The Taxman Comes for Homer

Last week I wrote about the Simpsons’ mortgage payment. In short, I found that using a reasonable assumption of Homer’s income, the median housing price, and the rate of interest, the Simpsons are likely paying less of their household budget on housing today than in the 1990s.

But what about the family’s taxes? Are they getting squeezed by the taxman? Taxes are referenced throughout The Simpsons series. Here’s an article that collects a lot of the references. And that makes sense: the Simpsons are a normal American family, and normal American families love to complain about taxes.

Using the same reasonable assumption about Homer’s income from last week’s post (that Homer earns a constant percentage of a single-earner family, rather than merely adjusting for inflation), we can calculate the family’s average tax rate and how it has changed over the year. Conveniently, “average tax rate” is just economist speak for “how much of your family’s budget goes to the government.”

First, let’s just look at the federal income tax, since this is where most of the changes happen. Don’t worry, I’ll add in payroll taxes below, though this is a constant percent of the family’s budget since it is a flat tax on income!

The chart below shows the average tax rate the Simpsons paid for their federal income taxes. I didn’t go through every year, because: a) it’s a lot of work (I’m doing each year manually); and b) it’s more interesting to look at years right after or before major changes in the tax code. So no cherry picking here — the years selected are picked to tell a mostly complete story.

I’ll now briefly explain each of the years chosen, and what changes in the tax code impacted the Simpsons. But as you can see, just like their mortgage payment, the Simpsons are now spending less of their household income on federal income taxes (don’t worry, the trend is similar with payroll taxes included). In fact, they are now getting a net rebate from the federal government, and have been since the late 1990s!

For all of these, I assumed they took the standard deduction — it’s possible they could have benefitted by itemizing in some years, depending on where they were in their mortgage amortization, but that would be a lot harder to estimate and wouldn’t change the overall trend.

In 1989, the Simpsons are clearly net taxpayers to the federal government. They’ve got about $22,000 in earned income, and while deductions and exemptions do significantly lower their tax bill, they still have plenty of taxable income left over. All of their taxable income is in the 15% bracket, and they pay about $1,000 in federal income taxes.

By 1996, there has already been a major change in their tax situation. Their income hasn’t grown much and is now about $25,000 (1996 is also the year which we get the data about Homer’s income — see the image below). That slow income growth alone means that their tax bill would fall slightly, but the big change is two expansions of the Earned Income Credit in the early 1990s. While the EIC was established in 1975, it was a pretty narrow credit in 1989 and the Simpsons earned too much to qualify. By 1996, they got a decent sized EIC of about $800, which was almost exactly equal to the tax they owed, cancelled out almost all of their federal income tax liability (they are still in the 15% bracket).

Notice also the paystub we see for 1996. Homer had $56.25 withheld from his weekly paycheck, or over $2,900 for the entire year. Here’s what’s really important: he will get almost all of this back as a refund, since his actual tax liability for 1996 is less than $100. He’s overpaid, big time, though on net his tax bill is pretty close to $0.

But just 2 years later in 1998, there was another big change for the Simpsons: they now get a net refund, equal to about 2% of their annual income. So they would get back all of the income tax withheld, plus another $650 or so. While they started with earned income of just under $28,000, by the time all the deductions, exemptions, and credits are applied, they get a net refund (note: they are still in the 15% bracket — no rate changes for the Simpsons yet, the most salient feature of the tax code).

What’s the big change in 1998? The introduction of the Child Tax Credit. While only a maximum of $400 per child at the time, and limitations based on how much payroll tax you paid, this credit plus the existing Earned Income Credit move the Simpsons out of the tax paying category and into the category of receiving money from the federal government. Again, this isn’t just a refund, it’s a net refund of all their tax liability plus an additional amount for their refundable tax credits (yes, they still pay payroll taxes — more on that below).

