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The Middle Class and Taxes Under Clinton and Bush

By JLP | February 27, 2008

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.

Topics: Taxes | 26 Comments »


26 Responses to “The Middle Class and Taxes Under Clinton and Bush”

  1. jgs Says:
    February 27th, 2008 at 3:08 pm

    I would like to raise the question of what you get for your tax dollars. I did not pay quite as much in taxes in 98 as I do today, but all things being equal income wise, I would venture to say that I got more paying less in 98 than I do today. Government waste to me is the key. If we reduced government inefficiency, we could take tax rates even lower and get more. I just wish someone would focus on the expense side. However, that is not what gets votes and so long as we keep electing politicians to office this will continue to be the case. We need people who are not concerned with getting reelected to make the tough decisions. The problem is that those individuals are too smart to run for elected office. Therefore, we are left with career politicians whose key to reelection is spending money while trying to lower taxes. Hence, our current situation.

  2. No Debt Plan Says:
    February 27th, 2008 at 3:19 pm

    What we really need is a government committed to sticking to a budget and paying off our national debt. Essentially in gov’t, if you don’t spend 100% of your budget one year, it gets cut the next year and may not be available when you truly need it. And we wonder why the government has become bloated.

  3. james Says:
    February 27th, 2008 at 3:48 pm

    1. You always seem to get some really interesting data. Not so much for this article, but your data on market returns per month, etc. And you get it in a data format, rather than scraping an image. Where does that all come from? Do you have a few good sources you generally use?

    2. Speaking of good sources, I did a quick search and found the CBO’s effective tax rates at http://www.cbo.gov/ftpdoc.cfm?index=6133&type=0 (see the excel link at the bottom). It seems to reinforce what you found, but you might have fun playing with the numbers.

    Also. I hate to get political, and move beyond your narrow topic, I agree with NDP’s principle. Tax breaks are one thing, but it’s a lot easier to give tax breaks when you (the US) are going into debt. It’s like saying your couple could spend an extra 5,000$/year if only they paid it back over the second 30 years.

    James

  4. Ernesto@InsuranceYak.com Says:
    February 27th, 2008 at 3:49 pm

    When Clinton was in office..you mean back when we had a balanced budget? Yeah not suprising we paid more in taxes back then. I paid little in taxes during the 90s and even less these days.

    I just got my tax return back from my tax guy (he’s an EA). I’m officially in the 2.75% tax bracket.

    When I get my ‘economic stimulation’ check, I’ll be in the 1.44% tax bracket.

    The tax code is so skewed towards investors & business owners, it’s a wonder anyone pays taxes.

  5. JLP Says:
    February 27th, 2008 at 4:01 pm

    James said:

    1. You always seem to get some really interesting data. Not so much for this article, but your data on market returns per month, etc. And you get it in a data format, rather than scraping an image. Where does that all come from? Do you have a few good sources you generally use?”

    James,

    Thanks. I always try to find interesting stuff like that. If I have a source for the information I always mention it. The S&P 500 returns you mention were found in Ken Fisher’s book, “The Only Three Questions…”

  6. Meg Says:
    February 27th, 2008 at 10:44 pm

    Ernesto – the lack of a balanced budget today is not because of the lower taxes; it’s largely because of the war in Iraq (which you may or may not agree with, of course). It’s also due to the entitlement obligations that are in place–which were put into place by administrations like Clinton’s.

    And yeah, both Democrats and Republicans understand that tax incentives for business owners and investors are necessary and great for this country, our economy, and all Americans. Most middle class Americans wouldn’t have jobs or homes if businesspeople weren’t incented to take the risk of starting businesses and build homes and apartment buildings.

  7. RacerX Says:
    February 28th, 2008 at 12:25 am

    Really interesting. The other falicy is that the working poor are paying more. That was resolved in the new structure. It is actually the aspirational class – the Upper Middle class that has been spanked.

  8. Independent George Says:
    February 28th, 2008 at 8:26 am

    I hope this doesn’t turn into a political flame-fest (full disclosure: I voted for the guy in ’04, but not ’00), but the problem I have with these numbers is that the Bush tax cuts are really tax shifts. Absent spending discipline that hasn’t existed since the Coolidge adminstration, tax increases are pretty much inevitible. The federal tax rates are essentially an adjustable rate mortgage writ large; eventually, one (or more) of three things has to happen:

    1. We tighten our belts.
    2. We empty our wallets.
    3. We default.

  9. JLP Says:
    February 28th, 2008 at 9:15 am

    Independent George,

    I agree with what you say. I haven’t been impressed with Bush’s fiscal management. I’m fine with tax cuts as long as we adjust spending downward.

