USA Income / Taxes

Details

Last Updated: Saturday, 30 September 2023 13:55

Published: Tuesday, 02 October 2018 16:28

Hits: 816

USA Income and Taxes:

To look at the US economy, we have to first look at the total income of all the people living here, as well as their wealth.

US income/wealth percentile:

There's a neat income percentile on this link: https://dqydj.com/income-percentile-calculator/

There's also a wealth percentile here: https://dqydj.com/millionaires-in-america/

We saw in other USA sections, that there are about 130M households and about 150M working population in USA. Income percentile refers to percentile in these 150M workers, i.e top 5% means in the top 7.5M earners. Wealth percentile refers to these 130M households, i.e top 10% means you are in the top 13M households. Wealthier households are usually middle age or old age household as it takes 20 years or more to accumulate enough wealth to get to top percentile with a day job.

• 0%-70%: We see that every $1K in income gets you 1 percentile higher upto $70K in income. That means if you have $1K in income, you are in bottom 1%, while if your income is $70K, you are in 70 percentile. So, 0% to 70% goes up linearly with income. After this starts slight non linear curve.
• 71%-80%: Here, income goes up by $2K for every 1%. 70% starts at $70K in income, and 80% ends at $92K in income.
• 81%-90%: Here, income goes up by $4K for every 1%. 80% starts at $92K in income, and 90% ends at $132K in income.
• 90%-95%: Here income start going exponentially higher, and you need to make $10K more to get up by 1%. Income start at $132K and end at $186K. About 15M or 12% households are millionaires, meaning most of them are in this income group starting at 90% and above.
• 96%-99%. Here income go even more exponentially higher, and to make it to the top end of this income group, you need to make at least $500K. About 5M or 4% households have $4M or more in assets, and they are usually earners in this group.
• Top 1%: These are the richest people, who not only make > $500K/yr, but also have wealth > $10M. About 1M households have wealth > $10M, with 100K households having wealth > $50M, and 30K households having assets > $100M.  These 30K huseholds are who's who in America, and are generally well known. This is the chart showing top 1% of households income wise per state. As can be seen, in richer states as Connecticut, Masschusetts, California, New york, your hosehold needs to being in close to $1M, while in poorere states as West Virginia, Mississippi, New Mexico, etc, just $0.5M will get you there.
  
  • Link => https://www.cnbc.com/2023/09/30/how-much-money-you-need-to-make-to-be-in-the-top-1-percent-in-every-state.html

IRS income data

A lot of tax and income data available on IRS website. We want to just get an idea of how income of the population lines up.

IRS data taken for years, 2017, 2011 and 2007 (taken from here: https://www.irs.gov/statistics):

Types of returns filed: 3 major kind of tax returns filed, which account for 80% of tax revenue:

A. Individual tax returns: Filed by individuals like you and me. These are the 1040 forms filed. I'm showing data for 3 years: 2007, 2011 and 2017.

2017:

Selected data pulled from IRS stats file here: https://www.irs.gov/pub/irs-soi/17in14ar.xls

This is the 1040 form which the above table refers to: https://www.irs.gov/pub/irs-prior/f1040--2017.pdf

152M individual tax returns (form 1040)  filed.  73M were returns of single persons, 55M were returns of married filing jointly and 22M were returns of heads of households, and 3M were married filing separately.

AGI (line 37 in form 1040): AGI is Adjusted gross income and is line 37 in form 1040. Total AGI was $11.1T.

Number of returns with AGI > $500K was 1.5M or about 1% of total returns. 1M of these returns had AGI < $1M. So, once you start hitting AGI of $1M, you get in top 0.3% of population. Total cumulative AGI for this group is $2.3T (avg AGI = $1.5M). Only $0.9T of this income came from wages/salaries. $0.6T came from sale of capital assets, $0.1T from dividends, $0.6T from partnerships and S corps. In fact, as you go higher up in AGI, higher percentage of income comes from passive assets and not from wages (for people with AGI > $10M, income from assets is 6X their wages. So, decline in price of stocks/equities will hurt this top 1% very disproportionately as 25% of their AGI will evaporate in absence of capital gain (as they can't sell stocks for profit when markets are down for the year).

