Guest Post: The Real-World Middle Class Tax Rate: 75%

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

The Real-World Middle Class Tax Rate: 75%

If we include all taxes, the real-world tax rate is much higher than the "official" income tax rate.

For those Americans earning between $34,500 and $106,000, the real-world middle class tax burden in high-tax locales is 15% + 25% + 5% + 15% + 15% = 75%. Yes, 75%.

Before you start listing the innumerable caveats and quibbles raised by any discussion of taxes, please hear me out first. Let's start by defining "taxes" as any fee that is mandated by law or legal necessity. In other words, taxes are what is not optional.

If we include all taxes, the real-world tax rate is much higher than the "official" income tax rate. These "other taxes" vary from nation to nation. France, for example, has a "television tax." It is mandatory, and since virtually every household has a TV this operates as a universal tax. The argument that this is "optional" is specious.

In every other advanced democracy, basic universal healthcare is paid by tax revenues. In the U.S., healthcare insurance is "optional" but this too is specious: in the real world, private healthcare insurance is mandatory because the alternative--having zero insurance--places your entire net worth and income at risk of catastrophic loss.

Having no healthcare insurance only makes sense if you have no real assets and a low income. At that point, your care will be provided by the taxpayer-funded Medicaid program, which is the default universal-care program in the U.S.

For this reason I consider the cost of private healthcare insurance in the U.S. the equivalent of a tax. We pay over $12,000 annually for barebones healthcare insurance, which amounts to about 15% of our gross income. Some countries pay for healthcare with a 15% tax, here we pay the 15% directly. There is no difference except the process of collecting the 15%. (The only real difference is that healthcare costs twice as much per person in the U.S. because the system is operated by cartels whose business model is fraud, opaque pricing and the elimination of competition via Central State regulation.)

Yes, the super-wealthy can absorb a $150,000 hospital bill, but the 99.9% cannot. Thus any claim that healthcare insurance is "optional" is specious.

Property tax is mandatory. Some countries have no property tax, others do. Once again, only counting social-insurance and income taxes as the "official tax rate" is horrendously misleading. For countries without property taxes, the revenues are collected as value-added taxes (VAT) or higher income taxes. One way or another, the services paid by property taxes in the U.S. are paid by other tax schemes in countries without property taxes. So property taxes must be included in any accounting of total taxes paid.

Many of us who reside in states such as Illinois, New York, New Jersey and California pay $12,000 or more annually in property taxes. That is about 15% of our household income.

Renters pay the property taxes indirectly, but to the degree that rents would be lower if property taxes were eliminated and the tax burden shifted to a VAT, then renters "pay" the tax just like property owners.

Employees looking at the paycheck stubs do not see the entire tax paid on their labor. Empoyees may wonder why their net pay has stagnated for decades. One reason is that the total compensation costs of employees has risen substantially.

To give but one example of many, Social Security taxes were once modest, 3% paid by the employee and 3% paid by the employer for a total of 6% of the wage. Now the total for Social Security (12.4%) and Medicare (2.9%) is 15.3%. Self-employed people pay the total 15.3% as "self-employment tax." This is the real-world tax burden of Social Security and Medicare.

The 15.3% Social Security/Medicare tax starts with dollar one of net income. The Social Security tax goes away above around $106,000 in income, the Medicare tax does not.

Most employees do not know how much healthcare insurance "tax" is paid by their employer. To the degree that wages would rise if the healthcare "tax" was not paid by employers, then employees pay for this "tax" indirectly. To act like it isn't a mandatory part of compensation costs is both specious and misleading.

The only transparent way to calculate the total tax burden is to count all taxes (or equivalent) paid by self-employed property owners. Not counting the indirect taxes of healthcare and property taxes is misleading to the point of blatant misrepresentation.

The basic Federal income tax gives each individual earner $9,500 in standard deductions and exemptions. The tax rate for all income above that is:

$1 to $8,500: 10%
$8,501 to $34,500: 15%
$34,501 to $83,600: 25%
$83,601 to $174,400: 28%
$174,401 to $379,150: 33%
Above $379,151: 35%

These rates are scheduled to rise at the end of 2012 unless Congress acts to maintain rates at current levels.

Many households have gigantic interest deductions stemming from gigantic mortgages, but let's set aside outsized debt-based tax deductions as far from universal.

Above a rather modest $34,600 in taxable income and up to around $106,000, the real-world middle class tax burden in high-tax American locales is 75%:

Social Security and Medicare: 15.3%
Federal income tax: 25% (28% above $83,600)
State income tax: 5% (mid-range)
Healthcare insurance: 15%
Property tax: 15%

15% + 25% + 5% + 15% + 15% = 75%

Clearly, the percentage of income devoted to healthcare insurance and property taxes declines as income rises. Someone earning $200,000 has not only dropped the 12.4% Social Security tax for income above $106,000, healthcare insurance and property taxes as a percentage of their income drops from about 30% for those earning around $86,000 to 15%.

