As we enter the last stretch of the presidential election, voters are starting to take a closer look at the candidates and what they stand for.
While social and foreign policy issues have dominated elections in the recent past, this year’s polls suggest it is all about “the economy.”
But what does that really mean? What about “the economy?”
What is “The Economy?”
It is tricky to know for sure because “the economy” as a construct is so abstract that it could mean very different things to different people.
Does it have to do with industrial output, taxes, jobs, entitlements, trade, the budget, the national debt or all or none of the above?
In general, it seems to be related to mood, which can be answered, at least in part, by the now clichéd phrase, “Are you better off today than you were four years ago?”
Mitt Romney, the Republican presidential nominee, raised the famous Reagan question in his convention speech a few weeks back and got people talking.
While most people tend to answer this question in a partisan manner, it is worth taking some time to figure the answer out for yourself.
There are lots of questions here, but answers are hard to come by. The idea of “the economy” as a construct is very personal, making it hard for politicians to target one or two key issues.
If you feel like crunching some numbers, the Federal Reserve Bank of St. Louis provides a database of 55,000 economic time series gathered from 45 sources.
If you don’t have time to go through them all, Business Insider grabbed some of the best screen shots here.
Each week, from now until the election, Mint is going to take a closer look at an economic topic that may be of importance to you.
If there is an economic topic you want to learn more about, go ahead and suggest one in the comment section below. Your question could be featured the following week.
This Week: Federal Income Taxes
This week we are going to take an initial stab at a biggie: taxes. More specifically, Federal income taxes.
For many Americans, the amount of money leaving their pockets and headed to Washington is a key indicator of how well the economy is doing – their own personal economy.
If someone feels they are currently paying more to the government than they did in the past, then they are probably not going to feel they are better off today.
Federal income taxes are one of the largest expenditures in a person’s budget, so a slight increase or decrease can make a major impact on how “rich” they feel.
US Tax Structure
The US has a progressive tax structure, which means a person should (in theory) pay a higher percentage of their income to the government in taxes as they make more money (up to a certain amount).
In the US we have six tax brackets based on individual income levels. Here is what they look like in 2012:
Married Filing Jointly
|10% Bracket||$0 – $17,400||$0 – $8,700|
|15% Bracket||$17,400 – $70,700||$8,700 – $35,350|
|25% Bracket||$70,700 – $142,700||$35,350 – $85,650|
|28% Bracket||$142,700 – $217,450||$85,650 – $178,650|
|33% Bracket||$217,450 – $388,350||$178,650 – $388,350|
|35% Bracket||Over $388,350||Over $388,350|
Does that look familiar? It should, because after adjusting for inflation, the Federal tax rate hasn’t changed since the so-called “Bush era tax cuts” came into effect in 2001 and 2003.
The tax cuts were supposed to end in 2010, but they were extended for another two years. The tax cuts are now set to end at the end of this year unless Congress and the President vote to extend them again.
Tax Credits and Payments
Do you feel like you are paying more or less than that?
Chances are you are paying less, but you think you are paying more.
You think you are paying more because this tax rate doesn’t take into account payments made to Social Security, Medicare, and state and regional governments.
This can add up to around 8% or more of your income based on where you are located and your income level.
But the reality is that you probably pay less than you think because of the multitude of tax deductions and tax credits you receive.
There are tax credits for things like children and there are deductions for things like the amount of interest paid on your mortgage.
The 47% Percent
Mitt Romney was heard on tape last week saying 47% of Americans don’t pay taxes at all.
That number is a bit misleading because it also counts retired people and students, who, of course, do not work and therefore do not pay taxes.
But there are a number of Americans who do work and still don’t pay income taxes – Federal income taxes.
The Tax Policy Center illustrates how this is possible:
“For example, a couple with two children earning less than $26,400 will pay no Federal income tax this year because their $11,600 standard deduction and four exemptions of $3,700 each reduce their taxable income to zero.”
That same couple could theoretically earn around another $20,000 without paying any Federal income taxes due to the myriad of credits and deductions available to them.
If we just look at the Federal income tax, then it is true that a large number of Americans do not pay into the system.
That means 53% of people do – but those people haven’t seen their tax burden go up, as there have been no major increases in the tax code since President Obama took office.
In fact, taxes for many Americans fell thanks to the “Making Work Pay” tax credit passed in 2009, which gave people a “stimulus check” of $400 per working individual in a household (up to a maximum of $800).
If anything, for most Americans, it appears that the amount they pay in taxes, at least in real terms, has gone down in the last four years because people’s incomes have fallen.
In the last quarter of 2008, when Mr. Obama was elected but not yet sworn in, the median household income was around $55,380.
And in the last quarter of 2011, the median household income was $52,377 – a whopping $3,000 difference.
With the gap between the high and low income earners diverging, it means most Americans have seen their Federal tax bill fall along with their incomes.
The Federal Tax Burden
So what does this all mean in terms of the overall Federal tax burden of Americans?
Well, we have a rough estimate thanks to the non-partisan Congressional Budget Office. They recently updated their insightful report on the Distribution of Household Income and Federal Taxes through 2009, the first year of the Obama presidency.
While it is not as current as other statistics, it is the most thoughtful on this subject.
The CBO found that overall Federal tax rates, including income taxes, payroll taxes (Social Security and Medicare), excise taxes (tobacco, gasoline and alcohol) and individual share of corporate income taxes was at its lowest point since they started taking data in 1979 at 17.4%.
The all-household Federal tax rate hit its peak at 22.7%, which was also the year before President George W. Bush took office. But the rate fell throughout his presidency as the Bush-era tax cuts went into effect.
So in terms of your tax burden, it appears that due to the stimulus checks and falling incomes, chances are you are paying less in Federal income taxes today than you did four years ago.
It is understandable if you are not jumping for joy here. After all, most people would probably prefer to have more money in their pockets, even if they are paying more in taxes.
That’s why taxes can’t be looked at in a vacuum and why there is so much more to consider when casting your vote based on “the economy.”
Next week we will be looking at the two candidates’ tax plans and see how they mesh with economic reality.
Cyrus Sanati is a frelance financial journalist whose work has appeared in dozens of leading publications, including The New York Times, BreakingViews.com, and WSJ.com. Follow Cyrus on Twitter @csanati.