Long-time readers of my posts may recall this comparison I made a year ago, using the TurboTax computer program, between the federal, state and local taxes owed by two hypothetical Brooklyn couples with the exact same $75,000 middle-class income — one a couple of retired senior citizen homeowners, the other a working couple crammed into a small apartment. I found that the young couple would pay three times as much in taxes, and that while the seniors paid far less in federal taxes, because retirement income is exempt from the payroll tax, the disparity in New York’s state and local taxes was even greater, because retirement income is not subject to state and local income taxes at all. Well, it’s tax time again, and I’ve once again used the Turbo Tax program to do my taxes and theirs. This year I bumped the income of the two couples — Mr. and Mrs. Senior Voter, and Mr. Young and Ms. Younger Hopeful — up to $100,000 to see what changes. The answer is not much. The Young Hopefuls continue to be taxed heavily as if they were rich, while the Senior Voters continue to pay little as if they were needy, despite the exact same income. Adding a child to the Young Hopefuls, and child care costs and child tax benefits, helps little. If Ms. Hopeful were to stay home with the child, the young couple would still pay more in taxes than the older couple, despite lower income.
The analysis is summarized in the attached spreadsheet; I’ll try to keep the discussion briefer this year, but the reader can follow the links to last year’s four-post review if more information is desired.
Compared with last year the Senior Voters got a cost of living increase in their city pensions and Social Security, as mandated by law in good times and bad, no matter the effect on the people who pay taxes to fund these benefits. Of course the cost of the health insurance, which they don’t pay for, also went up. Some of that cost (particularly for Medicare) is paid for with borrowed money, likely reducing the benefits the Young Hopefuls will receive when they are old. To get the income up to $100,000, I have given the Senior Voters more savings — $835,625 in their retirement savings account, to provide $33,425 in 2007 spending money at the recommended 4% withdrawal rate.
The Senior Voters have wisely paid off their house, rather than refinance it and spend the money as so many Americans have. Their $100,000 in annual income is a perfectly balanced three-legged stool — one-third pension, one-third Social Security, one-third savings. Today half of all American workers, and a majority of those under 45, have nothing but Social Security to look forward to, and as I discussed here, because the federal government has been spending all the additional payroll taxes young people are paying “for Social Security,” even those benefits are likely to be slashed once the 60’s generation is in the program and can be exempted from sacrifices.
For now the Young Hopefuls are getting by on $100,000, although they do not receive health insurance from their employers (he is required to work as a “freelancer” while she works a low-wage, no benefit job). To get to $100,000 in income, I pushed Mr. Hopeful’s self employment income up to $75,000, since 2007 was a fairly good economic year in New York. In 2008, with a recession, the Hopeful’s income could plunge, but the Senior Voters will be due another cost of living increase. So much for senior citizens being on a fixed income. One thing that has definitely increased — the Young Hopeful’s cost of living. Today’s young Brooklynites do not receive the benefit of rent stabilization, because rent stabilized units are held by long-term tenants. Many rent apartments in small homes, which in NYC receive an enormous tax break limiting property tax increases without any correlative obligation to limit rent increases. Based on information collected by the firm where I work, I estimate their market-rate rent increase at 9% in 2007.
So what about taxes?
The Senior Voters would owe $11,791 in 2007 federal taxes on their $100,000 income, or 11.8% of it. The Young Hopefuls would owe $22,214, or 22.2%, nearly twice as much. The key difference is in the payroll tax, which the Senior Voters do not pay at all, but which costs the Young Hopefuls more than the federal income tax — like most working Americans. Mr. Hopeful, because he is self-employed, pays both the employer share and the employee share of the payroll tax, for a total of 15%, while Ms. Hopeful pays the 7.5% employee share. But it is likely that Ms. Hopeful’s employer takes the cost of payroll taxes into account when deciding how much to offer in a raise, shifting that burden to her also. (That indirect effect is not counted here). One could argue that it would be silly to have pensioners pay Social Security taxes and also collect Social Security — that is something you pay when you are young and get when you are old. But is it reasonable that the Senior Voters get Medicare but do not pay Medicare taxes, while the Young Hopefuls pay Medicare taxes but do not get Medicare, or any other health care assistance from the government?
