Notes and Citations For Tax Project

The model

There isn’t anything too exceptional about the Splitwise Tax model, other than that is a rough and ready estimator. It uses a macro-level estimate (not a more accurate and sophisticated micro-estimate) to estimate changes in revenue based on changes in the tax code. This is necessary to have the beautiful, interactive, and relatively quick visual response that the calculator has to changes in the tax code. Our tax model also is built from entirely public data, and linearly interpolates to fill in holes in its knowledge.

It does not calculate any economic impacts or budgetary impacts of the tax code – that sort of projecting is best left to experts, and is obviously significantly more speculative.

The model is plotted on an x-axis log scale, used for clarity and breath. We choose not to show very low AGI taxpayers or very high AGI tax payers to keep a manageable dynamic range.

I am very grateful to the NBER’s wonderful TAXSIM 9 program, which helped me check my work on understanding the tax code and taught me about how the system works.

We realize that the y-axis values we chose can have a big impact in perception, and we spent some time before settling on a -25% to 50% 75% (updated 4-14 by popular request) tax frame. Using a very large frame (say, to 100%) makes the graphic hard to read, hard to edit, and visually unbalanced. When the average tax goes below the scale, the pop-up shows the tax rate. The 50% maximum top rate made things look better, but we do plan to add an advanced option at some stage to allow users to go above this 50% rate. 4-14-2012: we’ve made the new default 75%, and we don’t expect to change it again, except perhaps as an advanced option.

We currently only show brackets and taxes for an average family of four, but we plan to change that as soon as possible.

We launched version 1.0 of the model on 4/12, and welcome corrections or suggested improvements. Changes will be posted below.

Comments and Flaws

Mortgage interest deduction: we seems to be a bit high relative to other studies of the cost, relative to existing published studies. One limitation of the model is that we can’t predict how many people would choose to just use a standard deduction, but we assumed all of the people who itemized would continue to itemize and would just lose the deduction.

Buffet rule: Our result seems to be in between published studies of the rule, which have claimed figures as low as $4B per year and as high $50B per year. We do not have a good sense of the variance of rates paid by individual tax payers, but we simply apply the rule to the “average” taxpayers we have sample data for above 1M dollars. Ours is a relatively rough estimate, and I haven’t studied the details, so I don’t have a position on which of these rival studies is more accurate.

EIC: I have a function that calculates this directly, but due to the details of the qualifications and under-claiming (and over-claiming) of the credit, I rescaled its effect on the budget to internally match the IRS data. I’m not sure it would be possible to do this any other way.

We show a mix of itemized and unitemized returns in the graph, so it’s not possible to specify the exact number of kids. We’re working so that you’ll soon be able to browse in these modes.

Some technical notes:

The model specifically works by using 2012 standard deduction and exemption features and using 2009 deduction data to deal with the fraction of deductions itemized and how much was itemized at each level.

“Income before taxes” is technically AGI, Adjusted Gross Income, which does include some deductions. Most of the data is derived from this IRS data from 2009 (and these two files, one outlining the deductions itemized and another. Obviously, this makes the data somewhat out of date, so it is scaled linearly to be equal to the 2012 projected revenues of $1165 billion for personal income tax.

The number of children assumed was derived from Census data.

Changelog:

version 1.1 posted 9:45pm Saturday 4/14/2012. Brackets now allowed up to 75%. Voting now allowed without social plugin (but non-logged in votes may be screened after the fact if we suspect foul play).

version 1.0 posted 1pm Thursday 4/12/2012.

27 thoughts on “Notes and Citations For Tax Project”

  1. Try running the personal income tax as is except that at 100 times full time minimum wage you stop using net and start using gross incomes, from whatever source derived. At that 100 times bracket tax rate is 50%. at two hundred times tax rate goes to 55%. at three hundred times it goes to 60%, and so on in 100 times steps and 5% increases until total income tax rate paid at all levels is 95%, which occurs at 1000 times full time annual minimum wage.

    Add in a ten percent tariff additional tax on all imports not of substantially Canadian Manufacture. (Canada has whatever Tariffs are now in place. Due to our long and very peaceful border and such considerations.

  2. Definitely interesting. Two questions though:
    1. You have the default top rate set at 39% – isn’t it 35% currently (39% in Obama’s proposal)?
    2. More importantly – you have the effective rate going up to over 30%, before settling down to about 30% at the top income. But studies that I’ve read have the current effective rate peaking at only about 24%, and dipping back below 20% at the very top (largely because of the preponderance of Capital Gains in the income of the very wealthy – reference the returns of Obama & Romney). Thoughts?

    Oh, and a thought on a ‘whizzy’ addition – when you change something, it’d be cool to have the old and new effective lines show, for easy comparison – perhaps always show the base one at least?

