How federal taxes work, and sometimes don't

I'm aware that this has nothing to do with transportation whatsoever, but I'd like to talk about taxes in the United States. I could make a point about how we fund our government plays a major role in how we pay for infrastructure, which is true; in reality I just think this is very important and I only have one blog, so this is where it's going.

Let me just start with an anecdote. About seven years ago I was an employee at Comcast as a cable technician and, during my first few weeks, I was trained by a few different people who'd worked there quite a while. One of them was telling me about how much money you could make as a contractor, relating to me that he'd made just under $75,000 in a prior year, which led to a brief discussion about how he was worried about hitting that $75k threshold and being taxed at a higher rate. Knowing what I did about taxes at that time (i.e., nothing), I took it at face value that if you earned more you would be taxed at a higher rate, and assumed that applied to every cent you earned. So if you paid a higher tax rate above $75k than you did below it, you would actually keep more of your money if you earned $74,999 than if you earned $75,001.  It seems kind of unfair, but in a simplistic way it makes perfect sense.

It's also perfectly wrong. Even professional writers have been shown to be ignorant of this fact. In fact, we have something called a marginal tax rate for federal income tax in this country, and it's structured such that you only pay a higher tax rate on money earned after a given threshold has been reached. For example, if we had only two tax rates, 10% for earnings under $50k, and 25% for everything above that, it would look like this:

$35k earnings: full amount taxed at 10% = $3,500
$50k earnings: full amount taxed at 10% = $5,000
$51k earnings: $50k taxed at 10% ($5,000) + $1k taxed at 25% ($250) = $5,250
$100k earnings: $50k taxed at 10% ($5,000) + $50k taxed at 25% ($12,500) = $17,500

Play around with the numbers all you like, the takeaway point is that the more you earn in this system, the more money you take home. Always. There are diminishing returns on the amount of money you keep as you earn more, but it's impossible to be taxed more than someone with higher earnings than your own. The corollary here is that, ignoring the many exemptions that exist, as well as non-wage income, your average tax rate is always lower than someone who earns more than you. So the people making $35k and $50k pay a tax rate of 10%, the person making $51k pays a tax rate of 10.3% (5,250 divided by 51,000), and the person making $100k pays an averaged rate of 17.5%. This is exactly how our system works, with a greater number of brackets (2012 rates pictured below) so that the tax rate increase from one threshold to the next isn't quite so dramatic.

Federal income tax brackets. From Wikipedia.

One thing I think it's important to keep in mind when someone says they're paying a certain tax rate is that they're often referring to the highest marginal tax bracket that they pay. So if I earn $150k per year I might say that I'm paying a tax rate of 28%, but that's not actually the case. Instead, my tax rate is calculated as follows:

10% of $8,700 = $870
15% of $26,650 (35,350 minus 8,700) = $3,997.50
25% of $50,300 (85,650 minus 35,350) = $12,575
28% of $64,350 (150,000 minus 85,650) = $18,018
Total tax paid = $35,460.50
Actual tax rate = 23.6%

A 28% tax rate on $150k would come out to $42,000, so while it's not a massive discrepancy between the highest marginal tax rate and actual tax rate, that difference equates to more than $6,500 that they get to hold onto. To get just a little bit political here, this is why I don't find the "it'll hurt small business owners" argument against increasing the rates of the upper brackets convincing: for one, about 2% of business owners who file their taxes as individuals earn over $250k a year; that point aside, only the income beyond that $250k threshold (or other arbitrary amount) would be subject to the increased rates. And since high earners still get the benefit of all those sub-$250k tax cuts, they still get a bigger tax cut than anyone else. Passing up hundreds of billions of dollars in revenue just for the sake of this tiny group of business owners--people who are just as free to use that extra money on a fancy rug as on expanding their business or hiring new employees--seems very foolish to me when we're supposedly so concerned about our nation's debt and the insolvency of our entitlement programs.