Number of returns with $200K < AGI < $500K were 6M or 4% of returns. So, an AGI of $200K or more places you in top 5% of working US population. Total cumulative AGI for this group is $1.8T (avg AGI = $300K).

Number of returns with $100K < AGI < $200K were 20M or 14% of returns. So, an AGI of $100K or more places you in top 20% of working US population. Total AGI for this group is $2.7T (avg AGI = $130K).

Number of returns with AGI < $100K: Remaining 125M returns fell in this category. This represents bottom 80% of the population. These are the poorest people with very little savings, and little assets. Their combined AGI is $4.5T (avg AGI = $36K), which is about half of tthe total AGI of entire US workforce. Their AGI is mostly comprised of wages, and SS/pensions. 80% of AGI, or about $3.5T comes from wages. Remaining $0.5T comes from retirement accounts, and $0.5T from Social security benefits. So, most of the retired people fall in this category. Also, most of the youngest workers under 26 years of age fall here too, as they are just starting. 2M returns are for people under 18 years of age, totalling $0.01T while 23M returns are for people between age of 18 and 26 years of age, totaling $0.45T. So, 25M returns are from people under 26 years of age, who mostly fall in AGI < $100K. When you hear about unemployment in news, this is the group that is most vulnerable, and comprises of most unemployed people. This bottom 80% drives the so called economy, as whatever they make gets spent, with negligible savings. About 50M people have non taxable returns, meaning they owe $0 in federal income taxes. Looking at table about 54M returns had AGI < $25K (or income below poverty line for a family of 4, with 2 kids and 2 adults. For an individual, poverty threshold is at $13K), so most likely these are the people having non taxable returns, since std deduction and many other credits can wipe out taxes. US census.gov website shows 11% of people below poverty line, while here we see 35% of population with AGI below $25K. Reason is many individuals filing return as single person are above poverty line, since poverty threshold for households with single person is at $13K.

Social security website shows that about 6% of returns filed have earnings over maximum taxable limit for social security for each year since 1980. Congress adjusts the Social Security limit every year to keep this 6% number constant. For 2017, the limit was $127K. This limit has doubled from $68K in 1998 to $138K in 2020, implying that wages/salaries for top 6% are rising at an annual rate of 3.5%.

https://www.ssa.gov/policy/docs/population-profiles/tax-max-earners.html

Bottomline: So, to be in top 5% and to stay there, you need wages > $130K and AGI > $200K for year 2017, and both of these need to go up by about 4% every year starting from year 2017. Also, you need to have extra income from dividends, interest, stocks sale, comprising at least 1/2 of what you get in wages/salaries. So, that way your AGI comes out to 150% of your wages.

AGI componenets: Various components of AGI are as follows:

wages/salaries (line 7 in form 1040) = $7.6T (126M returns), So, that leaves 26M returns (since total returns=152M) with no wages/salaries, which is mostly older retired people and disabled people. 29M returns had Social security benefits amounting to $0.6T. 15M returns had IRA distributions totaling $0.3T. These are mostly older people not in workforce. This implies that 26M returns are filed by people not employed (i.e old people living off social security, disabled people, etc). Looking at other table, we see that 26M returns were for people 65 and older, with collective AGI of $2.1T, out of which only 9M had salaries and wages totaling $0.5T.

interest (line 8 in form 1040) = 0.16T : taxable interest = $0.1T (44M returns), tax exempt interest = $0.06 (6M returns), => about 35% of returns have money earned thru bank account CD, savings a/c, etc. So, 2/3 of workforce don't even have bank accounts or don't earn any interest. Of the bottom 80% with AGI < $100K, 26M had taxable interest income totaling $0.025T. So, 80% of the interest income is attributed to top 20% of people, since they have savings. However, total deposits in US banks is over $10T, so $0.1T interest implies 1% interest rate, which is the highest rate banks offered in the last decade. So, basically income from interest has evaporated.

