Thursday, September 29, 2011

The teacher or the Prez: who pays more in taxes?

The answer is:  it depends!  Specifically, it depends on whether the teacher has "Qualifying Children."

This makes a great case study for my fall term public finance class, because it illustrates how much tax bills can differ for a person with "Qualifying Children" versus other types of dependents (e.g., a teacher supporting elderly relatives or other adult dependents gets far fewer tax benefits--and possibly none at all.)

Joe Kristan reports:

Echoing Warren Buffett's complaint that he isn't paying enough tax, President Obama said that he pays lower tax rates than a $50,000-per-year teacher. says that isn't quite so:
 President Obama’s claim that he pays a lower tax rate than a teacher making $50,000 a year isn’t true. A single taxpayer with $50,000 of income would have paid 11.9 percent in federal income taxes for 2010, while the Obamas paid more than twice that rate — 25.3 percent (and higher rates than that in 2009 and 2008). And if the $50,000-a-year teacher were in Obama’s tax situation — supporting a spouse and two children — he or she would have paid no federal income taxes at all.
Adding FICA taxes doesn't get the teacher up to the President's tax rate, even if you include both employer and employee taxes. So now the President has joined Warren Buffett on the list of celebrities who you shouldn't have prepare your tax returns.
A few thoughts from someone who has overseen the preparation of a number of tax returns for teachers and other folks earning less than $50,000 at our Union College VITA site.

0) It is almost surely true that if the teacher is eligible to claim a spouse and two "Qualifying Children" on her federal and state tax returns, then her effective average tax rate (from all taxes combined, federal, state, and local) will be lower than President Obama's tax rate.   However, it's important to note that supporting dependents does not guarantee that the taxpayer can claim those dependents.  For example, non-custodial parents paying child support often do not get any of the tax benefits normally associated with children.   It's also the case that "Not all dependents are created equal," under tax law.  As noted above, if the teacher is supporting elderly relatives or other adult dependents, her tax bill will be much higher than if she can claim "Qualifying Children" as dependents.

1) I have not seen any analyses that include the employer FICA payroll tax share, even though the CBO standard tax incidence analysis assumes that the effective burden of both shares actually falls on the employee.  [Update: it appears that the Fact Check and Tax Policy Foundation analysis do use the CBO incidence assumption.]  If the teacher is single and not eligible to claim dependents, her effective average tax rate for federal income and both halves of FICA payroll taxes in 2010 would certainly be in the same ballpark as President Obama's effective average tax rate, and possibly a tiny bit higher, considering only those two taxes.  [Update:  the Fact Check and Tax Policy Foundation analysis come up with 25.3% in combined federal income and payroll tax for the teacher, and 26.5% for President Obama's combined rate for those two taxes.]

2) No analysis that I have seen takes into account other federal taxes.  The typical teacher surely pays a higher share of her income in federal excise taxes on gasoline and airline tickets than President Obama does.  If she is a non-smoker, he pays more in federal tobacco taxes than she does.   Alcohol taxes and firearms taxes, well, we don't have enough data to go there.  On average, however, people with incomes in the $50,000 range pay about 1% of their income in federal excise taxes, while those in President Obama's income bracket pay a much lower percentage than that.

3) The biggie:  state and local taxes.

3a) State & Local Income taxes:  President Obama's 2010 tax return  says he paid $52,527 in state and local income tax last year.  That is about 3% of his gross income ($1,795,614).    A teacher who lives in Washington DC (again, earning $50,000 and single with no dependents) would pay 5% of her income in DC income tax.   That same teacher living in New York City would pay 8% of her income in NYS/NYC income tax.

3b) Property taxes:  President Obama's tax return says he paid $25,742 in property tax last year.  That is about 1.5% of his 2010 income.   How much our teacher pays in property taxes is going to vary all over the map, depending on local property taxes and housing values, but it's almost a sure thing that she pays more than 1.5% of her income in property taxes.  (For my public finance students, remember that even if she is a renter, economic incidence analysis leads us to conclude that her rent includes some or all of the property taxes paid by her landlord.)  In Schenectady, where our college and VITA site are located, it is frequently the case that moderate income taxpayers pay far more in property tax than they do in income tax.

3c) Sales taxes:  using the handy-dandy IRS sales tax calculator, we can estimate that our teacher paid about 1% of her gross income in sales tax if she lived in DC (unless, of course, she bought a car or other big ticket item last, in which case she paid considerably more.)  The same calculator estimates that President Obama spent less than 0.1% of his gross income on sales tax.

Bottom line:  It all comes down to the "Qualifying Children."

If the teacher is eligible to claim qualifying children on her tax return, her federal, state, and local income tax rates go way down.  In that case, President Obama probably pays a higher total combined effective tax rate than she does.

If the teacher is NOT eligible to claim qualifying children on her tax return (because she doesn't have any, or because her dependents are too old, or because her children live with their other parent or with a grandparent--even if she supports them!), then she most likely DOES pay a higher total effective average tax rate (federal, state, and local) than President Obama does.

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