Moving on: federal income taxes aren't the only taxes we pay, of course. There are property taxes which everyone pays (including renters, since this cost is generally passed on by the owner), as well as sales taxes, capital gains taxes, gas taxes, and income taxes for many states (on top of federal income taxes). And we have payroll taxes, the other tax that shows up on your actual paycheck. On the employee side, we pay 6.2% of our income for Social Security, and another 1.45% for Medicare. Social Security taxes are only collected on the first $110,000 of taxable income as of 2012, so earnings beyond that are only subject to federal income tax and the 1.45% Medicare tax.

Keeping the Social Security tax exemption for income over $110,000 in mind, let's calculate the total tax rate for three different incomes. I'll just give you the total amount of taxes paid (summing income tax, SS tax, and Medicare tax) and the actual total tax rate:

$110k income = $32,675.50 taxes = 29.71% tax rate
$150k income = $44,455.5 taxes = 29.64% tax rate
$300k income = $94,698 taxes = 31.57% tax rate

Uh oh, we broke it. Why is $150k-person paying a lower rate than $110k person? The answer is that the person earning $200k is paying exactly the same dollar amount in Social Security taxes, but since their income is higher their effective payroll tax rate is much lower than the rate of the person earning $110k. Once we get up to $300k we see that we're back in "higher earnings = higher tax rate" territory, although it might be reasonable to ask why the person earning almost three times as much as the $110k guy is paying a rate that isn't even 2% higher. For comparison, the jump from roughly $35k to $85k in earnings is commensurate with an effective tax rate increase of almost 7 percentage points:

$35,350 income = $7,571.78 taxes = 21.42% tax rate
$85,650 income = $23,994.73 taxes = 28.01% tax rate

Someone increasing their income from $35k to $85k is experiencing a much more significant and positive change in their quality of life and financial circumstances, and yet it seems that we're penalizing them more for this improvement than we are for someone jumping from $110k to $300k. Of course the point of taxes is not to punish people for earning money, and rather to fund government services of various kinds, but we should also be honest about the fact that taxes discourage the activity that they're tied to. This is more obvious with things like cigarette and gas taxes, but it also has some small impact on how much time people devote to work versus leisure. Why we are applying that discouraging tax rate increase more forcefully on those raising themselves from middle-class to upper-middle-class than we are from people moving from upper-middle-class to upper-class is something of a mystery to me. Weren't we supposed to be champions of the middle class?

You've probably figured out by now that I don't have any particular point I'm trying to make here. Hopefully you learned a little something about how the United States tax system works, and maybe have a slightly different perspective than you did before (or maybe a radically different one!). It's important that we do more than complain about the things we don't particularly like (i.e., taxes) and instead make an effort to better understand them and make educated decisions about how they should be changed. Maybe lower taxes are a good idea, but "lower taxes" doesn't tell us anything about who's paying less, how much less they're paying, or whether some people might be paying more to afford it. Additionally, how our institutions are organized is important. People will always argue about appropriate tax rates, but few would disagree that things aren't working properly when someone earning $150k a year pays a lower tax rate than another person earning $110k without even taking advantage of any of the numerous loopholes found in our tax system (which would take much more than this one post to discuss). Conversely, the advantages of a marginal tax rate system are self-evident: in actual dollars, people shouldn't pay more taxes than someone earning more than them.

If this post left any questions unanswered for you please let me know in the comment section. Chances are that I won't know the answer off-hand, but in the spirit of Better Institutions I'll be happy to learn the answer for myself and pass it along.

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It's time for Capitol Hill to get its first pedestrian plaza

Pike street between Broadway and 12th Ave.

I was reading a few articles at the local news blog for my neighborhood, Capitol Hill Seattle Blog (really one of the greatest hyper-local news sites there is), and I got an idea. The articles in question were this one about parklets, and this other one about preserving the character of the neighborhood as development continues in the area. The parklets piece got a lot of activity in the comments section, much of it negative, mostly with people complaining that there's little enough parking already, and with many questioning whether something like this would even be popular. From my perspective it seems like they're doing this the right way, starting with buy-in from the business owners and the community and then going from there. It's a great idea, however small, but I see no reason to stop there.

