Am I Taxed Enough?

I did some back of the envelope calculations recently to estimate what percentage of my income is paid to government in the form of taxes and fees.  Here's what I came up with:

Federal Income Tax:                             28%
Social Security Tax:                               6.2% normally, 4.5% in 2012
Medicare Tax:                                       1.45%
State Income Tax:                                  6%
Property Tax:                                        2.5%
State Sales Tax                                      1%
State and Federal Gasoline Taxes          1%
Misc. Fees and Taxes                               .5%
                                                                ------
                                                                47.5%

I do live in the People's Republic of Maryland-- state motto: "If you can dream it, we can tax it." The Governor and State Legislators are trying their darnedest to turn Maryland into California or Illinois, and drive all of its productive citizens to more tax-friendly places.  I have a middle class income, nothing extravagant for the DC suburbs, so I ask you does government in the aggregate deserve 47% of anyone's wages, regardless of income level? Is it that taxpayers are not paying their fair share, or that government just grows greedier and greedier each year?  Once Obamacare kicks in, I expect my overall tax rate to approach 50%.  My incentive to earn that more money will be greatly reduced, because if I'm pushed into the next higher income bracket the government will be getting more than 50% of what I earn.  And I'll be damned if I am going to hand over more than 50% of my earnings to bureaucrats to fritter away on pet projects to enrich their cronies and buy votes to get themselves reelected.

The Costs of the Tax Code

Narrated by Hiwa Alaghebandian of the American Enterprise Institute, the mini-documentary explains how needless complexity creates an added burden – sort of like a hidden tax that we pay for the supposed privilege of paying taxes.

Two things from the video are worth highlighting.

First, we should make sure to put most of the blame on Congress. As Ms. Alaghebandian notes, the IRS is in the unenviable position of trying to enforce Byzantine tax laws. Yes, there are examples of grotesque IRS abuse, but even the most angelic group of bureaucrats would have a hard time overseeing 70,000-plus pages of laws and regulations (by contrast, the Hong Kong flat tax, which has been in place for more than 60 years, requires less than 200 pages).

Second, we should remember that compliance costs are just the tip of the iceberg. The video also briefly mentions three other costs.

1. The money we send to Washington, which is a direct cost to our pocketbooks and also an indirect cost since the money often is used to finance counterproductive programs that further damage the economy.

2. The budgetary burden of the IRS, which is a staggering $12.5 billion. This is the money we spend to employ an army of tax bureaucrats that is larger than the CIA and FBI combined.

3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior.

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Grouch: How much does it cost to just comply with the United States Tax Code? $338 Billion (more than $1000 per American citizen), not to mention the immense cost in time---the IRS itself estimates that Americans spend 7.6 billion hours a year dealing with the complexities.

I don't think anyone who's filled out a tax return lately would argue that the tax code is too simple or that they'd like to spend more time and money preparing their tax return. I don't hold much hope that there are any politicians in Washington who know how to make things simpler. Every time tax simplification legislation gets passed, the tax code just keeps getting larger and larger, and more and more complex. For grins, I've posted the original 1913 tax forms (that dreaded year that kicked off this lunacy) for the readers to compare to the contortions they have to go through today. Notice the tax rates: 0% on $1 - $19,999, 1% on $20,000 - $49,999, 2% on $50,000 - $74,999, 3% on $75,000 - $99,999, 4% on $100,000 - $249,999, 5% on $250,000 - $499,999, and 6% over $500,000. That looks a lot more like The Land of Opportunity than what I see today.

'Patriotic Millionaires' Demand Higher Taxes

As I've said many times on this blog, there is no need for such showboating to show how patriotic you can be, or to force that level of patriotism on others. Anyone in any income category (Warren Buffett and Bill Gates included) can make a non-tax deductible donation to their favorite charity of choice -- the US Government-- at the following address anytime they have cash they don't need:

Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 622D
Hyattsville, MD 20782
http://www.fms.treas.gov/faq/moretopics_gifts.html

So I don't want to hear any more whining about how people are under-taxed. Time to shut your mouths, get out your checkbooks and take action -- help feed this endless spending machine that is modern-day Washington, DC. But I guarantee you this: no matter how much you donate, Congress will still spend more than it receives no matter how much the revenue increases, and you'll go broke long before the budget is ever balanced.

How Tax Adverse Are You?

