While doing some research for a follow-up on the Roth 401(k) vs. Traditional 401(k) post from yesterday, I discovered something interesting. One of the campaign promises we keep hearing from members of a certain political party is how we need tax cuts for the middle class. What these candidates have failed to mention is that the tax burden on the middle class is a lot less now than it was under the last administration.
Take a look at the marginal tax rates from 1998 and 2008 (for Married Filing Jointly) along with the standard deduction and personal exemption information:
I wanted to do a side-by-side comparison to see how much a middle-class family of two would pay in taxes over a career if the tax rates stayed the same. Before I ran the numbers I adjusted 1998’s standard deduction and personal exemption for inflation, which brought it inline with 2008’s numbers. I also assumed the following:
1. A married couple filing jointly with a household income of $60,000 in 2008 with a 3% salary increase every year for the next 30 years.
2. A 10% contribution to a traditional 401(k).
3. The couple took the standard deduction and two personal exemptions each year (the 1998 standard deduction and personal exemptions were adjusted for inflation).
4. Taxes were calculated using the numbers from the above brackets.
According to my numbers, over a 30-year career, a couple could expect to pay over $107,000 more using 1998’s numbers than they would using 2008’s tax rates. NOTE: If you are interested, you can download the Excel spreadsheet I put together for this post by clicking here.
Now, in all fairness, I must mention that the likelihood of tax brackets NOT changing over a 30-year career is slim to none. But, as they stand right now, the middle class is paying less in federal income taxes now than they were when Clinton was in office.