We can argue fruitlessly about how many tax angels can dance on the head of a pin, but all the caveats and quibbles don't change the basic fact that real-world tax rate for the "middle class" earning more than $34,500 in taxable income in high-tax locales is a confiscatory 75%.

Please don't tell me the U.S. is a "low-tax" nation; I might suffer a breakdown that I couldn't afford due to exclusions in my "voluntary" healthcare coverage.

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Bam_Man's picture

All your income are belong to us.

camaro68ss's picture

your forgeting sales tax in some states. What do you do with your FRN's when you get them, you buy stuff and get taxed. so add another 8% to the list for those states with sales taxes

WhiskeyTangoFoxtrot's picture

Sales tax doesn't apply to your gross income, only to that portion which you use to buy retail goods. That can also be offset by idealmeat's suggestion below - boycott retail to the extent possible.

In any case, there are a number of problems with the article when you get into the specifics, but the point is the same: those of us in the US live under a confiscatory police state regime. I did some quick calculations and figured that my real rate is much lower than 75% - more like 45%. But then I thought about it for 1/2 a second - 45%!!!. All for what? The privilege of getting spied on and treated like a criminal? Awesome.

Colombian Gringo's picture

The only activity that the governments so far have not taxed is sex between consenting adults without the formal exchange of dollars.

Marginal Call's picture

They don't want to discourage the creation of new tax payers. 

Miffed Microbiologist's picture

As long as you aren't married! We pay 5000.00 more a year in income taxes for the privilege. Another reason to not get married sad to say. Sex sure better be good for that price! :-)

Miffed:-)

Precious's picture

Property tax is only mandatory if you own property.  No one says you must own property.

Liquor tax is only mandatory if you elect to purchase liquor. No one says you must drink liquor.

Cigarette tax is only mandatory if you elect to purchase cigarettes. No one says you must smoke cigarettes.

Income tax is only mandatory if you elect to earn a wage.  No one says you must have a job.

Car insurance is mandatory only if you elect to own a car.  No one says you must drive a car.

Healthcare insurance or tax is mandatory if you are breathing.  Doesn't matter if you ever get medical help or not.

Figure it out yet?  See the pattern?  The pattern is this:  No one fucking cares about the rule of law anymore.

 

reader2010's picture

The beauty is they're working on a worldwide O2 tax for the blood-sucking elites. As long as you consume oxygen, you pay.

flacon's picture

Property tax is only mandatory if you own property.

 

I rent. I pay the owners property taxes in my rent....  

economics9698's picture

Social Security and Medicare: 15.3%

Regressive tax, the rich pay less.


Federal income tax: 25% (28% above $83,600)

The better your accountant is the less you pay.  It can be progressive.


State income tax: 5% (mid-range)

The rich move to Florida where there is no state tax.


Healthcare insurance: 15%

Regressive tax.


Property tax: 15%

No deduction for this one.

economics9698's picture

And do not forget the baby tax.  Have a baby out of wedlock or divirce and you will pay 25%, 50% 120% of your income to someone else.

economics9698's picture

The Yids figured out how to get the white people to become extinct.  Who needs war?

 

 

Precious's picture

Keep yer gold in a hole, yer gun warm and handy, and yer dick in yer pants --- and no other ways round.

Them's the real rules of the fight club...

NumNutt's picture

They forgot to mention that we are also double taxed on money we don't have. If you still have a job, look at your pay stub, they take Federal taxes based on your gross pay, then they take SS based on the same gross pay amount, not on what was left over after federal taxes. Then they do the same thing for Medicare, & State......all based on that gross pay amount. I love paying taxes on money I don't have......sonsabitches...

Svendblaaskaeg's picture

I think you got it upside down, UN's masterplan is "as long as you exhale CO2, you pay", that is what all this global bloody warming is/was about

DCFusor's picture

Property tax isn't optional if you live anywhere but the wilderness - it's built into all rents, duh.

None of those other taxes are really optional for similar reasons either if you buy anything made by some one who smokes, drinks, or drives....they're built into a price you pay for the things they make.

vast-dom's picture

Any tax is only mandatory if you have a pulse. See the con? 

Anonymouse's picture

Wrong.  You are forgetting the inheritiance tax.  You got taxed upon death too.

 

"Now my advice for those who die;

  Declare the pennies on your eyes "

vast-dom's picture

when i'm dead it won't matter much.

FeralSerf's picture

Marriage doesn't make sex any better.   Trust me on that one!

UP Forester's picture

True.  It only makes it less frequent.

Panafrican Funktron Robot's picture

If you apply the recent Supreme Court logic that a fine is a tax (I tend to agree with that logic), then that scenario has been taxed extensively, due to laws regulating personal sexual behavior (particularly homosexual behavior).  

narnia's picture

Government spending is paid the price you pay for taxable transactions.  This includes direct taxes (income tax) that cover involuntary purchases, the inflation tax from deficits, regulatory taxes from stupid rules (like price fixing of wages & prohibitions) & the associated compliance, off balance sheet future taxes from other crazy interventions, consumption & property taxes, and fees & compliance for licensing and all other crap that the state can assert its tentacles, 

I bet the REAL tax rate is close to 95%.  The market price for stuff we need and would voluntarily purchase absent government intevention would be pennies on the $ for what it cost us to maintain this death star.

James_Cole's picture

Saying the article has a number of problems is a vast understatement. Clearly not a lot of math experts on ZH.

 

First of all, you can't take the various tax rates and add them together and come up with some arbitrary figure (in this case 75%) - yes grade school students this figure is incorrect! 

In order to get to any sensible number you'd actually have to move (gasp!) beyound addition. I know that's hard to believe for all the anti-education folks around here but there is actually math beyond addition and subtraction. 

 

Outside of Charles' "real world tax rate" idiocy there is an actual formula for arriving at a better estimate of tax burden than posted rates.

 

 

http://www.economist.com/blogs/dailychart/2011/09/effective-tax-rates

And here's how it works (c/o wiki) so you can calculate your actual tax burden:

 

  • Let  be the effective tax rate.
  • Let  be the tax liability.
  • Let  be the taxable income.
  • Let  be the nontaxable income.

http://upload.wikimedia.org/wikipedia/en/math/e/2/7/e2775c4bad2b6f60d238...

An effective tax rate (or effective average tax rate) is the total tax liability divided by the total economic base (taxable plus nontaxable income or spending). Economic income or spending is a broader base that includes all the taxpayer's income or spending, whether it is subject to tax or not.

 

KowPie's picture

Doublespeak all you want dipshit. Your links to economic articles and bogus wikibullshit have nothing to do with the real world. Your methodology is suspiciously like that of a government pogue that tells me my "effective tax rate" is 23% as I total up my gross income and subtract from that every penny spent in the form of a tax and realize the pittance left as my share. When I divide the tax total by the gross I come up with a REALIZED tax rate of 58%. You can spin that shit any way you choose but it won't change the MATHEMATICALLY CORRECT RESULT of 58%. Put that in your tax free crack pipe and smoke it.

James_Cole's picture

Am I your accountant? Because I have no idea what you pay, nor did I make any claims about your effective rate. I only pointed out how moronic it is to add all the tax rates one happens to pay to get to a "real-world" tax rate. 

Is Charles' math the way you got to your 58% rate? And what accounts for the difference between Charles' bulletproof estimate of 75% and your 'mathetmatically correct' 58%? Could his post actually be a bunch of meaningless bullshit??

I'm not making a statement on tax rates, I'm making a statement on idiotic guest posts. 

Lednbrass's picture

And the percentage of taxes one actaully pays is not a real world tax rate? It is indicitive of the tax rate- where? Mars? Oz?

Lednbrass's picture

You attempt to refute the article with a model which you fail to provide variable definitions for because you are apparently a cut and paste fool, what a hoot. "Ummm let nothingness equal income and let more nothingness equal..." LOL. As you couldnt be bothered with definitions calculate this example:

I earn $100,000 in a year. Uncle Sam takes $25K and the state and local governments take $10K. I then pay $5K to the state and/or county in the form of property taxes for my car and home. With the remainder, I purchase goods and services on which the state takes a further 8% in sales and other taxes.

In this example,what is my tax burden according to you? Give the percentage of income paid in tax.

 

James_Cole's picture

Your scenario is 45%, but I don't know what your point is. 

Images aren't copying properly here, for the calculation:

http://en.wikipedia.org/wiki/Tax_rate

And then scroll to effective tax rate. 

Lednbrass's picture

My point was to figure out what you were saying as you didnt provide the variable definitions you based your argument on.

malek's picture

You're blabbering nonsense.

Why exactly can't I add together percentages (tax rates), as long as they are not overlapping?

And if you'd read the article attentively, you might have noticed CHS is talking about a self-employed individual.

Uber Vandal's picture

And fuel taxes.

Various other taxes lumped on your cell phone bill.

And, since we are at it, lets call fees that everyone charges for everything these days for what they are, taxes.

Finally, imagine how much less the bottom line will be when the FED goes NIRP like Denmark, and you also factor in the "offishul" 2% inflation rate.

Inflation is also a tax.

spastic_colon's picture

Thank you....has anyone ever challenged the fees on your cell phone and utilty bill that goes to pay for their employee pensions and low income free phone and utility assistance?

These are fees (taxes) we have no say over, even if you already contribute time and/or money to the myriad energy assistance chairities that are available.

Tell me there is proper accounting oversight there!

/sarc off

vast-dom's picture

GOV IS OUT OF CONTROL! Today you are a major fucking fucktard if you don't see how outrageous the whole system is. They are sociopaths that on some unconscious level desire apocalypse or some trouble any form of trouble in the erroneous belief that they will keep their positions! 

 

INSANITY! Anyone who feels otherwise is drugged and out grazing. 

Marginal Call's picture

Phone tax, utilities tax, license fees, vehicle registration tax, gas tax, user fees on everything, etc. etc.

 

We have the lower class, the tax class, and the parasite class that skims off the other two. 

Stuck on Zero's picture

Add to that tax preparation fees. You also pay outrageous insurance fees because the government has given attorneys a license to suck the life out of people who work for a living.  And the biggest tax of all, if you have savings, is the inflation tax.

 

Hal n back's picture

sales tax is still a tax.

 

Back in the 60's Illinois had a 4% sales tax--now all-in its 11% in the higher places. No income tax till August 1969--now 5.75%. I might be fuzzy on this but I do not think car sales had sales tax attached to them way back when. Now--there is hte tax and if you buy a car in a low tax county and liv ein a higher tax county --you have to pay the lower tax at dealer and then pay the higher tax for your county before you get license.

 

You also -in income tax return-have to pay sales tax on products bought thru Amazon.

 

Hw on earth was IL  govt able to survive without much tax revenue then.

 

Not as high salaries, pension and health care costs for state employees as there is now. Incl State legislators who should recuse themselves from increasing pensions and benefits.

Fidel Sarcastro's picture

i also live in Illinois, and this f*cking state sucks!  Taxes up the ass.  Oh, I may be taxed just for saying that. 

krispkritter's picture

Ding! You are fined five dollars for repeated violations of the verbal morality statute.

Newsboy's picture

There is also the effective tax of dilution of monetary value by manipulation of the currency, but that's impossible to get agreement on, in terms of how big a tax it represents. It's 2-3% until all hell breaks loose, which is always "unforeseeable".

Panafrican Funktron Robot's picture

Yeah, it's tough to look at the huge add to the Fed balance sheet to cover the shadow banking system's ongoing collapse.  I don't really have any other conclusions to that other than "buy gold", but I just wanted to say that it's tough to look at.  

Just to further unnecessarily buffer your statement:

http://data.bls.gov/timeseries/APU0000702111?data_tool=XGtable

http://www2.census.gov/prod2/statcomp/documents/CT1970p1-06.pdf

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=sp_dyn_le00_in&idim=country:USA&dl=en&hl=en&q=average+life+expectancy

The average life expectancy in the US is 78 years.  The current price of bread is $1.41.  The price of bread in 1934 (78 years ago) was 8 cents.  The price of bread has increased 17.6x in one average lifespan.  The Dow Jones industrial average was 100 in 1934.  Now it's around 13,000, for an increase of 130x.  See where inflation doesn't hurt the rich everyone?  They don't give a flying fuck about it.

 

 

LMAOLORI's picture

Fu*$ing thieves in our govt. redistributing the hardest working group of American's income we need to bring back public hangings! Whether it's foreign aid or pet projects those pigs would (SHOULD) be in jail and they would be if they robbed us like that on the street!

Middle Class--Not the Rich or the Poor--Pay Majority of Federal Taxes, Says CBO Data

http://cnsnews.com/node/68094

janchup's picture

Who else will front the $3 billion per week for useless war?

idea_hamster's picture

If you accurately calculate the progressive tax on $83,600 it comes out to 20.4% -- but I don't think that moves the needle here.

NooooB's picture

I don't have a TV. otherwise I agree whole heartedly...

wolfnipplechips's picture

More taxes coming bitchez. Now Obummer can levy anything he wants as a tax thanks to those crazies in the supreme court

crawldaddy's picture

are you really that dumb?  The executive branch doesnt have this power.

WhiskeyTangoFoxtrot's picture

The ACA was his baby. WNC is speaking too loosely and you're splitting hairs.

idea_hamster's picture

The executive branch doesnt have [insert what you want] power.

Keep saying stuff like that -- you'll look good in Gitmo Orange!  ;-)