With a potential rise in tax rates on the horizon if Congress doesn't act in the upcoming lame duck session, many people are thinking about their own tax situation, i.e. how to legally keep more for themselves and their families and give less to the government. For those who feel especially patriotic, I've outlined in recent posts how to make gifts to the IRS. I don't know of anyone who has taken me up on the challenge yet. I doubt anyone will, because people's self-interest is to keep as much of their own earnings as possible.

I recently read on Greg Mankiw's blog how tax adverse the Rolling Stones are:

I broach the subject with Keith [Richards] in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn. Source(http://www.you.com.au/news/1253.htm)

Anyone attune to modern culture is well aware of all the celebrities fleeing high tax states like New York and California for tax-friendlier locales. But what can the Average Joe do?

1. Max out your 401ks.  The 2011 contribution limit is $16,500, with an additional catch up contribution for those over 50 of $5,500.
2. Max out your IRA contributions if they are tax deductible.
3. Capture stock/mutual fund losses prior to the end of the year by selling positions at a loss and replacing with similar invests.
4. Purchase low turnover or tax managed mutual funds.  Indexes that do little buying and selling help keep the taxman away.
5. Consider muni bonds for the income portion of your taxable portfolio.  Just be aware that a number of states and municipalities have severe budget challenges.
6. Clean out your closets and make a donation to our favorite charity. Just make sure you get a receipt. Charitable donations, be they cash, goods or services, are deductible.
7. Participate in your employers flexible spending account for out-of-pocket medical expenses.
8. Take advantage of energy tax credits while to last to make your home more energy efficient.
9. Live in tax friendly states and localities.
10. Defer income to years when adjusted gross income will be lower than normal.
11. Consider acquiring rental real estate for the tax advantages. 
12. Take more income in dividends to harvest the 15% rate.

I'm no expert on taxes, but like everyone else I have a keen interest in paying as little as I can to Uncle Sam.  What other ways can you think of that I have left out?

It's Simple to Balance The Budget Without Higher Taxes

Politicians and interest groups claim higher taxes are necessary because it would be impossible to cut spending by enough to get rid of red ink. This Center for Freedom and Prosperity video shows that these assertions are nonsense. The budget can be balanced very quickly by simply limiting the annual growth of federal spending.

The Grouch: Politicians don't cut spending simply because they don't want to. It is the major source of their power and influence, and how they reward supporters and constituents in their districts. Even the most ardent deficit hawk changes their tune once under the spell of the Washington establishment. The only realistic way to control spending in DC is to keep taxes low. There is a deficit threshold even the politicians won't exceed for fear of losing reelection. But that limit for the current and previous fiscal years ($1.4T or more) has been greater than I ever would have imagined.

The Itemized "Taxpayer Receipt"

What You Paid For
2009 tax receipt for a taxpayer earning $34,140 and paying $5,400 in federal income tax and FICA (selected items)	$
Social Security	$1,040.70
Medicare	$625.51
Medicaid	$385.28
Interest on the National Debt	$287.03
Combat Operations in Iraq and Afghanistan	$229.17
Military Personnel	$192.79
Veteran’s Benefits	$74.65
Federal Highways	$63.89
Health care research (NIH)	$46.54
Foreign Aid	$46.08
Education Funding for Low Income K-12 Students	$38.17
Military Retirement Benefits	$32.60
Pell Grants for Low Income College Students	$29.75
NASA Space Program	$28.09
Internal Revenue Service	$17.69
Environmental Clean Up (EPA)	$11.67
The FBI	$11.21
Head Start	$10.91
Public Housing	$10.50
National Parks	$4.27
Drug Enforcement Agency	$3.14
Amtrak	$2.23
Smithsonian Museum	$1.22
Funding for the Arts	$0.24
Salaries and benefits for members of Congress	$0.19

Wouldn't it be nice when you pay your taxes if you could get an itemized receipt of where your money is going?  A D.C.-based policy group called "The Third Way" has produced a policy paper called "A Taxpayer Receipt," from which the above table is taken for the median tax filer in 2009 making an adjusted gross income of $34,140, and paying $2,790 in federal taxes, and $2,610 in Social Security and Medicare "contributions," for a total federal tax bill of $5,400.

