Oh, it really is the rich getting richer, after all

(Update, Jan 6, 2010 - Bad math corrected.)

I've heard the phrase "it's the rich gettin' richer and the poor gettin' poorer" often throughout my life, usually by old-timers discussing politics, social mobility, the decline of the middle class, things like that. Like most things people say when they're complaining about the government or "rich people", I didn't put much stock in it.

Each year since 2006 I have created a spreadsheet at work to calculate what my paycheck should be. You fill in how much you pay for insurance, whether you're filing as single or married, how many exemptions you're claiming, and your salary, and it outputs what your paycheck should be - give or take a couple pennies. To make it work correctly, I stumbled through figuring out how gross, taxable, and net income are calculated, what federal, state, and local withholdings should be, how exemptions work, how 401k and company paid benefits are calculated, what marital status really changes. Here are a couple examples to show how nuts payroll math can be:

• 401k isn't tax-free. Medicare, Social Security, and the city of Columbus all tax your 401k contributions.
  
• Saying you're married on your W-4 decreases federal withholding only, and only if you make more than $15,000. The state of Ohio doesn't care if you're married or not.
  
• Employee-paid benefits (life insurance, for example) aren't really free. They count as a raise in taxable income that is deducted back off after withholding is calculated.

So today I started on this year's spreadsheet using the withholding tables listed on 2010's Publication 15 on irs.gov. The tables looked odd, making me suspicious, so I investigated and got all mathy. Usually as your pay rate goes up, your tax rate goes up. In 2009, for example, single people making over $10,400 annually were taxed at 15%. Those making over $36,200 were taxed at 25%. $66,530 = 28%, $173,600 = 33%, and $375,000 = 35%. This year was similar, unless you make between $84,450 and $87,700. In that range, your tax rate jumps up from 27% to 30%. After $87,700, the rate drops back down to 28%. Confused, I decided to run the 2009 tables and 2010 tables through for different pay rates to see what the real tax amount would be for each income level. As you can predict, that produced a pile of meaningless numbers, and my eyes quickly crossed. "OK, then," I said to myself "let's just subtract the 2010 tax from the 2009 tax for different income levels and see what happens". It took a few seconds of glancing at the results for me to loudly declare that yes, indeed, the rich are getting richer, and the poor are getting poorer. Not by much, but by enough to notice. If you make $10,000, this year you'll pay $113 more in federal deductions than you did in 2009. If you make $200,000 annually, this year you'll pay $1,000 $25.85 LESS in federal withholdings than you did last year. Here's a chart showing some sample incomes and change in withholdings, including the sweet-spot of $76,865 where the withholding is the same both years:

Income       Diff 2010-2009
$10,000              $    113.00       
$12,500 - $35,000    $    111.75       
$37,500 - $65,000    $    126.75       
$67,500              $     97.65        
$70,000              $     68.65        
$72,500              $     43.65        
$75,000              $     18.65        
$76,865              $      0.00
$77,500              $     (6.35)       
$80,000              $    (31.35)      
$82,500              $    (56.35)      
$85,000              $    (64.85)      
$87,500              $    (14.85)      
$90,000 - $172,500   $    (10.85)      
 $175,000             $    (80.85)      
$177,500             $   (205.85)     
$180,000             $   (330.85)     
$182,500             $   (455.85)     
$185,000             $   (580.85)     
$187,500             $   (705.85)     
$190,000             $   (830.85)     
$192,500             $   (955.85)     
$195,000             $ (1,080.85)
$175,000 - $372,500  $    (25.85)
$377,500+            $    (39.85)

So most single people in the "middle class" pay range will be paying either $111.75 or $126.75 more in federal taxes this year. There is some oddness in the $80,000 range, and then between $175,000 and $350,000 (I guess that would be VP-level pay) the withholding amount drops linearly. They pay 5% less than they did last year. After $377,500 (CEO-level?), 7% less than in '09. at higher incomes taxpayers owe marginally less than they did in '09. What's up with that, Obama? I guess all that hope is expensive. If you don't need any hope, by contrast, you get quite the kickback. In closing, here are some yummy charts to illustrate the above numbers. How much extra regular folk pay this year: How much less the well-off and rich pay this year (note the years are switched to keep the numbers positive): (the old image above is replaced with this one with better math) The insane tax breaks of the rich this year: (image removed. Cuz it was wrong)