• Roll Your Own Tax Plan - Based on the Proposed Tax method in Alternate 3 but allows you to enter your own percent discounts to various taxpayer groups.

Income Tax Trivia

• Year 2000 census counted 280 million people in the USA.
• 1998 is the latest year for which detailed personal income tax data has been summarized and published by the IRS on its web site. The rest of the discussion below applies to the 1998 tax year, unless noted otherwise.
• Record budget deficit of $290 billion occurred in 1990.
• 1998 was the first year after 29 years in which the federal government went from a budget deficit to a budget surplus.
  
  Source: Wall Street Journal Mar 9, 2004

Income Tax Analysis

• The lower income groups may include returns with negligible or even negative Adjusted Gross Income (AGI) because of business, capital or farm losses, or because of other valid adjustments to gross income. Still, some of them paid AMT.

• Taxpayer groupings in these tables:

         Group            Income Range*        Median Income*	 Share of All AGI
    ----------------  ----------------------   --------------  ----------------
    Bottom 20%          Less than $9,144           $4,382           1%
    Lower Middle 20%    $9,144  to  $19,124       $13,944           6%
    Middle 20%         $19,124  to  $33,548       $25,229          12%
    Upper Middle 20%   $33,548  to  $60,237       $44,012          21%
    Well-Off 12.2%     $60,237  to  $95,216       $72,213          20%
    Rich 6.5%          $95,216  to $285,321      $142,619          20%
    Richest 1.3%        More than $285,321       $437,396          20%
  
    *Adjusted Gross Income (AGI)

  Basically, I first divided the total number of tax returns into five equal groups of 20% each (about 25 million tax returns in each group). The share of AGI and taxes of the Top 20% group seemed to be lope-sided. For example, they were hogging 59% of the AGI and paying 77% of taxes. The usual practice I noticed was to subdivide the Top 20% into Top 1%, next 4% and next 15%. This division seemed to be a bit arbitrary to me. So, I tried dividing the total AGI of the Top 20% into three equal AGI group, figuring that it will automatically put less and less number of taxpayers into higher income groups. This calculated out to be $1 billion per subgroup of Top 20% in 1998. Then, I calculated the number of taxpayers in each such subgroup. They came out to be Top 1.3%, next 6.5% and the next 12.2% which is pretty close to the 1%, 4% and 15% breakdown usually seen.

• Out of $788 billion total income tax, $610 billions (77%) were paid by the Top 20%, but then they earned $3.2 trillion (59%) in AGI. Upper Middle 20% paid $115 billion tax (15%) on an AGI of $1.1 trillion (21%).
• It doesn't take a lot of AGI to make it into the Top 20%. A couple with each spouse earning about $30,000 and filing jointly will be in the Top 20%.
• The table below mainly shows how many singles, married filing jointly or separately etc. were there in each group in 1997. It also shows what percentage of total AGI and taxes each filing status shared.

  This is important because a married couple filing jointly may fall into a higher income group and "appear" to share a larger tax burden than if they were to file separately.

• The "Separate, Head, Surviving Spouse" label means married filing separately, head of household and surviving spouse tax returns. The values in this row should be mentally added to the "Single" row values when comparing with "Joint" row values.

• It is interesting to note that, in the Lower Middle 20% group, 79% of the tax returns were effectively "Single" tax returns. Compare that to the Top 20% group where 82% of the tax returns were "Joint" returns.
• It is becoming too complicated to further breakdown the rest of the this analysis by filing status. So, I won't do it the rest of the way below.
• The table below shows a group's share of the grand total AGI and taxes, among other things.

• The Upper Middle 20% (median AGI $44K) earned 21% of total AGI and shared 15% of total tax. The Rich 6.5% (median AGI $143K) also earned about 20% of total AGI but shared 24% of total tax. The Richest 1.3% (median AGI $437K) also earned about 20% of the total AGI but paid 36% of total tax.
• The table below looks at each group separately and indicates what percentage of the group's AGI was paid in tax, among other things.

