Taxes are a hot topic due to the extravagant budget put forth by the Obama administration and Congress. Did you ever wonder how much of your hard-earned dollar actually ends up in the hands of the government? Aside from standard income taxes, chances are you pay several other types of taxes that can add up.
An individual, married or otherwise, is subject to paying federal and state income taxes, Social Security tax, Medicare tax, sales tax, excise tax, and some other miscellaneous taxes depending upon your unique situation. I am going to call these “direct” taxes because a person is directly paying these taxes to the government. There are also “indirect” taxes. Every time you spend money a company records your expenditure as revenue. That business now has to pay the government income tax, sales & use tax, excise taxes, payroll taxes, and personal and real property taxes. That business pays for these tax liabilities with the revenue it generates (expenditures by you). Indirectly you are funding taxes paid by companies.
Many U.S. citizens dedicate anywhere from $0.32 to $0.40 per dollar of income to paying direct and indirect taxes. This means on average that you will retain about two-thirds of your income while paying the other one-third in taxes. The two largest factors in determining how much per dollar you pay in taxes are your income taxes ($0.20-0.26 per dollar) and your property taxes ($0.00-$0.06 per dollar). While homeowners enjoy the ability to deduct the interest paid on their mortgage from their gross income, they pay heavily in property taxes; which, in some cases, actually winds up being more than the income tax liability reduction realized by deducting the mortgage interest. These two types of tax alone account for approximately $0.26 to $0.32 of taxes per dollar of income.
Sales, excise and other taxes typically will represent a much smaller fraction of taxes paid. 
Sales and excise taxes vary by state, so this is a difficult number to pin down. However, given that sales taxes (if they are levied in a state) usually range from 5% to 7%, and exclude certain types of products (many states exclude non-prepared foods, clothing, and other necessity items), an estimated calculation was used to come up with a result of $0.03 to $0.04 per dollar of a person’s income is paid in sales and excise taxes. This is a slightly higher figure than you might think, but consider that the main excise tax is levied on gasoline. The eleven percent tax on a product that is a massive part of the American economy and way of life skews the smaller sales tax percentages resulting in a slightly higher than expected percentage of income.
An analysis was performed to determine the percentage of a person’s dollar spent with corporations goes toward paying taxes. Corporations are on average paying about 2% of their revenues in income taxes and another 2% in payroll, sales & use, excise, and personal and real property taxes. This means for every dollar you spend with a company, about $0.04 goes toward paying that company’s various tax liabilities.
The average American taxpayer can expect to give up about $0.32 to $0.40 per dollar of income to the government in various ways. Varying income levels and other tax-pertinent information about a person or legal entity can result in higher or lower total taxes. Low-income levels that are subject to lower tax brackets and instances of long term capital gains as the largest proportion of an individual’s taxable income can lower the overall tax liability substantially.
One important realization from this analysis was that property taxes have a considerable impact on how much of your income you get to keep. For those living in states with high property taxes, your disposable income is already several percentage points less than someone with an almost identical situation in a state with lower property taxes. Consider whether the impact of your mortgage interest deduction is above or below the property tax liability you have assumed as a homeowner. Dollars and cents can’t drive every decision, but maybe it can help you decide between buying a home in one location versus another to maximize your quality of life while minimizing your overall tax liability.
Image Used in This Post
Two Dollar Bill courtesy of flickr user Doublep1 under the CC license.
20 Comments
Well researched and interesting post Jay. I agree it is unfortunate that we have to pay taxes on gasoline considering that in today’s world it is without a doubt a necessity. Infrastructures would shut down without it. What makes it worse is that not only is there the Federal tax on it, but also the State tax. Why couldn’t the U.S. stop taxing gas? Do you think it’s because of foreign reasons, like OPEC, pumping their prices up?
Somewhat unrelated but at least the state gas tax is the one and only New Jersey tax levy that is actually far below the national average. If I’m not mistaken Jersey may actually be the lowest – as hard as that is to believe.
Greg, your comment sparked a fire under my arse to look this up and NJ is the 3rd lowest in State tax on gasoline as of January 1st 2009.
Here is a decent site for state taxes on non-necessity related items.
Nice find.
OPEC and the price of crude oil are completely unrelated to the U.S. taxation policy. They tax it because they can. Other governments tax it because they can. Do you forget how much Europe pays in taxes on oil? Perhaps you should consider yourself lucky to live in the U.S. with our puny 11% average tax if taxation of petroleum bugs you?
Just found this site, and have already have to question just where you get such “rosy?” tax figures… Your argument is quite convincing, as is your knowledge on economics, but I fear you have way oversimplified your calculations..
For example, considering that for most Americans, we pay that initial 26-32% before we even get our checks, the rest of the figures should be based upon a much lower “buying power” instead of the same initial dollar. 1.00-26=.74…. Which roughly, would increase all your other tax outlays by roughly 25-30% as the starting point, and increase as well, for any other, non-discretionary spending that is taxed (is there any that is not?).
