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Think income tax rates are ok? Read this.
Category: Law
by Admin on Friday, June 20th, 2008 at 09:42:16

Let's talk for a moment about an imaginary worker who makes, oh, let's say... $50,000.

Let's further stipulate that said worker lands, for various reasons, in the 25% tax bracket.

So, you'd presume that of the $50,000 our worker earns, $12,500 is paid to the federal government as income tax. Right? Because that's 25% of $50,000, so... we end up with $37,500 that actually goes towards social security, state taxes, food, gas, savings, etc. The other stuff. Right?

No. Wrong. Here's why.

Let us stipulate that said imaginary worker is paying for a service. I mean obviously there will be many such costs in anyone's life, but let's just pick one. Let's pick a... painter.

Now, the painter charges $50 for labor (I wish — what did they do, paint the mailbox?) and $50 for materials. The painter isn't taxed on the materials, so that's fine. However, they are taxed on what they earn. Let's say that said painter earns $25,000 a year. Just hand waving. Lands in the 15% tax bracket in that case. And where, pray tell, does the painter get the money to pay taxes? Why, from his labor charges, of course — they constitute the gross taxable income of a painting enterprise.

And where do the labor payments come from? They come from the $50 our imaginary worker paid to the painter for labor. That's right. 15% of that $50, or $7.50 in real monetary terms, of that payment went straight to... wait for it... income tax.

Depending on the good or service purchased, that real dollar amount that goes to income tax will vary, all keyed to how much income the various people involved in the good or service are pulling down as compared to cost of goods, money they can hide in investment in their business, etc. Per hundred dollars, $7.50 is a half-decent, conservative guesstimate (because to apply $50 worth of paint, you're going to pay a lot more than $50 in labor!)

Anyway, that $7.50 is another 7.5% of our imaginary worker's income (because we're estimating $50 was non-taxable, otherwise it'd be 15%), which means the amount of actual money that goes to the feds from our imaginary worker is not 25%, it is 32.5%;

But as the late night commercials like to crow, But Wait! There's More!

The painter has $50 minus $7.50 (their income tax) left, right? So that's $42.50 in-pocket. But remember, for everything the painter purchases, the same thing happens to them: So of every hundred dollars the painter pays for a good or service, another 7.5% or so is also skimmed off into income tax. And you do remember where the painter got that money, right? From our worker. Another 7.5% per hundred dollars out the window. Raising our imaginary worker's total tax burden — because that's where the money came from — to a sweet, sweet 40%.

And... wait for it... remember the "non-taxable" $50 our worker paid for the paint? That means that the painter didn't have to pay taxes. The worker, on the other hand, can't write off the materials used for their... mailbox... (unless buying them directly), and so who pays the income taxes for the people who manufactured the paint? Why, our imaginary worker does. Again. Call it another 7.5%. And of course those people pay taxes, and so on. And at every level, the income tax skim goes to the feds.

Remember; this hand-waving analysis only looked at one service. Every service and every good that we purchase has income tax built into it. Every one. Some will be more than 7.5%, some will be less. I don't actually know what the average is. I'm just hand-waving, and I want you to remember that. But on the other hand, I think I've been very conservative. If you really want to know specifics, hit Google and start checking facts.

The point is, whatever it is, the people buying the good or service are paying all of the downstream taxes. You. Me. Because the money comes from us. It doesn't just magically appear; customers produce that money. That's us. No matter where you are in the income stream, the income you got was skimmed for taxes before you got it; it was skimmed when you got it; and it'll be skimmed again every time it finds a taxable good or service to be spent on. By anyone who handles that money. Every time.

So the next time you pay your income tax, just be aware, that's only the visible part. The next time you buy something — anything — remember that a significant percentage of what you paid is going to go to income tax as well.

By the way, this is just one of the reasons why consumption taxes, that is, taxes on the things you buy, rather than what you earn, are a better idea. Consumption taxes (a) make the entire tax burden visible at one time, and (b) prevent the devious sneaks in Washington from doing underhanded, sneaky things like... well, income tax — to us.

Personally, I'm in favor of consumption taxes on everything except one home and its maintainance, one vehicle and required service per employed worker and per active student in a household, all costs of education, basic necessities, meaning food, fuel that gets you to and from work and school, toilet paper and similar household staples, and basic utilities.

This would entirely replace income tax. My guess is that such a consumption tax would run in the 50% to 70% range. Perhaps higher. Sounds horrible, right? But you're already paying it. They're just trying to hide it from you. The reason I think it'd be so high is that's what you're paying now.

Now think about this: If you knew you could save 50%...70% of your income for school, home repairs, etc... by not buying that luxury item... would you buy it? I sure wouldn't. I'm thinking that the luxury items I would buy would be things I really, really, really wanted. Really. No, really!

In this way, the people with the most money and the most goodies and gadgets and real estate end up paying most of the taxes, as they go about their business enjoying themselves, just as they should. We want them to. We'd appreciate it. I sure would, anyway.

Of course, congress will never allow this. I just offer it as a little tidbit for you to mull over. Income taxes. They aren't what you think they are.

(Pssst... neither are the other taxes you pay...)

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