bama, BigLaw, and Taxes

(Or: Obama = $34,000 Paycut)

[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.

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."

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."

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391095)

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391143)

How can anyone vote for him when he hasn't laid out the specifics of his tax increases?

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391162)

Is the lack of specificity a concern for me? Sure, but I don't think there's any chance in hell of him lifting the cap without including a significant donut-hole. I'm sure he'll be forced to make a detailed proposal before the general election.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391186)

That doesn't mean he supports it.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391185)

"During the forum, Obama referenced a “doughnut hole” where people would not start paying the payroll tax until their incomes reached $200,000 or $250,000."

http://www.dispatch.com/live/content/local_news/stories/2008/02/25/obama.html

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391201)

Every time? That's a lie. I've heard him discuss it at least twice during debates and not mention anything about a "doughnut hole."

How can you vote for him when you don't even know what his tax plan is going to be?

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391211)

HOPE!

BELIEVE!

ETC.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391221)

Fuck, I don't even want the doughnut hole idea. The answer is to raise the retirement age and cut benefits, NOT to raise taxes.

Also, don't forget, during the Nov 15 debate Obama said anyone making over 96k is rich and deserves to pay more taxes. More tax hikes will follow.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9392970)

Seriously though, even if you're making $205k, a hike with a donut hole up to $200k won't lead to anything remotely resembling a $35k tax increase.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391246)

the solution is the raise the retirement and cut benefits.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9392998)

This calculation is fair game, and the doughnut shills have hardly a leg to stand on. That said, it's an option he's kept open, so it's certainly plausible.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391189)

But this type of shit is inevitable. You can blame the baby boomers for this crap.

There are way too many entitlements that need to be funded. Whoever is president, they are going to have to raise taxes, it's just the way it is.

Our generation is fucked in the ass. We will have to pay for a bunch of entitlements for other people that we ourselves will never get. Again, thank the boomers.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391155)

Fuck poors.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391172)

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391183)

He's provided as many, if not more, details on his policy plans than any other candidate for president.

Do your fucking homework before you talk out of your ass.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391269)

whatever that means

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391224)

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391230)

The fact that the rezko bullshit is the best opp research HRC's machine could come up with makes this point pretty clearly.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391251)

So you trust that he will have a great tax plan b/c you think he is honest. Okay.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391263)

I know his record. I know his history. And they lead me to reasonable believe he's an honest person.

As a second independent point unlike you I have read his policy proposals, and I know the basics of his plans.

You make it sound like other candidates are providing thousands of pages of revised tax code language. Which they aren't.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391278)

2. link to hillary saying no other tax raises?

3. link to hillary disputing increasing payroll cap?

4. link to obama wanting to increase capital gains tax for regular people?

5. link to increasing capital gains tax leading to increased likelihood of depression?

6. link to obama specifying that he would eliminate payroll cap without a donut hole?

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391504)

Author: dr. joseph smith's rotting corpse, esq. ("Man-to-man up your ass, Bud!")

I know the outline for what he wants to do, and if you'd read his plans you would too.

He's provided as many, if not more, details on his policy plans than any other candidate for president.

Do your fucking homework before you talk out of your ass.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391269)

ReplyEdit Your Message

Date: February 26th, 2008 3:40 PM

Author: Gaydolf Titler

Link to his detailed tax plans, please?

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391283)

ReplyEdit Your Message

Date: February 26th, 2008 4:13 PM

Author: Gaydolf Titler

Well?

