----- Original Message ----- From: "Erik Reuter" <[EMAIL PROTECTED]> To: "Killer Bs Discussion" <[email protected]> Sent: Friday, January 14, 2005 4:42 AM Subject: Re: Social Security
> average tax rate = ( present value of lifetime taxes paid minus present > value of lifetime benefits received from government ) divided by present > value of lifetime earnings > > R = (T - B) / E > > marginal rate = dT/dE - dB/dE Right, one of us did need to write that out explictly, because it appears that a lot of folks are following along...and there was always the chance that we had slightly different defintions. But, we don't; that's exactly what was I was thinking. > I think their calculation is much more extenstive than yours, but I'm > glad you want to check their numbers. I'll work through it in more > detail this weekend (and post some excerpts from the book that explain > in more detail what they are calculating) Thanks for that work....I've done just a bit of leg work on your questions given below, and I'll do a bit more later today unless you said you already have done it. > In the meantime, a couple things that I can think of that would make > their figure larger than yours: > > If the extra spousal income bumps the couple into the next federal > income tax bracket, say from 15% to 25%, depending on the brackets when > the calculation was done. But, wouldn't that just be a slope change....dFIT/DE = .15 to dFIT/DE = .25? If so, then as long as I'm using the right marginal rate, then I'm calculating the Federal Income Tax (FIT) contribution to T and dT correctly. > You didn't count state tax, which in California or other high tax states > could be more than 10%. True, but I just checked California. Assuming just the standard deduction, the tax rates for a married couple who takes the standard deduction in California is (roughly): from http://www.payroll.ucla.edu/Charts/taxCAcur.htm for bi-weekly and monthly tax rates and http://www.taxesindepth.com/state-taxes-California.html for the standard deduction, we get the following tax table for a married couple who take the standard deduction. income<18.3k 1% 18.3k<income<35.1k 2% 35.1k<income<52k 4% 52k<income<69.9k 6% 69.9k<income<86.7k 8% 86.7k<income<1000k 9.30% >1000k 10.30% For my example, dR/dE between 39k and 40k, they'd be in the 4% bracket. But, since state income tax is deductable, and the dFIT/dE=0.25 (25% tax bracket), the net result would be a 3% increase in taxes. For their example, from 20k to 40k, the net effect would be under 2%. If the deduction is greater than the standard deduction, that has the effect of moving the tax brackets up in income. > Economists tend to count the full FICA contribution, which I think is > either 13.85% or 15.3% (I'll check the exact figure later). If you are > self-employed, you pay the full amount yourself. 15.3%, but half of the tax can be deducted from one's income if one is self employed. If one is in the 25% bracket, that comes to a net rate of about 13.4%. I should know that, I'm self employed. :-) Also, if one does this, it should be added to the income as well as the tax. That's not critical when the rest of dR/dT is low, but as it gets high, its important. Let us consider the example where the marginal net tax rate calculated without considering employer paid tax on income as either income or tax is 75%. Let us then consider a 7.7% tax being added to this. The result is (.75+.077)/(1+.077)=.77=77%. Since they were talking about net tax rates around 80%, this gives some idea of how the two ways of calculating the tax would change the answer. It's only another 2%. > Also, they don't look just at SS benefits when they net out the changes. > If the present value of all government benefits went down when the > spouse starting working, then netting out dB/dE can actually increase > the marginal rate. They include things like medical benefits and welfare > benefits as well as SS. But, for income that is already in the 20k range, we shouldn't be talking about much in the way of Mediaid or welfare benefits. Take food stamps, for example. For a family of 4, assuming the same relationship between net and gross income as the maximum allowable for each at: http://www.fns.usda.gov/fsp/applicant_recipients/fs_Res_Ben_Elig.htm we are talking about a family of four looking at losing about $1000 in food stamps benefits. This translates in a dB/dE rate of -5% between 20k and 40k, and 0% for my example of $39k to $40k. The marginal value of working for someone on welfare is a real problem, but I think we can mostly seperate it from the problem of one spouse working for 20k/year and the other spouse thinking of taking a 20k/year job. Medicaid limits are too low to be comsidered. Head Start (for pregnant women and for children under 6) applies, but that's fairly limited. The other benefit that I can think of them losing is the earned income tax credit. If no one says that they've already calculated this in an hour or two, I'll go to last year's copy of TurboTax to make a calculation. Also, if anyone else can think of federal benefits that go away when family income rises from 20k/year to 40k/year, I'd be interested in seeing some numbers. If you don't have the inclination to do the numbers, just mention it and I'll see what I can do. > Anyway, more later. Great. I hope I got this in before you already did the work. Also, if anyone else wishes to contribute by figuring the effects of taxes in other big states (like New York, Florida, or Ohio), it would be very much appreciated. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