"Corn syrup, milk chocolate, sugar, cocoa butter, coconut, almond, soy lecithin… any consumer can read these ingredients and their nutritional value on every package of a75-cent Almond Joy. What is provided to a taxpayer with a $5,400 tax bill? Nothing. For many Americans, the amount they pay in taxes is larger than any purchase they make during the year, but studies show they know almost nothing about where that money goes.

An electorate unschooled in basic budget facts is a major obstacle to controlling the nation’s deficit, not to mention addressing a host of economic and social problems. We suggest that everyone who files a tax return receive a “taxpayer receipt.” This receipt would tell them to the penny what their taxes paid for based on the amount they paid in federal income taxes and FICA."

A slightly different version of an interactive itemized tax receipt calculator exists at a website called Where My Money Goes, which allows you to put in any income amount and see an itemized tax receipt.

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Grouch:  I think this is a superb idea and should be required for all levels of government, federal, state and local, so taxpayers can see where their money is going.  Personally, I'm not too happy paying so much for combat operations in Iraq and Afghanistan, health care research, foreign aid, education, Pell grants, the IRS, head start, the EPA, public housing, national parks, the DEA, Amtrack, and anything for the arts.  I am also highly skeptical taxpayers are getting a bargain with social security, medicare and medicade.

The Great Tax Debate: Ben Stein and Linda McGibney

Ben Stein


Linda McGibney


For those who feel as Ms. McGibney does--

"I am an American. I am in the highest tax bracket. I also work in entertainment - which is what Mr. Stein does as well. I am fine with the tax increase. I think it patriotic that I am taxed in this way. I want to help my country.

I believe the fact that I can have a job this year, and hopefully every year to come, is a privilege. Mr. Stein, there are Americans who qualify for this tax increase under the proposed plan who don't feel "punished" by it. We feel it is our duty in hard times to help the rest of America.

I am a "have." I am willing to pay this tax increase. I'm not going to whine about it. I won't feel punished. I will understand it's the cost of doing business."

I have good news for you.  The IRS accepts donations and gifts.   Here is the link to the Department of the Treasury website "Gifts to the United States Government" for "citizens who wish to make a general donation to the U.S. government." According to Treasury, "This account was established in 1843 to accept gifts from individuals wishing to express their patriotism to the United States."

I encourage all like minded citizens (including the uber-rich such as Buffett, Munger, Gates, Soros,  Pelosi, Kerry, Feinstein, Rockefeller, Issa, Grayson etc.) to express their patriotism immediately by making a gift to the government instead of donating to charity. In fact, why wait for the Bush tax cuts to expire; send in extra money every month, every year. Also, consider setting up your estate plans to make the U.S. Government your sole beneficiary. It will make estate planning so much easier and get rid of those pesky problems with heirs.

Who is right, Ben or Linda?

HT: Carpe Diem

Tweety has an Epiphany While the UK Moves Closer to Full Blown Statism

In a rare moment of clarity, Chris Matthews utters the unutterable. Shame on him.

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In a related, but very disturbing story, the UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.

The proposal by Her Majesty's Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.

Currently employers withhold tax and pay the government, providing information at the end of the year, a system know as Pay as You Earn (PAYE). There is no option for those employees to refuse withholding and individually file a tax return at the end of the year.

If the real-time information plan works, it further proposes that employers hand over employee salaries to the government first.

This certainly gives new meaning to the phrases "working for the government," and "welfare state." Let's hope the geniuses in Washington don't hear about this idea.

Indexing the Capital Gains Tax to Protect Taxpayers from Inflation

The capital gains tax is a perverse form of double taxation that should be abolished. This bad tax is especially damaging because families often are taxed on gains that are solely the result of inflation. This video explains how taxpayers could be protected by indexing the capital gains tax so the levy only applies to inflation-adjusted gains.

What the US Tax Code Really Costs

How much does it cost to just comply with the United States Tax Code? $338 Billion (more than $1000 per American citizen), not to mention the immense cost in time---the IRS itself estimates that Americans spend 7.6 billion hours a year dealing with the complexities.



I don't think anyone who's filled out a tax return lately would argue that the tax code is too simple or that they'd like to spend more time and money preparing their tax return. I don't hold much hope that there are any politicians in Washington who know how to make things simpler. Every time tax simplification legislation gets passed, the tax code just keeps getting larger and larger, and more and more complex. For grins, I've posted the original 1913 tax forms (that dreaded year that kicked off this lunacy) for the readers to compare to the contortions they have to go through today. Notice the tax rates: 0% on $1 - $19,999, 1% on $20,000 - $49,999, 2% on $50,000 - $74,999, 3% on $75,000 - $99,999, 4% on $100,000 - $249,999, 5% on $250,000 - $499,999, and 6% over $500,000. That looks a lot more like The Land of Opportunity than what I see today.

