How to Uncover Your True Tax Burden
Like many myths, most Americans believe the US is a low tax nation. Compared to many European countries, Americans have a much lower tax burden. But that comparison fails for many reasons. The most important reason is that most people don’t have a clue how much they pay in taxes. America has a myriad of tax authorities (local, city, state, federal) and a web of overlapping rules that complicates and conceals individual’s tax burden.
Another reason that comparing with European nations fails is due to the welfare state. Yes, Europeans pay higher taxes, but they receive much more government handouts. This is especially true for middle class workers1. I have no doubt that private solutions would be more efficient and fair, but at least European workers get something in return. Most welfare payments in the US are means-tested, which leaves middle class (especially upper-middle class) workers the bill without any of the “benefits”2.
Tax Calculations
So, how much does a typical American pay in taxes? Unfortunately, that is impossible to answer without more information. Since tax laws are so complex, averages aren’t particularly useful. Instead, let’s look at the specific tax burden for an unmarried, middle-class worker named Joe Burden. He lives in my home state of Georgia, which has fairly decent tax laws. Joe makes $125,000 per year; right in the middle of the middle class for a household in Atlanta’s metro area3. See the figure below for exact numbers.
The first problem is calculating Joe’s true wages. Mr. Burden negotiated a salary of $125,000 per year. Joe pays 50% of his health care premiums and his employer pays the rest. Due to America’s bizarre tax code, his employer “pays” several taxes on his behalf too4.
Sadly, the governed designed this accounting gimmick to obfuscate tax rates. In reality, his employer pays everything, including Joe’s salary, so it really doesn’t matter how it is accounted. Looking at the first table, Joe’s employer pays $13k of taxes and $5k of health premiums as part of this accounting gimmick. Accounted truthfully, Mr. Burden actually earns more than $143k per year.
Death by a Thousand Cuts
Using standard tax tables from the State of Georgia and the IRS, I calculated Joe’s Social Security, Medicare, federal income, and state income taxes. For these calculations, he has no dependents and claims the standard deduction. After these massive sucker punches, Joe pays properties taxes for a $375k house and a $35k car. Healthcare is the next massive bill.
Luckily for Joe, his premiums are tax deductible. However, since the Affordable Care Act (aka. Obama Care), true health insurance is illegal. Instead, Joe’s company offers a “Silver” health plan, that cost $10k per year. Even though Mr. Burden is young and healthy, he pays the same amount as people his same age with extreme health risks5. The Obama administration cleverly designed these health plans to function as redistribution schemes. And they are completely divorced from traditional insurance. For this reason, I’ve classified his health expenses as a tax.
Joe’s last major tax is a local sales tax of 8.5%. Like most Americans, Joe spends everything he earns. Removing big ticket items that avoid sales tax, like his mortgage and utilities, the government takes another whopping $5k of his money.
Honest Assessment
The illustration above shows how a relatively modest earner pays over half of his wages on taxes. He lives in a moderate tax state and his salary is squarely in the middle 24% federal tax bracket. Just imagine how bad these numbers look for people in high tax states and/or higher federal tax brackets (like 37%). The bottom line is that America places an enormous burden on the middle class. It is one of the many reasons why most Americans believe they are falling behind6.
My calculations only capture big ticket items. There many other smaller taxes that Joe pays, likely without ever knowing (like taxes on gasoline or alcohol, and tariffs). And as horrifying as the monetary costs are, they are only part of the economic impact. Think about all the time and effort wasted avoiding paying taxes. In fact, the industry is so large, that Americans burn over 11 billion dollars preparing taxes7.
Tax Friction
Another side effect of taxes is the friction created due to the added costs of doing business. This is especially true for the service industry. Without income taxes, service workers would easily exchange services. However, with the burden of income taxes, instead of simply exchanging work, every transaction also involves paying the government. For example, if a mechanic and a plumber need each other’s help, they both need to work an extra hour to afford an hour of other’s time.
This friction leads to several options. One option is doing the work yourself. As long the mechanic can fix his toilet in less than two hours, he is better off doing the work himself, even if the plumber could have done the work in less than an hour. Of course, the mechanic could always work late one night to earn two extra hours of wages and pay the plumber above board. But why would he do that when he could barter directly with the plumber? The answer is that plenty of people avoid the ridiculous tax friction and barter with one another. According to the IMF, barter and/or black market transactions comprise 20% of GDP8.
Conclusion
The income tax is the single most destructive tax ever invented. It enslaves the middle class, distorts labor markets, and costs billions in compliance. And as terrible as the tax is, the US government spends substantially more than it collects in taxes. Perpetual budget deficits funded by the federal reserve leads to the last major tax: inflation. Inflation further erodes purchasing power, especially for the lower and middle class workers whose salary struggles to keep up with inflation.
Taxes are the most critical impediment to freedom that modern people face. How can Mr. Burden say he is free when more than half of wages goes to the government? Of course, the government knows this, so it does everything in its power to disguise the true costs of taxes. Worse, the media parades around every two years talking about how Americans don’t pay enough in taxes. After all, your fair share is 100%. You should be happy they let you keep any of your wages!
Concordia
In the book, Concordia, There Must be a Better Way, a new nation is formed by means of a peaceful succession from Chile. In this book, income taxes are completely eliminated and government spending is vastly limited. They use tariffs instead of the income tax to fund the government. Unlike the graduated income tax, tariffs are naturally limiting, simple to enforce, and applied equally to all.
What would you do if you had the opportunity to start from scratch? How would you balance freedom, liberty, and justice, while assuring that investors are rewarded for taking a risk on your enterprise.
To found out what happens, buy the book now on Amazon. It is an exciting novel that challenges your assumptions and entertains you in the process.
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