Two things you can always count on: Death and Lies about Taxes

Last week, I found myself sitting at home on a Friday night enjoying the Sean Hannity show on Fox News. My riveting social life aside, this particular episode featured a special discussion with millennials, both democratic and republican, about their views on politics, policy, and their future. In general the discussion was your normal “news” banter about healthcare, job growth, student debt and taxes.

My favorite of the discussants was conservative blogger Kellen Curry who must have been the panelist who was allowed to make logical arguments in this segment. At one point in the show, he suggested the perpetual republican fight for lower taxes is no longer a valid one. He supported his claim by citing the downward trend in marginal tax rates over the last 60 years.

Before diving deeper, let’s take a second to review Taxes 101. As you know, people pay different tax rates based on many factors including how much money they make and their marital status. Below is the table of the 2013 marginal tax rate. A common misreading of this table would be to find the box your income falls in, look to see what rate it is taxed at, and be done with it. This is INCORRECT. Everyone’s first $8,925, whether they make $5,000 or $500,000 per year, is taxed at 10% and so on through the stages.

Taking the example of a single filer who made $450,000 in 2013 (see table below), the first $8,925 is taxed at a rate of 10% for a value of $892.50. Dollar $8,926 to dollar $36,250 is taxed at a rate of 15% for a value of $4,098.60. Skipping ahead, every dollar over $400,000 is taxed at a rate of 39.60%. So for this example, dollar $400,001 to dollar $450,000 is taxed at a rate of 39.6% for a value of $19,799.60. All together, this person is paying $135,962 in taxes on an income of $450,000 for an effective tax rate (percent of total income paid in taxes) of 30.2%. This is what is called the effective tax rate, or what you actually pay for the entire tax year.

Back to my thrilling Friday night, Kellen Curry articulated that conservatives were able to call for lower taxes throughout the 1950s, 60s, and 70s, when the marginal tax rate peaked at over 90%, but today it is only 39.6%. As you can see on the chart below, Woods is right in saying that the top marginal tax rate has steadily declined since the 1960s.

As Curry was making his point, he was quickly drowned out by the angrier conservative in the room Michelle Fields (a classic Fox News move: drowning out logic with anger). Fields countered that facts are not going to dissuade conservatives from calling for lower taxes, and that the fight for lower taxes should be continued based solely on principle. She went so far as to say that we need, “real people who are really fighting for our country, not a bunch of John McCains.” Perhaps Ms. Fields forgot that McCain actually did fight for this country.

Sean Hannity eventually stated that 60 cents of every dollar he earns goes to taxes of some kind (Federal, State, and Local income taxes as well as Sales, and Property taxes.) He was confident of this number, and I am sure he has used it many times, but I thought to myself… there is no way that is actually the truth, right?

I did some searching and I think this is may be where he gets his numbers from:

Here is the problem: There is absolutely no way that this is actually what Hannity pays in taxes. His numbers are calculated by taking the absolute highest tax rates in every category, which is easy and convenient, but vastly overstates his final end of year tax bill after all loopholes and deductions are included. This would also mean Mr. Hannity is making $0 a year on investment income, which is taxed at a much lower, 15 percent rate.

Also, he is making this argument while living in New York City, which I would agree is slightly excessive in its taxing policies, but you simply cannot make a federal tax argument from the standpoint of a single NYC citizen. While the city is huge, it only makes up only 2.5 percent of the US population. Just think of the horror of living in a country whose policies were completely dictated by those living in New York City, I think Mr. Hannity’s head might explode if that were the case. (Editor’s Note: Apparently it’s nothing Jacoby Ellsbury couldn’t tolerate for $150M.)

Anyway, back to the facts. The Tax Policy Center provides this chart which contains a mass of information. First, move to the bottom and to the right side of the chart, this is showing the Total Federal Taxes paid by the top 1% of wage earners. The total federal tax burden for those in the 90th percentile of federal taxes paid is only 32.3 percent of their income, a full 7.3 percentage points lower than the number used above to get to the 60 percent tax rate.  

That is the top tax payers in the entire country, which probably amounts to less than 150 thousand individuals. Looking at the other extreme, the lowest percentile of taxes paid for top 1 percent of earners in 2010 handed over only 5.9 percent of their incomes to federal taxes. Moving the federal tax burden from 39.6 in the original calculation down to the 5.9 percent that is paid by some of the richest people in the world would drop Mr. Hannity’s 60 percent claim down below 27 percent. Sean, call me. You must be getting terrible tax advice.

The total percentage drops even more when you look at the specifics of the State and Local level taxes. For example, the 8.97 percent New York state tax is the marginal rate for incomes over $500k, meaning only an individual’s $500,001st dollar is taxed at this rate, however the effective rate on all income earned up at a salary of $500,001 is dropped to 7.37 percent, a 1.6 percentage point drop below the number used in Hannity’s original calculation. You didn’t expect facts from cable news did you?

Here is a complete shot in the dark estimate of what Sean Hannity most likely pays in taxes each year on his $20 million/year contract. I estimate that his total effective tax rate is much closer to 46 percent than the 60 percent that he claims (a difference of over $2 million). The point here isn’t to say that 46 percent is high or low, the point is that if we are going to discuss tax policy let’s at least start with factual numbers.

The US Tax Code is 10,000 pages long and filled with deductions designed to prevent anyone from having to give 60 percent of their income to the government. That being said, the US Government is currently spending $680 billion more than it collects in taxes each year and the national deficit is up to $17 trillion. (For details on the budget deficit and national debt, see this post). This trend isn’t sustainable for much longer, so logic would suggest the government should both cut spending and raise taxes. 

It is hard enough to have a political argument on something as convoluted as tax policy, but it becomes even harder when “political journalists” say they pay an exorbitant 60% of their income in taxes to convince the 2 million+ daily Fox News viewers that the wealthy among us are taxed at incredible rates. A simplification of the tax code would largely eliminate loopholes and make deductions for things like home mortgages and charitable deductions clear so they are generally understood by all tax payers. A simplification may also bring to light the true story of taxes in the United States, which very few seem to understand. The only downside of a simplification- what would I do on Friday nights?

Rob Mahrt graduated from Ohio University in 2008 with a degree in Economics and Management Information Systems and currently works as an Energy Consultant for the United States Navy. In his free time he enjoys the incredibly dull study of tax and foreign policy, attempting to outplay the stock market, and long walks on the beach. You should follow him on Twitter @RobMahrt