dividends (line 9 in form 1040) = 0.28T : ordinary dividends = $0.28T (28M returns), qualified dividends = 0.22T (26M returns), => about 20% of all returns have money earned thru stocks, since qualified dividends mostly comes thru stocks. That's a very high percentage of people invested in stock market thru their personal ccounts, considering that only 35% have bank accounts. Of the bottom 80% with AGI < $100K, 16M had ordinary dividend income totaling $0.05T. Here, just as in interest income above, 80% of the dividend income is attributed to top 20% of people. People with AGI in range $100K < AGI < $500K made about $0.1T in dividend. Assuming most of the dividend comes from US equities, it implies, that top 20% of the people have a lot of money invested in equities/stocks. Looks like all of America owns equities, with top 1% owning 50% of equities. Also, let's assume that $500B paid in dividends was paid by US companies in 2017 (no reliable source found for this but that's the range dividends have been around 2015-2020 ? FIXME?). Since ordinary dividends are $0.28T, then this implies that about 50% of US equities are owned by people in their personal accounts, while remaining 50% is held in their retirement accounts. Note that most of the equities held in personal accounts is for people in top 10%.

sale of capital assets (line 13 in form 1040, schedule D) = $0.8T (17M returns), Of these, about 6M returns filed for net cummulative loss of $13B. Reason for such low net loss is because losses are limited to $3K/return, so net loss could not exceed 6M*$3K = $18B in any given year. Again, people with AGI <$100K (or bottom 80%) of people had just $0.05T in cummulative capital gain, which is just 5% of all capital gains. Top 1% had capital gains totaling $0.6T or 75% of all capital gain. Sale of capital assets include house, stocks, and many other assets. Looking at tables on irs website for "capital gain/loss by asset type for year 2012" didn't give a clear picture on how much of this is from stocks and how much from other assets.

partnership and S corp income (line 17 in form 1040) = $0.7T (7M returns). Many individuals also form partnerships to open corporations. The profit from these corporations pass thru their individual income tax return,

rental and royalty income (line 17 in form 1040) = $0.05T (11M returns)

Of 26M returns that didn't have wages (152M-126M), most of them are either old/disabled people collecting SS/IRA/401K, or people with their own business

business income (line 12 in form 1040) = $0.35T (26M returns). Surprising that 20% of workforce have their pwn business. Probably a lot of mom/pop shops or franchises. What's interesting is that about 6.5M or 25% of these business returns had net loss. If that's true then a lot of these individual business would go bankrupt every year.

pension/annuities (line 16 in form 1040) = $1.2T (30M returns). distributions from 401K plan are reported under this on line 16a, 16b of form 1040. 18M returns were from people over age of 65, totaling $0.7T, while 6M returns were from people between age of 55 to 65, totaling $0.3T. As expected, 80% of this income is attributable to people in retirement.

taxable IRA distributions (line 15 in form 1040) =$0.26T (12M returns), here distributions from personal IRA accounts (not thru work) are reported on line 15a, 15b of form 1040. 11M returns were from people over age of 65, totaling $0.21T, while 2M returns were from people between age of 55 to 65, totaling $0.05T. As expected, 80% of this income is attributable to people in retirement.

Social security benefits (line 20 in form 1040) = $0.6T (29M returns),

unemployment compensation (line 19 in form 1040) = 0.1T (13M returns) and others were misc items.

Of this AGI, 100M returns applied for std deduction of $0.75T, while 45M returns applied for itemized deduction of $1.2T. So, Taxable income was $5.7T after accounting for deductions, exemptions, tax credits, etc. IRS collected a tax of $1.05T (~20% of taxable income).

2011: 145M individual tax returns (form 1040)  filed.  67M were returns of single persons, 53M were returns of married filing jointly and 22M were returns of heads of households, and 3M were married filing separately.

