Wait, where did 25% of our Paycheck go?

Are we getting our money’s worth for all the taxes we’re paying?

The chart shows the grand total of taxes we paid in 2016 (yes I do track every $1 of our money). My wife and I both have well-paying professional jobs – and “the government” has made themselves 1/4 partners in our earnings.

Ok, to clear the air, we’re all about paying our fair share. We appreciate that we have good jobs in a robust economy, drive on roads, the military protects us, public schools educated us, and consumer and labor laws make our lives better. All of that is great; I’m pro order and civility. But should it really cost $46,000 a year!?

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A lot of people don’t really consider how much they are paying in taxes, mostly because those payments are automatic. Your Federal taxes are taken out through withholding on your paycheck; this includes Income Tax, Social Security, and Medicare. The money never hits your bank account, so you never really think about it. Here’s a nice succinct article on the pros and cons of the withholding system.

What if the way we paid taxes was different?

Now imagine if all of your salary was paid to you and then you turned around and handed Uncle Sam cold hard cash. If you’re salary is $52,000 a year $2,000 bucks would hit your bank account every 2 weeks. Every other Friday a man in a worn brown suit will come by your cubicle and you’ll hand him $450 cash to cover your federal withholding. 25% of your paycheck – gone in a second. Another way to think about it is that for every 8 hour day you work, 2 of those hours are on behalf of the federal government. If you show up at 9 am, you’re not working for you until 11.

And that’s only the start of it

Did you know that your employer has to also pay 7.65% in Social Security and Medicare taxes on your behalf? If they didn’t have to do that they could pay you another $4,000 a year!

Ok, so we’ve paid the piper, at least we still have $1,550 to show for our hard labor, let’s hit the town! Well actually, first there are more taxes. We live in Texas which does not have a state income tax (yay), but they make up for this by having higher property taxes (boo). If I live in a $200k home I’ll pay about $4,500 a year in property taxes or $175 a paycheck – hand it over. This also comes out “automatically” as part of your mortgage payment, whew, I was worried I’d have to think about it. Oh you live in an apartment and don’t pay property taxes? Yes you do, it’s baked into your rent.

Well federal and state taxes are all paid up, and we still have $1,375 – not bad! Let’s go spend it. We can get $1,275 worth of stuff with that money. This is because state and local governments want another go at the dollars they let us keep, so they tack on an 8% sales tax. They get you coming and going.

So in the end we receive $1,275 of purchasing power from our paycheck, which turns that comfortable $52,000 salary into $33,000!

But wait there’s more:

Those trinkets we bought with our leftover money… the price was inflated because of the taxes paid by the company producing them. The thing about corporations is, they don’t pay taxes, not really, they just charge us enough to cover them. A company that loses money won’t be around long so they need to charge us, the end consumers, enough to cover their tax bill. They have to pay 35% in income taxes, 7.65% on wages they pay, and pay property taxes… Tax on tax on tax #circular reference error.

What’s the takeaway? I don’t really see an actionable item I guess, maybe complain about taxes even more? I think it is important we know where our money is going. Taxes fund a lot of worthwhile things, social safety nets, military, infrastructure, yada and so on. I know that I definitely benefit from these services and want to pay my reasonable fair share… but $46,000 a year just seems like a lot. Can I get a price check aisle one?

What are your thoughts? Do you know how much of your money goes to taxes? Do you feel it’s fair for what you receive in return?

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