Saturday, September 20, 2008

Reader Mailbag: The Tax Calculator

One reader wrote to us:

Thanks for building such a great and informative website. I have sent it to my entire family as we are in the midst of an important family debate about this year's election.

Quick question: Why can't I put in my families income as $300,000 or 400,000 in the tax calculator? Is this a blind spot in the Tax Policy Center's research? Or is Obama planning on taxing the hell out of this group of people and doesn't want to publicize it?

Either way it seems really weird that this area: 2 earner families who make between 250,000 and 450,000 dollars have to pick between either making 200,000 or 500,000 on the calculator. Is it possible to calculate the tax implications with more precision?
While we endorse the tax calculator, we didn't put it together or calculate the underlying numbers. The numbers come from the non-partisan analysis of the Tax Policy Center (TPC), and we don't know the people who built the calculator.

(A little more background: while I was blogging at the Democratic National Convention, it became clear that a key part of McCain's strategy was going to be to lie shamelessly about Obama's tax plan, and I realized that producing an online calculator was a good idea. I started
working on a calculator using the TPC data but discovered through a comment on our blog that it had already been done. The calculator we link to presents exactly the same information I would have used.)

The figures in the calculator are taken from the TPC's estimates for some typical taxpayers, with incomes at a select number of levels, using average characteristics at those incomes. They calculate these figures using a large dataset with a sample of IRS returns from a recent year. Obviously the estimates they produce are only a very rough guide to what someone with a given income will actually pay in taxes. That's because no one has average characteristics. For example, mortgage interest payments, charitable donations, and state tax deductions will all vary a great deal and have a big effect on tax payments. Plus the mix of types of income (wage, dividend, capital gains, etc.) makes a substantial difference.

Why does TPC use the income levels it does? I'm not sure. These are the levels it always uses for this kind of analysis. It's certainly not due to any Obama-favoring conspiracy. Not many taxpayers have over $200K adjusted gross income (less than 4%). For people at the high end, my guess is the TPC estimates are an especially rough estimate for a particular taxpayer, for all the reasons mentioned above. That's to say that even if TPC broke down their figures more and gave you tax incidence estimates at, say, incomes of $250K, $300K, etc., I doubt they would really give you a much precise estimate of how much you would pay.

For details of the Obama tax proposals, see this article by his advisers or Obama's site. In my original post about the calculator, I link to the TPC tables on which it's based.

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