Your real tax rate: 40%By Scott Burns
Feb. 27, 2007
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Income taxes, sales taxes, property taxes, Social Security and Medicare taxes, 'sin' taxes and the rest add up to a virtual flat tax nationwide.
We have a national flat tax, albeit one with bumps and potholes.
The fact that the political parties won't acknowledge this is one reason they are doing a disservice to the voting public.
Instead, both parties have a vested interest in the theatrical possibilities created by the idea of graduated tax rates. Notice that I said "the idea of" graduated tax rates. That should not be confused with reality.
Democrats argue that taxes on the rich should be raised because others need the money. This wins votes from the legions of voters who aren't rich.
Republicans argue, with great piety, that high taxes crush incentives and should be reduced, and that only then will the American way see a new dawn.
Politicians talk this way because they generally talk about only one tax: the federal income tax, which offers graduated rates from 10% to 35%.
Politicians rarely talk about what real people experience: the true maze of taxes and government benefits. If someone put them all together, we could see what our actual tax burden was. We could see who pays at the highest or lowest rates. Discussions of tax policy wouldn't be a waste of time.
Well, two researchers did it.
In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is 40%, give or take a bit. Yes, you read that right: 40%.
Most workers will pay about that much on each dollar of income when all taxes -- federal and state income taxes, sales taxes, taxes for benefit programs, etc. -- are considered.
As a consequence, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5%, while a 45-year-old couple earning $500,000 pays at 43.2%. There are some exceptions: A 30-year-old couple earning $50,000 a year, for instance, pays 24.4%, and a 60-year-old couple making $150,000 a year faces a tax rate of 47.7%.
The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3%, the median tax rate is 41.8%, and the standard deviation of all of those rates is 5.3 percentage points. Basically, most of us pay about 40%, plus or minus 5.3 percentage points.
That's not a big range, particularly when you notice that it covers an income rise of 2,500%.
So I have a modest proposal: Ask your senators or representative if they have a clue about this. If they donít, regardless of party, they shouldn't be in office. Vote accordingly.