Keith Wilson

02-04-2010, 01:16 PM

Here's a hypothetical case I posted on another thread:

Mr. X works an ordinary job and has taxable income of $60K/year after all deductions. Mr. Y has a considerable inherited fortune and a very well-paid job; his taxable income is $250K/year from his investments and $250K in wages.

Mr. X pays about $11K in income tax, and $9400 in Social Security/Medicare taxes, (including the employer's share) for a total of about 34% of income. Mr. Y pays about $68,000 in federal income tax. He pays Social Security only on the first $106K of wages, or $16,800. His capital gains are taxed at 15%, or $37,500. His total federal tax bill is $122,300, which is certainly a lot of money - but it's 24.5% of his income. (income tax numbers here (http://www.moneychimp.com/features/tax_brackets.htm))

Let us say both these gentlemen live in Seattle. Including all state taxes, Mr. X will pay about $6000, and Mr. Y around $15,000 (source here (http://www.itepnet.org/whopays3.pdf))

Mr X's total taxes are $26,400, or 44% of his income.

Mr Y pays a total of $137,600, which is 27.5% of his income.

Mr Y is being taxed at a rate about 60% that of Mr. X. Mr Y makes more than eight times as much money.

None of this involves any kind of clever or creative accounting, it's just the tax code as it's written.

Is this right?

Mr. X works an ordinary job and has taxable income of $60K/year after all deductions. Mr. Y has a considerable inherited fortune and a very well-paid job; his taxable income is $250K/year from his investments and $250K in wages.

Mr. X pays about $11K in income tax, and $9400 in Social Security/Medicare taxes, (including the employer's share) for a total of about 34% of income. Mr. Y pays about $68,000 in federal income tax. He pays Social Security only on the first $106K of wages, or $16,800. His capital gains are taxed at 15%, or $37,500. His total federal tax bill is $122,300, which is certainly a lot of money - but it's 24.5% of his income. (income tax numbers here (http://www.moneychimp.com/features/tax_brackets.htm))

Let us say both these gentlemen live in Seattle. Including all state taxes, Mr. X will pay about $6000, and Mr. Y around $15,000 (source here (http://www.itepnet.org/whopays3.pdf))

Mr X's total taxes are $26,400, or 44% of his income.

Mr Y pays a total of $137,600, which is 27.5% of his income.

Mr Y is being taxed at a rate about 60% that of Mr. X. Mr Y makes more than eight times as much money.

None of this involves any kind of clever or creative accounting, it's just the tax code as it's written.

Is this right?