Monday, July 26, 2010

Time to bail on the USA?

Tim Geithner, our income tax dodging Secretary of the Treasury, made the rounds on Sunday political TV yesterday. Tax Dodger Tim thinks we need to allow the Bush tax cuts to expire on the wealthiest 2 to 3% of Americans, but keep the Bush tax cuts in place for everyone else. That sparked an all-day debate on CNBC as to what makes good economic sense in terms of actions to take on these expiring tax cuts. It was a never ending drum beat, all day long on CNBC. That got me to thinking. Who pays taxes? Is it possible to close our $1.4 Trillion deficit? What will that mean for the investing environment in the intermediate and longer term?

I went on a hunt for income tax information. What I found was interesting, but also alarming. My observations from examining this information certainly altered how I view the investing landscape.

The tax info is easy enough to obtain. It’s here. The 2008 stats were just released within the last couple weeks. You can follow myriad links to a ton of historical IRS information. And it’s in spreadsheet form. But, it’s also overwhelming. Far too much detail. But I poked around, did some combining, simplifying, reorganizing, and a little math here and there to get a clearer picture. And, I’m going to document my findings here for future reference.

This will be a long post. But, trust me, it’s worth a look. And it’s a hell of alot easier to understand than all the detail the IRS dumps out there. And it should be a good reference point in debating income tax issues in our country.

First, the IRS goes nuts in grouping the information in far too many different income categories. Let’s simplify. When we typically think about our citizens, we tend to put people in one of four different categories:

Table 1 – 2008 American Taxpayers, Categorized

Income (AGI) Description
Poor > $20 K These folks live hand to mouth and largely depend on governmental assistance or charity to subsist.
Blue collar > $20 K < $100 K These folks generally can put food on their tables and pay for shelter. Some drive decent autos and can send their children to college.
White collar > $100 K < $200 K The solid middle class citizens of this country. They are the core.
Wealthy > $200 K The lucky few who have little trouble providing for themselves and their families.

I don’t want to get too technical with how our taxes work, but just know that I based the cutoff for these categories according to Adjusted Gross Income (AGI).

In looking at the reams of information Americans report on their tax returns, I focused on just 3 key categories of income: Salary (S), Adjusted Gross Income (AGI) & Taxable Income (TI). Although I fear your eyes glazing over and you falling asleep, its important to get a very general understanding of these three categories:

Table 2 – S, AGI, TI – Key categories of income on tax returns

+ Salary (S) Easy. What you’re paid in your job. It’s reported on your W-2. Note though that 401 K savings are backed out of this number.
+ Various adjustments to pull in all other sources of income + Interest, Dividends, Pensions, Taxable Social Security, Rents, Business Income, Alimony received
- IRA, Alimony paid
= Adjusted Gross Income (AGI)
- Various adjustments to allow for deductions from income - Itemized deductions of home interest, investment interest, state and local taxes, medical costs above a certain floor, charitable giving
= Taxable Income (TI)

Tax rate applied to taxable income determines how much income taxes one pays. Yes, there is also some math involved with tax credits, but in the overall scheme of things, credits are noise, so I ignored them in my review. I just focused on (S) Salary, (AGI) Adjusted Gross Income and (TI) Taxable Income.

You can’t stop at Income Taxes however. There’s also Payroll Taxes – Social Security and Medicare. The link to the IRS information is only helpful for Income Taxes. They don’t break out payroll taxes. But using the tax rates and rules for calculating Payroll Taxes (I’ll spare you the complexity), I made rough estimates as to who paid what in payroll taxes as well. Then I added Income Taxes and Payroll Taxes together to get a picture of total Individual Taxes Paid (Income + Payroll).

So, let’s look at how all this stuff breaks out into our four buckets:

Table 3 – American Taxpayers, Stratified

# Filers %
Poor 49.0 M 34.4%
Blue collar 75.1 M 52.8%
White collar 13.8 M 9.7%
Wealthy 4.3 M 3.1%

142.4 M

Table 4 – Total Salary in America, 2008

Total $ % Avg Per
Poor 377.3 B 6.3% 7.6 K
Blue collar 2,935.3 B 49.3% 39.1 K
White collar 1,431.9 B 24.1% 103.3 K
Wealthy 1,026.0 B 20.3% 275.6 K

5,950.6 B
41.8 K

Table 5 – Total Adjusted Gross Income (AGI) in America, 2008

Total $ % Avg Per
Poor 297.5 B 3.6% 6.0 K
Blue collar 3,658.2 B 44.3% 48.7 K
White collar 1,845.1 B 22.3% 133.2 K
Wealthy 2,462.0 B 29.8% 562.6 K

8,262.9 B
58.0 K

Table 6 – Total Taxable Income (TI) in America, 2008

Total $ % Avg Per
Poor 64.8 B 1.2% 1.3 K
Blue collar 2,032.4 B 37.0% 27.0 K
White collar 1,336.6 B 24.4% 96.5 K
Wealthy 2,053.7 B 37.4% 469.3 K

