And Higher Still

In recent discussions about the US federal budget, much of the conservative rhetoric has pivoted on the argument that heavily taxing the wealthy is unfair. The latest budget out of Congress added a new tax bracket, 39.6%, that applies to the wages of those earning more than $400,000 (single filers) or $450,000 (joint filers) instead of the old 35% bracket (1); this led to the infamous 'sad rich people' infographic in the Wall Street Journal (2).

These discussions piqued my interest in the history of income taxes in the US. How do current taxes compare to the historical rates? Thanks to the IRS (3) and the Tax Foundation (4), I can do more than wonder. I used data from these sources to create my own infographic:

US historical income tax rates. y-axis is year (2013 on top); x-axis is earnings ($0-1,275,000); each color is 10%

This graphic represents the inflation-adjusted effective income tax rates in the US over the last century. Effective tax rates have been much, much higher than they are today for most of the US' history. From 1942 to 1981, taxpayers with wages over $1 million in today's dollars were paying 60-80% income tax; from 1944-1963, the top tax bracket was over 90%. The Apollo space program, President Eisenhower's Interstate Highway System, education improvements beginning with the National Defense Education Act, payoff of World War debts, and all of the other projects of the Greatest Generation were in part funded by these taxes on the rich.

This doesn't take into account payroll taxes (Medicare, Social Security), state taxes, sales tax, or any other kind of tax, so I can't say how the overall tax burden has changed for the average American over this time period. That being said, it's clear that the rich in previous generations haven't shied from contributing.

The graphic also doesn't take into account the various tax deductions available to eligible taxpayers; on this topic, however, I was able to find some interesting data on the history of the Personal Exemption (5):

It looks like the Personal Exemption was originally supposed to entirely exempt enough money to live on, but this concept didn't survive World War II.

The Google Spreadsheets in which I calculated the inflation-adjusted exemption data (6) and created the income tax graphic (7) are available.

(1) http://taxes.about.com/od/Federal-Income-Taxes/qt/Tax-Rates-For-The-2013-Tax-Year.htm
(2) http://online.wsj.com/article/SB10001424127887323689604578220132665726040.html
(3) http://www.irs.gov/pub/irs-prior/
(4) http://taxfoundation.org/
(5) http://taxfoundation.org/article/federal-individual-income-tax-exemptions-and-treatment-dividends-1913-2006
(6) https://docs.google.com/spreadsheet/ccc?key=0AiEk9zzYZVLgdFpQMXlaVkc1UVQ3bXBEdUl2S0tBTmc
(7) https://docs.google.com/spreadsheet/ccc?key=0AiEk9zzYZVLgdFNSd1QwVHhMbXR1VHd5M2Ryd25IN0E

For easy reference, all credit score and credit report information is now available in one place:

Virtually all credit card comparison and review sites are fatally flawed: they receive affiliate marketing kickbacks and advertising money from the companies whose products and services they review. I don't receive a damn cent, so you can trust me!

Mmmm plastic.

Many sites also compare credit cards in the context of 'which one is BEST'. There is no reason to have only a single credit card, so this form of comparison is entirely artificial. I have assembled a credit card collection to maximize the cashback and rewards I receive on my purchases. In this post, I'll share what cards I have chosen and why you might consider them for your own credit portfolio.

Caveats

When you're anticipating the financial high you'll get from the 5-10% cashback you can get on a purchase, keep in mind that forgoing the purchase entirely yields 100% cashback. Don't buy things you wouldn't have otherwise just to meet a minimum spending requirement or rack up points, or you'll find yourself losing out overall.

While building your rewards card portfolio, make sure that the cashback (or points, or miles, or whatever) are in a form you can actually use, and be wary of annual fees. While there's no financial reason not to have all of the 5%-cashback-rotating-category cards (see below), a card is not doing you any good if the fees outweigh the cashback or the points earned are only redeemable for gift cards you can't use. This is especially true for airline cards, which usually have high fees and often make it a real pain to redeem miles.

Credit Score

A common fear is that having too many credit cards will hurt your credit score and make it harder to get credit in the future. This is false. By increasing the amount of credit you have you will reduce your credit utilization ratio, which generally improves your credit score.

When a bank requests your credit report, a process called a 'hard pull', record of this will remain on your credit report for 2 years and your credit score will be temporarily reduced for 1 year. In school and not planning on any big loans (mortgage, car) in the near future? Apply away!