Fast forward just a few years to 2003. Much has changed in the world, most notably a recession and a terrorist attack, but two tax changes at the beginning of the decade have also benefitted the Simpsons. If we look at their tax bill in 2003, a few things have changed. First, they are now finally in a new tax bracket, because a new lower bracket has been created: all of their taxable income is now taxed at 10%. But even though they start with $32,000 of earned income, not much of it is taxed and 10% after all the deductions, exemptions, and credits.

Speaking of credits, the other big change for the Simpsons is that the maximum value of the Child Tax Credit is now $1,000 per child (and remember, they have 3 kids). Putting all this together the Simpsons get a net tax refund of about $2,700, and that’s above and beyond the refund of all the income taxes withheld over the year. Their refund is equal to about 8% of their annual household income.

At this point it might be useful to bring in the chart which includes federal payroll taxes. Because now the Simpsons have entered the territory where their tax refund from the income tax is so large that it even eliminates their payroll tax liability. Recall that payroll taxes are 7.65% of earned income, so their negative 8% average tax rate on income taxes puts them pretty close to breaking even with the federal government overall (ignoring some tax incidence from tariffs, etc.).

And as you can see in the chart, this situation of basically breaking even on federal taxes (including payroll taxes) persists for almost the next 2 decades. While there are many debates and changes to taxes during the Obama administration, almost all of these changes impact high-income earners. For the Simpsons, the “Bush tax cuts” of the early 2000s become a permanent feature of the tax code.

Even the 2017 tax cuts under Trump don’t affect the Simpsons that much, though this is because single-earner households saw pretty decent nominal wage growth between 2016 and 2019 (almost 17%!). The Child Tax Credit is doubled (to $2,000), as is the standard deduction (but exemptions are gone, and the Simpsons had 5 of them), but the Simpsons are still in the 10% bracket at the end of the day. And the gains they get from the CTC expansion are offset but a reduction in their EITC, once again due to faster than average wage growth (note: for families with roughly the same income before and after the 2017 tax cuts, almost all got a tax cut).

And then we get to 2021. Of course, much about the world has changed since 2019. I need not get into details here about the pandemic and the social and governmental response. But big changes happened to the tax code, although much of this applies only to 2021 so it is very much temporary. One of the most important ones is the further expansion of the Child Tax Credit: Bart and Lisa each qualify for a $3,000 credit, and Maggie’s is $3,600! Remember, this credit was just $400 per child when the Simpsons first got it in 1998. Some of this may have been paid out as an advance, but either way, the Simpsons will get it.

The third round of economic impact payments, the so-called “stimulus checks,” was issued in 2021 (the first two were in 2020). And this check was $1,400 per person, one check for each of the 5 Simpsons. They also continue to get a modest EIC refund, meaning that their total refund comes to about $14,000 (above and beyond withholdings, which would also be refunded!). Homer earned about $54,000 for the year (that’s my guess, since the relevant data isn’t out yet), meaning that their net refund from the federal government, even considering payroll taxes, was almost 20% of their household income. Wow!

And families that sent kids to daycare (should your daycare have been open in 2021!) also got a big bonus, which I’m not including for the Simpsons (Marge watches the baby), potentially up to 50% of the amount you paid for daycare.

Of course, these 2021 increases were temporary, and it doesn’t look like they will get extended. The Child Tax Credit will revert to $2,000, and in a few years may eventually revert to $1,000 as well. What this all means for the Simpsons going forward is that they will likely be treading pretty close to “break even” line with the federal government, with their income tax refund roughly cancelling out their payroll tax liability.

So perhaps the next time the Simpsons visit Washington, instead of booing the IRS building as Homer did in episode 8F01 in 1991, perhaps he will thank them for the refundable credits. Or at the very least, he can tip his hat and acknowledge a good foe, who now takes roughly no more from the Simpsons than he gives back in credits.

The Simpsons, of course, do pay other taxes, such as state and municipal taxes, and that famous Bear Tax. But as far as the federal government is concerned, they are pretty much even-Steven (and the Simpsons get the benefits from all that federal spending).

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