At the state and local level, the disparities remain greater. Based on the more detailed data now posted by the NYC Department of Finance, I estimate that the Young Hopeful’s South Slope landlord paid $3,551 in NYC property taxes on their one-bedroom apartment (see spreadsheet notes), which (given market clearing conditions and landlord-tenant negotiations) factors into the $23,544 in annual rent the Young Hopefuls paid. (In rent stabilized apartments, property taxes are factored into the rent increases allowed, which is based on changes in landlord costs). For a Windsor Terrace rowhouse actually worth $650,000 (my estimate) but often selling for close to $1 million in recent housing bubble years, the Senior Voters would pay $3,200 net of their Basic Star tax reduction. In addition, they would receive a $400 Bloomberg rebate check from the city and, starting last year, a $132 Spitzer rebate check from the state, cutting their net property tax cost to $2,668. Had their incomes been low enough to qualify for Enhanced STAR, available to those over 65 with less than $70,650 income but not to anyone else with less than $70,650 in income, their property taxes would have been lower, and their state check higher.
For both the Senior Voters and the Young Hopefuls, property taxes are lower than they would be in most of the state, but this is offset by the city’s virtually unique local income tax. The Young Hopefuls would owe $1,680 in local income taxes, but the Senior voters would owe nothing, because retirement income (Social Security, Pension, 401K) is exempt from New York State and local income taxes for those over 65 — or at any age for retired public employees. In fact, according to Turbo Tax the seniors would get a $290 STAR local income tax rebate despite paying no local income taxes. The Young Hopefuls would owe another $4,666 in state income taxes — again the Senior Voters would owe nothing. Worse, the self employed are the mirror image of senior citizens when it comes to special treatment in New York City. So the Young Hopefuls have to pay an additional $1,029 in New York City Unincorporated Business Taxes on Mr. Hopeful’s freelance income that government, non-profit and corporate employees with the very same income would not have to pay.
Adding it up, the Young Hopefuls would pay $10,926 in state and local taxes, or 10.9% of their income, while the Senior Voters would pay just $2,378, or 2.4% of their identical income, one quarter of what the younger couple would pay.
And adding in federal taxes, the Young Hopefuls would pay $33,590 in direct, federal, state and local taxes, or one-third of their $100,000 income. That does not include indirect taxes, such as sales taxes on the goods and services they buy, and Ms. Hopeful’s employer’s taxes for Social Security, Medicare, unemployment insurance and workman’s compensation. On their $100,000 income, the Senior Voters would pay just $14,169 in taxes, or 14.2% of their income. Moreover, because of the wealth the Senior Voters have in a paid off house, they would have $83,405 left to spend after taxes and housing costs. The Young Hopefuls would have just $46,418, or little more than half. So who is likely to feel they are needier, the retired seniors living in a house and doing as they please all day, or the young people working and living in a small apartment yet having half as much to spend? Probably the retired seniors, based on the politics of the past 25 years.
In response to last year’s post, one comment objected that young couples get plenty of tax breaks if they have children to care for. But adding a child, and some child care when Ms. Hopeful is working, changes little. Their taxable income for federal income tax purposes drops by $3,400, but their federal income tax falls by just $450. Their state and local taxable income drops by $1,000, but their state and local income taxes fall by just $112. These breaks are worth much more to those in higher tax brackets — they are intended for two-income professionals — until their income gets high enough that the breaks phase out and the Alternative Minimum Tax kicks in. And property, payroll, and unincorporated business taxes are not affected by the presence of a child at all. The total direct tax burden is reduced from $33.6% to 33.0% by the presence of a child. (For comparison my total direct tax burden, as a homeowner in a two-income family better off than our hypothetical couple but with neither of us self employed, is 37.0% for 2007.)
Even if Ms. Hopeful were to stay home with the baby, cutting the Young Hopeful’s income to $75,000, they would still pay 33.5% of their income in taxes, as the taxes that don’t change — property, his UBT — bite harder. A young, working renting couple with $75,000 in income and a baby would pay $25,146 in taxes, while an older, retired homeowning couple with $100,000 in income and no other dependents would pay $14,169.
These disparities are a combination of many decisions to “do something” for politically important constituencies — senior citizens, public employee unions, outer borough homeowners. These continue to demand more and more each year and believe they are entitled to it. When money gets scarce others — the young, the self employed, renters who lack the benefit of rent stabilization — are sacrificed to pay for it. While some, including myself, benefit from some deals while being hurt by others, many are on the right or wrong side of just about everything. The difference is generational. It is inequitable, and wrong.