Saturday, March 16, 2013

Why is it so Hard to Understand Taxes?

I recently read some comments on Rand Paul's speech at CPAC about his proposal to institute a 17% flat tax.  One commenter raised the issue of a single mother making $7.25 an hour minimum wage just barely squeaking by getting her tax rate unfairly raised to 17%.

I've discussed this before in Tax Primer, intending to address it further.  Well after the wonderful sequester hysteria and now these comments from Rand Paul at CPAC stirring more misinformation out there, it's time to get to it.

The reality is that with this example of a single mother, her payroll taxes alone already add up to 15% (7.5% direct withholding and matching 7.5% the employer pays).  So out of her $7.25, she pays approximately $1.08 in tax ($.54 from her paycheck and $.54 from her employer).  Some will undoubtedly argue that her taxes are only half that and the employer pays the other half, but that still makes the $7.25 an hour of which the employee takes home $6.71 after her payroll tax is deducted cost $7.79 (rounded) an hour to the employer, possibly inhibiting him from paying her more or hiring more workers.  Those taxes are part of the total labor costs that get added into the retail price of whatever she produces, so she's effectively taxed double for buying the very thing she makes at a retail outlet.

For example, say she makes 1 coffee pot in an 8 hour day @ 7.25 an hour.  She gets paid $58 gross minus $4.35 (7.5%) deducted for payroll taxes for a total of $53.65  That total $58 she made before taxes were taken out is part of the retail price of that coffee pot at the store as well as the $4.35 the employer paid to match her payroll taxes.  So just for her part of the production chain, the effect of the payroll tax alone, it would cost her $62.35 for the labor associated part of the retail price to buy something she made for what she only received $53.65, meaning she not only paid those payroll taxes upfront in the production chain, but will have to pay that $8.70 a second time for an "effective" tax rate of 30% just because of the payroll tax alone.

Now that doesn't mean that the government gets 2x as much revenue. That extra $8.70 just pays herself and her employer back for what the government took from them up front.  It simply has the 2x the effect on her cash flow.

That's what helps make US made products that much more prohibitively expensive in that these taxes can often exceed transportation costs of importing similar products made halfway around the world with cheaper labor.

Those problems will also be a part of Paul's proposal for most income/payroll taxes have the effect of hitting you 2x, when you get it and when you spend it.  It gets even worse when sales taxes are added on top, adding insult to injury that you're now paying a tax on a (hidden) tax. 

That's why I do believe a single consumption or sales tax on all goods and services and getting rid of all income taxes, while certainly not perfect, may be a much better solution for it makes it that much harder for them to hide real tax rates and it would add the same imposed cost of our bloated government to the price of competing foreign products.  It will also help shift some of the burden to the underground markets when untaxed income of such activities as prostitution or drugs is used to purchase goods and services in the regulated markets.

While I'm at it, let me touch upon the dreaded Mitt Romney's comments on the 47% who supposedly get a free ride.  The truth is that income taxes that are imposed on the 53% who do pay them only add up to 42% of federal revenues.  Another 40% of the federal revenues come from payroll taxes.  About 9% comes in from corporate taxes, which of course, we all pay for whenever we buy any product or service from those taxed corporations.  And that's only federal taxes.

Citizens for Tax Justice put out this analysis which IMHO is woefully short on identifying anything close to the true tax burden, but is does somewhat illustrate that everyone pays taxes.  As I described above, it fails to capture hidden taxes and the fact that a portion of sales taxes amount to a tax on a tax.  It also fails to consider thousands of user and license fees and other ingenious vehicles for taking money from citizens are taxes, such as those for hunting/fishing licenses, department of motor vehicle fees, tolls, fines, forfeitures, court fees, regulatory burdens, the all too rarely discussed inflation tax and, yes, even the minimum wage is effectively a tax - imagine that.

The current tax code is a ingenious trap used by the predators to divide the herd as it seeks out victims upon which to feast.  They use it to divide and conquer to keep their bellies full.  It will never change unless we wake up and understand it for what it is and stop pointing fingers at each other claiming we pay too much and it's everyone else who is skating.

Please add your 2¢ if you see anything I missed or disagree with any points or have questions in the comments section below.  :)

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