• Tax as a percentage of the groups' AGI progressively increased from 4% for the Lower Middle 20% to 18% for the Rich 6.5% and 27% for the Richest 1.3%.
• The table below summarizes the actual tax paid by various groups (in preparation for further what-if analysis below).
• The table also shows a new calculation - "Tax as % of Group's TI". TI denotes taxable income which is AGI minus exemptions and deductions. All government tax tables are based on taxable income, not AGI. Therefore, this calculation is important in further analysis.

  Basically, this calculation tells us that:

  1. Take your AGI
  2. Subtract whatever exemptions and deductions you can claim (kids, parents, dependents, mortgage interest, state tax, property tax etc.)
  3. The result is roughly your taxable income
  4. What percentage of taxable income is being paid as tax (per group).

  So, it indicates the "effective tax rate" (vs. "marginal tax rates" established in government tax tables).

  Each taxpayer can come up with their "effective tax rate" by dividing total tax paid by taxable income (or AGI if that's what is being used; the table below shows both percentages).

• The following points can be made about actual income tax paid:
  1. Richest 1.3% earned 20% of all AGI and paid 36% of all income tax. On average, the tax amounted to 27% of their AGI and 30% of their taxable income.
  2. Rich 6.5% also earned 20% of all AGI, but paid 24% of all income tax. On average, the tax amounted to 18% of their AGI and 23% of their taxable income.
  3. Well-Off 12.2% also earned 20% of all AGI, but paid 17% of all income tax. On average, the tax amounted to 12% of their AGI and 17% of their taxable income.
  4. Upper Middle 20% earned 21% of all AGI and paid 15% of all income tax. On average, the tax amounted to 10% of their AGI and 15% of their taxable income.
  5. The remaining 60% earned 19% of all AGI and paid 8% of all income tax.

Now let us look at three different arbitrary methods of taxing an individual's income. The first method taxes everyone's AGI at a flat rate. The second method allows exemptions and deductions as in actual tax calculations, and then taxes everyone's taxable income at a flat rate. The third method attempts to rebuild the logic behind the actual tax system in place by taxing the taxable income of the higher income groups at an increasing rate.

All of the methods below are set to yield the same income tax as was the actual income tax collected in 1998 (about $788 billion). This was done because 1998 was the first year after 29 years that the federal government showed budget surplus. So, the total income tax in 1998 dollar terms must be just about right. At least that's what I think.

Alternate 1 - Equivalent Flat Tax on Adjusted Gross Income

• If all were to pay equal rate of tax on their Adjusted Gross Income (no exemptions or deductions are allowed) so that the total income tax collected is the same as the 1998 total income tax:

• The eqivalent flat tax on AGI is 15%. Everyone who earns pays the same rate of tax whether they make $1,000 or $1,000,000 in 1998.
• It does not allow any exemptions or deductions. It means that, after taking some very legitimate exemptions and deductions as allowed by the current law, the Bottom 20% will be paying 72% of their taxable income as tax where as the Top 20% will be paying only 18% of their taxable income as tax.

Alternate 2 - Equivalent Flat Tax on Taxable Income

• If all were to pay equal tax on their Taxable Income (after exemptions and deductions) so that the total income tax collected is the same as the 1998 total income tax:

• The eqivalent flat tax on taxable income is 21%.
• In theory at least, this appears to be an ideal tax strategy. Give everyone the exemptions and deductions one is entitled to, and then, tax the resulting income at the same rate across the board.
• Under this method, Bottom 20% contribute negligibly to the nations income tax requirement. Higher income groups pay increasing portions of their AGI as income tax.
• The "Tax Discount (Surcharge) from Actual Tax" deserves some explanation. These values are the difference between actual income tax paid by the group and the proposed flat tax calculated for the group. The "Discount" means that the group will pay less under this flat tax scheme than actual tax paid. The values in parenthesis denote a surcharge which means that the group will pay more under this flat tax scheme than actual tax paid.