5,487.5 B
38.5 K

Table 7 – Income Tax Paid in America, 2008

Total $ % Avg Per
Poor 5.7 B .6% .1 K
Blue collar 256.9 B 24.9% 3.4 K
White collar 232.2 B 22.5% 16.8 K
Wealthy 536.6 B 52.0% 122.6 K

1,031.6 B
7.2 K

Table 8 – Individual Payroll Taxes Paid in America, 2008

Total $ % Avg Per
Poor 28.9 B 7.0% .6 K
Blue collar 224.6 B 54.6% 3.0 K
White collar 109.5 B 26.7% 7.9 K
Wealthy 48.1 B 11.7% 11.0 K

411.0 B
2.9 K

Table 9 – Total Individual Taxes Paid in America (Tables 8 + 9) , 2008

Total $ % Avg Per
Poor 34.6 B 2.4% .7 K
Blue collar 481.5 B 33.4% 6.4 K
White collar 341.8 B 23.7% 24.7 K
Wealthy 584.7 B 40.5% 133.6 K

1,442.6 B
10.1 K

At this point I stepped back to make sure my numbers were in the ballpark of being correct. Jim Quinn posted this great piece a few days ago about our nation’s deficit situation. There’s a chart there showing total collection on individual income taxes to be $1.1 Trillion, pretty darn close to my $1.03 Trillion. And it shows collection on payroll taxes to be $934 Billion. Given that 1/2 payroll taxes are paid by individuals and 1/2 by companies, my $411 Billion is in the ballpark. My numbers are a little shy of his. But his chart may also be older info than 2008. I’m comfortable that what I reflect above is fairly accurate.

I stopped to ponder the tax rates we pay:

Table 10 – Tax Rates, 2008

Income Tax/TI
Table 7/Table 6
Total Tax/TI
Table 9/Table 6
Total Tax/AGI
Table 9/Table 5
Poor 8.9% 53.4% 11.6%
Blue collar 12.6% 23.7% 13.2%
White collar 17.4% 25.6% 18.5%
Wealthy 26.1% 28.5% 23.7%

18.8% 26.3% 17.5%

Now, on to stepping back from the trees and pondering the forest.


1. The most shocking observation is that American individuals pay $1.4 Trillion in taxes (Table 9). Our deficit is $1.4 Trillion. So, we’d have to double our tax payments to balance our budget. Not possible. Not anywhere near being possible. Doubling all individual income taxes would murder our economy.

2. Do the wealthy pay all the taxes? You often hear this is the case. The wealthy make up 3.1% of filers (Table 3). They make 20% (Table 4) of the total salary income in our country, have 29% (Table 5) of the adjusted gross income, 37% (Table 6) of the taxable income, and pay 40% (Table 9) of the individual income taxes. So, they don’t pay all, but a big chunk.

3. Do the wealthy pay more than their fair share? Hardly. They make 37% (Table 6) of the taxable income, yet pay only 40% (Table 9) of the total individual taxes. Only a 3 percentage point difference can hardly be called a progressive income tax structure. Most people try to press this point by using an intellectually dishonest comparison of income tax paid to taxable income, and leave out payroll tax. Sure, the wealthy pay 52% (Table 7) of the income tax, yet make 37% (Table 6) of the taxable income. But, one needs to consider total tax (income + payroll) and not just income tax. So it is reasonable to make the case that the wealthy should pay more. Our total tax rates could stand to be more progressive.

4. Can we close the budget deficit by only increasing taxes on the wealthy? Nope. Not anywhere near. The total taxable income of the wealthy is $2 Trillion (Table 6). Let’s say we slapped an additional 10 percentage point tax on to the shoulders of the wealthy, that’d raise $200 Billion, $1.2 Trillion short of closing our annual deficit.

5. Let’s say we took a much more drastic step of slapping a tax on all income for everyone, and not allowing any deductions at all (no home interest, state and local income taxes, charitable giving, et al). Our total individual income in the country is $8.3 Trillion (AGI in Table 5). It would take an additional 18% tax on all income to close our budget deficit. Again, not possible.

Starting to get the picture of how F’ed we are in this country?

What are my conclusions?

Economic – We are in such dire straights with our budget deficits that I see no way out of this mess. The numbers simply won’t work. The cuts in spending and increases in taxes will be so drastic as to sink our economy into a deep, dark hole. We’re not there yet, but at some point this disaster will become evident to investors the world over. When it does, our dollar will crash, interest rates will skyrocket, our economy will tank, and chaos will rule.

Financial – Only a fool wouldn’t be parking his money outside the US, and in hard assets like gold/silver, and commodities.

Political – We didn’t get here overnight. 8 years of irresponsible leadership from the Republican Bush administration was largely responsible for this F’ed up situation. Republicans really SUCK. I’ll never again vote for a Republican. Never ever.

North Carolina deserves better than Republican Richard Burr.

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