This post is part of a larger series. I have changed its name to Block to Block: Poverty and Inequality in Philadelphia.
In the last post, I discussed program revenue and expenditures in Philadelphia and Pennsylvania. Now, I want to take a look at taxes, because this determines how much money we have available to spend, it enables certain kinds of income distributions, and it encourages or discourages certain behaviors.
Let’s start with the basics—the current tax rates and types of taxes in Philadelphia. I’m going to break this into several posts to keep it more manageable. There are many types of taxes, but I will only cover the most significant taxes for typical households. These are income, property, sales, and business taxes. I’ll also cover how taxes become implemented, who has taxing authority for what, and total tax revenues.
In this first post, let’s cover income tax, since it’s probably the most significant for everyday households.
For Philadelphians, there are several layers to income tax. The city has a flat tax rate, which is slightly lower for non-residents who work in the city. The state also has a flat tax rate, but it does not vary based on residency. Finally, there are several brackets of federal income tax. Federal income tax rates are progressive, meaning that the rate increases as income increases. Note that this does not mean that your post-tax income decreases if your gross income increases—this will never happen because of the bracketing system. This means that, for your first bracket of taxable income, you pay the lowest rate, then for the second you pay the next tax rate, and so on. Federal income tax is also more complicated in that there are several deductions to consider, and your tax rates change depending on your filing status (single, married, etc.). Finally, there are Social Security and Medicare taxes, more commonly known as FICA taxes. The Social Security tax is flat, and your income is only taxable up to a certain threshold. The Medicare tax has no income cap, and only has two brackets. Also, note that the employer and employee split the Social Security and Medicare taxes evenly, except for the second bracket of the Medicare tax, which is an additional 0.9%.
Here are the rates for 2019:
City wage tax: 3.88809% for residents and 3.4567% for non-residents
Pennsylvania income tax: 3.07%
Married filing jointly or qualifying widow
Head of household
Married filing separately
As mentioned earlier, federal income tax has several forms of deductions on taxable income. There are standard deductions and itemized deductions, and you can only choose one or the other. The standardized deduction applies to your tax filing status, and the itemized deductions are numerous types of deductions based on your behaviors or status, such as whether you paid for schooling, have children, and so on.
Here are the standard deductions:
Single or married filing separately: $12,200
Head of household: $18,350
Married filing jointly or qualifying widow: $24,400
There are additional standard deductions for the following, if you are an unmarried individual:
65 or older or blind: $1,650
65 or older and blind: $3,300
For married individuals and qualifying widows, the additional deductions are the following:
65 or older or blind: $1,300
65 or older and blind: $2,600
Both spouses 65 or older: $2,600
Both spouses 65 or older and blind: $5,200
There is no longer a cap on the value of itemized deductions. The types of these deductions are too numerous to list here, but here are the most significant:
Up to $10,000 of state and local taxes
Qualifying home mortgage interest
Medical expenses in excess of 10% of your income
Social Security tax:
Both Social Security and Medicare taxes do not utilize deductions. So, if you’re a single filer earning under $12,200, you still have to pay these taxes, but you won’t have to pay any federal income taxes. Note that if you are self-employed, you are also responsible for the Social Security and Medicare taxes that your employer would have paid.
Okay, that is a lot of information at once! I’ve made this more digestible by turning it into a chart that shows income level and the effective tax rate, or the total percentage of income paid in taxes. This chart assumes the standard deduction, rather than itemized deductions. I have also assumed a single filer living and working in the city for simplicity’s sake.
I extended this chart all the way to $600,000 in order to capture every tax bracket, to best show how income tax plays out. However, the vast majority of us are not earning upwards of $600,000, and are below the $100,000 mark. Let’s zoom in on that bit.
These are the tax rates most of us are paying. The minimum possible tax rate is 14.60809%, then it increases very rapidly, until slowing down significantly at about $130,000 annual income. As your income increases, it will approach, but never reach, an effective tax rate of 46.30809%. More realistically, if you’re earning six figures, you’re probably paying 30-40% of your total income in taxes.
In my opinion, the most critical feature of income taxes to note is that there is a significant portion that is a flat rate. This means that no matter what your income is, you will always be paying at least about 15% of your income in taxes.
Although our tax system has a progressive tax structure, it begins as a flat tax. This most heavily impacts people earning in the lowest income brackets. What’s more, although the effective tax rate increases with income, the rate of increase slows down as income increases. This has a dramatizing effect on the lower tax brackets by enormously increasing their tax burden with relatively small increases in income, and conversely, it means that those earning above six figures will feel little change in their tax rate as their income increases. So, in sum, we do have a progressive income tax, but it is a very weak one. If its intended effect is to reduce tax burden proportionately for lower-income households, and to increase tax burden proportionately for higher-income households, then it does a poor job at this. It is a step in the right direction—but only a baby step.
Of, course, the exact curve is different for each filing status a household has, and for whatever deductions they might be claiming. However, that will only change the point at which the rate of taxes change significantly. It will not change the general structure of tax rates starting at about 15%, increasing rapidly, then flattening out.
In the next post, I will discuss property taxes.