[Ed. note: Today we bring you some "news you can use": a practical look at how political choices might affect your personal finances. This post is by Ted Frank, who blogs at Overlawyered.com and PointofLaw.com, and who has guest edited ATL in the past. Take it away, Ted.]
BigLaw lawyers love Obama. If one searches by law firm various databases on-line for campaign contributions, one sees an overwhelming sea of blue, and most of it to Obama.
But how will Obama affect BigLaw wallets? On Above the Law, we regularly see commenters threaten to abandon law firms for falling $5,000/year short of market. I therefore thought it worthwhile to examine the effects of Obama’s tax and spending plans on take-home pay.
We all know that Obama wants to end the Bush tax cuts. That is a 3% bump across the board to the bad old days when associates faced a marginal federal tax rate of 36%.
But the real hidden tax is that Obama plans to end the social-security tax cap. Right now, you may notice, sometime during the summer or early fall, your take-home pay suddenly goes up because they stop deducting FICA. Current law caps social security taxes: in 2008, the cap is at $102,000. Obama proposes to abolish this. That mid-summer bump will be no more: add about several thousand dollars to your annual tax bill.
But social-security taxes are not only on employees. The government also charges 6.2% to employers that you never see on your W-2s. But rest assured the partners see this, and will notice that the expense of keeping an associate has risen several thousand dollars a year when FICA taxes double and triple. Will they swallow that additional expense, or take it out of your bonus?
Find out, after the jump (or click here).
I’ve taken the liberty of calculating the effect of Obamanomics on the typical mid-level BigLaw associate. Betsy BigLaw is a fifth-year associate who is paid market at a New York City BigLaw firm. She rents; she itemizes her deductions; she is single; she maxes out her 401(k). I assume she’s generous, and gives $10,000 a year to charity; I assume her law firm partners are generous, and swallow nearly half of the Obama tax increase, only cutting her bonus $5,000. If either of those assumptions are untrue, the cost of Obamanomics to Betsy go up even more.
The effect is enormous. Betsy’s marginal tax rate goes up from an already ridiculous 42.5% to 51.4%—not including the new 6.2% marginal tax on your employer. Subject to how she structures her withholding, Betsy’s take home pay drops an average of $515 a paycheck—less in the early months of the year, but much more in the later months of the year. Add in the effects on her bonus, and Betsy loses nearly $20,000/year in take-home pay.
I added a third column: how big a pay cut would you have to take to receive the same take-home income? The answer is that Obama’s tax increases have a bigger effect on your income than a law firm cutting New York salaries by $34,000.
Now, money isn’t everything. A BigLaw associate, who is already handsomely paid, might find it worthwhile to take the equivalent of a $34,000/year paycut to have Barack Obama as president instead of John McCain; how else will we guarantee more Obamagirl videos? But given the hue and cry seen on Above the Law and XOXOHTH over salary fluctuations that are a fraction of that size, BigLaw associates may want to fully consider the effect of the candidates’ tax plans on their economic well-being. If you’re willing to reject a law firm over a few thousand dollars, how much money would sway your presidential vote and campaign contributions?
Update: If you read the original version of this post, please note that we’ve updated it by making the spreadsheet available. To access the spreadsheet, which you can then tinker with to reflect your own financial state, click here (or right-click to save it directly to your computer).
Further Update: Per Ted Frank: “The spreadsheet is only meaningful for taxable income above $164,550. Below that figure, it will produce garbage.”
Final Update: A follow-up post and revised spreadsheet, which works for lower incomes, are available here.