dgh@sun.UUCP (07/22/86)
Marginal Tax Rates and the Senate Tax Bill sun!dhough or dhough@sun.com Most people only know what they read in the newspapers, and in the case of the Packwood (now the Senate) bill that's not much. If you want to know more you can plow through over 1000 pages of the bill itself. As a tax client of Coopers and Lybrand I received a copy of their June 8, 1986 Tax Topics Advisory which summarizes key provisions of the bill in only 91 pages. They also included a discussion of the House bill and noted that the California state legisla- ture is quietly in the midst of a major rewrite of the state income tax to get it more in conformance with Federal. Anyway this posting is intended to disabuse you of the notion that the maximum marginal tax rate is only 27% in the Senate bill. The bill calls for taxing low income people at 15% and high income people at 27%. Note that none of the high income people's income gets taxed at 15%, so there is a transition point at which your tax rate jumps from 15% of all your income to 27% of all your income. Well, almost. To avoid such a disincentive marginal tax rate > 100%, there isn't a transition point but a transition region. Your first x dollars are taxed at 15%, your last y at 27%, and in the middle, at 32% in order to get continuity at the ends. It's further complicated beyond that (thank goodness they tried to SIMPLIFY taxes). Low income people are allowed n personal exemptions; high income people aren't allowed any. So there is a second region in which you are taxed at 27% + n * 1.35% if you have n personal exemptions. The personal exemptions work like property insurance with a disappearing deductible, except not in your favor. So if you have a wife and 18 kids, your marginal rate in this region is 54%, even for long-term capital gains. No doubt you are wondering what these transition regions are. They are set to not bother the low income peo- ple who have lots of votes or the high income people who have lots of money to finance election campaigns. They hit the people trying to make the transition from low to high income: 32% bracket 27%+n*1.35% bracket Single 45000-87240 87240-127240 Married joint 75000-145320 145320-185320 Many Silicon Valley singles and two-earner couples will be in these brackets. Your consolation is that although the marginal rate is high, you are still only paying a max of 27% on your total taxable income. >>> MORAL <<<. Politicians simplifying taxes makes as much sense as simplifying the Unix kernel by hiring students who've just completed their first programming course (in BASIC). >>> EDITORIAL <<<. The overwhelming impression one gets by studying the Internal Revenue Code is of an enormous kluge put together by hackers without the slightest sense of where they were intending to go or how the various parts might interact. Most of the Senate bill is in this same great tradition. My main objections to the bill are 1) it doesn't go far enough in radically simplifying the Code, but the economy will suffer all the transitional adjustments anyway, with very little to show for it in the end; 2) it is fraudulent tax reduction in that it hides the cost of government in the prices of goods and services rather than by direct exaction from individuals. One of the few things Reagan has said that I think is sensible is "Taxes should hurt". I don't know if he under- stood what he meant, but whoever he was quoting meant that if people knew how much it was costing them to keep the government going they might do something radical about it. Unfortunately he seems to have forgotten all that now that, and seems eager to hide the cost of government by increasing corporate taxes. Well, I didn't vote for him!
mark@cbosgd.UUCP (Mark Horton) (07/28/86)
In article <5314@sun.uucp> dgh@sun.UUCP writes: > 32% bracket 27%+n*1.35% bracket > >Single 45000-87240 87240-127240 >Married joint 75000-145320 145320-185320 Let me get this straight. If I'm married and our combined income is under $75,000, we'll be taxed at the 15% rate? Sounds to me like that covers most of the middle class. I'm not in any danger of breaking into the 32% bracket in the forseeable future. (Send job offers at over $75K to...) Which "income" does this refer to? Gross receipts, before (schedule C) business expenses? Adjusted gross income? AGI after exemptions? Taxable income after deductions? Another thing I've been wondering. There is so much worry about the IRA being deductable, yet there has never been any question about the 401K. Even under the latest horror threat from the House-Senate group, they would limit the 401K to $5000/year, which is 150% better than an IRA. The 401K does stay deductable, doesn't it? Or are they going to tax our contributions to it, too? Mark
kdj@teddy.UUCP (Kenneth D. Jordan) (07/29/86)
The statement used to be: If you contributed $$ to a 401k plan or your company contributed $$ towards a pension plan for you then you could not contribute towards an IRA. Is this still true or have they become wiser ?
ask@cbrma.UUCP (A.S.Kamlet) (08/01/86)
In article <2937@teddy.UUCP> kdj@teddy.UUCP (Kenneth D. Jordan) writes: > > The statement used to be: > > If you contributed $$ to a 401k plan or your company contributed $$ > towards a pension plan for you then you could not contribute towards > an IRA. > > Is this still true or have they become wiser ? This is not the current law. Today, you can contribute to both an IRA and a 401K. This may change under the new tax bill. One version decreases the amount you can contribute to a 401K by the amount contributed to an IRA. And there's a version (same version?) that reduces the 401K from MIN ( $30,000 , 15% ) to MIN ( $7,000 , ?% ). A 401K is only offered through a cooperating employer, who may set lower limits. -- Art Kamlet AT&T Bell Laboratories Columbus {cbosgd | ihnp4}!cbrma!ask
dgh@sun.UUCP (08/03/86)
cbosgd!mark writes... > Let me get this straight. If I'm married and our combined income > is under $75,000, we'll be taxed at the 15% rate? Sounds to me like > that covers most of the middle class. I'm not in any danger of > breaking into the 32% bracket in the forseeable future. (Send job > offers at over $75K to...) > I mentioned particularly married couples both of whom work, which is the norm around here. Even public school teachers can be making > 75000 combined salary since they all have enormous seniority. Engineers do somewhat better than that. Combine salary with gains from selling stock or appreciated real estate and you get into interesting tax situations. > Which "income" does this refer to? Gross receipts, before (schedule C) > business expenses? Adjusted gross income? AGI after exemptions? Taxable > income after deductions? > The discontinuity that the phasing-in tax brackets address is in taxable income, which = adjusted gross income - deductions - exemptions, so the phasing in should logically be based upon taxable income. Instead, it's based on adjusted gross income, which = total income - adjustments to income. > Another thing I've been wondering. There is so much worry about the IRA > being deductable, yet there has never been any question about the 401K. > Even under the latest horror threat from the House-Senate group, they > would limit the 401K to $5000/year, which is 150% better than an IRA. > The 401K does stay deductable, doesn't it? Or are they going to tax our > contributions to it, too? House and Senate both limit 401K to 7000. House also limits IRA+401K to 7000. Amounts within limits are deductable same as currently. I haven't heard if the conference committee has reached agreement on this.