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Trivia Tidbit Of The Day: Part 191 -- Tax Brackets & Income Inequality.

Life-Cycle Effects Of Earning-

The Tax Foundation has been on a roll lately, churning out lots of great information on the American tax system. As a tax reform discussion approaches, it is important to have a grip on who pays what-- and how, when, and why they pay.

The folks on the left like to talk quite a bit about income inequality, without much context. The predictable refrain of, "Republicans want tax cuts for the rich," is the tried and true talking point for Democrats.

But here are some important points to note:

1. America remains a country where upward mobility is not only possible, it's probable. The overwhelming majority of us aren't locked into a class or income level from birth.

2. Many American voters would be surprised to learn they are not "Middle Class," as Democrats use the term. It only takes a little more than 70,000 in annual income to each the top quintile of taxpayers. Few Americans realize that being married with two middle class incomes (say, $45,000 and $35,000) thrusts a couple well into the top 20% of income earners.

3. Life-cycle effects are also something many Americans overlook or are just plain unaware of. Democrats love to play to this lack of knowledge. Let's turn that around a bit.

As an individual moves through life, it's rare that he or she will earn the same level of income, year after year, even adjusted for inflation. More likely, an individual will pursue more than one career, with several different employers. There may be a year or two with no employment in the middle. There may be an occasional taxable bonus or windfall of some sort that jolts someone up briefly into a higher income tax bracket. The next year, they could be back in the middle somewhere.

In other words, income is rarely stable. It's more of a snapshot. But on average, older workers make more, while younger workers make less. And that just makes sense. It's called a "starting salary" or "entry level salary" for a reason.

So let's look at some facts on life cycle effects:

...higher-income taxpayers are 50 percent older than their low-income neighbors. Overall, the lowest-income taxpayers (those in the bottom 10 percent) have a median age of 31 years. Looking at the remaining income groups reveals the progression of taxpayers’ incomes as they age in the workforce. Taxpayers in the middle 10 percent group have a median age of 40, while those in the top 10 percent have a median age of 47.

This is not shocking news.

So, older Americans make more than younger Americans. That's not groundbreaking. Pair that with the fact that taxpayers who pay the most are more likely to be married.

That would mean that slightly older married couples, likely with children, are the wealthiest taxpayers. These are couples who may have children of driving age, in college. These taxpayers have children getting married. These taxpayers likely still have years of payments left on a mortgage, not to mention property taxes galore. These newly over-the-hill taxpayers may have large medical bills they never had to deal with when they were in their 20s and 30s.

So it's not so clear cut. We should be quite a bit more careful when we talk about "rich" and "poor" Americans in the context of tax reform.

More on life-cycle effects of earning from The Tax Foundation.

Previous Trivia Tidbit: The Chinese Housing Boomlet.

Posted by Will Franklin · 20 October 2005 04:40 PM

Comments

Posted by: Zsa Zsa at October 20, 2005 05:19 PM

Posted by: bunkerman at October 20, 2005 08:58 PM