The low tax rates in the US


Every year when I do my taxes, I also do a small extra calculation to see what percent of our gross family income goes as taxes. It amazes me that the number comes out to less than one third. This low rate would make sense if I were poor. But I am not. I have a good job, as does my wife, and our combined income puts us well above the median income for families in the US, which in 2008 was around $52,000. In fact, as I have discussed previously, our whole concept of what constitutes the ‘middle class’ is hopelessly out of whack with how income is really distributed.

Bear in mind that in calculating my total tax liability I include federal, state, and local taxes, and also social security, Medicare, and property taxes. Furthermore, I do not use an accountant to find loopholes or use any fancy tax shelters and the like to reduce my liability, the way that very wealthy people do. Our finances are so straightforward that I have always done my own tax returns. Yet despite the lack of any determined effort to find ways to reduce taxes, I still pay what seems to me to be an absurdly low rate.

This is why I have so little patience with those people, often people like me or even better off, who use phony tax arguments to constantly whine about how the taxes in the US are too high. They are not. These people seem to start from the assumption that the justifiable amount of tax is zero and anything above that is an imposition. You hear these people saying things like every dollar they get in their paychecks is ‘their’ money and that anything taken out from it in taxes is tantamount to the government ‘stealing’ their hard earned income. Because these people have dominated the discussion, they have convinced everyone that all taxes are bad and any politician who raises them risks defeat.

But this argument is bogus. When I take on a job and sign a contract to have my employer pay me a certain amount of money, that is not a zero cost arrangement. For the company to exist to offer me the job and for me to be able to accept requires the existence of a huge infrastructure. Simply to exist, the company needs roads and bridges and lights and water and electricity and police and schools and fire protection and a whole range of other government services. For me to reach a stage where I am capable of doing the job requires those same services. All those things require money and just because I do not pay for them at the moment of use does not mean they cost nothing. The cost is hidden from us because they are paid using our taxes. These costs are factored in by employers when they negotiate the contract. So what is ‘taken out’ of our paychecks is what was ‘put in’ to cover all these costs. The taxes we pay is not ‘our’ money that is taken away from us, it is basically a bookkeeping device to show us how much money was essentially loaned to us to cover the cost of the very things that enable us to earn the money in the first place. If the costs of all those services were paid for elsewhere by the tooth fairy, our salaries would likely be correspondingly lower.

The fact that costs are factored into the process of determining salaries should be obvious. This is why a job in New York city will likely pay more than the identical job in a small rural town, because to live in a big city simply costs more, especially for housing. We could have a system where the city levies a ‘housing tax’ that reduces your take-home income by a certain amount and uses that money to subsidize your housing costs so that you recover the money at the back end. The net result in terms of take-home pay would be the same but people accept the former arrangement because they themselves are paying the extra costs for housing and it seems like they have a choice as to how they spend ‘their’ money. It does not come out of their paychecks and is thus not seen as a tax.

But certain public services cannot be paid for by individuals at the point of receiving the service. How would you pay for roads and streetlights and police? The debate about taxes should be not be the silly one about the amount of taxes we should pay, as if there is some magic number, but about what public services we want to have and at what level and the degree of progressivity of the tax code that we think is fair. The taxes we pay will naturally flow out of that discussion.

POST SCRIPT: Atheism-inspired rock song and video

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It is actually a pretty good song and if the embedded video below does not work, you can see the video here.

The band’s website is here.

Comments

  1. says

    I recommend the book “Social Problems” by Henry George. In it, he argues that — because most infrastructure is location based, and because no one really has a just claim to owning nature — that most of our tax base should be in location/property taxes (not buildings, but land).

    He wrote mostly in the late 1880s, and you may have to tolerate some religious rhetoric, but it’s sparse and mostly of the “we really should do something about poverty” variety.

  2. dave says

    For me, payroll taxes are wrong because they prevent the individual from protesting the gov’t by not paying taxes.

    Because we must work to live (unless you’re lucky enough to be born rich) we must pay taxes. How can I protest an unjust war if I must continue to pay for it?

    That is why I think payroll taxes are wrong. The tax burden should be shifted to a heavier sales tax. This way, those who consume the most will pay the most. Those who are unhappy with their gov’t can simply decide to reduce how much they buy which will reduce the amount of money being sent to the gov’t.

  3. Robert Allen says

    Mano,
    If you look at the federal budget, how much of it actually goes to infrastructure? It’s not very much. I’m not really concerned as much about how much tax I pay, but how much of that money is actually going toward things that benefit me. I have benefited from college grants, so I don’t mind paying for education. However, I don’t want 40 cents of every tax dollar going toward military spending. If we spent proportionally as much on our military as other countries do, you’d be even more amazed at how low our taxes would be.

  4. Vincenzo says

    You could also argue it the other way around: since every single note that ends up in your wallet bears the title of the Federal Reserve, it is government’s money. The government created the money and (ultimately) gave it to you.

    In the old days, notes were convertible in gold. Today, we have a fiat currency system, where the government prints notes as it sees fit. Notes do not have an intrinsic value in gold or any other collateral. Rather, their value derives to a great extent from the power of the government. For example, notes are legal tender, and if you refuse to accept payment in dollars, you can be prosecuted. Similarly, you will be prosecuted unless you pay your taxes in dollars.

    In a fiat currency system, it is hard to understand that “every dollar they get in their paychecks is ‘their’ money”, since every dollar is created by the government, and its value depends(among other things) on the government’s power. As to why the government prints money to then take it back in the form of taxes, well, that’s a long story for another day.

  5. says

    The comments illustrate the kinds of discussions we should have about tax,and move way from the ‘less tax good, more tax bad’ mantra.

    Eric, a consumption/sales tax may make sense but only if basic items like food, clothing, etc, are exempted or taxed at a lower rate. Otherwise poor people, who must spend all of their income just to live, will be paying tax rates at a higher rate than the rich who can afford to invest and save.

    Robert, while I too dislike paying taxes for the military, I think a system were individual people pay taxes only for the things they personally support would be unworkable. What we need is more transparency so that the community as a whole has a much better understanding of what their taxes are being used for and come to an informed decision.

    I don’t think people really know how much tax money is sucked up by the military or goes as giveaways to big industry and I think this obscurity is deliberate.

  6. says

    Daniel,

    Are the tax rates you quoted the marginal rates on the highest income slabs (in the US this is 35%) or the average tax rates paid by some ‘average’ taxpayer?

  7. says

    Mano,
    This is the first positive posting on taxes in the US I have ever seen. I would be happy to pay about 12% taxes and limit my government to this excess. This is excess since church tithing is recommended at 10%, so 12% would be considered a 20% bonus.

    I also looked at my net taxation, but unlike yourself, I discovered my family pay just over the “Royal fifth” of medieval times. Sales tax is 10% where I am so every dollar spent has a significant surcharge on it.

    Considering church tithing, income taxes, sales taxes, and FICA: 10%+18%+10%+7.6%=45.6%. A religious family must have little left for themselves….I wonder if I cut tithing….

  8. says

    If I pay 10% to each, what is left to put a roof over the head and food on the table?

    10% Tithing / Charity of choice
    10% Federal Income Tax
    10% Social Security and Medicare
    10% State Income Tax and Other Taxes
    10% Local / County/Municipal Income and Other Taxes

    If I choose to save for:

    10% Retirement and/or Rainy days
    10% Children’s’ Education and/or future

    30% Roof Over the head and Food on the table

    I have to choose to live within those means!

    Thank You for the Awesome Post

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