As many Americans are now starting to understand the statistics quoted by politicians, to sell the GOP tax plan, is far from what they wrote into the bill. From the onset the plan was touted as “a tax break for everyone!” It appears that almost 80 percent of Americans now oppose the GOP tax plan, and for good reason. The vast majority of Americans are going to end up working longer if the tax plan ultimately passes.
But wait! If I am getting a tax cut, why would I have to work longer?
Well that question gets us into economics. I don’t want everyone to tune out immediately, so let me summarize the results. I will simplify the economic explanation and post the math at the bottom of the article.
To put it simply, if everyone gets something extra…then that thing is now less valuable. If everyone gets a tax cut, it isn’t really a tax cut…but rather a new normal.
We may be able to offset some of that new normal by growing the economy, but normally tax cuts don’t produce enough new revenue to pay for what is lost to inflation. To make sure we were including data that accounts for economic expansion we used “high range” GDP growth numbers.
If I am getting a larger tax cut than most other people, then I am truly getting a cut. If I get less of a tax cut than the average (mean actually)…well, then for all intents and purposes my taxes were raised.
I work as an investment manager and financial planner. The most common question that I am getting these days isn’t “how much is my tax cut?” Most of them are asking “what does this mean to me?” So we took a look. We fed the numbers into financial planning software and ran ‘Monte Carlo” analysis on people across the income spectrum.
For all of our examples we will be looking a taxpayer just starting their working career and look at the ages where their savings will support them in retirement. We ran a savings plan for each taxpayer with a target retirement age of 65 and looked at how much they would need to save monthly to cover 85% of their after tax income post retirement.
We compared taxpayers at the 20, 40, 60, 80, 90, 95 and 99.9 percentiles of income. Then we ran a second income plan for each of the taxpayers after the normalized tax change was included….here are our results:
Financial Planning Results
To read the graph, first find your closest household income under “Income Percentile.” Then follow the data over to the right side of the chart. “Difference in Years” shows how many more or less years a person would need to work. For instance an average person making $86,100 annually would need to work an additional 1.8 years to afford the same level of retirement.
The results show us that most Americans (80% or more) will need to work almost 2 additional years in order to achieve the same level of retirement as before the GOP tax plan. The worst group to be in was the 40% quintile where a taxpayer makes roughly $48,000 annually. This person would need to work an additional 2.3 years, where a person making $732,800 would be able to retire more than 3 years earlier. The top 1% of income earners should be able to retire 4 to 5 years earlier due to the tax plan.
One of the interesting anomalies is that a taxpayer making $216,000 a year should be able to retire slightly sooner, while a taxpayer making $307,000 a year may need to work slightly longer. This is not a mistake in math, this is just how the changes in tax brackets works out.
The final Senate bill changed substantially within a few hours of passage. We are still finding out about major problems with the Senate assumptions. We would expect many changes will be made to the plan prior to any congressional vote, but these changes would not change our calculations by more than a few tenths of a percent. Most of the changes made in the last day on the Senate floor resulted in benefits mainly for the top 5% of taxpayers.
One interesting statistic buried in the numbers: To pay for the tax break received by 1 person in the top 1%, roughly 451 people living in poverty will need to average an additional 2.1 years of work.
It is important to note, that these examples do not allow each of the income earners to archive the same level of income during retirement. We are simply trying to calculate how long a person would need to work in order to save enough to cover 85% of their post-tax pre retirement income, which is a standard way of calculating retirement income need.
To take the politics out of the numbers, we obtained our base information from the least controversial group we could find, the Tax Policy Center. This is the group congressmen normally order reports from when they are trying to come up with reasoning or justification for a law change. You can find our base level data for average income and tax quintile deltas here:
Examples of our calculations: