For the middle 60 percent of the U.S. income distribution — the middle class and working class — the 25 years after World War II were the most prosperous in history. Those leaving high school or college, a level of education their parents worked to provide but could never have aspired to themselves, often ended up earning more than their fathers their first day on the job. Many obtained secure jobs with employer-provided pensions and health insurance, both of which had been developed during the war. As people moved on to the suburbs and Sunbelt and up the economic ladder, the extended family frayed and America’s seniors were often left behind and forgotten. Their suicide rates were high, and many were poor. America realized its mistake, and toward the end of this period a huge number of programs, tax breaks, subsidies and other benefits were created for senior citizens. Most of these were provided to anyone age 65 or over, regardless of income: senior citizens were simply assumed to be in need. Over the next 40 years, however, as the fortunate generation that came of age after the war became seniors themselves, the old ceased being the worst off people in America and in many ways became the best off. Even so, benefits for seniors continue to accumulate, making the current situation just as inequitable as in the 1950s — but in the other direction. This, and my next few posts, will demonstrate this for one aspect of public policy — taxes.
I’ve used the TurboTax software program and some other information to calculate the tax burden on two hypothetical couples — Mr. and Mrs. Senior Voter, and Mr. Young and Ms. Younger Hopeful. Both live in Brooklyn, New York, in or near the Windsor Terrace neighborhood, and both have money income of $75,000 per year. This repeats, with slightly different facts, an analysis done many years ago by the Concord Coalition for two couples in Northern Virginia. This analysis is for 2006, when a young couple would have paid nearly three times the taxes of a nearly identical senior couple with the same income.
The Senior Voters are 67 years old, having been born in 1940 and reached age 18 in 1958. They are near the end of the aforementioned “Silent Generation,” the name some demographers have coined for those between the “Greatest Generation,” which came of age during the Great Depression and WWII, and the Baby Boomers, born after the war. As their name and its relatively recent coinage demonstrate, this group hasn’t been talked about much. But the Silent Generation, and the first half the Baby Boomers (those born before, say, 1957), could be called the “richest generations” relative to both those who came before and those who came after.
The Voters benefited from the opportunities of the time. They have pensions that currently pay them $35,000 per year. They have Medicare, one of the big senior benefits enacted in the mid-1960s, and retiree health insurance provided by their former employer. Perhaps they were public employees. Or perhaps they were unionized private sector workers, or middle managers or clerical workers, in large companies. They also saved up $250,000 which has been rolled into an annuity that paid out $10,000 in 2006. And they receive Social Security — $30,000 worth in 2006. With the generations after them so much larger than their own (people didn’t feel like having so many babies during the Depression and WWII), there are plenty of workers supporting their Social Security payments.
The Senior Voters paid off their mortgage and own their rowhouse free and clear. It is probably worth $600,000 in normal times, but desperate people have paid far more for similar houses recently. That makes their total wealth $850,000. The house offers a big benefit — they live rent free. If they had saved a similar amount of money, put it in the bank, and used the interest to pay for rent, then the interest would have been taxable income. But since they instead invested in a house and “rented” it themselves, that “rental income” is tax free — a much bigger tax and economic benefit than the mortgage interest deduction and capital gain most people thing about. The Senior Voters do have some housing expenses, however — $1,030 per year for homeowners insurance, $338 for water and sewer, and $1,473 for heat and hot water. They don’t contribute the charity, and don’t any other unusual deductions other than the state and local taxes they pay.
Young and Younger Hopeful are 27, having been born in early 1980. This puts them toward the back end of Generation X. Like the Silent Generation, GenX is a small group, the product of the baby bust following the mid-1960s. Unlike the Silent Generation, however, GenX followed the huge Baby Boom groups rather than preceded them, and (like those at the back end of the Baby Boom) have grown up with much of the housing already bought and many of the better jobs taken. On the other hand, they didn’t grow up with a depression and didn’t face being drafted into a war. For our purposes, they could be immigrants or the children of immigrants rather than the descendents of those in the U.S. when the Senior Voters were born.
Like many young people today, Young Hopeful is self employed. Perhaps he is a college graduate who has been hired as a freelancer or contract worker — so his employer doesn’t have to provide health insurance, the employer half of payroll taxes, and other benefits. Perhaps he is a tradesman, repairman, or handyman, or has a wholesale route, or operates a small service business. Perhaps he is a freelance writer or artist or music teacher, or works on demand in the audio or video business. In any event, he has $60,000 in receipts and $10,000 in expenses, for a net of $50,000. As anyone who has been offered a lower price for paying in cash knows, many self employed people do not report all their income, cheating on their taxes. As if to make up for this, the tax code often hits the self-employed harder — not a good deal for those who are honest, but more expedient than going after those who aren’t. Assume Mr. Hopeful is honest.
Ms. Hopeful has a wage and salary job that pays $25,000 per year. Perhaps she works in a store or service establishment, or in a daycare center or as a home health aide. Her job does not provide health insurance, and the Hopefuls cannot afford individual insurance. If one of them becomes ill, they’ll end up on Medicaid after all their savings are exhausted, and with that kind of incentive, no wonder they have no savings, living paycheck to paycheck instead. Or worse, have a balance on their credit cards. And like half of all American workers — and a much larger share of those in younger generations — they have no retirement plan. Just Social Security, and President Bush said there may be a problem with that for those who aren’t “at or over age 55.”
The Hopefuls live in a one-bedroom apartment in an apartment building that costs them $1,800 per month. Like the Senior Voters, they don’t contribute the charity, and don’t any other unusual deductions other than the state and local taxes they pay.
In summary here are two couples with the same cash income: $75,000 per year. The Senior Voters have substantial non-cash income — they have health insurance and live rent free in their own home — and the Hopefuls have none. The Hopefuls both work, the Senior Voters do not work at all. So how much would they owe in federal, state and local taxes?
As the attached spreadsheet shows, the Senior Voters would pay $8,674 or 11.6% of their money income in taxes. Subtracting that and their housing costs as described above, they would have $63,485 per year left for other things.
Including the portion of their rent that goes to pay their landlord’s property taxes, Young and Younger Hopeful would pay $24,371 in taxes, or 32.5% of their cash income. For those counting at home, that is nearly three times the tax burden as a couple over age 65 with the same income. Subtracting their taxes and their rent (without double counting the property taxes) they would have $32,280 left for other things, or little more than half as much.
Ah yes, but the Hopefuls are young, free and easy! Burden them with a child and the government will come through for them, no? Not really. Adding a one-year-old Baby Hopeful would reduce their tax bill by $1,600 to $22,771, or 30.4% of their money income. It would leave $33,880 for everything but taxes and their one-bedroom apartment. Moreover, even if Ms. Hopeful lost her job or left the labor force to care for a Baby Hopeful, cutting their income to $50,000, they would still owe $14,597 in taxes — far more than Senior Voters earning $75,000 — or 29.2% of their income. A loss of one-third of their income would reduce the percent of their income paid in taxes by just over one percent.
Interestingly, my family is significantly better off than the Hopefuls, but our total tax burden as a share of income for 2006 is 31.7%, less than theirs without Baby Hopeful and not much more than theirs with a child. That is with a very simple tax return. Our tax burden is also about the same as the 31.5% of income we paid in taxes in 1989, when our average age was 27 and we were struggling young hopefuls ourselves. Although our income didn’t change in real dollars, our tax burden jumped to 35.9% the next year: “read my lips.” Since then, of course, we’ve added children and charity, which help to bring the tax bill down, but we’ve also added income. Our tax burden stayed down in part because multiple administrations have thrown money at people just like us (and them?) — dual-income college-educated professionals who earn enough not to take the standard deduction but not so much that they owe the Alternative Minimum Tax. The Clinton Administration did so by undoing the tax simplification of 1986 and adding tax breaks; the Bush and Pataki Administrations cut rates; the Bloomberg administration decided we and the Senior Voters need a $400 check (but the Hopefuls, who rent, do not).
But that is a discussion about taxes for those at different incomes, and would require many more TurboTax runs (any volunteers?). This is about age, and about how and why senior citizens pay less than those with the exact same income, even if they are otherwise better off. My next post will be about federal taxes, the following about state and local taxes, and the third about whether in a more long term, given that the Senior Voters were young once and Young and Younger Hopeful will be seniors someday, all this is fair. So if you want to argue that it is, print out the two-page spreadsheet and prepare to do so.