Tudor April 2023 Commentary
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Market Snapshot
April 2023

Where Did the Crisis Go?

In the 1960's, Bob Dylan wrote and sang The Times They are a Changin'. While the song has nothing to do with economics, it's a good description of what we see as an attention deficit among media outlets for all things financial. A little over a month ago the pervasive buzz at the time suggested the banking world was set for collapse, and there were daily reminders of growing worries that a bank contagion would bring the economy to its knees. Didn't happen...at least not yet.

Most interesting is how quickly the news moved on to other stories when long lines at banks didn't form and equity markets shrugged, regrouped and went back to gains for the year.

Notable banks in this story include Silicon Valley, Signature and First Republic Bank. These three have required rescue or assistance. Perhaps there are others (bank failures occur all the time), but as we noted last month, banks have different chemistry and a contrast can be made between the characteristics of these three banks and the wide ocean of 4,800 banks across the U.S.(5)

Also noted last month - the average bank balance is $5,300, while FDIC insurance of $250,000 far exceeds this average balance. (bankrate.com)

Beating This Horse
On the other hand, recession: a news story that apparently has no intention of going away.

Is the economy heading into recession? Looking back, the economy (GDP) in 2022 contracted slightly in two quarters followed by two quarters of growth. This week, we have 2023 first quarter GDP showing tepid growth, but economic growth nonetheless. So far, so good...three quarters of economic growth.(6) This favorable news won't make commentators happy. Many will suggest the fed will "interest rate us" into recession. We will see how consumers hold up as the year progresses.

Never underestimate the power of worry. It spurs markets to climb...

April is showing another monthly market gain following March's gain.(1) Markets are forward-looking mechanisms and they see a glass half full as they trade near their highs for the year. Perhaps The Times They are a Changin' for the better and markets know it.

Taxes Paid Align Closely with Income Levels
Healthy Skepticism for Media
Income Tax Rate Discussions
The topic of taxation is filled with sound bites that perk up the ears of those that long for fairness. It's a hot button issue across the political spectrum.

It is important to look at reliable sources to see where taxation burdens fall. Discussions of theoretical taxation should be eliminated...this results in conjecture, not reality. Examples of conjecture include applying a tax liability on things taxpayers own that have grown in value based on current non-existent tax law.

Below, we explore the demographics of federal income taxes paid.

Federal Income Tax

Nearly every private sector employee pays FICA tax, which we discuss below. What about federal income tax?

40% of households pay no federal income tax(7)

The bottom 50% of taxpayers paid 2.3% of federal income taxes collected in 2020

The top 50% paid 97% of federal income taxes collected in 2020

After deductions, the average federal income tax rate paid by:

The top 1% of earners - 26%

Top 5% of earners - 22.4%

The top 10% of earners - 20.3%

The top 25% - 17.1%
The top 50% - 14.8%

The bottom 50% - 3.1%(3)

The correlation between income levels and tax liability is clear. The higher the income, the higher the average tax rate. A disproportionate level of federal income tax is paid by higher income earners. The top half of taxpayers pay 97% of federal income taxes.

Who is FICA and
Why are They
Taking Money from Me?

FICA payroll tax, also commonly known as Social Security tax, was established in 1937 with the Federal Insurance Contributions Act (FICA). In 1966, another tax known as Medicare was added on to the original FICA payroll tax.

The current percentage rate of 7.65% for both FICA and Medicare tax was established in and has not changed since 1990.

Social Security Wage Base

In 2023, employees pay into the Social Security and Medicare system from their wages at a rate of 7.65% up to the Social Security wage base of $160,200. Employers match that rate out of their own coffers resulting in a total FICA/Medicare payroll tax of 15.30% for each employee. Above the Social Security wage base, high wage earners continue to pay the Medicare portion of the tax up to their highest wage income, also matched by their employer, a total of 2.90%. There is also a seldom discussed 3.8% Medicare surtax on higher earning taxpayers.

The Social Security wage base captures 93% of all workers - that is, 93% of wage earners in the U.S. earn less than $160,000 in wages and pay the full 7.65% amount of FICA tax.(4)

Social Security Trust Fund

FICA payroll taxes collected go into the Social Security trust fund, but these deposits are largely transferred over to current Social Security and Medicare recipients. Any excess FICA payroll tax collected in the past was invested in government bonds resulting in a trust fund. If no changes occur in the next nine years, the amount of excess tax collected in the trust fund will be depleted and this will require existing workers at that time to fully fund the monthly checks for recipients. This will be increasingly difficult as 10,000 baby boomers retire every day, and by 2030 all baby boomers will be over age 65 according to the U.S. Census Bureau.

Estimates are that benefits will be cut by double digits at that time. We will see what politicians do at the crucial last hour before this becomes a social challenge.
"The fastest way to build wealth is to go slow"
 Morgan Housel
Dow Industrial Index

March 23, 2020 - 18,214 (2020 low)

April 28, 2023 - 34,098 (1)

87% Gain
Enjoy the week...
Grant S. Donaldson, MS, CPA
(1) yahoofinance.com, S&P500 historical data, Barrons, Morningstar.com, Vanguard benchmark returns
(2) Information available upon request
(3) https://taxfoundation.org/publications/latest-federal-income-tax-data/
(4) https://dqydj.com/income-percentile-calculator/
(5) https://www.fdic.gov/
(6) https://www.bea.gov/data/gdp/gross-domestic-product
(7) https://www.cnbc.com/2022/10/28/more-than-40percent-of-us-households-will-owe-no-federal-income-tax-for-2022.html#:~:text=An%20estimated%2072.5%20million%20households,from%20the%2056%25%20in%202021.
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