Henry Aaron writes to me

James Kwak's calculation of the value of tax exclusion is incomplete.  He leaves out the exclusion from the payroll tax, worth 15.3 percent to the person in his example and to most people, and 2.9 percent (at the margin) for the rest who earn more than the OASDI taxable maximum.  The correct math is that the gross wage is 1 + .0765 = 1.0765 to allow for the employer's payroll tax cost.  The take home pay that could be used, after both payroll and income tax for someone in the 15 percent bracket is 1 – 0.0765 – 0.15 = 0.7735.  That means that the tax wedge is equivalent to a subsidy of 1- [.7735/1.0765] =.7185.  That is a 28.15 percent subsidy. 

For filers in the 28 percent bracket, which is easy to reach for a couple each of whom earns, say, $75,000, the subsidy is a bit over 40 percent.

Comments

Wow, nice to see an old gold gloves right fielder can still make a great catch.

In addition shouldnt one have to add state taxes as well which would further increase the subsidy. In some states this could be as high as 10%.

My comment on Tyler's first post had the answer that Aaron e-mailed (in the link to a Gruber paper). I explain the derivation in detail in a new post, for those who want it: http://baselinescenario.com/2010/02/03/the-republican-plan-ii-youre-on-your-own/

He really hammered home the point.

Higher Employee Income Tax Withholding in 2010 -

Employee take home pay will decrease while employer 941 payment liability will increase. Lower wage earners that are filing as married will be impacted the most.

Check out the table that illustrates the impact at http://blog.apspayroll.com/

That's why I want Benjamins in my pocket rather than counting on my ability to lobby future Obamas.

Very well put.

aaagh. statutory, not staturoty.

Highgamma,

AMT is lower than 35%.

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Paying taxes is always complicated and I think that there are special professionals that take care of this as there are peo services companies that deal with hiring the best people for a specific job.

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