Alternate 3 - Increasing Tax with Increasing Taxable Income

• The third method recognizs that each increasing dollar of income is not the same as the dollar before. The first $10,000 income is best utilized in taking care of life's necessities and their is little disposable income leftover to pay taxes. Compare that to the last $10,000 of a $1,000,000 income. It is probably just saved or invested to generate future income, or spent on luxary items.

  Therefore, the utility of subsequent dollars of income decreases and one can afford to pay higher portion of it as a tax to lessen the tax burden on lower income dollars.

• The calculations below proposes a distribution of tax discounts for the lower income groups and resulting tax surcharges on the higher income groups. It takes the ideal scenario of flat tax on taxable income and gives progressively decreasing discounts to increasing income. The tax discount to a lower income group is distributed as a surcharge on the higher income groups in proportion to their AGI.
• Continuing with the theme of this document, all of the tax returns are divided into the following groups for the purposes of applying this elaborate tax burden distribution "scheme":

         Group            Income Range*        Median Income*	 Share of All AGI
    ----------------  ----------------------   --------------  ----------------
    Bottom 20%          Less than $9,144           $4,382           1%
    Lower Middle 20%    $9,144  to  $19,124       $13,944           6%
    Middle 20%         $19,124  to  $33,548       $25,229          12%
    Upper Middle 20%   $33,548  to  $60,237       $44,012          21%
    Well-Off 12.2%     $60,237  to  $95,216       $72,213          20%
    Rich 6.5%          $95,216  to $285,321      $142,619          20%
    Richest 1.3%        More than $285,321       $437,396          20%
  
    *Adjusted Gross Income (AGI)

  This grouping puts equal number of tax returns (about 25 million tax returns) in the first four groups. Then, realizing the need to subdivide the Top 20% group, three subgroups of the Top 20% are made so that each group has equal total adjusted gross income.

  Another desirable grouping is to divide all of the tax returns so that each group has equal adjusted gross income. Say, 5 groups with 20% of total AGI each. Note that, all one has to do is to consider the first three groups as one group because their total AGI is about 19% (1% + 6% + 12%). The remaining four groups are already at roughly 20% AGI each. Such a grouping automatically puts progressively less number of tax returns in higher income groups. This is desirable because more people get tax breaks while minimizing the amount of tax surcharge on less number of people as a proportion of AGI .

  Example: The table below shows the results of the following tax distribution scheme:

  1. All tax returns are first set to pay the 21% flat tax on taxable income (TI Flat Tax) as ideal tax rate.
  2. Let us give 90% discount to the Bottom 20% on their taxes owed. So, on (flat) tax owed of $2,444 million, the group gets a discount of $2,199 million and it only has to pay $244 million.
  3. The discount ($2,199 million) is distributed among higher income groups in proportion to their AGI. So, for Lower Middle 20% :

     	TI Flat Tax ($ million)   =  $22,513
     	Tax Surcharge ($ million) =  $2,199 x 6% ÷ (6%+12%+21%+20%+20%+20%)
     	                          =  $133
     	                          ------------
     	Total Tax Owed            =  $22,646
     	Discount (75%)            = ($16,985)
     	                          ------------
     	Tax Due                   =  $5,661

     Except that, in the table below, I used the absolute dollar AGI instead of the group's % share of total AGI to stay more accurate. Hence the difference between $5,661 shown above and $5,664 shown in the table below.

  4. Let us give 75% discount to the Lower Middle 20% on their taxes owed. Of course, the tax owed by this group now includes TI Flat Tax and surcharge from sharing the discount to the Bottom 20%. The calculation above illustrates how this 75% discount is applied to the total tax owed by this group.
  5. The discount ($16,985 million) is again distributed among higher income groups in proportion to their AGI. So, for Middle 20% :

     	TI Flat Tax ($ million)   =  $74,310
     	Tax Surcharge from Bottom =  $2,199 x 12% ÷ (6%+12%+21%+20%+20%+20%)
     	  20% disc. ($ million)   =  $267
     	Tax Surcharge from Lower  =  $16,985 x 12% ÷ (12%+21%+20%+20%+20%)
     	  Middle 20% disc.($ mil) =  $2,192
     	                          ------------
     	Total Tax Owed            =  $76,769
     	Discount (50%)            = ($38,385)
     	                          ------------
     	Tax Due                  =  $38,384

     Again, in the table below, I used the absolute dollar AGI instead of the group's % share of total AGI to stay more accurate. Hence the difference between $38,384 shown above and $38,394 shown in the table below.

