Tuesday, September 15, 2009

Wondering about your taxes after you graduate?

I used the National Bureau of Economics Research's handy-dandy TaxSim simulator to figure out the 2009 federal tax bill (income tax, payroll tax, and total federal tax) for a single person with no dependents and only wage income. The result is the graph above.

A single person with 40K in wage income will pay about 25% in federal payroll and income taxes. With 100K in wage income, that single person will have a federal tax bill totaling almost 35% of income.

Of course, as I pointed out in class, if that same single person with no dependents could figure out a way to have his income arrive in the form of dividends and long-term capital gains, he would pay ZERO in federal payroll tax and a much lower federal income tax as well. With 40K in income, such a person would have a zero dollar total tax bill. At 100K in income, the total tax bill for such a person is still less than 9% of income.

If Congress gets serious about addressing the deficit and/or funding expanded health care programs, many taxpayers can expect their rates to rise, and the highly preferential rates on dividends and capital gains are likely to be a prime target. If Congress does nothing, the graphs for 2010 will look much the same as the 2009 graphs I've shown above. However, many tax rates will automatically increase substantially in 2011, when the Bush tax cuts are set to expire, so Congressional inaction means your tax rates will go up for sure in 2011.

Of course, if you're budgeting for your total tax bill, you should also figure in state taxes as well. State income taxes in some states have top rates in the 10% range. You'll also be paying sales taxes in most states. If you don't own a home, you won't pay property taxes directly, but when we do tax incidence analysis, you'll see that your rent is likely to reflect some of those property taxes indirectly.


  1. Note: The NBER TaxSim simulator is good for a rough estimate of your taxes, assuming your situation isn't too complicated or unusual. It's not something you should rely for preparing your return, but it is a quick and dirty estimate that can be helpful to many people who want to get a handle on their likely tax bill for budgeting purposes.

  2. Also, note that the payroll tax bill includes both the employee and employer share of FICA. As we'll see when we get to tax incidence, most economists believe that the employee actually bear the economic impact of both halves of the FICA tax.

  3. As I also mentioned in class today, hedge funds generally pay their employees most in the form of a special type of capital gains income referred to as "carried interest." This practice is controversial. The argument for this form of compensation is that it gives employees better incentives by aligning their interests with the clients'. But the favorable tax treatment of such income raises very problematic equity concerns.

    You can more about that here: