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.
The price of civilization
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, www.smartasset.com. And to check the position of each income level on another site, www.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.
How Our Taxes Rise with Income |
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| Income % tile 1 | Income 2 | Marginal Tax Rate 3 | Fed Inc Tax 4 | FICA 5 | Total 6 | Eff Fed Tax Rate 7 | Eff Total Tax Rate 8 | |
| 11 | $10,000 | 0% | $0 | $765 | $765 | 0% | 7.65% | |
| 21 | $20,000 | 12 | $745 | $1,530 | $2,275 | 3.73 | 11.38 | |
| 34 | $30,000 | 12 | $1,895 | $2,295 | $4,190 | 6.32 | 13.97 | |
| 45 | $40,000 | 12 | $3,095* | $3,060 | $6,155 | 7.74 | 15.39 | |
| 55 | $50,000 | 12 | $4,295 | $3,825 | $8,121 | 8.59 | 16.24 | |
| 64 | $60,000 | 22 | $6,120 | $4,590 | $10,778 | 10.31 | 17.96 | |
| 71 | $70,000 | 22 | $8,388 | $5,355 | $13,749 | 11.98 | 19.63 | |
| 76 | $80,000 | 22 | $10,588 | $6,120 | $16,708 | 13.23 | 20.88 | |
| 80 | $90,000 | 22 | $12,788 | $6,885 | $19,763 | 14.21 | 21.86 | |
| 83 | $100,000 | 24 | $15,009 | $7,650 | $22,659 | 15.01 | 22.66 | |
| 86 | $110,000 | 24 | $17,404** | $8,415 | $25,824 | 15.83 | 23.48 | |
| 88 | $120,000 | 24 | $19,809 | $9,180 | $28,989 | 16.51 | 24.16 | |
| 90 | $130,000 | 24 | $22,209 | $9,945 | $32,154 | 17.08 | 24.73 | |
| 91 | $140,000 | 24 | $24,609 | $10,710 | $35,319 | 17.58 | 25.23 | |
| 92 | $150,000*** | 24 | $27,009 | $11,028 | $38,038 | 18.01 | 25.36 | |
| 98 | $300,000 | 35 | $75,152 | $14,104 | $89,255 | 25.05 | 29.75 | |
| 99 | $500,000 | 35 | $145,152 | $18,804 | $163,855 | 29.03 | 32.79 | |
Sources: https://smartasset.com/taxes/income-taxeshttps://dqydj.com/income-percentile-calculator/*income level at which federal income tax exceeds employee FICA tax payment**income level at which federal income tax exceeds full FICA tax payment. This means both the employee and employer portions.***near the Social Security wage base maximum of $147,000 this year |
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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 percent of income. Earn more and you will pay more. (You can see this in the 4th and 7th columns in the table.)
At an income of $60,000 a year the federal income tax will take 10.3 percent of your income, and your next dollar of income will be taxed at a 22 percent 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 percent 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 percent of all workers. The federal income tax will take 18 percent of your income, and additional income will be taxed at 24 percent. 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 percent of all workers rise higher than the wage-base maximum.
Shock in Dallas
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 percent of your income, and additional income will be taxed at 35 percent. Equally important, only 2 percent of workers earn more.
Earn $500,000, the level that puts you in the top 1 percent, and you’ll pay 29 percent of your income and additional income will be taxed at 35 percent.
Well, maybe not.
As income rises, lower taxed capital gains and dividends lower the average tax rate
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 percent in 2019 was 25 percent, not 29 percent.
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.
But, however you slice it, the federal income tax is a graduated tax
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 for 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 percent of your income will go to the employment tax. You’ll need an income around $40,000 a year before your federal income tax bill exceeds your employment tax bill.
But even this is an understatement.
Who pays the employment tax, all of it?
While your employer “pays” half of the employment tax (7.65 percent) and you pay half (another 7.65 percent), 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. Check the table and you’ll see that nearly 86 percent 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, let’s insist that the entire tax burden be considered, not just one tax or the other.
Related columns:
Scott Burns, “Should the rich pay all the taxes?”, 02/11/2001 https://scottburns.com/should-the-rich-pay-all-the-taxes/
Scott Burns, “Is it time to ignore the rich?”, 10/20/2013 https://scottburns.com/is-it-time-to-ignore-the-rich/
Scott Burns, “The Minion Measure”, 11/10/2015 https://scottburns.com/wealth-the-minion-measure/
Sources and References:
Income tax calculator https://smartasset.com/taxes/income-taxes
Percentile rank of income calculator https://dqydj.com/income-percentile-calculator/
Internal Revenue Service, Statistics of Income: https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-tax-rate-and-income-percentile
Warren Buffett on why he pays taxes at a lower rate than his secretary https://www.youtube.com/watch?v=J9Hg_e4NVpQ
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Pexels
(c) Scott Burns, 2022
4 thoughts on “Are Your Taxes Too High, Too Low or Just Right?”
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What happens when other taxes are included, i.e. sales tax and real-estate tax?
Other taxes tend to flatten out the tax burden. See above.
It would be interesting to see how total taxes vary up and down the income scale when you add in *all* the government taxes and fees: sales tax, vehicle registration/tags (cars & trucks, boats, airplanes, motorcycles), real-estate property taxes, personal property taxes, state/local income tax, gasoline taxes, recycling fees (tires, batteries, plastic, glass), taxes and registration fees on personal businesses and state professional licenses, vice taxes (alcohol, tobacco, gambling, legalized marijuana), etc.
It would also be extremely interesting how that varies from state to state or to compare it with the amount of total taxes that the founding fathers of our country found so unbearable.
Use and sales taxes tend to be regressive for a simple reason: The higher you go on the income scale, the greater the proportion of income that is saved. That’s also the reason many people reject the notion of a flat tax. Real estate taxes present their own problem. The most valuable homes tend to be under appraised because they turn over less often and there are fewer comparables relative to the real estate owned by average wage earners.
One of the few very complete studies that has been done found that our total tax rate was relatively flat through typical income range. But it was very different at the two extremes. Incomes at the lowest level faced the highest rates because additional income often meant the loss of various support benefits so the effective tax rate could be nearly 100 percent. At the other end of the income scale most income came from capital gains and lower taxed dividend income.