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.