Tuesday, February 2, 2016

What is Your Real Tax Burden?

As election year starts ramping up and tax season is upon us I thought it would be a good idea to take a look at the heated topic of an individuals tax obligations in the USA.

I'd like to start out by showing a very lovely graph provided courtesy of TaxFoundation.org. This group provides us with our "Tax Freedom Day" each year. In theory it's the day Americans as a whole have earned enough to satisfy ALL their tax obligations and governmental fees considered a tax.


In the beginning Tax Freedom Day was very steady until around 1913-1917 which coincides with the beginning of income taxes(1913 with the 16th amendment) and the US entering WWI. FYI before the 16th amendment income taxes were passed intermittently to pay for wars or other temp obligations, but always expired. You read that correctly. Income taxes were not always imposed in this country. Our very own Founding Fathers that risked their lives against the British Empire saw direct taxation as an unnecessary evil. It was an evil they saw being abused on a daily basis by the king and his agents. Thus they setup our country to operate through indirect taxes. Until of course future generations totally screwed it up. Once someone else gets a taste of your money they become like a drug addict always needing more.

Then in the 1930's there was a temporary relief drop which has been followed by a strong uptrend ever since. Ironically the 1930's are the decade FDR instituted the New Deal(1933-1938) and more famously the Social Security Act(1935). Which of course is more taxes. Despite FDR being the longest running President he might still go down in history as the worst by laying the framework for truly destructive policies(more on that in a future post). Then the 1960's brought us Medicare adding just a touch more in taxes.

Which brings us to today. 2015's tax freedom day was April 24.  Judging by the deficit spending adjustment plotted on the chart we should easily reach a week into May for 2016 based on that figure. Crazy that Americans were able to work around 3 weeks 100 years ago to satisfy their obligations, and now we must work approximately 4 months and 1 week to satisfy government's demands(deficit adjusted). That's a required working time increase of 504%.

So let's move on to the average American to get an idea of what you could expect to pay each year.

We'll use a fictitious Erin for our example. Erin has a college degree and works as a manager at a local distribution company with 20-25 employees. Erin earns  $55,000/yr which is close to the nations $53k average placing her in the 25% tax bracket. Erin also owns an average priced home of $176,600 in a state with 1.18% property tax assessments. Erin can also expect to make $12,990 worth of purchases subject to sales tax at 7%. Additionally there is a state tax on income of 3.5%.


Federal Income Tax*^$6,996
Social Security 6.2%$3,410
Medicare 1.45%$798
State Income Tax*$1,705
State Sales Tax $909
Property Tax$2,084
Misc Excise Taxes/Fees**$350
Total$16,251
Tax as % Gross Income29.54%


One thing to keep in mind is that Erin's employer also matches Social Security and Medicare contributions. Plus the company pays an additional unemployment tax on wages. So the idea of corporations not shouldering their fair share is totally false, and I'll write up an article in the future detailing that.

That would imply you would need to work approximately 30% of the year in order to satisfy your tax obligations. That's in close agreement with tax freedom day.

However this analysis doesn't include the newest tax. The Affordable Care Act, or Obamacare. Unknown to many is that the Supreme Court ruled the health care law is actually a TAX. Erin's company does not offer health care to its employees so she must buy it on her own. Lets assume Erin decided to purchase a low cost/low coverage Bronze Plan from the Health Exchange costing $200/mth.

Federal Income Tax*^$6,996
Social Security 6.2%$3,410
Medicare 1.45%$798
State Income Tax*$1,705
State Sales Tax $909
Property Tax$2,084
Misc Excise Taxes/Fees**$350
Health Care Tax$2,400
Total$18,651
Tax as % Gross Income33.91%

We now see that Erin's total tax obligations are extremely close to 35% of her pay. This would imply she has to work 35% of the year, or well into May, or possibly even June if we included the deficit adjusted liabilities.

While everyone will have different tax obligations based on their state, locality, and income tax bracket this should serve as a useful reference for many. So far in the USA we are lucky compared to many European countries where its notorious for taxes to consume 50% or more of income. Although it's well known in some states and localities for an individuals tax burden to reach 50% in the USA also.

Take some time this tax season to calculate how much of your pay went to taxes to find out your individual situation.


*Used Federal Standard deduction in calculating the tax.
^Updated to include personal exemption amount
**The miscellaneous tax is my best conservative estimate, but depending on where you live the burden could be higher or lower. This could include various registration, recording, and licensing fees. Removing it from the calculation brings us to 37.86%.

All data sourced from the US Census Bureaus Quick Facts, www.TaxFoundation.org, and WalletHub.

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