Neo-liberal rhetoric often laments the financial woes of average Americans. Whether it be savings, retirement, or income, they strongly believe that free market capitalism created various problems and that government largesse can fix it.
I usually view the issue from a strict economics perspective, but then I considered how my own financial situation might relate to other people. After digging up two-year old pay stubs, one thing stuck out: federal taxes. I am by no means a high income earner – especially two years ago. Despite that, however, I was losing thousands of dollars to the federal government.
During the times dated on the pay stubs, my base salary was $40K per year as a single filer. Every pay check, hundreds of dollars went to the federal government. By year end, the feds confiscated over $7K of my income. That is a lot of money for anyone, especially average Americans that liberals claim to represent.
Let’s put that in perspective: if a new college grad, for example, makes a base salary of $40K, then how are they to pay student loans or save money for a house? Their problem is not capitalism, which enormously increased the standard of living for everyone. Confiscatory taxation poses a much greater liability than anything else.
The numbers on my pay stub only represent personal income tax and various federal programs. Payroll taxes, however, do not show up on my pay stub because they are an unseen tax liability on wages. According to the Tax Foundation, a single file worker who earns $48,486 has an income tax liability of $8,196. Again, this is a lot of money to anyone, especially for my income level. Payroll taxes, which are split between employer and employee, are an additional $8,462 – which brings their total tax wedge to $16,658.
In other words, not only do they lose over $8K to income taxes, but they would earn even more if not for payroll taxes – about $5K according to Tax Foundation. All in all, the total tax burden for wage earners is 31.3% of pre-tax earnings.
This only expresses federal tax liability. I have not even broached property taxes, state and local taxes, sales tax, capital gains, and excise taxes. Of course, many taxes are actually regressive and adversely burden low income people – such as the excise tax on cigarettes.
If you want a consumer driven economy, taking over 30% of everyone’s income does not aid to that end, nor does it address any other financial concerns. Economists from the IMF, for example, found strong empirical evidence concludes that higher income tax rates negatively affects household savings rates.
Current tax policy imposes a substantial financial burden on everyone. The top 20% already pay 70% of income taxes, yet pundits believe there is no limit to which they can be taxed. There is a diminishing return on raising the top marginal rate – you can only “tax the rich” so much. Eventually, everyone will end up paying more with little improvement on revenue. Despite the rhetoric, tax revenue has never exceeded 20% of GDP regardless of tax rate.
It’s important to understand the concept of marginal utility as it relates to tax burden. For example, at my $40K salary from before, an extra $1 in my pocket is of greater benefit to me than it would be for someone making $250K. My tax liability may be nominally smaller, but, in real terms, has a greater effect on overall loss of utility. Even if you increase the top marginal tax rate, everyone in the lower quintiles still suffers a greater loss of utility.
You might think a progressive income tax reduces the marginal utility effect, but, as stated previously, money is taxed numerous other ways – excise, gas, property, and more. Thus, total tax burden is really greater than the 31% burden on wages. With this in mind, I think we should scrap current tax policy in favor of a flat tax. Ultimately, there should be no federal income tax.
Various political philosophies maintain their own principles on taxation. Economically speaking, however, high levels of taxation become a major financial burden for everyone; especially average income earners. It’s important to understand how taxation financially affects individuals as well as the entire economy. We can always debate the efficacy of various tax-funded programs, but ultimately the greater cost is the respective precedent of taxation.