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391421)

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391781)

Bump this thread later in the spring/summer when he releases a more detailed plan and we'll see who's right on this. I see no credible reason to fear Obama's tax plans right now.

edit: here's a good article from tnr on the pragmatism of Obama's policy shop: http://www.tnr.com/politics/story.html?id=4d40a39e-8f57-4054-bd99-94bc9d19be1a

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391272)

true wealth doesn't care about hikes, because they have their income positioned in such away that allows them to take advantage of the many tax loopholes that exists and were created to separate the TTT from uber-prestige

if you cocksuckers were true blue-bloods you would be bitching about how HIGH the insanely LOW capital gains tax is whilst simultaneously living off of dividends and other unearned income

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391252)

My father is 59 and retired, I want to sock him in the face because he's already complaining about not being able to afford the nice house in the sunbelt he wanted. I want to sock him in the face and tell him to work for another 5 years, and maybe that 300,000 in after tax income would make things easier

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391261)

true wealth doesn't care about hikes, because they have their income positioned in such away that allows them to take advantage of the many tax loopholes that exists and were created to separate the TTT from uber-prestige

if you cocksuckers were true blue-bloods you would be bitching about how HIGH the insanely LOW capital gains tax is whilst simultaneously living off of dividends and other unearned income

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9391289)

Hillary said she wouldn't raise payroll taxes.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9407948)

The question should have been "if the iraqis told you that leaving would be genocide, would you leave anyway?"

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9393258)

seriously, congress is controlled by dems, and the way they irrationally suck his vapid cock, they'd give him anything he wanted.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9407862)

The question that you have to ask yourself is whether the government can spend your colleagues' money better than they can. Judging from what BigLaw associates buy, this seems like a very weak assertion with strong empirical verifiability.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9415975)

WTF? So if you all get ripped off then you're fine? Aside from which:

A) Some of my colleagues come from families with money.

B) Some of my colleagues live in countries that don't have an insane tax rate. Like Russia or Singapore, for example.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9416016)

http://www.barackobama.com/issues/socialsecurity/#protect-ss

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#9540264)

I mean, our marginal rate is still higher under his plan than under McCain's, but now it's on the order of a few percent.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#10102530)

http://taxprof.typepad.com/taxprof_blog/2008/11/tax-policy-in-the-obama-biden-administration.html

Steve Johnson (UNLV): "And the cap on incomes subject to the Social Security tax likely would disappear or rise steeply."

James Maule (Villanova): "The so-called cap on wages subject to FICA will be lifted, and it very possibly will be a simple removal such that all wages are subject to that tax."

2009 cap is 106,800 (which, btw, is a HUGE increase from even 1999, when it was $72,600).

Removal of the cap would mean about $6k in extra taxes for first years. Add into the fact that Employers will not have to pay more in social security taxes as well - one would have to think they might cut bonuses or at least prevent them from rising.

This doesn't even take into account the almost certain 3-5% increase on the top rate and the increases on the tax on investment income.

All this while he plans to give refundable tax credits to people who don't pay taxes or do useless community service in college.

Hope this guy is worth it!

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#10330798)

And yea, Obama is gonna fuck us over...

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#10330826)

But I will give you the advice I give everyone. I only know about corporate - the litigation department at my firm is totally foreign to me (it is like they work for a different company in the building and I occasionally see them in the elevator or at a building event) - and I think this is pretty common at other firms - so you'll need to ask someone else if you are interested in litigation.

For corporate, though, ultimately the top tier firms (S&C, DPW, STB, CSM) are pretty different in how they assign work to young lawyers and your career options re: specialization, and I don't think there are two more different firms in this respect than Cravath and DPW. Cravath has the rotation system that you get assigned something and then keep changing every 2 years. DPW has a system were you pick three six month rotations as a junior and then you pick something and specialize in it.

The cultures are different, true. CSM might be slightly more impressive to your law school or banker friends. But I think ultimately this difference re: training and specialization should be where you make your choice. It really is two significantly different approaches - neither is "right" or "wrong" - but most likely you will prefer one to the other.

If you think you will likely pick an area you want to focus in and then do it - then you may want to avoid Cravath unless you only plan to be there a few years. But if you find the idea of being forced to specialize restricting and ultimately boring - DPW may not be the best place for you either.

(http://www.autoadmit.com/thread.php?thread_id=774162&forum_id=2#10330878)