Tax Rates - How Much Do You Really Pay?

photo by jacreative

It’s been said that statisticians can make the numbers say anything they want. Politicians just make the numbers into what they want. Can we trust any of them? Who knows… Not long ago I read an article in the paper that stated our average tax rate was only 9%. Surely this was a typo? I just had to know.

So I did a little digging and found the Congressional Budget Office released some interesting data about how much we pay in taxes earlier this year. The only reason I tend to give them any credence is that they often disagree with data that the White House or Congress distributes. They get brownie point for that. More to the point of this post is one number specifically. The CBO states the overall effective federal tax rate was 20.6% in the latest year the data has been analyzed, 2006.

First we have to be clear on what is included in this 20.6%. Of course it includes the income taxes that we are all too familiar with. In addition there are your payroll taxes which are made up of a couple different numbers. We pay 7.65% to cover FICA on any income below the cap of $94,200 at the time of their analysis. FYI… the cap in 2009 will be $106,000. Keep in mind this is just what you see but in reality your company also contributes an equal amount based on your payroll. In effect your labor is taxed @ 15.3% for every dollar up to $106,000 this year! The CBO also includes a few more obscure taxes that they attribute to consumers such as excise taxes on consumables like tobacco and alcohol and what they refer to as corporate tax. Corporate tax is the share of taxes on the capital (stock) of corporations that you own which is based on interest, dividends, capital gains and rents. Take the poor and the rich, mix it all up in a blender and it looks like this:

• Individual Income Taxes – 9.0% (So maybe there was some truth to the article)
• Social Security Taxes – 7.6%
• Corporate Income Taxes – 3.3%
• Excise Taxes – 0.8%
• Total – All Federal Taxes – 20.6%

 How do you feel about that? Are you getting the short end of this stick too?

But is that all the tax we pay? Not by a long shot

• Unemployment – Your employer pays Federal and/or State unemployment taxes. These vary widely but may go as high as 6.2%. In effect you are paying for these taxes as well.
• State Income Tax  –  This one varies widely some states like Florida have zero while others may be near double digits like California with a maximum of 9.3% state income tax.
• City/County Tax – You are out of the frying pan and into the fire if you live in New York City. Not only will you pay a state income tax of up to 6.85% but you will also be hit with a city income tax of up to 3.648%.
• State and local sales taxes – This is another variable depending on where you live. Alaska, Delaware, Montana, New Hampshire and Oregon don’t have sales taxes while others like California (10.25%), Arizona (10.6%), and Illinois (11.5%) can have double digit sales tax rates when you combine state and local sales taxes.
• Miscellaneous taxes – Again state by state, town by town there are many other “taxes” that we end up paying.
  • Toll Roads – Some segments are as little $.35 are as much as $9.25 for a 10 mile stretch of SR-91 in California. I had to pay $4.50 in the middle of nowhere Oklahoma a few weeks ago. Couldn’t believe it! For a moment I had wondered if I’d been sucked  into a wormhole and dropped in Jersey.
  • Gasoline tax – The Federal gas tax is 18.4 cents per gallon while the average state tax is 27.2 cents per gallon (Energy Information Administration)
  • Real Estate Taxes (Property)- As a percentage of income, New Jersey wins this award at 6.75% while Louisiana might be the place to own a house with only a rate of .37%
  • Personal Property Taxes – Some communities charge you on what they refer to as “personal property” such as cars, boats, planes etc. This tax can vary but as an example Arlington VA charges $5.00 per $100 of value for your car and $.50 per $100 for a pleasure boat. More surprising was a forum that noted Shenandoah charges for “Felled timber, ties, poles, cord wood, bark and other timber products.
  • Permits and licenses fees – If your building an addition to your house, going fishing, getting married or starting a business you will likely have to pay a fee to the government for the privilege. (Odd that you have to pay a tax to get married but not divorced?)
  • Corporate taxes – this might be a stretch for some but consider that every corporation pays taxes and they get the money to do so from you and I!

No doubt I missed a few. Please leave a comment at the bottom if you have more ideas to add, I would love to acquire a definitive list.

It is amazing to consider that many of these taxes are paid after we have already paid taxes on the money we have earned. Taxation without representation? No doubt many would argue we have representation. The trouble is that one “representative” is not necessarily working with the others.

The CATO institute conducted an enlightening study several years ago. They ran the numbers to determine how much you must earn in order to purchase a car, a computer or pay for college education. In an average state had to earn over $17,000 to be left with enough money to purchase a $10,000 car in 1992. A $1,500 computer would require $2,256 in income and a years college costing $8,000 would require $13,107.

Furthermore they showed that due to higher tax burdens on the self-employed, they would need an additional income of $180, $985 and $1282 to purchase a car, computer or car respectively. There was also a large variation from state to state. It would require roughly $2000 more in income to purchase a car in the 5 state with the highest levels of taxes.

Beyond just irritating, what good is all this information? At some point in your life you may face an opportunity to relocate for a new job or for your retirement. If so, you need to take the time to fully research the total costs of living. This includes not just the relative rate of real estate, utilities, and insurance and don’t forget taxes.

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