Money & The Economy

It’s time to pay your federal income taxes. How much did you pay?

Normally April 15 is the day that federal income taxes are due and any balances must be paid.  Because of the current Coronavirus pandemic, the tax filing day was pushed to July 15.  Did you ever wonder how much taxes you actually pay each year?

Before you receive your paycheck, taxes are paid for the federal income tax, Social Security tax, Medicare tax, state income tax and any special taxes local or state governments impose.  When added together these taxes take a large bite out of every wage and income earner’s paycheck.

According to the Tax Foundation, more than two-thirds of Americans, pay more payroll taxes than the income tax. About 80% of Americans earn wages less than $137,700, which is the upper limit to pay Social Security tax.  Wages earned above $137,700 do not pay the Social Security tax. Here’s a resource if you need help with payroll tax.

The Medicare tax is paid on all wages with no upper limit.

Workers pay 6.2% in Social Security tax and the employer pays 6.2% for the worker, totaling 12.4% actually paid.  The Medicare Tax is 1.45% paid directly by the worker, while the employer pays 1.45% for the worker.

In total 15.3% of almost all worker’s wages go to pay those payroll taxes.  That’s in addition to the federal income tax and other taxes. The average American household pays about 10% in federal income taxes, although the average is a bit skewed.

Forty-three states have a state income tax. The rates vary.  Thirty-two of those states have a progressive system, so the rate increases as income increases.  California has the highest top rate at just over 12%.

Forty-five states impose a sales tax on nearly all consumer products, often not taxing only food and clothing.  The rates vary but nearly all charge between 6% and 8% of taxable consumption.

Local governments raise the majority of their revenue through property taxes, meaning the tax paid is based on the value of the property.  The rates vary widely.

Then there are hidden taxes that consumers don’t directly see but pay for in the price of the product.  These include taxes paid on things like gasoline, alcohol and tobacco products.

In total, adding the payroll taxes, the federal income tax, state income taxes, sales taxes and local taxes, the average income tax-paying American pays nearly 30% in total taxes.  This is really what started the TEA  (Taxed Enough Already) Party.  That movement was successful in reducing the federal income tax which Congress voted to cut in 2017.

The Trump administration says that payroll taxes, which are regressive are way too high.  There is some talk of reducing those taxes in the near future.  Reducing payroll taxes would tend to increase economic growth.

The federal income tax rate reduction that went into effect in 2018, lowered the tax rates for all Americans.  Many middle to lower class income earners complained that the income tax cut provided little or no benefit to them. That is true.

The reason is that 44% of American households pay no federal income tax at all. For the other 56%, the total tax burden is heavy.

At this time, the economy needs a boost to recover from the devastating coronavirus recession.  The House of Representatives wants to give more “free” money to nearly all Americans, regardless of income level.  The Trump Administration wants to reduce payroll taxes so that the benefit is receiving only by those working and contributing to the economy.

A payroll tax cut would provide an incentive for unemployed people to return to work when called.  Right now, because the federal government stimulus package added $600 to the weekly benefit an unemployed worker receives, 68% of the unemployed are getting more money being unemployed than they would earn by returning to work.  This is a huge incentive to remain unemployed

High taxes and even higher government spending tends to stagnate the economy.  Taxpayers feel the burden all year long, but especially on tax day.  If you are a solid contributor to the US economy, add up all the taxes you pay.  The total is staggering.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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