Tax Policy Reform

Top 10% earn only 46% of Adj Gross Inc in the US but pay 70% of the Federal taxes. AGI income split point for top 10% is $114K.

Also note that the Bottom 75% (<$67K) of all earners pay only 14% of all Inc Taxes! The bottom 50% pay 3% of all Inc Taxes.

Yes, them rich folks are really getting a free ride.

Apparent there is a very brief (3 page) overview of income and payroll taxes – who pays, how much, the effective tax rates – and why (I think) this clarifies the need to significant tax reform.

This document is still in development (though can be forwarded to clients, but please be aware as the disclaimer states, this represents my opinions alone, not those of BNP Paribas) and I hope to include more information over time, incorporate a broader context, and correct any mistakes.

A Bear Sitting on a Teeter Totter

There is no denying this analysis leans towards a streamlined tax policy that will resist a further burden of taxes being placed on the top 5% (who already pay 59% of all income taxes and earn 35% of adjusted gross income – for a 21% average income tax rate) versus the bottom 50% (who pay a mere 2.7% of all income taxes, earn 13% of AGI and whose average effective income tax rate is less than 3%).

For those of you who just read that and said “yeah, what’s wrong with that?” (some of my best friends are Democrats) I do endeavor to include a balanced viewpoint. In the second section on payroll taxes, I go to lengths to point out that payroll taxes are not progressive – but since they are flat taxes with the social security portion tax capped for earnings above $106,800 – the effective FICA tax rate does fall for higher income levels.

One addition I haven’t had a chance to made, as someone asked me this today — why are average income tax rates for wealthy people in particular only 23% (the highest of all average rates, but significantly below the 35% marginal tax rate)? I work through an example at the bottom of page 2 as to how deductions and personal exemptions lower taxable income and the effect of the rising marginal tax rates. What I did not include is that at very high income levels a significant proportion (~20 to 30%, but I would need to check) of gross income comes from dividends and capital gains – which are (for now) taxed at much lower rates than ordinary income. So that effect keeps tax rates lower for many of the wealthiest individuals.

Tax Reform Is Coming

To put this discussion into context, the 12 Congressmen who are now referred to as the “deficit supercommittee” (kind of makes them sound like deficit fighting superheroes) recently named Mark Prater as its staff director. For those of you who are going “uhh..who?”, you’re not alone. As it turns out, Mark Prater is a GOP Finance Committee staffer and chief tax counsel for the Senate Finance Committee. He has deep expertise in tax law and tax policy, and has worked with lawmakers on both sides of the aisle drafting tax legislation. Both parties have cheered his appointment and his bipartisan support is genuine.

Although we don’t know what proposals specifically will be discussed by the deficit supercommittee (DSC), there is a menu of tax reform strategies and policies that have been proposed by prior deficit reduction teams and vetted in other legislation. As we move towards November when the DSC is required to propose and vote on a plan, we’ll evaluate the options in terms of their impact on the economy and broader fiscal policy.

In the near term, President Obama is expected to suggest extending the payroll tax holiday through 2012 or 2013. The payroll tax deduction of 2% currently in force costs the government $110 bn per year in reduced revenues from the social security portion of the payroll tax. There are both Democrats and Republicans who are against extending this particular tax cut, spelled out by people more knowledgeable than myself. You can find a good, balanced article here:

Individual Income Taxes + Payroll Taxes = 80% of Government Revenues

Any change or reform to tax policy has the potential to dramatically impact the economy, whether its via changes in investment choices, small business plans, savings rates and incentives or spending habits. For example, one widely discussed proposal is to drop the myriad of deductions, exemptions and subsidies in the tax code, including elimination of the mortgage interest tax deduction. There is no escaping that such a move might have a long-term impact on the housing market and home prices at the very least. But on a net basis perhaps the housing market over time would be less subject to distortion? Time is not in great supply for the DSC as these decisions will need to be made very quickly. We will endeavor to stay on top of them and evaluate their potential impact on the markets.

Please keep in touch, regardless of your wavelength on the political spectrum. I promise to pass along new and complete information as I receive it, and with the help of those who (violently disagree) find themselves on the other side of the debate, I hope to offer a balanced evaluation from which you can draw your own conclusions (if you must).

Take care,
Mary Beth

Scott Shires

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