Monday, December 12, 2011

Taxes:  Taxing Wages Instead of Wealth


I compared the taxes of two hypothetical married couples for tax year 2011. Mr. and Mrs. Owner received $90,000 in taxable, qualified dividends, and Mr. and Mrs. Worker received $90,000 in wages. Neither couple had any other income, and both took the standard deduction and had no dependents, adjustments, nor credits, and live in Nevada, which has no state income tax. Each had a taxable income of $71,000 after a $11,600 standard deduction and $7,400 in exemptions.

The Owners owed $300 in federal income tax according to my tax software.

The Workers owed $10,006 in federal income tax + $5,085 in payroll taxes for a total of $15,091.

But if there weren't a temporary Social Security tax cut for 2011, the Workers would have paid $1,800 more, for a total of $16,891 out of their pocket.

And that does not include another $6,885 in payroll taxes their employer would have paid, for a grand total of $23,776 in taxes due to $90,000 in wages.

The calculations for Mr. and Mrs. Worker:

 10,006  federal income tax
+ 1,305  Medicare tax  (1.45% of 90,000)
+ 3,780  Social Security tax  (4.2% of 90,000)
 15,091  tax paid out of their pocket for 2011
+ 1,800  Social Security if wasn't a tax break  (2.0% of 90,000)
 16,891  tax out of their pocket if 2011 were a "normal" year
+ 6,885  employer payroll tax  (1.45% + 4.2% + 2.0% of 90,000)
 23,776  total for the Workers and employer in a normal year

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