Total AGI was $8.4T. Various components of this are:

wages = $6.0T (120M returns),

interest = 0.2T : taxable interest = $0.12T (52M returns), tax exempt interest = $0.07T (6M returns), => about 35% of returns have money earned thru bank account CD, savings a/c, etc.

dividends = 0.35T : ordinary dividends = $0.2T (28M returns), qualified dividends = 0.15T (25M returns), => about 20% of returns have money earned thru stocks

capital gains = $0.4T (22M returns),

partnership and S corp income = $0.4T (8M returns),

rental and royalty income = $0.05T (11M returns)

Of 25M returns that didn't have wages (145M-120M), most of them are either old/disabled people collecting SS/IRA, or people with their own business

business income = $0.3T (23M returns),

pension/annuities= $0.6T (27M returns),

Social security benefits = $0.2T (17M returns),

taxable IRA distributions=$0.2T (13M returns)

unemployment compensation = 0.1T (13M returns) and others were misc items.

Of this AGI, 100M returns applied for std deduction of $0.75T, while 45M returns applied for itemized deduction of $1.2T. So, Taxable income was $5.7T after accounting for deductions, exemptions, tax credits, etc. IRS collected a tax of $1.05T (~20% of taxable income).

2007: 142M individual tax returns (form 1040)  filed.  Total AGI was $8.7T. Of this wages = $5.8T, capital gains = $0.9T, pension/annuities= $0.5T, partnership and S corp income = $0.4T,  business income = $o.3T, taxable interest = $0.25T, ordinary dividends = $0.25T, Social security benefits = $0.2T, taxable IRA distributions=$0.2T and others were misc items. Taxable income was $6T after accounting for deductions, tax credits, etc. IRS collected a tax of $1.1T (~20% of taxable income).

B. Employment tax return: This tax return has to be filed by employers to pay social security and medicare tax to the government. Note that each employed person in USA is supposed to pay 12.4% SS tax and 2.9% Medicare tax. If you are self employed, you pay all of this, but if you are employed by someone, you pay one half and your employer pays the other half. Most of the people are employed by someone else, so their employer files tax form 940, and pays this tax to IRS. We as employees never see this tax return being filed, as money is already taken out of our paycheck by the employer. Employer then files this separate tax return paying his share (6.2%+1.45%)as well as paying the money that he took out of our paycheck (6.2%+1.45%). Self employed people file this return themselves. There were 30M such tax returns filed for 2007. Employers don't file separate tax return for each employee, but combine it in one for all their employees. So, this tells us that there were 15M employers (as 15M are self employed people. If we assume that each employed person paid about $6K in SS+Medicare tax (assuming median income of $50K), then for 150M employees (for 2008, workforce was about 155M), that would be about $1T in employment taxes.

C. Corporations: 7M corporate tax returns were filed for 2008.

D. Partnership: 3M partnership returns were filed for 2008.

There are 2 kinds of business: unincorporated and incorporated.

A. Unincorporated business: The revenue, expenses and income of business flows thru personal tax return. It has unlimited liability, is unable to defer taxes, and must file income taxes based on calender year. It's simple to set up these kind of business, and they have no payroll. These business are also called non employer or self-employed firms, and are genrally excluded from all business statistics from census bureau, as they account for only 3% of all business receipts in USA.

UnInc business, are further subdivided into 3 types as per IRS classifications:

1. Sole propertierships: someone who owns an unincorporated business by himself or herself. Generally non-farm sole propertiership are included in all stats.

2. Partership: relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. Partners may be individuals, corporations, other partnerships, tax-exempt organizations, nominees, or other legal entities. Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners.

3. S-corporations: These are an alternative to Inc corp, but they should have no more than 100 shareholders, and have one class of stock. S corporations avoid double taxation on the corporate income, as income is passed thru tax on individual's income tax return.

B. Incorporated business: Usually represented by Inc at the name of business. The revenue, expenses and income of business flows thru corporate tax return, at corporate tax rates (usually 35%). The profit is again taxed when it's distributed to shareholders as dividends. It has unlimited liability, credit proofs its shareholders, is able to defer taxes, and file income taxes based on their own fiscal year which may or may not coincide with the calender year. It's complex and expensive to setup these kind of business, and it has payroll. There is only 1 type of Inc business, known as C corp.