Likewise, I’d like to know how you arrived at the 2% figure with corporate tax since combined, state and fed taxes on business, approach 40%? Of course there are deductions, etc, but even if that were enough to lower it to 20% (which they don’t), do you think they themselves actually “absorb” that other 18%? No it won’t, as it is also passed on to the consumer.
Next, let’s look at your fuel tax.. I live in Ga, with a relatively low state tax.. But, it is still 12.4 per gal, added to the 18.4 per for the feds, for a total(?) of 30.4 per gal… For simplicity, lets divide that by $2.00 which gives me 15.4% tax per dollar of fuel bought.. Alas, they still aren’t done here in this great state, because now, I get to pay sales tax on that fuel as well… The chart that Gregory links to, only supplies the % for the state, but here, the counties and municipalities also can levy their own tax, giving a sales tax in most areas of Ga, 7-8%..
I’d also like to point out to you, from the above if you follow closely, you would see that the Ga excise tax is based on the price of a gallon, AFTER the fed excise is calculated in, and the sales tax is added in, AFTER the state excise is figured in… A tax on a tax??? Why yes, it in fact, is.. But it happens a lot today… Look at your own phone bill for instance.. Notice the 911 “fee”, fcc access charge, state relay “fee” and even federal tax, are all calculated in before they total your state and local tax?? No wonder how my own, “special”, all inclusive price of 74 bucks, gets me a monthly phone/dsl bill of about 100…
Sorry for the long write, or if I sounded condescending in any way since I’m certainly not trying to be. This is a good site, with intelligent thought and conversation/debate, that maybe, even after you read this, you’ll allow me to return to:-)…
Charlie,
No worries, I appreciate the dialogue. However, I would say that if you are interested in where my figures came from you should download the Excel workbook that accompanies the post. It provides the detail behind the summarized concepts and numbers presented in the above post.
Now, I am unfortunately going to have to debunk most of what you just said, because it really isn’t correct. Your initial point of lower the buying power of the dollar by the income tax with held directly from one’s paycheck is not valid. I utilized two different income tax scenarios: (1) individual filing, not a homeowner; and (2) joint filer who owns a home and has two children. The rationale for this methodology was to get the scenarios that would yield both the highest and lowest typical income tax. That percentage of your total gross income works out to be anywhere from a 23% to 26% effective tax rate. Given that percentages are base 100, just like a dollar is based on 100 cents, that works out to the $0.23 to $0.26 per dollar tax that I mention in the post. Not 28-32%, that is not your “effective” tax rate.
The 2% corporate income tax was calculated by taking the income tax expense for approximately 50 different major companies from a wide spectrum of industries over a three year period and dividing it by the companies’ annual revenues. Different industries usually had a slightly different percentage of income tax to revenue, however the overall average of all the companies analyzed was 2%. Download the Excel workbook and look at the sheet with the numbers and calculation if you don’t believe me. The 35-40% income tax you mention is based off of what is called Earnings before taxes, which is the revenues of the company minus EVERY expense they incur (just about, anyway). Example: Company A has $100 in revenues with $35 in Cost of Goods Sold (COGS), operating expenses of $30, depreciation and amortization of $10, and other income/expense and interest income/expense of a net $5. Company A then pays taxes on the $20 remaining ($100 revenue mine the $85 total expenses listed above) at 40%, which is $8. In this example, the corporate income tax works out to be 8% of total revenues. That is why using a straight up 35-40% assumption for corporate income taxes is not only wrong, it is WAY wrong.
I can’t address your issue with the fuel tax. I utilized blended figures to accommodate the entire population of the U.S. Besides, if you look closely at the arithmetic, a person may spend $2,000 to $5,000 a year on gasoline, of which maybe $250-$600 is tax. When you divide that small of a number by a person’s gross income figure, the percentage is in the tenths of a percent, which doesn’t really change the overall tax per dollar because using significant digits. We are only showing down to the percentage point since everything smaller than that is irrelevant. I hope this helps, but I honestly encourage you to take a read through the Excel workbook because you are obviously interested in the topic and have a good thought process. The thought process is operating under a few false assumptions, but that is exactly what we are trying to remedy here with this information.
Oh, and yes, there are plenty of non-taxed discretionary spending items. Groceries and other non-prepared foods as well as clothing (in most states) are not taxed. Since those two things represent a fair amount of what a house hold consumes, it really has a significant impact on the taxes paid on expenses.
Good find on the HDR two dollar bill.
One factor that would greatly skew you’re personal sales tax expenditure would be if you are a chain smoker.
I have always found it amusing that politicians can freely tax cigarettes without any repercussions simply because the practice of smoking is social taboo. Often, the very same politicians will tout “tax cuts for the working man” while at the same time adding taxes to cigarettes that are consumed predominately by the working class. This of course results in a net change of zero tax dollars while at the same time public perception is changed in favor of the politician. This is the oldest trick in the corrupt NJ politician playbook.
Your methodology is unclear. Income surely has some relevance, but since one pays many taxes even when unemployed, retired, or living like Bill Gates or Warren Buffet, it seems to me that it is best to calculate by household. The comments on gasoline taxes, which pay for highways (and generally not enough to maintain or improve them), show how easily people are distracted by taxation that may amount to about $200 a year — while neglecting taxes that cost $10,000+.
