Since the most recent tax reform was adopted in December 2017, this writer has been wondering what it really meant to average people. My averages will be a bit on the high side, but when I ran across a 1995 tax table I decided to try running some tests. Here are the results and I welcome comments and criticisms to my methodology. I am happy to publish any comments or corrections that merit consideration.
My test case is a single person earning $100,000 in 2019. To compare that fairly I need to adjust for inflation. In 2019, the CPI ended just under 257. In 1995, it was at 150. I understand that for many, wage growth has not kept pace with the rate of inflation but forgive me, this is a blog and not a study in labor statistics. However, if I stick we CPI, the person making $100,000 would have been making about $58,500 a quarter century ago. So, with that qualification let’s do some math based on a single person:
| |
1995 |
2019 |
| Wages |
58,500 |
100,000 |
| Standard deduction |
3,900 |
12,200 |
| Personal exemption |
2,500 |
0 |
| Taxable income |
52,100 |
87,800 |
| Federal tax |
11,552 |
15,246 |
| Tax rate on gross income |
19.75% |
15.25% |
Social Security and Medicare are for these folks, about the same. 7.65% of earned income. More on that later.
So we have good news right? Federal taxes as a percentage of gross income have declined by 22.8% while employment taxes remain static. Government is much more efficient to accomplish that, right? Hmmmm….
In 1995, the economy was stable and growing. Still, the government ran expenses of $1.5 trillion and the federal debt was $4.974 trillion. Today, in a full employment economy and with a SP500 index 7x greater than 1995, we have federal expenses of $4.5 trillion. Therefore, we spend 3x more than we did 25 years ago. But wait, we should inflation-adjust that as well. Fair point. So federal expenses are just about twice what they were in 1995 after we adjust for inflation. Meanwhile effect tax rates are 23% lower.
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