Tax Update: Highest Earners’ Tax Share

October 4, 2018News, News Archive

Woodstock Quarterly Newsletter / Spring 2018

One of the things the new tax bill didn’t lower is the percentage of the income tax paid by the highest earners. In fact the very “progressive” income tax became more so. According to Congress, the income tax is expected to raise 50% of the total federal revenue in 2018, which is the largest source of US revenue.[1] The highest earning 20% of taxpayers, those expected to earn $150,000 or more, will pay 87% of the income tax, up from 84% in 2017.

The great leveler in the US tax system is payments for Social Security and Medicare made by all working Americans and their employers, almost regardless of income level. When those taxes are added to the income tax, the share of those combined taxes paid by the highest earners drops to 67%.

The US Federal Reserve Bank watches the risk in something called the “household financial stability” picture, comparing household wealth to disposable personal income and to household debt.[2] With household wealth approaching $100 trillion because of increasing stock market and real estate values which is seven times disposable personal income (at a high point) and, although household debt is increasing, it is not rising at as fast a pace as in 1999 and 2007 (so a “modest risk”).

We are watching recent Congressional Republican efforts to make some of the “temporary” parts of the new tax law permanent. The “cost” of the “make permanent” law, according to congressional accounting, is estimated at $600 billion. The benefits? Perhaps, it makes more certainty for investors and businesses. However, provisions expiring in 2023 or beyond are several election cycles away anyway and our politics would appear to continue to be volatile even if this “permanent” vote passes. Certainty does not seem to be in the cards for investors or businesses. In looking at coming mid-term elections, a Washington DC political consultant reminded his audience that the last time Democrats controlled Congress they did so with the help of “blue dog” Democrats.[3] More than watching the generic, like-dislike, national ballot, the mid-term results will come down to who is running against who in individual races across the country, according to the consultant.

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & President
Jeanne M. FitzGerald, CPA – Tax Manager

[1] WSJ 4/7-8/2018 p.B5
[2] WSJ 3/9/2018 p.A2
[3] Ask your investment manager for the reference.