Giving half your income to Uncle Sam
By Beth Cody, Writers’ Group member
Iowa City Press-Citizen
Wednesday, April 9, 2008

It’s the dreaded Tax Time again: April 15 looms large as the deadline for filing federal income tax returns.

But focusing on this date obscures the fact that we actually pay taxes all year long, nearly every day, and that the amount of tax shown on the 1040 is only a very small portion of the total taxes we pay every year.

In fact, middle-income households pay about 40% of their income in various taxes, and bear probably another 7% in “regulatory tax” and 3% more in “inflation tax”. Yes, that’s half of every paycheck for our bloated governments.

These numbers seem unbelievable. How could half of our incomes go to government?

It’s possible because we pay so many different kinds of taxes at several levels of government, and we pay in small amounts nearly every day.

Governments are smart about this: If every April, households earning $50,000 a year had to write a $20,000-plus check for taxes, imagine the revolt that would follow! Instead, taxes are stealthily imposed and withheld throughout the year.

So how is the incredible “half” figure calculated? The following tax figures are drawn from the study “Who Pays Taxes and Who Receives Government Spending”. They are the taxes paid in 2004 by households in the middle 20% of household incomes. I have removed the allocated corporate taxes, as I am comparing cash taxes to cash income.

The largest tax paid by this group is the payroll tax: Social Security and Medicare taxes add up to $6,788 annually. The income tax, as annoying as it is to calculate, is “only” $3,720 per year for the federal tax, $1,341 for the state tax.

Property taxes claim $1,290 of household income, and general sales taxes, which hit us nearly every time we purchase something at a store, follow closely at $2,188.

Next come the excise taxes, sales taxes on specific items (often known as “sin” taxes): $243 per year for gasoline taxes (that’s 40 cents for every gallon here in Iowa); $116 for alcoholic beverages (possibly more here in Iowa, because we have some of the highest taxes on wine and spirits in the nation); $199 for tobacco; $252 for other selective state sales taxes; and $89 for other federal excise taxes.

The list goes on: $41 for airport taxes; $134 for motor vehicles licenses; $200 for customs duties; $199 for public utilities; $131 for insurance receipts; $25 for special assessments; $49 for personal property taxes; $28 for severance taxes; and $32 for other personal taxes.

This adds up to $17,065 in direct taxes for middle-income households. These many taxes equal nearly 40% of incomes in the middle quintile. That’s more than those households spend each year on food, clothing and housing combined.

Then there’s the indirect tax from corporate regulatory costs, which is ultimately borne by households. According to an SBA study, “The Impact of Regulatory Costs on Small Firms”, business compliance with a hundred-thousand pages of federal, state and local regulations conservatively costs half a trillion dollars annually. This was a staggering $5,400 per household in 2004 and even after netting out the benefits of some regulations, is nearly $3,000 a year for middle-income households.

And one other indirect tax, the “inflation tax”, is largely the result of our government printing more paper currency than it should – great for managing deficits, but bad for middle-class earnings, equal to perhaps another $1,300 a year.

So government costs middle-income American households at least $21,000 a year – about 49% of the 2004 median household income of $43,389.

Incredibly, middle-income workers spend half of their working hours laboring to support government bureaucrats with cushy benefits. No wonder the middle-class are finding it hard to make ends meet – does anyone else see the elephant in the room?

Perhaps instead of only focusing on making wealthier households pay more than their “fair share”, we should also look at the overall size of the ever-increasing pie itself. Is a government that consumes half of our earnings good for us? Perhaps there are some things that private companies could do more efficiently.

Ask yourself: Are we getting a good deal here? How much is government costing you?