  6. Similarly, let us give 50% discount to the Middle 20%, 33% discount to the Upper Middle 20%, 25% discount to the Well-Off 12.2%, 10% discount to the Rich 6.5% and no discount to the Richest 1.3% on their taxes owed. Keep in mind that the discount for higher income groups applies after the surcharge from lower income group discount has been added to their taxes.
  7. The amount of percent discount is completely arbitarary. Only sound judgement and common sense need be applied.
  8. The results of these calculations are shown in the table below.
• Also keep in mind that AMT is likely to apply to tax returns whose AGI is between $75,000 and $627,000.

• The "Tax Discount (Surcharge) from Actual Tax" values are the difference between actual income tax paid by the group and the proposed tax calculated for the group. The "Discount" means that the group will pay less under this tax scheme than actual tax paid. The values in parenthesis denote a surcharge which means that the group will pay more under this tax scheme than actual tax paid.
• The "Tax Discount (Surcharge) from TI Flat Tax" values are the difference between 21% TI Flat Tax calculated for the group and the proposed tax calculated under this tax scheme for the group. The "Discount" means that the group will pay less under this tax scheme than TI Flat Tax. The values in parenthesis denote a surcharge which means that the group will pay more under this tax scheme than TI Flat Tax.
• This means that the bottom 20% are currently paying $1.2 billion more actual income tax than under this proposed plan. Similarly, the lower middle 20% are paying $0.5 billion more tax and the top 20% are paying $49 billion more tax. The groups getting a break are middle 20% who are not paying $13 billion of their share and the upper middle 20% who are not paying $31 billion of their share under the proposed plan.
• The Upper Middle 20% get no tax break under this scheme when compared to their actual tax paid.
• The Well-Off 12.2% and the Rich 6.5% have to pay more.
• The remaining groups, including the Richest 1.3%, get a tax break.
• The whole scheme is for illustration purposes only!

New York Times

• There are 1.25 million tax payers in the top 1 percent, making more than $373,000 per year. (New York TImes)
• There are 5 million tax payers in the next 4 percent, making $147,000 to $373,000 per year. If no AMT changes are made (as in the House plan), these tax payers will get an average tax cut of $1,302 each which is less than the $1,600 Mr. Bush has said his plan will give back to families with children that are making around $60,000. The Senate plan would change the way the alternative minimum tax kicks in and these taxpayers will get an average tax cut of $3,593 each.
• There are 19 million tax payers in the next 15 percent, making $72,000 to $147,000 per year. These tax payers will get an average tax cut of $2,093 each under the Senate plan, and $1,509 under the House plan, according to the Citizens for Tax Justice calculations.
• The top tax rates are cut form 39.6% to 35%.
• Under the Senate version, the top 400 would get a tax cut equal to 0.6 percent of their incomes.
• Assuming that all gains were long term, a 1998 reduction in tax rates on long-term capital gains may have enabled the top 400 taxpayers to save an average of $6.4 million each that year. The top 400 paid an average of 22 percent of their adjusted gross incomes in 1998, down from 30 percent in 1995. Under Mr. Bush's plan, as approved by the House, the figure would fall further, to 20.9 percent; 21.4 percent under the Senate plan.
• For all taxpayers, the average income tax rose to 14.6 percent from 14 percent over these same years, the I.R.S. data shows. Under Mr. Bush's plan, as the House passed it, the average income tax for all Americans should fall to 12.3 percent, Treasury officials said. No such figures have been calculated for the Senate alternative to the Bush plan.
• The estate tax is paid on the fortunes of only the richest 2 percent of Americans who die. It will be repealed by 2010.
• The highest income tax rate of 39.6 percent is paid by the top 1 percent of tax payers. The second highest income tax rate of 36 percent is paid by the top 2 percent of tax payers.
• The almost 25 million tax payers making $72,000 to $627,000 would get far less than these rate cuts would imply because of the alternative minimum tax. The senate version somewhat reduces the effect of the alternative minimum tax.