LLC: A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation (C-corp or S-corp), partnership or sole proprietorship tax return.

Note that sole proprietorship, partners, S-corp are included above in individual income tax returns as the income from these flow through individual tax returns of owners and not through corporate tax on business (as in C-corp) itself.

Workforce

Workforce is comprised of people hired by government or by private companies. Total population of USA is 315M, of which 50% don't go for work. Of this 160M who don't go for work, 45M are elderly (65+), 75M are kids (<18) and 50M are stay at home mom/dads and disabled people. Remaining 155M want to work and are either working or looking for work. They are called the civilian workforce (Total number of people in the non-civilian workforce is 1.5M who are hired by the military). Since unemployment or underemployment is about 10%, we can assume that only 140M people are employed. Lets break this number further down:

I. Federal government: employs about 2M civilian workforce (on top of 1.5M military workforce), and is the largest employer in USA. It excludes postal service employees of usps. avg salary is about $100K.

II. State and local government: employs about 17M civilian workforce. 7M are employed in schools as teachers and support staff, 2.5M in protective services (including police officers, fire fighters, and correctional officers), 2.0M in higher education, 1.4M in health care (including nurses and other workers at public hospitals and clinics), 1M in libraries, housing, others, 0.8M in transportation (including road maintenance workers and bus drivers) and remaining 2M in all other professions. Link is:   http://www.cbpp.org/cms/index.cfm?fa=view&id=3410. about 35% of state and local government spending is on wages of these employees, excluding healthcare and retirement benefits. Including these benefits, about 45% of the spending is on wages.

so, about 15% of the civilian workforce is employed by Government (public employees), while remaining 85% is employed by private companies or are self employed. About 15M (10% of civilian workforce) is self employed, with 10M unincorporated self-employed (often work by themselves without employees) and 5M incorporated self-employed (often have employees).

In year 2007, there were total of 27M private non-farm business in USA, out of which 21M were unincorporated businesses (no employees), and 6M incorporated business (with employees). UnInc business brought in $1T in business sale receipts, while Inc business brought in $30T in sales receipts. This is the link from census bureau: http://www.census.gov/econ/smallbus.html

These 21M business which had no employees include the self-employed, freelancers, independent contractors, sole proprietorships, family-owned businesses, LLCs, corporations, S-corporations or partnerships. So, the number of unincorporated self employed above implies that out of 21M businesses with no employees, only 10M are actually a day to day business with an owner. The remaining 11M are just corporations, partnerships built for tax/liability advantages.

Ap per IRS data from 2007 (http://www.irs.gov/pub/irs-soi/07ot3naics.xls), there were 32M business returns filed (instead of 27M that's expected). These had business receipts of $30T, with net income of $3T. Of these, 23M returns were for no-farm sole proprietorship, which had $1T in business receipts and 0.3T in net income. 3M returns were filed for partnerships (Form 1065). The number of partners on these returns was 18M. Most of these partnerships are in Finance, Insurance, Real estate, construction, retail and other services. Net revenue from these partnerships was $5.9T (business receipts = $3.9T, portfolio income from interest/dividend/capital_gains=$1T, others = $1T) while net income was $0.7T ($0.3T was ordinary income while $0.4T was from dividends, interest, royalties, rental income, etc). total assets of these partnerships was $20T. About 6M corporations in USA (includes both C-corp and S-corp), but 4M of these are are S-corp or other pass through entities (like REITs, RICs, etc) which pay no corporate tax. These S-corp had business receipts of $6T, with net income of $0.4T. About 2M were C-corp, for which corporate income taxes were filed, which paid tax of $0.3T on taxable income of $1T (real income was $1.5T, but taxable income came down with deductions/credits. corporate tax rate is 35%). Total assets was $82T. Total revenue was $22T, of which business receipts were $18T. Total revenue is more than GDP as corporations sell not only to consumers, but also to each other.