    One more annoying question: I’m assuming that this doesn’t include Social Security and Medicare – right? You might have said so, but I didn’t notice it (and am too lazy to save the comment and check back 🙂 ).

    1. Hey Bruce,

      You must have found the site through someone else’s proposal, and not a direct link to the default plan. If you click on a friend’s link, it goes to the tax code they created. In the top left, you can open the drop down and get a link to see the “current tax code,” which has the top rate at 35% (you’re correct about that).

      Similarly, you’re right that the average effective rate peaks below 30% (you were looking at some proposed change, not the current one), but in our model, derived from 2009 IRS data, it peaks at 28.7%. Would love a link to the study if you found a more accurate or relevant data set.

      Comparison is a cool idea, but it’s hard to do it and not make the whole thing more confusing. We’ll think about it.

      Indeed, does not include social security or Medicare, or FICA taxes.

      Thanks for the thoughtful comments!

      Jon

  3. In addition to the effective (average) tax rate at any point, can you display the marginal rate? One consideration is avoiding too-high marginal rates, especially at the low end where the EITC phases out. Watching the slope helps, but given the vertical and horizontal distortions it doesn’t say much..

  4. Hi Anon,

    Good point. Marginal rates are an important tax policy issue, but very difficult to aggregate into a single graph, because it would depend on the individual’s situation, and it’s hard to glean from aggregate IRS data. It would be much easier with a micro-simulation. However, there are some cases that are probably worth calling out, like what the Buffet rule does under some circumstances, where it’s obvious many people will face greater than 100% marginal rates.

    It will take a lot of fancy footwork to get that into the current graph, but it’s a great idea. I’ll speak with some experts to see if there’s a good way to include it.

  5. It would be very instructive if there was an alternate interactive model that keeps the tax rates fixed but varied the income distribution so, e.g. we could see the effect of the middle quintile earning 10% more … though i guess it is not clear if it should be a zero sum game.

  6. If I turn off all the option checkboxes, and set the tax rate to a flat % for everyone, the curve is flat at 0 until about 28500, and then at high income levels, actually decreases after about $600,000. What are your assumptions for what percent of incomes are from capital, and other deductions? (A link to a IRS site or something similar would be fine)

    1. Hi James,

      The curve will decrease at high income levels due their increasing amount of itemized deductions. The flat at 0 for the first bit is due to the standard deduction and exemptions. We assume a linearly scaled 2009 level of deductions (http://www.irs.gov/pub/irs-soi/09in12ms.xls) to have the total tax take be the same same as the projected 2011 tax take. Hope this helps!

  7. In the list of popular plans, what’s going on with Marginal Flat/ Effective Progressive? How can it raise so much revenue with only a 16% rate? Why does it still raise 1 trillion in new revenue when I lower the slider to make the rate 0%? There seems to be an error in the calculations.

    1. Hi Clifton – I agree. I don’t know what dark magic the creator of that plan did to make things look the way they do, but we’ll try and fix the display on that.

  8. Option to eliminate all breaks, credits, deductions, exemptions, loopholes, subsidies, et c.
    Option to select filing status.
    Option to add/remove brackets.
    Option to modify Social Security and Medicare rates, possibly in another frame

  9. Base Tax 7.65% Charged on all forms of income on all tiers

    Personal Income Tax
    Min Max Tax Rate
    $0.00 $31,250.00 0%
    $31,250.01 $62,500.00 10%
    $62,500.01 $125,000.00 25%
    $125,000.01 $250,000.00 45%
    $250,000.01 $500,000.00 70%
    $500,000.01 And up 85%

    $10,000 Deduction for each dependent, Charity Tax deduction still in place, remove all other tax credits, other deductions.
    All Federal taxes as one will not see FICA, medicare as separate taxes.
    No taxes charged for active duty military, or retired individuals where social security is at least 50% of their income. ( Must not be working to gain tax exemption. )

    I was wondering if I could look at the numbers you used to create this calculator so that I could better finish my own plan.

  10. It would be nice to have an option to type in the numbers. It’s frustrating to use the slider when they’re high. Also, it would nice to not have a cap at 75% – the top rate was over 90% after WWII. Including the child tax credit as a possible deduction would also be interesting. I love the concept!

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    1. Sorry – it was a big project and there were only so many options we could include! We haven’t updated it since 2012, so beware of continuing to use it. Still might be OK for estimating but definitely not as robust as the models produced by dedicated non-profits, academics etc.

  12. Everyone should have a stake in the country and should pay at least 5% & the highest tax should be 22% Max. The bulk of the middle class should pay 10% & 12 % Increasing to 15, 18, then top off at 22%. Stop AMT and most exceptions. Best would be a tax at 5% to 22 % on income. Not retired benefits across the board without an IRS to pay for. Don’t tax the military pay at all but reduce the amount. Keep it simple and make congress remove 2 old bills to get a new one.

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