  Because Congress has not adjusted the AMT to keep pace with inflation or other changes in the law in the past 32 years, it does not apply to people who make more than $627,000. Instead, it increasingly applies to middle- and upper-income taxpayers who claim wholly legitimate deductions.

  For example, on its face the Bush plan passed by the House would save a couple making $373,000 about $8,800, or 11 percent of their tax bill, the Citizens for Tax Justice model shows. But the alternative minimum tax would take away $6,370 of that, wiping out all but $2,430 of the income tax savings.

  The Senate version gives this taxpayer $4,551 because of changes it makes in the alternative minimum tax.

  The alternative minimum tax hits hardest at large families and people who live in places with high state taxes like New York, Connecticut, New Jersey, Massachusetts and California. That is because it reduces or eliminates deductions taxpayers take for themselves, for their children and for state income and local property taxes, as well as some medical bills.

  As a stealth measure, Mr. Bush's plan would increase revenue from the alternative minimum tax by $130 billion and that increase would help hold down the overall cost of the Bush tax cuts.

• Mr. Bush and Republican leaders seem to have made a decision that they would rather push through the underlying tax cut now and rely on public pressure to help them enact another tax bill in the next year or two to address the alternative tax problem.

Citizens for Tax Justice (April 25, 2001)

• Fully-phased-in Bush income tax cuts:
• Treasury department says that 13 million seniors would get an average income tax cut of $892 each under the Bush plan, it fails to note that almost 50 percent of all seniors would get nothing, and that the median tax cut will be only $150.
• Treasury department says that 8 million "single moms" would get a tax cut of $712, but does not disclose that 48 percent of single parents would get nothing, and that the median tax cut for single parents would be only $326.

  CTJ Estimates of the Effects of the Bush Income Tax Cuts

  Demographic Group	CTJ 2001 calculations
  	# with (mill.)	Average with	$-bill.	% with	Typical tax cut
  All taxpayers	97	$1,233	$119.1	74%	$500
  Families with children	34	1,836	61.5	73%	1,114
  Single parents	8	826	7.0	52%	326
  Seniors	12	1,076	12.9	51%	150
  Single, non-elderly, without kids	32	535	17.1	80%	283
  Notes: Estimates include President Bush's proposed income tax rate cuts, increased child credit, second-earner deduction and charitable deduction for non-itemizers, fully phased in. The "Average with" figures show the average tax cuts only for those with tax cuts; they exclude taxpayers who get no benefit from the Bush proposals and are heavily weighted by the very large tax cuts at the top of the income scale. In contrast, the "Typical" figures show what the median taxpayer in each group would get from the Bush income tax proposals.

Alternative Minimum Tax

• To calculate your taxable income under AMT, you "add back" the following to your taxable income as calculated regularly:
  • Your personal and dependent exemption deductions (about $2,800 per person/dependent in 2000).
  • Your standard deduction if you don't itemize (about $4,400 for singles and $7,350 for married filing jointly in 2000).
  • Any deductions for state taxes, local taxes, property taxes and foreign-owed taxes.
• If the result is less than $150,000 for joint filers and $112,500 for singles, you exempt $45,000 for joint filers and $33,750 for singles. Otherwise, reduce this exemption by one-quarter of the amount in excess of the limits. So, if a couple has $300,000 in AMT taxable income, it will exempt $45,000 - $150,000/4 = $7,500 only.

  These hard dollar amounts are not adjusted for inflation, which is one reason why more and more middle class people owe the AMT every year.

• Pay 26% AMT on the first $175,000 and 28% AMT on the rest. If the payment is less than regular income tax, pay the regular income tax.

  Again, the hard dollar amounts are not adjusted for inflation, which is one reason why more and more middle class people pay more and more AMT every year.