So how much would Joe the Plumber pay under Obama's taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plan? It's a difficult question to answer given that the tax code is so complicated and that you have to know so many details about a person to arrive at an answer (there will probably be a tax law passed that makes your dog's name affect your tax liability at some point). But we have made simple assumptions about Joe the Plumber to show how he would be impacted by Sen. Obama's tax increases in tax year 2009. Assumptions are explained below.
|
Tax Item |
Obama |
McCain/Current Law |
|
Adjusted Gross Income (after S.E. tax adjustment) |
$269,318 |
$269,318 |
|
Itemized Deductions less phase-out |
$49,420 |
$48,975 |
|
Personal Exemptions less phase-out |
$6,132 |
$6,911 |
|
Taxable Income |
$213,766 |
$213,433 |
|
Final Tax Bill |
$48,511 |
$48,254 |
Net Difference: Under these assumptions, Joe the Plumber would pay $257 more in taxes under Obama in 2009 than under McCain or current law. This is different from a previous quick estimate we did that merely took $280,000 as AGI and not as self-employment income. Using $280,000 as self-employment income as opposed to AGI gives Joe a lower tax bill because his taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. is lower due to the half self-employment tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. . This puts less of his income at the fifth tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. (the 33/36 percent bracket) and thereby less of a tax hike under Obama.
Note that running the numbers for tax year 2011 under similar assumptions as below for 2009 (after adjusting various parameters for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. assuming a rather significant 5 percent income growth for Joe and a 5 percent inflation rate), the tax liabilities under the various candidates' plans are as follows: Under McCain, Joe the Plumber would pay $56,731 in 2011. Under Obama, Joe the Plumber would pay $58,371 in 2011. That means his tax liability would be about $1,640 lower under McCain compared to Obama in 2011. (Income is assumed to be $309,000 in 2011 and tax parameters are adjusted accordingly.)
Note: These figures have been updated slightly to reflect the 2009 tax parameter for the itemized deductionItemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. phase-out threshold of $166,800 as opposed to the previous assumption of $165,100.
Assumptions
(1) Tax Year 2009
(2) AMT patch for 2009 (exemption for MFJ is $75,000)
(3) $20,000 in state and local taxes
(4) $30,000 in other itemized deductions
(5) $280,000 in small business income (no other income sources) — note that this is net income, not revenue. If Joe made $280,000 in revenue and say $180,000 in net income, he wouldn't face an average tax hike at all under Obama.
(6) Married Filing Jointly – no kids
(7) No payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.
change from either candidate
(8) Does not account for Obama’s special capital gains provisions for small business or McCain’s expensing provision
(9) Ignores health care provisions of the two candidates (we don’t know enough about Joe and his wife to make any judgments on this issue)
(10) No credits
(11) Assumes Obama sets PEP/Pease threshold for 2009 at $250,000 for joint returns
(12) Assumes McCain leaves PEP/Pease alone for 2009
(13) Assumes Obama raises 33 percent marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax.
to 36 percent in 2009, while McCain leaves it alone.