Anyone who's lived in Seattle in the past decade or enjoys going to see live music probably has heard of, if not attended, Capitol Hill Block Party (started in 1997). Every year for three days E Pike street is closed off between Broadway and 12th Avenue and filled to the brim with people. This is incredibly good business for the many bars enclosed by the boundaries of the event as they have a captive audience, but (I think) not so good for the businesses that don't sell food or alcohol. That's been a point of contention every time CHBP rolls around, but I've never really heard much grumbling about the road closure and parking spaces lost during the festival. This seems especially incredible given the complaints about taking away a few spots for parklets: if removing a few parking spaces is so damaging to visitor retention (i.e., business from people from other neighborhoods or other cities), how is it that so many thousands of people manage to make it here when we shut down several dozen spaces? Clearly, people can find other ways to get here if they really want to.

Capitol Hill Block Party: more fun than parking. Photo by Dave Lichterman.

Under normal circumstances Pike is open to cars, but with crosswalks on all corners of each intersection and heavy pedestrian traffic, it's not very fun to navigate in a car. With the high concentration of bars and music venues on this stretch of road this gets exponentially worse in the evenings, particularly on weekends. It's a mess, and the only people who are really justified in trying to drive through it at night are cab drivers looking for a likely fare. Given the number of pedestrians, obvious safety concerns with people streaming to and fro at all hours (often not sober), and parallel east-west routes one block north at E Pine street and one block south at E Union/Madison St., it's time to close off Pike to car traffic permanently.

Pedestrian plazas like this have a proven track record of vitality and enjoyment by the community. They encourage more foot traffic in the area, which of course translates into more customers for the businesses that abut the space. Notably, after Times Square was made over to become largely pedestrian-oriented it quickly found itself much more appealing to businesses:

Two years after the advent of its car-free plazas, for example, Times Square made its first-ever appearance on real estate firm Cushman and Wakefield’s list of the ten most desirable retail locations on Earth.

By no means is Seattle the same as New York, nor is the Pike/Pine corridor Times Square, but the same model has been replicated throughout the country, again and again: dedicate more space to pedestrians and they will use it. Businesses that allow these changes reap the financial benefits, while residents and visitors reap the benefits of greater safety and community. There is already relatively little vehicle traffic on this section of Pike and the natural strengths of this location make it the perfect place to try out our first authentic pedestrian plaza. With the Broadway streetcar coming in 2014 and Link light rail two years later, E Pike is only going to become a more popular and accessible destination whether the road is reconfigured or not.

Pike has already established itself as a favorite location for mobile food vendors, too, and this is a great opportunity to build on that reputation by providing plenty of dedicated, conveniently-situated space for more vendors to join the party. For the brick-and-mortar restaurants and bars this would potentially open up a lot more space for each of them, allowing them to fence off a significant area outside their buildings for extra customer space (much like what's seen at Grim's and Barca on 11th Ave, although perhaps larger).

Where would you rather spend your time?

 
Now, as far as challenges: yes, this would require the removal of several dozen parking spaces. Compared to the total number of parking spaces in the area this would make little difference, but there will certainly be complaints. When we look at the hundreds (or thousands) of people that cram themselves into these few blocks every weekend, however, it becomes clear that these parking spaces are servicing a minuscule fraction of the total number of people in the area. Roads belong to everyone; they're a public amenity. This particular public amenity is much more heavily used by pedestrians than vehicles and it would be great if its design actually reflected that. More than the on-street spaces, I think the challenge to overcome is the Havana parking lot, conveniently contained in a red rectangle in the Google Maps image at the top of this post. This is presumably a private lot, and closing off Pike makes this completely inaccessible by cars. I don't know the solution here except to buy out the lot, which might be prohibitively expensive for a voluntary, wonderfully-useful-but-not-strictly-necessary project of this nature.

Which brings us to cost more generally. One of the great things about these type of projects is that they don't need to become hugely expensive like most other major street reconfigurations. This is something that could be done extremely cheaply, at least at first. It could be as simple as blocking off the roads with some big rocks, throwing some plants, tables, and chairs in the middle and calling it good. This would probably be sufficient to achieve the goals of increased safety and increased pedestrian traffic, but over time it would of course be great to see some real investments in making this a genuinely attractive and pleasing destination. In other locations we've seen business owners actually contribute to improvements as they've seen the impact these conversions have on their bottom line, so doing things on the cheap as a means of enticing further investment might be exactly the way to go.