See this post for more information on credit reports, credit scores, and credit monitoring.

Managing Your Collection

Do you pay your credit card bills (or utility bills, or anything else) by mailing in a physical check each month? Stop that! - it's prone to error and a waste of your valuable, limited time and focus. Instead, create an online account with your card issuer and set up automatic electronic payment in full each month. To cut down on mail (and the associated inconvenience and risk of identity theft), have all of your statements and other communications delivered electronically. To keep track of your card and account balances, create a Mint.com account and link all of your banks. This way, you could have a dozen credit cards and it in no way complicates your day-to-day existence.

A store's Merchant Category Code (MCC) defines what kind of store it is for credit card cashback purposes. The credit card companies don't look through your receipt to see what you bought - everything bought at a grocery store is groceries, everything bought at a book store is books, etc. To check how a particular store is likely to be categorized, you can search for it in the Visa Supplier Locator MCC database: http://visa.via.infonow.net/locator/usa/supplier/

Cards For Everyone

These cards offer solid rewards with no annual fee. If the rewards are in a form you can use, there's no reason not to have these in your wallet.

Citi Forward Visa

5% back on bars, restaurants, bookstores, and movie theaters; 1% cashback on everything else. Yes, Amazon.com counts as a bookstore. Statement credits are redeemable at a cashback rate of only 2%, prepaid cash cards are available at 3.6%, Amazon redeems points at 4%. To get the full 5% back, save up points for a $100 gift card from one of the following:

Staples, TJ Maxx, Lands' End (also works at Sears and KMart), L.L. Bean, Macy's, Bath & Body Works, Timberland, Foot Locker, Pottery Barn, Chili's, Williams-Sonoma, Nike, Old Navy

Don't shop much at TJ Maxx? Have the gift card shipped to your mom.

Chase Freedom Visa

5% cashback on categories that rotate each quarter; 1% cashback on everything else.

For reference, here are the 2011, 2012, and 2013 categories:

=== 2011 (via: http://goo.gl/sV5DL)
Q1 (Jan - Mar) - Grocery and drug stores
Q2 (Apr - Jun) - Home improvement, lawn & garden, home furnishings
Q3 (Jul - Sep) - Gas, hotels, airlines
Q4 (Oct - Dec) - Dining, department stores, movies, charity

=== 2012 (via: http://goo.gl/IpwCG)
Q1 (Jan - Mar) - Gas stations and Amazon.com
Q2 (Apr - Jun) - Groceries and movie theaters
Q3 (Jul - Sep) - Gas stations and restaurants
Q4 (Oct - Dec) - Hotels, airlines, Best Buy and Kohl’s

=== 2013 (via: http://goo.gl/4LS13)
Q1 (Jan - Mar) - Gas stations, Starbucks, and drugstores
Q2 (Apr - Jun) - Restaurants and movie theaters
Q3 (Jul - Sep) - Theme parks, gas stations and Kohl’s
Q4 (Oct - Dec) - Select department stores and Amazon.com

You can redeem rewards for cash (statement credit, Chase bank account deposit, or paper check) or on Amazon.com for 5% cashback equivalent. If you redeem for discounted gift cards, you can get 5.6% (American Eagle, Kohl's, Old Navy, Pier 1, TGI Fridays, Bath & Body Works) to 6.25% (Lands' End/Sears/Kmart, Avis) cashback equivalent. Rewards are limited to $75 cashback equivalent (5% back on $1500 in purchases) per quarter.

Discover More (Discover It)

5% cashback on categories that rotate each quarter; 1% cashback on everything else.

For reference, here are the 2011-2013 rewards categories:

=== 2011 (via: http://goo.gl/S80Zl)
Q1 (Jan - Mar) - Airlines, car rentals, hotels, cruises, restaurants
Q2 (Apr - Jun) - Grocery and drug stores
Q3 (Jul - Sep) - Home improvement, department, and clothing stores
Q4 (Oct - Dec) - Gas, hotels, movies, theme parks

=== 2012 (via: http://goo.gl/bmV7o)
Q1 (Jan - Mar) - Gas Stations, Movies, Museums
Q2 (Apr - Jun) - Restaurants, Movies
Q3 (Jul - Sep) - Gas Stations, Movies, Theme Parks
Q4 (Oct - Dec) - Department Stores, Online Shopping

=== 2013 (via: http://goo.gl/wVHjF)
Q1 (Jan - Mar) - Restaurants, Movies
Q2 (Apr - Jun) - Home Improvement
Q3 (Jul - Sep) - *not yet announced*
Q4 (Oct - Dec) - *not yet announced*

Rewards are limited to $75 (5% back on $1500 in purchases) per quarter. Redeem rewards for statement credits at the full 5%. The Discover More is being replaced with the Discover It, but the terms and rewards seem to be pretty much the same.

