Since we published our calculator that shows how each presidential candidate's tax plan would affect you, we've received a lot of questions about how it was built.
So we asked Roberton Williams at the Tax Policy Center, which did the analysis for the calculator. Williams, who worked at the Congressional Budget Office from 1984 to 2006, went over the analysis and emailed us back with why certain decisions were made.
Question: How is it possible that taxes go up so much under Bernie Sanders? For example, an effective rate of 33.8 percent for someone making $35,000?!
Roberton Williams: The calculator includes more than just income tax. It also includes three other taxes:
- Payroll taxes that fund Social Security and Medicare. Those taxes are imposed on both workers and employers (7.65 percent of wages paid by each), but economists generally agree that workers actually pay the full tax — employers pass their share back to workers in the form of lower wages.
- Excise taxes on cigarettes, alcohol, airplane tickets, and other products.
- Corporate income taxes (paid partly by workers in the form of lower wages and partly by people who own businesses, either directly or through their investments).
The four taxes combined mean that effective tax rates are much higher than individual income tax rates alone.
The calculator also uses a broader measure of income than adjusted gross income, or AGI, the basic measure used for the federal income tax. The broader measure, called expanded cash income, or ECI, includes income from various sources not subject to income tax and therefore not in AGI.
(Editor's note: The calculator originally used AGI, but, as Williams will explain, we decided to switch to ECI to provide a more accurate measure of tax rates.)
For example, ECI includes tax-exempt interest on municipal bonds, all income earned by Americans working outside the US, health insurance premiums paid by employers, and employer contributions to workers' retirement plans. People often fail to take account of income from those sources when they consider how much they make each year. Because ECI is larger than what people think they make, effective tax rates calculated using ECI may seem lower than what people think they are.
In the calculator, average tax rates equal total tax paid, measured as a percentage of ECI. Because people often fail to consider all taxes they pay and all income they receive, average tax rates shown in the calculator may seem either bigger or smaller than they expect. Nevertheless, the rates in the calculator are the best estimates of the tax burden imposed on Americans.
Bernie Sanders would increase all individual income tax rates by 2.2 percentage points to help pay for his health plan and impose a new 6.2 percent tax on earnings (paid by employers but passed back to workers in the form of lower wages — which would occur over time as wages would increase more slowly than they would without the new tax). Both of those taxes would affect all workers, boosting taxes across all income classes.
Q: I'm confused by how payroll tax gets passed on to me. I already have a salary. My employer can't just lower my pay, right?
RW: Workers would not immediately bear the cost of payroll taxes paid by employers, because wages do not adjust instantaneously. Over time, however, wages and other benefits would increase less or perhaps go down (current workers would get smaller raises, new hires would get less pay, and so forth) until the full cost of the higher payroll tax falls fully on workers.
Q: Why didn't you calculate the effects of greater spending on government programs?
RW: The calculator uses results from the Tax Policy Center's analysis of the four tax plans to show the effects of each plan. The center's models do not yet include spending programs, so the analyses cannot show the effects of expanded government spending.
Q: This model doesn't show savings from universal health care and lower interest rates on education loans. What gives?
RW: The Tax Policy Center's model does not include spending programs and thus can only show the effects of tax changes. The model does not indicate the effects of changes in government spending that reduce what households have to pay for health insurance or other consumption.
Q: How accurate of an estimate can you make, when individual circumstances can vary so much?
RW: The calculator averages incomes and taxes for all of the households that fall into each income-demographic category. Because households in each category can be otherwise very different, the calculator can only show the average effects of the tax plans on all households in each category, which may not accurately estimate the impact on any particular household in the category.
(The Tax Policy Center will create a more detailed tax calculator for the general election that will allow users to enter much more detailed income and spending information and show the detailed effects of each plan on the specific household chosen.)
Q: Why can't the calculator explain the likely effects of higher and lower wages?
RW: The calculator does show the effects of different amounts of wage income but only on average for each income-demographic combination. For each combination, however, the result is only an average and so does not assess differences among households with different amounts of wage income.
Q: I am in the $120,000-to-$130,000 range. The calculator says I'd pay more tax if married with one child, versus married with no kids. Why?
RW: The calculator shows the average effect for all households in each income-demographic combination. Because each combination includes a wide variety of households that can have very different levels of income and spending that affect their tax bills, calculator results may differ across households in unexpected ways.
In the case cited, couples with no children may pay less tax than those with one child because they have more expenses they can itemize on their tax returns, because they spend less on goods subject to excise taxes, or for other reasons. But a childless couple would pay more tax than a couple with one child if the two couples were otherwise identical.
Q: Does this calculator include income not from W-2 wages?
RW: Yes. The calculator includes income from all sources, including wage and salary income, income from businesses and investments, and other sources, whether or not they are subject to federal taxes.
Q: The Supreme Court called the Affordable Care Act mandate a tax. Do you treat current health care spending as a tax in your comparison?
RW: The calculator includes the ACA's penalty tax imposed on people who lack required health insurance coverage. It does not include the tax credits the ACA provides to subsidize health insurance coverage for low- and moderate-income households.
