Help Mallard Fillmore find the T.P.

In dittohead cartoonist Bruce Tinsley's June 15 (Sunday) offering of Mallard Fillmore, a nameless Tax Payer (we'll call him "T.P.") rants:

HEY, I CAN BARELY PAY MY MORTGAGE ... I CAN'T AFFORD TO SEND MY KIDS TO COLLEGE ... OR EVEN TAKE 'EM OUT OF THEIR SUBSTANDARD PUBLIC SCHOOL ... BECAUSE THE FEDERAL, STATE, AND LOCAL GOVERNMENTS TAKE MORE THAN 50% OF MY INCOME IN TAXES ... AND THEN THE GUY ON THE NEWS ASKS WITH A STRAIGHT FACE ... WHETHER OR NOT WE CAN "AFFORD" TAX CUTS

Tinsley artfully crams several insinuations into one neat package. News guys are insensitive ... or biased and disingenuous. Public schools are "substandard". Poor T.P. can barely make ends meet, 'cause he pays more than half his income in taxes.

But does T.P. exist? Or is he -- like the farmer who lost the farm to estate taxes -- a figment of somebody's political imagination? A lot of Americans will tell you that taxes eat up half their income. Somebody tells them that, over and over, and they believe it.

Maybe some US taxpayers really do "break 50"... but how? Can you help us find Mallard Fillmore's poster child?

How much does T.P. make? Where does he live? What does he pay in federal, state and local taxes?

How many kids does he have? Why does he live in a neighborhood with high taxes and bad schools (uncommon but plausible), and not somewhere else?

How about that mortgage? Since he can barely make the payments, we assume it's a painful 50% of after-tax income ... or 25% of gross. Mortgage rates are at a record low 5%, but assume T.P. financed or re-fi'd at 6%.

On a 30-year conventional with 20% down, we calculate that T.P. bought a house worth 434% of current gross income. As a base case, assume T.P. is 20 years into a 30-year mortgage, so his monthly payments are a middling 50% deductible interest, 50% equity. [On either extreme he pays a lot more deductible interest, or holds a lot more accrued equity.]

Tax parameters for 2003 are still in flux, but let's profile T.P.'s worst-case tax situation for 2002 (where the federal rates are higher), and see what it takes to break 50.

Assume T.P. -- "family values" guy that he is -- is married, filing jointly. Assume he's self-employed, so he faces the maximum impact of employer and employee payroll taxes. Assume he lives in a high-tax locality.

Assume he files a very vanilla tax return. No "business" SUV write-off. No capital gains. No tax shelters. No tax-free municipals. No MSA. No SEP. No self-employed health insurance deduction. No child tax credits. No tax-advantaged college savings plans. No exemptions.

T.P. will itemize deductions, but only for interest on that barely-affordable mortage and those crushing state/local taxes (most of which will phase out as the Alternative Minimum Tax phases in.) No medical deductions, no casualty losses, no investment interest expense, no charity deductions ... and no tax prep expenses.

Put T.P. in New York City, where he's on the hook for state income tax (top rate 6.85%), city income tax (3.65%), state sales tax (4%), city sales tax (4.25%), and property taxes of $27 per thousand dollars of full market value. [Shooting for 50, and keeping it simple, we are ignoring some favorable lower-bracket effects and applicable tax relief programs.]

To break 50, T.P. must start out in a high federal tax bracket.

At $300,000 in self-employment income, T.P. is just breaking into the 28% AMT. 18.2% of his income goes to federal income tax, 6.4% to payroll ("SE") taxes, 9.7% (or less) to state income tax, and 11.7% to property tax on his $1,300,000 homestead. That adds up to 46%.

What about sales and nuisance taxes ... gas tax, phone tax, ticket tax, motor vehicle licenses and the rest? Major taxes and mortgage payments leave T.P. with $87,000 to spend out-of-pocket. He'll break 50 if the tax rate on this $87K exceeds 13.7%. Not likely. Sales tax in NYC is only 8.25% ... while food, medicine, and most services and most clothing are non-taxable.

T.P. can break 50 if most of his $87K goes "sin tax" items like alcohol and tobacco ... we just don't think that's the middle-class hero Mallard Fillmore is looking for.

Even with $75,000 to burn (and nearly $800,000 in home equity), T.P. won't send the kids to private schools. He won't settle for a humbler home in a lower-tax jurisdiction with better public schools. He won't put 5 or 10 thousand dollars a year into tax-sheltered college savings plans. He doesn't plan to take advantage of New York's fine public higher education system.

Maybe there's another explanation.

Maybe T.P. secretly hates his kids. Maybe they're not college material.

Maybe T.P. has a gambling problem, and when Mrs. P. asks where the money went, he reflexively croaks "Taxes!".

Maybe T.P. resides in one high-tax jurisdiction, and works full-time in a different high-tax jurisdiction, and the two jurisdictions don't have offset agreements.

Maybe -- like some other Republicans we know -- he has trouble working within a budget.

Where in the world is Mallard Fillmore's T.P.? Maybe our readers have some ideas ...

Update [2003-06-23]: Comments suggest the following cases in which a US taxpayer might pay more than 50% of his income in taxes.

(1) His income is unusually low for his lifestyle. If T.P. is unemployed, he still pays sales tax, property tax, license fees, etc., and taxes could be 50%, 100%, or 1000% of his current income ... but this is a transient circumstance.

(2) He's "house rich". The market value of T.P.'s house may have appreciated substantially above purchase price, with property taxes increasing proportionally.

T.P. could relocate ... or move downscale ... or borrow against this surplus equity to educate his kids ... but he'd rther just complain. The trap is of his own making.

(3) He's caught in the ISO/AMT trap. (This one's a bit exotic ... some details here.) T.P. received qualified employee Incentive Stock Options. He exercised those options at a favorable price spread. While he was holding the shares (in hopes of qualifying for tax-advantaged long-term capital gains treatment on the sale), the stock crashed. The earlier "paper profit" is excluded from ordinary income, but it does count as an Alternative Minimum Tax preference item ... and T.P.'s shares are no longer worth enough to cover the taxes.

Again the trap is of T.P.'s own making. He could have sold out sooner and paid ordinary income tax on the short-term capital gain ... but he didn't. He could have hedged his position (with put options, stop orders, etc.) for a small fraction of his ultimate loss ... but he didn't. The ISO/AMT trap is primarily a tax on greed and stupidity (though some smart/greedy and smart/lazy people get caught too). This is also a transient circumstance, and this year's AMT payment creates a tax credit that he can recoup in subsequent years.

Note: the trap was a prime target for tax reform before tax cuts became an overriding priority.

(4) He is caught in a cross-jurisdictional trap, paying state and local income tax both where he works and where he sleeps.

This is possibile in theory, though many jurisdictions have tax reciprocity offset agreements. No concrete cases have been brought to my attention. Again, the trap -- if it exists -- is of his own making.

In all cases, T.P.'s situation is uncommon, and he's whining about circumstances that are transient, self-imposed, or both.

Here's another useful resource for aspiring T.P.-hunters. The Institute on Taxation and Economic Policy (ITEP) surveys 2002 state and local taxes by state and by income bracket.

You'll see that upscale taxpayers consistently pay smaller fractions of income in non-federal taxes. Downscale taxpayers don't pay enough enough federal taxes to stand on teh top step and reach for T.P.'s "more than 50%".

Any other suggestions?

RonK, Seattle

Posted June 19, 2003 03:35 PM | Comments (139)