Math Problem #1: Tax burden increase on Californians. Remembering all the rhetoric from Democrats the past several years about “the working family” and “saving/protecting the middle class” and the “working poor”, remembering their rhetoric let’s see how their huge tax bill they passed in Sacramento last week (with a few Republican accomplices) helped these families. There are tax calculators all over the web for you to put in your own numbers, here’s one to save you the Google search. If you take a reasonable middle class family, Mom and Dad both work—let’s say they are both teachers and while not new not yet at the average salary and make $45,000 each for a total of $90,000. They each have a car, let’s say a minivan and a small SUV or crossover worth about $25,000 each for a total of $50,000 and they also have two kids. Under the taxes just passed in Sacramento this family’s tax payments will increase by $1227.
Now let’s say there is a hip young professional with no kids, has his master’s degree and works for the state college system as a senior administrator pulling down $140,000 annually and drives a sporty BMW X5. With no kids and a higher salary the tax burden on this young man will increase $966 per year. Making 55% more money that our married family and with no children to support gives a tax advantage of $261 per year to Californians.
So next time you hear anyone from Sacramento talking about budgets and helping America’s or California’s families ask them if they voted for the tax increases in February 2009—if they are in office and a Democrat they did—and then know they could care less about families and “working people” as they are typically defined.
Math Problem #2: President Obama and the Democrats hit the national campaign trail hot and heavy in 2008 giving speeches about how they were going to also help the middle class and unless you were in the top 5% of income earners in the United States you would not see your taxes go up. This past week Obama began the tax talk and has spoken about increasing the marginal tax rate for America’s highest income earners to help pay down the deficit—including the $2 trillion they just added to the deficit with the Porkies I stimulus plan.
A few weeks ago Obama and Congress announced that they were going to cap the pay of individuals who are employed by firms who received TARP (Troubled Asset Relief Program—the $750 billion bank and Wall Street bailout from October 2008) to $500,000. This was met with widespread applause and happiness from many in America who feel that if the banks have gotten $350 billion of tax payer money—never mind that it was traded for stock—that those in charge should have their income capped at a “reasonable level.” Given that the former head of Merrill Lynch was seeking a $10 million bonus for leading his company into an $11 billion loss and extinction the sentiment is very understandable. But the universe operates on cause and effect and not every plan is perfect.
This plan has a few flaws however and this is where some math will come in. First the caps also apply to commissioned individuals—those on commission get paid based on what they earn for the company. With the new caps after a very successful broker hits his $500,000 limit with say Chase he can/will quit and go to Citi and earn his next $500k taking his clients with him. What will occur is a huge merry-go-round of talented sales people through Wall Street brokerages as they maximize their personal income under the TARP compensation limits. But this is just part of the flaw. Let’s get to the math.
Under the current tax tables individuals earning over $372,950 are in the 35% tax bracket. So capping income at $500,000 caps the marginal tax amount on earnings over $372,950 at $44,500 to use round numbers ($500,000 – 372,950 = 127,050 x 35% = $44,500). Given the numbers on Wall Street I am going to use for my math problem the number that 200 individuals have earnings over $5,000,000 and work(ed) for TARP companies.
If there are 200 individuals with income of $5 million their marginal tax amount is $1,619,500 (rounded up $32.50) per person, or approximately $324 million collectively. With Obama’s compensation caps these individuals will now pay $9 million in marginal taxes in the 35% bracket, a loss of approximately $315 million to the Treasury. Sniffing around the internet my estimates of 200 individuals and $5 million is very conservative and it is likely the compensation cap imposed by Washington on Wall Street will result in a loss of income tax revenue far greater than $315 million. But at least we all feel good about capping what those greedy b**stards make! Right?