Saturday, February 24, 2007

The "Real" Tax Rate

This is the time of year when most of us complain about our taxes, Republicans vow to cut our taxes, and CPAs and professional preparers make a fortune either calculating those taxes or coming up with creative ways to avoid them. An interesting article on the MSN Money website puts taxes into a better perspective by pointing out that the federal income tax which is the focus of most of our complaints and tax-time anxiety is only one part of a very large range of taxes, most of which we don't even think about or are not aware of. These other taxes add up, making the real tax rate many people pay 40% or more instead of the smaller but more visible part we shell out to the IRS on April 15th.

There is, in fact, a vast array of taxes we pay daily, weekly, monthly, or annually. In addition to the visible state and federal income taxes, it includes sales taxes, Social Security taxes, real estate and personal property taxes, sin taxes on tobacco and alcohol, excise and utility taxes levied at the state and local level, inheritance taxes, and a wide range of taxes on businesses which are often passed on to the consumers, buried deep in difficult-to-read monthly statements. Adding all these other taxes together gives an average real tax rate of about 40%.

As so often happens, your government and the major political parties are not telling you the whole truth. They all ignore the true tax burden you and I face every day: the sum of many different taxes, some of which may be small individually, but which add up to a very large sum over the course of a year.

So, as you grit your teeth and crunch your personal economic numbers this tax season, remember that the income taxes you are calculating are only the tip of the tax iceberg. Real, honest tax reform won't come from reducing taxes across the board (the Republican view) or readjusting them to make higher-income taxpayers pay more (the Democratic view) - it will come from a serious assessment of tax policy across the board, and from a realization that taxes are not meant to be a vehicle for social policy engineering, but to raise operating funds for the government. A realistic tax policy will balance tax burdens at the federal, state, and local levels to bring coherence to an overly complicated, out-of-control system. Someone once said that the country needs a tax system that looks like it was designed on purpose; unfortunately, we probably will never get one, because the ability to curry favor with tax breaks and other tax-based incentives is too deeply rooted in our system of government.

But it's a nice thought.

If you would like to read the MSN Money article on which I based this post, you can do so at

Have a good weekend. More thoughts tomorrow.


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