This is the perfect time to start talking about a conversion for this area. Winter is coming, and, accordingly, pedestrian traffic will be somewhat reduced during the day. This relative lull gives us time to start reaching out to the community and business stakeholders for their thoughts and opinions, and ideally have something in place by late spring, just in time for the busiest time of year for the area. The summer could be a trial period, and if it's successful we can work toward making it a permanent fixture on the hill.

In the mean time, though, don't forget to look both ways when using the crosswalk.

Much better.

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What would Seattle look like if Metro fares weren't subsidized?

There are a lot of people out there who consider it a waste to use taxpayer money subsidizing transit fares in urban areas. Obviously I'm not one of them, and my response to those people is usually to note that if all those people drove instead traffic would be (even more) unbearable, pollution and oil dependence would increase, public health and safety would suffer, and more space dedicated to parking in apartment units would increase rents as well.

This usually leads to an argument about how if I want to save the world then it shouldn't be on the car drivers' dollar, to which I respond that the majority of Metro's operating budget comes from sales tax*, which everyone pays (and the lower your income the larger the proportion of your income paid as sales tax), followed by transit fares, then federal and state grants for the capital budget. The total spent on transit by King County Metro is about $1 billion per year. Certainly some money comes directly from those who drive, for example the 2-year $20 vehicle license fee in effect right now that the King County Council approved to mitigate a 17% cut in Metro service last year. There are other things too, higher up in the state budget. But most people who use the bus also own at least one car. So round and round we go, point-counterpoint.

Where your sales tax money is being spent (source: kingcounty.gov)

Lately I've been asking the question: what do you propose we do instead? These people seem extremely averse to spending money on mass transit, but especially in light of our growing population and a lack of room for any more roads, I don't hear many alternatives being offered. I'm all for directing more money toward maintenance rather than endlessly expanding our infrastructure (and therefore our maintenance liabilities), but it's obvious that simply maintaining what we've got is a recipe for a steadily worsening transportation system as the population increases. I've yet to get a straight answer from anyone on what they'd actually prefer to see (as opposed to "no more trains!" and "no more war on cars!"), so feel free to let me know in the comments what your vision is for the transportation system if you don't support subsidizing mass transit.


As a thought experiment about public transportation subsidies, here's what I think it would look like if we started demanding that everyone pay the full, unsubsidized cost of their fares:

First off, Metro fares are currently about $2.50 (up a dollar since 2008) in Seattle. We've got a roughly 28% farebox recovery rate, meaning that we recoup 28% of our operating expenses in the form of user fees. If we wanted to increase that to 100% we'd have to charge about $9 per ride and that's making the inane assumption that increasing fares more than threefold will not reduce ridership. So, to get to and from work we're looking at $18, and assuming five work days a week we've got about $360 a month spent just on the work/school commute. Add another ten trips during the month for various errands and we're up to $450.

Many bus riders could afford this, but would they choose to? Given that the vast majority of mass transit users own cars anyway, the question now becomes whether gas + parking (car payment, licensing fees, and insurance already being paid for) adds up to $450 per month, and the answer is almost certainly "no." So everyone who owns a car starts using it for almost all of their trips, even if they used to prefer using the bus or train to get around most of the time.

For those who don't own cars, the decision is a bit more difficult. They have to decide whether the cost of a car payment, licensing fees, insurance, gas, and parking are a better deal than $450 a month in fares. Personally, I owned a 1995 Camry for five years that cost me $5,000 to purchase and about $2,000 in maintenance over it's lifetime, which adds up to about $120 per month for 60 months. Add $50 for liability insurance (if you're over 24 and have a clean driving record, at least), $50 or so for various fees, and $100 for gas (optimistically). We'll ignore parking for now, but I'll get to that later. That adds up to $320 per month, far under the cost of a month of busing and much more convenient, too. So many people who don't currently own cars also start driving them to get around everywhere.