CHINA: 'The world does not have Money to buy more US Treasuries'...

The mess that is the Obama administration just keeps producing one laughable moment after another. Just when you thought nothing could top the ridiculousness of the Copenhagen Climate Summit with its record cold temperatures and snow from Copenhagen to the south of France, the President returns to find a blizzard blanketing Washington with record snowfalls. Then today comes a headline from the ShanghaiDaily.com that China is losing its ability and appetite to finance runaway US Government spending. What is Captain Stimulus to do now?

The Value Added Tax (VAT): A Hidden New Tax to Finance Much Bigger Government

This Center for Freedom and Prosperity Foundation video explains why a value-added tax would be a dangerous money machine for big government. The evidence from Europe also shows that VATs actually lead to higher income taxes.

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My take: IF IF IF IF the VAT were a PERMANENT REPLACEMENT for the personal income tax on all citizens, I would support it. However, the VAT is merely another way to grow government, and find new and creative ways to confiscate more money from the country's producers.

Controlling Leviathan: The Battle for Limited Government

Defeat The Debt Pledge Commercial

Something serious to think about as government spending continues to spiral out of control. Every dollar in deficits is a dollar+change in future taxes that must be collected or eaten away by inflation.

 Government Deficits.  Does this scare the crap out of anyone else?

Pelosi Floats Idea of VAT to Pay for Health Care

When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it. -- Frederic Bastiast (1801-1850)

In a subtle admission that Congress's Health Care proposal cannot be paid for without new taxes, Speaker of the House Nancy Pelosi is at last being honest when she says she that new taxes need to be looked at to pay for these massive new spending programs. However, it is beyond me how a Value Added Tax at every step of the production of a product will level the playing field for American manufacturers. I have trouble getting past the immediate and real impact on American consumers of raising the prices of all American made goods across the board. Even more baffling is her claim later in the interview that this will not raise taxes on middle class Americans. Good grief. Just who does she think is ultimately going to bear the burden of such taxes? The short answer: anyone who buys anything. This type of tax will hurt low income earners the most. The citizens need to start asking themselves some tough questions, like just how of their income should the government be entitled to take.... 30%, 40%, 50%, 60%? And why can't the government stop spending so much money, why can't they control the impulse to spend recklessly and stupidly, why can't the government live within its means and stop pushing the country towards bankruptcy and driving down the value of the dollar. Sneaky forms of taxation like the VAT should be fought against by every citizen.

The Middle Class Tax Hike Coming to a Neighborhood Near You

A government big enough to give you everything you want is a government big enough to take from you everything you have.
-- Gerald Ford

On some of the talking head shows over the weekend, several Obama administration economists floated the idea of a middle class tax hike. After a sharp negative reaction, this idea was immediately denied by the politicians in the administration. But to me this is the inevitable conclusion to all the spending that is going on in Washington these days and the economists were simply being rational. The rich in this country simply don’t have enough money to shrink these deficits and sooner or later the politicians are going to come after the cash cow of the middle class. But Obama is no dummy and doesn’t want to end up like Bush 41 breaking his vow of no new taxes for those making less than $250K. That would be political suicide.

Yet, on the other hand, the Obama deficits are unsustainable and will eventually undermine the economy and the dollar if something is not done. The ChiComs will not continue to loan dollars to the US indefinitely if we don’t get our fiscal house in order. And cranking up the printing presses will leave too few dollars chasing too many goods and give the US a good dose of inflation.

That’s why I think middle class tax hikes are inevitable. But they won’t be done in a straightforward fashion. They will be done in a roundabout way to leave the President enough room for plausible deniability. Cap and Trade and Health Care Reform come to mind as two golden opportunities to hike middle class taxes without appearing to do so. In addition to these items, there will be other fees and taxes levied in circumspect ways so people don’t actually see the impact on their tax returns.

To address the deficit, middle class tax hikes and a dose of inflation are almost a foregone conclusion because there just aren’t enough rich people to soak to pay for years and years of the government living beyond its means.