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Friday, October 28, 2005

Tax Foundation's Countdown to Tax Reform VI: How the Cost of Living Affects Tax Burdens

Tax_foundation_9The Tax Foundation has published Countdown to Tax Reform, Part VI: Cost of Living and Tax Burdens as part of a series in anticipation of the expected November 1 release of the report of the President’s Advisory Panel on Federal Tax Reform. Here is a taste:

To demonstrate how cost of living can affect a family’s tax liability, Tax Foundation economists adjusted the income of a median, dual-income childless married couple to various cities using the ACCRA cost of living index, one of the nation’s leading providers of cost-of-living data. In 2004, the typical dual-income childless couple in America earned $74,443—an income large enough to put them into the top 20% of taxpayers, with a tax liability of roughly $8,081 and an effective federal income tax rate of 10.4%. As it happens, the city with the closest average income to the national average is Milwaukee, Wisconsin:

Metro Area

Income Needed

Taxpayer Group

Tax Liability

Tax Rate

Houston

$67,315

Top 25%

$6,999

10.4%

Milwaukee

$74,443

Top 20%

$8,081

10.9%

Orange County

$100,079

Top 10%

$14,506

14.5%

San Francisco

$135,003

Top 5%

$23,250

17.2%

New York City

$162,974

Top 3%

$31,139

19.1%

("Income Needed" = income needed to buy median standard of living)

While the tax code was indexed for inflation in 1985 to protect Americans from “bracket creep,” nothing has been done to protect them from “cost of living creep.”

For prior TaxProf Blog coverage of other pieces in the series, see:

http://taxprof.typepad.com/taxprof_blog/2005/10/tax_foundations_6.html

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