    My point was that Democrats talk about how horrible Bush has been for the middle class even though the numbers don’t say that. I seriously think most politicians just say crap without fully understanding what they are saying.

    It’s frustrating as a voter because truth no longer seems to be important in making decisions.

  10. TIL Says:
    February 28th, 2008 at 11:36 am

    My first question is why didn’t you use the year 2000 or 2001? I don’t know if it is any different then 1998, but I am just curious.

    As for tax cuts, I would agrue that the Democratic platform is targeted tax cuts for educational purposes and such and not a permanent tax.

    Another point is the changes to capital gains taxes over this period, which can be debated to support either side.

  11. Ernesto@InsuranceYak.com Says:
    February 28th, 2008 at 11:58 am

    Meg,

    Actually the entire “War on Terror” is being fought ‘off budget’. When you read any figure referring to budget and deficit the war costs are not included, it’s a ‘supplemental budget’.

    See for yourself http://www.cbo.gov/ftpdocs/86xx/doc8690/10-24-CostOfWar_Testimony.pdf

    Clinton in fact did not develop the entitlement programs, these were in place for decades before he came to office.

    The main reason the country is running a deficit is GW Bush& the Republican congress pushed through two tax cuts and expanded the current entitlement programs (Medicare) to include perscription drugs without any additional funding, administrative cost cuts or curtailing current benefits. Kind of like Santa Claus with someone else’s credit card.

  12. Rob Says:
    February 28th, 2008 at 12:39 pm

    Please tell me how Middle Class is defined . People who are in poverty is there by Govertnment Standards .They only Pay Elderly , and disabled $ 900.00 a month . They have to pay the highest Interest rates of 9.29 % . They Have no CREDIT , and ABSOLUTELY CANNOT BUILD WEALTH . Look at the interest Rate , do you see how the rich man got it made ? He only pay’s a 5.66% interest on purchases he’s made . This only leaves the poor to blame , So a 9.29% interest they shall pay , is it right for people in poverty , to pay the rich man’s way ?

  13. Rob Says:
    February 28th, 2008 at 12:45 pm

    Well , IS IT ?

  14. JLP Says:
    February 28th, 2008 at 1:12 pm

    Rob,

    Interest rates are charged based on the likelihood of default by the borrower. The greater the chance of default, the higher the interest rate charged. Like it or not, that’s just the way it is.

    I do think that a lot of people who bought houses via subprime loans were destined to fail because the interest rates charged on those loans were so high that it would be nearly impossible to pay back. That’s not right, but the borrower should have known better than to accept a loan that they had no hope of paying back.

  15. JLP Says:
    February 28th, 2008 at 1:53 pm

    TIL said:

    “My first question is why didn’t you use the year 2000 or 2001? I don’t know if it is any different then 1998, but I am just curious.”

    I just went back ten years that’s why I used 1998. However, I did go back through and reran the numbers using 2000’s brackets but it didn’t change anything. The results were still the same.

  16. eddie Says:
    February 28th, 2008 at 3:21 pm

    clinton made TARGETED tax cuts while paying down the debt. something republicans used to advocate. bush is the only president in history to give tax cuts during war time. something we cannot afford. china is buying out debt (bankrolling our war). some people think entitlements are the killer but (with the exception of bushs drug plan)in reality it is the interest on the debt that is the killer, something that just got ALOT worse under bush. this debt is unsustainable and tax increases must prudently follow but the republicans will continue with their cuts foolishly and make the dems seem like the bad guys when taxes rise. the ironic part is that if it were not for bushs poor fiscal management, tax increases would not be necessary. bush has really hurt this country financially and we will be paying for it for the remainder of our lifetimes. and while tax rates may be lower, look around, everything is more expensive.corporations have had a boon under bush. too many people give bush a pass and think (like meg) that our debt has skyrocketed because of the war. WRONG. the repubs spent money like it was their moms credit card at a strip club and only now that the dems are in charge, they feign responsibility. we are headed for a recession or worse a depression thanks to the republicans.when that happens, watch them roll out the “AMERO” as the answer to our prayers. bush makes nixon look like a boyscout. there are literally about 15 legitimate scandals surrounding him and any one could impeach him or land him in jail. he must be blackmailing the dems since they take no action. its pathetic that republican voters were so concerned with “the rule of law” when clinton lied about a blow job but there is no outrage towards this president. bush supporters are mentally ill in one respect or another. either that or they only get their news from “faux news” and have no idea whats really going on. they are in for a rude awakening.