US Bank Cash+ Visa Signature

This card is awesome... but good luck getting it! You can only apply in-person at a US Bank location, and you must have an extraordinarily high credit score to be approved.

It offers 5% cashback on two categories and 2% cashback on one category... of your choice! The categories available to choose from change each quarter. For an idea, here they are for Q1 2012:

=== Categories, 5%

Bill Payment, Charity
Airlines, Hotels, Car Rental
Fast Food, Movie Theaters, Restaurants
Department Stores, Home Improvement Stores, Electronics Stores, Furniture Stores

=== Categories, 2%
Grocery Stores, Gas Stations, Drug Stores

If you redeem $100 in rewards for statement credit, US Bank will also send you a $25 Visa prepaid card, for a 6.25% cashback equivalent. Awesome! It's also a Visa Signature, which can occasionally get you cool stuff (e.g. free wine tastings in Sonoma).

Fidelity Investment Rewards Amex

This card is extremely straightforward: it offers 2% cashback on all purchases. Rewards are redeemed in $50 increments into a Fidelity Investments retirement or brokerage account. This is not as convenient as a statement credit, but if you already have a Fidelity account or you wouldn't mind opening one, 2% cashback on all purchases is very hard to find.

Specialty Cards

These cards have annual fees, so they only make sense if you are in a position to take advantage of their rewards.

American Express Blue Cash Preferred

This card has a $75 annual fee, but offers 6% cashback on groceries, 3% cashback on gas and department stores, and 1% cashback everywhere else. Unfortunately the 6% cashback only applies to your first $6,000 in annual grocery store purchases, but that's still $360-75 = $285 cashback possible per year. Don't spend $500 a month on groceries? Anything you buy in a grocery store counts! And that includes gift cards...

If you spend $2,500 or less at grocery stores per year ($210 per month), check out the Blue Cash Everyday instead. It has no annual fee and offers 3% back on groceries, 2% back on gas and department stores, and 1% back everywhere else.

US Airways Dividend Miles Platinum Mastercard

This card has an $89 annual fee. Each year, you receive two companion vouchers that will allow someone to fly with you on a trip for $99 plus taxes and fees (comes out to around $130 total).

You receive 2 US Air frequent flyer miles per dollar when purchasing US Air tickets, and the miles required to book a free flight are decreased by 5,000, allowing you to book a round-trip starting at 20,000 miles. How does that translate into cashback percentages?

If your desired flight is low-demand (search here):

20,000 miles + $35 in fees for a round-trip ticket
$600 ticket: = 2.825% cashback
$500 ticket: = 2.325% cashback
$450 ticket: = 2.075% cashback
$400 ticket: = 1.825% cashback
$300 ticket: = 1.325% cashback

If your desired flight is medium-demand:
35,000 miles + $35 in fees for a round-trip ticket
$600 ticket: = 1.614% cashback
$500 ticket: = 1.329% cashback
$450 ticket: = 1.186% cashback
$400 ticket: = 1.042% cashback

$300 ticket: = 0.757% cashback

You also get a ticket for free entrance to a US Air lounge once per year and Zone 2 priority boarding, if you care about that sort of thing.

Chase United MilagePlus Explorer Visa Signature

This card has a $95 annual fee, with the first year free. The usual priority boarding and United lounge passes aside, the main benefits are: first checked bag free for you and a companion; 2 United frequent flyer miles per dollar when purchasing United tickets; your United miles don't expire as long as you hold this card. If you use the free checked bag perk for you and a companion on a single flight per year, you've already saved $100 and the card has paid for itself.

It's also a Visa Signature, which can occasionally get you cool stuff (e.g. free wine tastings in Sonoma).

Conclusion

So there you have it! Lots of opportunities for saving while spending the money you already spend.

Have a credit card that's super-great that I didn't include? Let me know about it in the comments.

2013-03-30

Historical US Income Taxes

2013-03-27

Roth IRA Questions Answered

2013-03-26

Monitoring Your Credit

2013-03-25

Cashback Credit Cards