My calculation is that the current federal spending at $3.6 trillion. Spread over the 120 million households, this works out to $30,000 in taxes and new debt. The share of the federal debt existing today is around $90,000 per household. The state and local spending is approximately $1.9 trillion, which adds about $15,000 in taxes (and some debt) per household.
So, at current spending levels, governments are taking about $45,000 per year from every family in the U.S. This may explain why average people don’t feel very rich and believe they need help from the government to survive.
My conclusion would be that we need a radical shift in policies if we are to avoid continuing stagnation concealed by constant inflation.
Fredric:
If you download the Excel workbook that accompanies this post you will see my methodology in detail. The high-level overview is that I took two basic scenarios (1) individual filing who is not a homeowner, and (2) joint filers who are homeowners and have two children. In the end, there is not much difference in overall tax liability between the two, although the make up of the tax liability is different. Individuals without a home or mortgage pay more in income taxes but do not pay property taxes, which in most cases, almost completely offset. The other pieces of the pie get more involved, and it would be best to review the calculations in the attached file.
I think I understand your point, however some of your premises are flawed. Although the government budget for fiscal year 2009 is projected at $3.6 trillion, only $1.9 trillion in tax receipts are in the forecast (leaving the government to finance the remaining $1.7 trillion, further burdening tax payers with debt). Also, you only allocated the budget to households. That leaves out state and federal income taxes paid by all businesses that are not sole proprietorships (those businesses are filed with the household income of the owner).
i am constantly ammased that people have no idea how much of every dollar goes to taxes,will it shock you when i tell you its 60 percent?well it is.dont just count the withouldings out of your paycheck,count one third of all your bills go to taxes,then theres sales tax,occupancy tax,special use tax,motor vehicle tax,realestate tax,schools tax.the list is very long,my calculations have come up a strong 60 percent.that why you can never get a head above water.it kepps people enslaved.
Hi Henry,
Thanks for stopping by. I think you may want to re-read the post above and perhaps download the analysis in the Excel workbook. I factored all of those taxes you mentioned in, and I gotta say, “sorry, you are wrong”. Might want to re-check your numbers.
Henry you’re so stupid. You can’t spell. Your punctuation is awful. Whenever you end a sentence with a period (.), then the next letter of the sentence needs to be capitalized. You’re so silly. And by the way, it’s not “amassed”. I think perhaps the word you were trying to write it “amazed”. You’re silly and inept.
If you are going to dedicate your comment to pointing out grammer flaws then you should take care not to begin a sentence with “and.”
GrammAR. Just breakin’ your balls. But you’ve got to admit, saying someone is silly and inept is pretty funny…
I only read the first few sentences because I found it hard to believe that it is the Obama Administration’s fault that we have so many taxes. Wasn’t it Reagan who created the deficit. So shouldn’t this article be about how Reagan created a hole that was almost impossible to get out of and all the following administrations just continued digging (except for Clinton who actually started to bring money back in)? SO why does the first line say it is Obama’s fault when in actuality it starts with Reagan and continues from there? I personally, can get by on spending up to 50% of my paycheck toward taxes and still get my three kids by. I believe if we gave more in taxes, we wouldn’t have an economy like today; some presidents like to spend, spend, spend while other presidents like to spend, spend, spend but still try to get back some of the money through taxes. So it’s either; we live in a nation of possibilities and pay taxes or we end up having to give ourselves to other countries because we owe them so much.
The only reason why we’re still in decent shape with other countries, is our military force. If we cut that in half, started gaining money and paying back other countries and saw ourselves as equals with societies like the EU, there would be one large community superpower, not just one country superpower. So, I could really care less about my taxes, as long as they cut military spending.
You obviously just wanted a forum to espouse your opinion. The article has nothing to do with placing blame on Obama. The first sentence merely states a fact: that taxes are a hot topic due to Obama’s extravagant budget. Perhaps you do not agree with or like the adjective extravagant in the statement?
Anyway, I agree with most of your comment. I’ve written about how poor Reagan was at managing the economy, and I’ve explained about compounding deficits since his administration. If you care to have some facts and figures to support your opinion, which otherwise simply qualifies as an uninformed rant, I suggest you take a look at those articles.
Either way, your blind faith in your government to spend what they take in taxes wisely is naive at best. Are you aware of the mismanagement of Social Security and Medicare? Those two budget items are as big and bigger than defense spending. I’m not saying defense spending shouldn’t be reduced because it should. I’m just saying that not caring how much the government takes from you in taxes is not necessarily a real good idea since they have proven themselves grossly inept in the past.
Very interesting Article. I’ve tried to find out how much revenue corporations actually pay in taxes. The data provided will be very helpful.
I think it’s a shame (and a sham) how corporations pay about 2%, and people pay 32 to 40%. That’s insane. So, while corporate incomes account for a large sum, very little of it actually is paid to taxes. Not only that, the middle class is shrinking, incomes are stagnant or falling, unemployment is rampant, and that is where the tax burden lies. No wonder we are in a deficit.
Jason are you on LinkedIn?
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