It's Time To Stop Laughing Off The Laffer Curve

Sometimes they are even a terrible idea. For instance, there are tax increases that would destroy $5 of private income for every $1 of revenue they collect.

Single or married filing separately with 2 kids, income from $75k-$95k, has an effective federal tax rate of 63%. Plus state and payroll taxes there is a total 75% tax rate. My wife will fall into this tax bracket. As such we are managing her 2021 income to mitigate this. We are maxing out her 401k and will reduce her hours if necessary to stay under the $75k income threshold. This is due the stimulus and boosted child tax credit phase outs.

So, your wife is paying $70k in taxes on $95k in income?

Sorry. The marginal rate. Only for the dollars from $75k-95k will have a 75% rate for 2021. So if she make $85k, the last $10k will result in additional $7.5k in taxes. So it is not worth working.

Please explain how that is

I agree that that does not make sense. This article discusses how the top marginal tax rate dropped from 39.6% to 37% under the Trump tax cuts.

And those numbers are nowhere near the it looks like the difference between $86k and $95k would result in an additional $2160 in taxes, which would be worth a net take home of $7,000. Sure…it sucks to get into a higher tax bracket, but if I was still in the work world, the additional income would be worth it to me. Not sure where he is getting 63% federal tax rate.

The only place I can possibly see 63% coming from is that it is 100% minus the highest 37% marginal rate. Still, the income band is way off.

Assuming taxable income of $85k, it looks like about $15k or 17%, and it another 16% for payroll and and 35% would be close for the fed total. I guess, it one was to add in every other state and local taxes, it could be considerably higher.

The marginal rate is 22%, however the boosted child tax credit and the $1400 stimulus checks start phasing out at $75k. So every dollar above $75k is subject to 22% fed, 7.65% payroll, 5% state, and also forgoing tax credits for boosted child tax credit (phase out of $1,600 per child starting at $75k) also the $1,400 stimulus (1 adult + 2 kids) starts phasing out at $75k. We did not get these stimulus or boosted child tax credit based on out 2020 agi, but you can claw them back on your 2021 tax return if your income is reduced. All in the, marginal rate for the dollars from $75k to $95k for single with 2 kids or mfs with 2 kids is 63%federal plus 7.65% payroll, plus 5% state.

What is at issue is phasing out of $7,400 in tax credits in the $75k+ income level.

Here is a visual chart for those that are curious. This is assuming standard deduction, no other deductions or credits other than the stimulus (refundable tax credit) and child tax credit (now full refundable $3,600 per kid under 6). I also did not calculate any low income tax credit. Theoretically, for the incomes on the low end would have more credits.

Edited and updated table below.

There is a similar issue that happens with MFJ at $150K AGI, but it is not as severe. If you have a single person with 3+ kids, it is much worse in the $75-$95K AGI level.

This is relevant to the laffer curve. If your income falls in this level, it is very punitive. If this same single with 2 kids was earning much more than it would somewhat be muted. My wife’s 2020 income was just shy of $100K. This year she has already reduced a day of work each week, and we are maximizing her 401K in order to target the $75K AGI level. Every additional work she does above that, the governments will effectively keep 75.65% (63% fed, 7.65% FICA, 5% state) of every dollar, and that is just not worth it.

In addition, the democrats have determined that $75K is the magical number. There has been some talk about student loan forgiveness and income thresholds. There is the potential that $75K AGI would also be used for determining need of student loan forgiveness. If this turns out to be the case, even at $10K in forgiveness, the marginal tax rate would exceed 100% in the incomes greater than $75K.

what is your source for this chart? I have a tax estimator, which has been right on the money for me for the past 2 years and it doesn’t come out anywhere near what you show in this graph.

I made it myself. It is part of my personal tax planner that I built in excel that update every year. You have me questioning so I went back and audited the table. I made a couple of corrections and the marginal rate reduced slightly.

Here is the nuts and bolts.
$75K income has 22% tax rate.
$1400 stimulus phases out from $75-80K which is a 28% rate. This for 2 kids phases out at $90K. So for income $75-90, there is an additional 28% tax.

The boosted child tax credit phases out $50 per $1,000 of income above $75. This effectively is 5% tax rate that will be effective on incomes $75-$139K for 2 kids. More kids gets a longer phase out and fewer kids gets a shorter phase out. I also made the old $2K, fully refundable. I had this phase out incorrect in my table above and I corrected it. It was originally based on the preliminary proposal.

So you have single with 2 kids, AGI at $75-90K, you have 55% federal taxes on that money. This does not include 7.65% payroll and 5% state of OK (varies based on state). So there is a 67.65% rate applied to these dollars.

“That small difference in AGI eligibility could incentivize those right above the income limit to lower their taxable income for 2021 so that they, too, can get a check. This can be done by contributing to a traditional 401(k) or IRA, among other strategies, which lowers a taxpayer’s AGI.”

Here is the same thing for married 2 kids.

So imagine the case with 2 working incomes. For simplicity purposes that AGI is $125K & $75K for a combined $200K.

Income 1, $125K, will have no stimulus recapture, no child tax credit and total tax of $21,100K.
Income 2, $75K, will get 3 stimulus checks and 2 boosted child tax credits and a total tax credit of -$1,800.
The total if filing MFS is $19,300.

If filing MFJ, there is zero stimulus recapture, and only $600 of boosted child tax credit. The total tax is $25,500, an increase of $6,200.

It is noteworthy that this does not work out for single income households nor does it work when incomes are drastically uneven. This is due to the tax tables will be more valuable to file jointly as the much higher income gets to take advantage of the lower tax rates for MFJ. So income of $200K and zero, would result in roughly $4,800 higher taxes if filing MFS and recapturing the stimulus and child tax credit.

As a people, we profess to believe in equality under the law. Yet our tax law makes a mockery of this principle.

Some people can have Roth IRAs, others not.
Some people can deduct all real estate losses, others cannot.
Some people pay one rate on capital gains, others another rate.
And I could go on forever.

American tax codes are a disgrace.

Our elected officials continue to try and equalize economic results through the tax code by using a progressively penalizing structure. So in a record year for tax receipts to the Treasury, still operating under the Trump Tax plan, we have 61% of Americans paying no tax in 2020 and projected 57% paying no tax in 2021. That’s simply astounding…

IT is indeed astounding. But I thought you guys said that taxing social security benefits amounted to double taxation. And a lot of people don’t have the 3 gazillion dollars that most financial planners say that you will need in retirement, so they rely primarily on social security. Are you having a change of heart on that, or could you find an article that doesn’t include social security recipients in it?

ADHD flyer appears as usual to try to change the subject, as usual.

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years. These nations have progressed through this sequence: From bondage to spiritual faith; From spiritual faith to great courage; From courage to liberty; From liberty to abundance; From abundance to selfishness; From selfishness to apathy; From apathy to dependence; From dependence back into bondage.”
― Alexander Fraser Tytler