We have backed away from the fiscal cliff last week in a last minute deal that was pushed through, amended, and pushed through again all through the wee hours of the night. Many people are breathing a sigh of relief, no economic carnage to be seen, yet.
The bill that was passed looks to mean more taxation on the incomes of Minnesotans making $400,000 a year or more. Which has started the ongoing argument nationwide that the middle class is not being taxed enough, or on the flip side too much even after the plan to tax higher income earners. But the truth might be that both sides have seen an increase in taxes and it still might not be enough.
Who is seeing a tax increase
President Obama has been encouraging the safe keeping of middle class wage earners by attempting to put more burden on high wage earners—this was one of the biggest sticking points of the bill, what is appropriate taxation for high income earners, and would raising their taxes effect jobs? The bill seems to have reached a middle ground, income earners seeing $400,000/year or higher will see an increase in taxes. Obama, and his allies in Congress, wanted to see this increase at a much lower yearly level. Those making around $200,000 or higher. So the burden seems to be passed on to higher income earners, but not to the ideal level for President Obama, and middle income earners still feel the same percentage of previous years.
Upon a second glance
It looks as though many of those on the side shooting for a higher tax burden on high income earners have seen success. Earners making $400,000 and up are going to see more taxes, and middle income earners should stay level. But let’s take a second look. A payroll tax cut is set to expire after the passing of this bill. This means that 77% of Americans will have to pay higher taxes—USAToday. This means that if you are earning $75,000 to $100,000 will see a tax increase of about $1,200 a year. This hits right in the middle of Obama’s middle class.
Another second look will show that earnings coming from capital gains are getting a raise, from about 15% to 20%. This is important figure when looking at taxation on higher earners. A portion of those who make more than $400,000 a year typically has a portion of their income coming from investments. This is not always the case, but it is an important note in looking at the big picture. This in a roundabout way still means higher taxation for those earners, but it might not be as high as it seems.
Is there a fair balance
Let’s look at what the balance is for middle class Minnesotans. The 2011 census puts the median income for Minnesota at $58,476—which is above the U.S. Average I might add. This puts the median income households of Minnesota far below the two brackets that will see increases in taxes ($75,000-$100,000 due to the expiration of Bush-era tax cuts, and the changes to those making $400,000 or more).
The median income earners here in Minnesota are paying around a 25% income tax on that $58,476 income. This means they are paying around $14,619 a year in taxes, taking home around $43,857. Minnesotans making $400,000 or more a year are taxed at around 35% (not including capital gains taxation for simplification reasons). They pay around $140,000 of their income a year and take home around $260,000. With the Fiscal Cliff Deal, these earners will be paying around 39.6%--that is if their earnings are not considered capital gains. This now means paying in around $241,600 in taxes bringing in a net of $158,400 home. The math here looks simple, and it is there is more to the tax system, take a look at the details at Forbes.
This is where the issue stands. To some it looks as though the higher income earners are making out great, even after the increase there is still an extremely heavy burden on lower income earners. The balance can be argued in the fact that higher net earners tend to make a good portion of their money through capital gains. This is taxed relatively low at 20%, raised from 15% with this deal. So the thought is, realistically high net earners with income that can be put in investments could balance their share of taxation through capital gains.
Where we stand
Minnesotans making more than $400,000 year will be paying more taxes, and there still is a discrepancy between middle/low income earners’ and high income earners’ perceived burden. In reality most Americans will be paying higher taxes. This includes 77% of Americans in the $75,000-$100,000 bracket. The bill passage has allowed tax reliefs for this bracket to expire. The increased taxes still do not account for the deficits that we see, or account for balancing the budget, and burdens haven’t been changed merely spread out to larger portions of people. Changes in other areas most likely might be needed, and many are calling for this as well.
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