So, if we take out these 15M self employed from the civilian workforce, we are left with 120M people, or about 75% of the workforce. This 75% of the workforce is hired equally by small business (Business having less than 500 employees) and large business (Business having more than 500 employees). Of the 6M businesses with employees, only 20K businesses had more than 500 employees.   These small businesses employed about 60M people, while large businesses (about 20K in number) employed the remaining 60M ppl. So, these small businesses had about 10 employees on avg, while large businesses had about 3K employees on avg. Large business are usually all public or large private companies, which have chains throughout the country. Small business are the ones run by a owner, hire few employees, and typically include all mom-pop stores that you see around, gas-stations, restaurants, motels, personal care, house maintenance contractors, or small internet companies.

Among the large businesses, Walmart is the largest private employer at 1.8M employees, followed by Mcdonalds and UPS each at 0.5M employees. USPS employes about 0.6M people and is the second largest cvilian employer behind walmart, but is generally not counted as a private employer. It has the backing of federal government. The top 50 largest employers, excluding usps, employed about 12M people. link: http://nyjobsource.com/largestemployers.html . Most of these companies are retail companies, and as such the salaries of majority of their employees are < $50K/year.

Employment taxes (FICA and medicare tax from both employees and employers): Total tax of $0.9T was paid to IRS.

Total money earned by individuals, corporations and Government:

individuals income=$7.6T(money kept in pocket) + $1.1T (federal tax) + $1.4T (approx state/local tax incl property taxes, as state/local tax for 2012 was $1.4T) + $0.9T( assumed contributions of 10% to IRAs, health insurance premiums,etc which are excluded from AGI)=$11T.

Corporations income=$1.1T(money kept in corp reserves) + $0.3T (federal tax) + $0.1T(dividends paid).

Federal Government income: total taxes collected by IRS = $2.5T amounting to 18% of GDP.  individual income tax=$1.1T, Corporate income tax=$0.3T, Employment tax=$0.9T, Excise/gift/estate tax=$0.1T, others=$0.1T.

sum total of all money = $11T(individual income) + $1.5T(corporate income)+ $1T(federal government income from Employment tax + other tax, which weren't included in individual or corporate income) = $13.5T (while GDP was $14T)

individual expense:

corporate expense:

Federal Government Expenses: total = $3T. defense = $0.7T, healthcare = $0.7T($0.4T to medicare for 45M elderly/disabled and $0.3T to medicaid/CHIP for 60M low income people),   pensions=$0.7T(mostly Social security avg check of $1.2K/month to 35M retired workers and 10M spouses/children of retired/dead workers, and 10M disabled workers), welfare=$0.4T (unemployment assistance, food stamps, low income assistance,etc) interest=$0.2T(on debt of $9T) , education=$0.1T, transportation=$0.1T and others=$0.1T.

GDP:

USA nominal GDP was approx $?T in 2011 ($14T in year 2007).

GDP components: GDP can be measured using income approach (sum total of income of all individuals living in a country during 1 year) or using production approach (Market value of all final goods and services calculated during 1 year) or using expenditure approach (All expenditure incurred by individual during 1 year ). Mostly expenditure approach is used, components of which are shown below:

A. personal consumption: = 70% of GDP. money spent by individuals on various items and services.

1. services: 40% of GDP. The two largest components are real estate (10%) and health care (12%)

2. non-durable goods: 20% of GDP. The three largest components are food (10%), clothing (2.7%) and fuel (2.4%)

3. durable goods: 8% of GDP. autos (3.6%) and furniture (3%).

B. Private/Business investment: 16% of GDP

1. Non-residential: 12%

2. Residential: 4%

C. Government investment: 19% of GDP

1. Federal Govt: 7% of GDP. defense spending=5%, non-defense spending=2%

2. state and local Govt: 12% of GDP

D. Import/export: -5% of GDP.

1. exports: 12% of GDP, with goods being 9% of GDP and services comprising 3%.

2. imports: 17% of GDP