Who's left after that? Basically the very poor, the young, and the very old. In other words, the transit system falls apart due to lack of a constituency and we don't actually have mass transit anymore. Everyone drives everywhere, and those who can't due to age, ability, or income are left to fend for themselves. Even if we limited transit subsidies to just these people, they don't make up a large enough share of the population to constitute a real transit system and many of them already struggle with $2.50 fares, so instead we'd end up with a bunch of incredibly inefficient routes serving a relatively small pool of people. In our quest to end transit subsidies we end up with a system with a farebox recovery rate that is probably closer to 5-10%, subsidized to an even greater degree than before. If efficiency was the goal here we've failed miserably.

And what about all the people already driving as their primary means of transportation? Needless to say, traffic and parking get much worse, particularly downtown where a large proportion of transit trips begin and end. Less of their money is going toward transit projects though, and more toward roads. This does almost nothing to improve traffic in Seattle since there's no room for more roads, but maybe existing roads are kept in a better state of repair. Maybe not though, since all of those cars take a toll on the road, and since congestion has increased everyone is spending more of their time on the pavement. Pollution worsens; people walk around less and sit in traffic more, both of which are bad for physical and mental health; and although the full 1.8 cents of sales tax** that is devoted to transit is no longer needed, those savings are almost certainly eaten away--and then some--by the extra gas wasted sitting in the worsened traffic.

More of this. Right on.

To make matters worse for drivers, with more people now reliant on cars parking in central Seattle will become scarce. This means two things: first, metered street parking rates increase drastically in order to maintain their target of one open space per block; second, as paid parking lots and garages begin to fill up and supply is saturated, demand drives prices for private parking up too. Likewise for parking rates in apartments, driving up effective rents. New apartments and condos built in the city will start including more underground parking (an extremely expensive form of parking infrastructure), adding tens of thousands of dollars to the cost of each unit. This general phenomenon would likely recapitulate itself in every neighborhood center, driving up parking rates not just in downtown, Capitol Hill, and South Lake Union, but Fremont, Ballard, the University District, Wallingford, Queen Anne, Columbia City, Eastlake, etc.

This would be a terrible outcome for drivers, particularly those who preferred to take the bus but can no longer afford it, but it's bad for the economy too. There are already people who avoid traveling to Seattle because of the traffic and lack of cheap parking. (Personally, I hated Seattle before moving here because my only experiences involved driving around in it.) If the buses disappear you can count on that sentiment getting far stronger, and a lot of business that comes in from outside the city will quickly evaporate. That means less business for just about every type of service- or retail-based company in the city, and reduced tax revenue as a result. So all that money we're saving by not sending the entire 1.8 cents of sales tax toward transit? It's at least partially offset by the loss of sales tax revenue from non-Seattleites who now avoid Seattle when they can. That's to say nothing of Seattleites themselves, who are now spending more on gas (or in the case of former busers, transportation in general) and have less money to spend on food, drinks, entertainment, rent, electronics, bicycles, clothing, etc. Once again, this means less revenue for the city, and all those sales tax savings are chipped away even further.

Have I made myself clear? Subsidized public transportation is not a luxury in a large urbanized city: it's a necessity. I made a point of glossing over the moral implications of removing these subsidies not because it's unimportant--it's vitally important--but because the economic argument is sufficient unto itself. By dedicating 19% of our sales tax toward public transportation we ensure that Seattle is able to function as the cultural and economic center of our region. Non-automotive options for getting into, out of, and around the city are essential if we're to retain that position, and our investment in those options more than pays for itself by keeping more spending local, restraining housing costs, and allowing us to remain a viable destination for those who come to our city by car, either by choice or of necessity.


*Fun fact: One-quarter of the sales tax collected for Metro goes toward capital expenses. If the entire 1.8 cent sales tax was directed toward operating expenses, user fees + sales tax revenue would exceed the operating budget.
**The 1.8% sales tax dedicated to transit pays for both King County Metro and Sound Transit.

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