The most applauded tax is one that is paid by someone else. It is thought to be fair and well-conceived. This is common knowledge.
But the taxes we pay? Well, that’s another matter.
So how much do we pay in taxes? Is the burden fair or excessive? If taxes are, as Oliver Wendell Holmes Jr. said, “the price of a civilized society,” then why are we paying so much for a society that is less and less civilized? We seem to be paying a lot in taxes while the candy bar of civilization keeps getting smaller.
These questions got me onto the web. The idea was to use a tax calculator for different levels of income on one site, smartasset.com. And to check the position of each income level on another site, dqydj.com. You can see the results in the table below. Some CPAs and academics may differ, but they present a good estimation of taxes we pay.
Yes, that’s a lot of numbers. Let me provide some observations.
- The federal income tax, the one that gets talked about and tweaked the most, is a genuine graduated tax.
It puts no burden on the very poor. But the burden rises as a percentage of income. Earn more and you will pay more. You can see this in the table as the federal income tax (fourth column) and the effective federal tax rate (seventh column).
At an income of $60,000 a year, the federal income tax will take 10.3% of your income, and your next dollar of income will be taxed at a 22% rate. The rate on the next dollar of income, by the way, is called the “marginal tax rate.”
This income puts you at the 64th percentile, meaning that you earn more than about 64% of all workers. It may not seem like it, but you’re doing better than most.
At an income of $150,000 a year, you’ll be doing better than 92% of all workers. The federal income tax will take 18% of your income, and additional income will be taxed at 24%. With the wage-base maximum for Social Security set at $147,000 this year, this is the high-water mark for most workers. Historically, only about 6% of all workers rise higher than the wage-base maximum.
This fact, by the way, shocks many in Dallas. Those at the top end of the income scale seldom understand how thin the income air they breathe is, or how rapidly it gets that way.
Earn twice that much, $300,000, and the federal income tax will take 25% of your income, and additional income will be taxed at 35%. Equally important, only 2% of workers earn more.
Earn $500,000, the level that puts you in the top 1%, and you’ll pay 29% of your income and additional income will be taxed at 35%.
Well, maybe not.
That level of taxes assumes that all of your income comes from work. The burden will be lower if some of your income comes from dividends and capital gains. Income from capital is taxed at lower rates. According to IRS data, the actual effective tax rate for the top 1% in 2019 was 25%, not 29%.
Go into the ranks of the super-rich, where most income comes from dividends and capital gains, and the average tax rate can sink to middle income levels. That’s why Warren Buffett can talk about paying taxes at a lower rate than his secretary.
Even so, if all you thought about was the federal income tax, it would be hard to make a case that those with lots of income didn’t pay their fair share or that our tax system wasn’t graduated, with higher earners paying a larger proportion of their income than those who earned less.
But …
- The employment tax — the tax we pay to support Social Security and Medicare — changes how we experience the tax burden.
How can that be? Simple. The employment tax takes more income from most workers than the federal income tax takes. And every worker pays it.
If, for instance, you earn $10,000 a year, you’ll pay no federal income tax, but 7.65% of your income will go to the employment tax, which is also known as FICA. You’ll need an income of around $40,000 a year before your federal income tax bill exceeds your employment tax bill.
But even this is an understatement.
While your employer “pays” half of the employment tax (7.65%) and you pay half (another 7.65%), the reality is that the entire tax is a cost of your employment. As a consequence, you’ll need an income of nearly $110,000 before your federal income tax bill is larger than your true employment tax bill. If you look at both the employee and employer portions, nearly 86% of all workers pay more in employment taxes than in federal income taxes.
Readers who doubt this should ask anyone who is self-employed. They pay both sides of the employment tax directly.
When you add the burden of the employment tax, our tax system isn’t nearly as graduated as it seems.
So here’s a novel idea. Next time our politicians suggest we need yet another heroic tax reform bill, let’s insist that the entire tax burden be considered, not just one tax or the other.
