BusinessWeek Publishes Misleading Article on Federal Withholding Changes in 2011
October 29, 2010
All taxpayers should be concerned about the impending expiration of tax cuts (from both the Bush and Obama years) but no one should have a heart attack reading BusinessWeek’s latest estimates of how much higher the taxes will be. They’re way too high.
In an article yesterday, BusinessWeek purports to show how much more will be withheld from each two-week paycheck this coming January, assuming all the tax cuts expire. They make several errors, though, so taxpayers should either wait for the official tables from the IRS or check out the Tax Foundation’s calculator at MyTaxBurden.org.
Since Congress has yet to act to extend any of the cuts, it is increasingly likely the IRS will release initial 2011 withholding tables to employers assuming that the cuts expire. This would result in smaller paychecks beginning next year.
BusinessWeek crunches the numbers and claims, for example, that a married couple making $80,000 per year would pay an additional $224.48 twice every month, for a total of $5,315.52 per year, and links to a calculator showing withholding changes for a number of different taxpayers. This claim is being repeated across the blogosphere.
Unfortunately for BusinessWeek and their readers, the calculations are based on the wrong years and take no account of ten years’ worth of inflation. Their calculator lists, for example, the annual increase in income taxes for a single taxpayer making $40,000 as $1,913.28. The correct increase is closer to $425.
How could they miss by that much? Even if the IRS does, as seems likely, base its withholding tables for next year on the assumption that the cuts expire, the 2011 withholding tables will not be identical to the year 2000 tables. But BusinessWeek dug up the withholding tables from the year 2000 and built a 2011 calculator around them, asserting that when the tax cuts expire, all of us will once again owe what we did back then, with no inflationary adjustment of the bracket thresholds.
They arrive at their $1,913 figure by looking at 2010 IRS withholding for a single taxpayer making $40,000 in paychecks paid semi-monthly ($219.53) and subtracting that from the identical figure from the year 2000 IRS withholding table ($299.25) to arrive at a difference of $79.72, which, times 24 paychecks, equals $1,913. Ridiculous.
Another strange feature of their calculator is that it assumes each taxpayer, single or married couple, has zero personal exemptions. Legally, a taxpayer can choose zero, but almost no one does – a single taxpayer with no dependents can claim himself or herself as an exemption. Even if we ignore this, however, the correct withholding amount for the hypothetical taxpayer making $40,000 and choosing not to exempt himself is about $257, not $299. The BusinessWeek calculator is substantially overstating the tax increase for every one of its hypothetical taxpayers.
While taxpayers are right to be concerned about the possible expiration of the tax cuts, the potential increase isn’t nearly as dire as BusinessWeek suggests. Their article is based on the incorrect premise that tax brackets, in addition to tax rates, will revert to 2000 levels, which is simply not true. Those who would like to get a more accurate picture of their possible income tax burden next year can visit the Tax Foundation’s free 2011 Income Tax Calculator at www.mytaxburden.org.
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