  17. thomas Says:
    February 28th, 2008 at 6:44 pm

    why hasn’t anyone mentioned the huge economic boom that Clinton has the luxury of in office while Bush was hit with a recession (or 2 now)? It’s easy to operate a balanced budget when the money is rolling in.

    Leaving parties out of it, fiscal responsibility and cutting the huge amounts of excess budgetary fat are crucial for the US to remain a superpower.

  18. JLP Says:
    February 28th, 2008 at 7:00 pm

    Thomas,

    It’s been mentioned but tends to get ignored.

    That said, even with all the troubles Bush has had while in office, he still could have done a MUCH better job with fiscal policy.

  19. RH Says:
    February 29th, 2008 at 1:18 pm

    Did you adjust the tax brackets for inflation as well?

  20. Jesse Says:
    February 29th, 2008 at 2:32 pm

    Eddie,
    I agree that the debt has got to be paid down, but disagree that the interest is worse than the entitlement programs:

    http://www.thebudgetgraph.com/

    Based on the proposed 2008 budget, Medicare, Medicaid and Social Security are ~1.2 trillion, whereas the interest on our national debt is 261 billion.

    Entitlement programs need to be pared down drastically, and with that money, the debt needs to be repaid.

  21. Lord Says:
    March 1st, 2008 at 1:58 am

    It’s also due to the entitlement obligations that are in place–which were put into place by administrations like Clinton’s.

    Meg, this is utterly backwards. The deficit is actually much lower than what it really is because entitlement taxes are continuing to rise as they will until 2018 and are keeping it down. Lower taxes have indeed led to higher deficits.

  22. Mike Says:
    March 7th, 2008 at 3:30 pm

    You listed the SCHEDULED Tax Rate not the ACTUAL Rate payed.

    This makes a huge difference especially when the wealthy start to complain. The middle class actually pays the most based upon percentage of holdings whereas the wealthy get more exceptions and have more loopholes to jump out of paying the entire percentage rate.

  23. Ed Says:
    March 10th, 2008 at 12:39 pm

    Clinton created a budget surplus from what Ronald Regan left which was the biggest deficit in history to that point. Georgie has taken Clinton’s surplus and created what dwarfs any deficit that people could have even imagined. Sure I could have more money in the bank too if I put everything on credit cards. Duh! Leaving the next x number of generations our deficit to pay off is not exactly fair or too smart. It costs money to borrow money. If you aren’t smart enough to figure that out then you probably voted for Bush.

  24. Genius Boy Says:
    April 1st, 2008 at 10:00 am

    JLP:

    I’ve gone back and read most of your posts, which I’ll agree to, but this one is just plainly wrong. Any policy that reduces tax in declining revenue, running an enormously large deficit isn’t a good policy, since eventually someone has to pay.

    I’m Canadian (though I lived many years in the US), teaching at the H-school in Boston. But even I recognize far before Bush put in the tax cuts, that he was going to have to eventually pay for them somehow. Well, it hasn’t been by shrinking the government. No other president has increased the size of government than the W.

    Yes, the war in Iraq is costing the government $300 million a day or $100 billion a year. But the annual deficit is $400 billion. A lot of that is the tax cuts, which were ill-advised, and the increase in government spending.

  25. SOAS Says:
    April 8th, 2008 at 1:33 pm

    Meg,
    Are you sure the budget is not balanced because of the war? How is the war financed? Through the normal budgetary process or through supplementals that are not part of the budget ledger?

  26. SOAS Says:
    April 8th, 2008 at 1:36 pm

    Meg,

    Also, what entitlement programs did the Clinton Admin put in place that are causing the unbalanced budget today? It would be more productive for you to be a little specific (I realize in a blog/forum format it is difficult to get too detailed). Don’t we have an enormous prescription drug program under current admin? It doesn’t come across as objective the way you submit your posts as a “contributor” to the discussion.

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