Paula on minimum wage. The Clinton era helped her with her income tax rate, but since her payroll taxes are higher than her income taxes the relief was moderated. During those Clinton years, only one taxpayer saw more than a one percentage point increase in tax rates, and that was Ricky the millionaire.

In 1980, when middle-class folks were paying 35% of their income in federal taxes and the wealthiest were subject to a 68% marginal tax rate, tax revolts and cries of “socialism” might have been justified. But it’s much harder to make that same case today. The Tea Partiers might have a better case if they warned that unless we cut spending, the only way we’ll be able to service our debts is to raise tax rates all the way back to those 1980 levels. There may be some merit to that argument and I’ll take a look at spending in another post.