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More about taxes…exciting, huh?

August 17, 2011

Yesterday I had an exchange of comments with a reader (!) who brought up the fact that we tend to talk about income taxes all the time, but never about payroll taxes as a possible point of reduction. Or at least, the Republicans do.

Maybe so. That’s because there are, for most folks, three components of taxes withheld as payroll taxes. First, some of your federal income tax is withheld, according to what you told your employer to withhold. That keeps you from having to come up with all of it on April 14. The rest is social security and Medicare.

You probably have heard at some point that politicians considered talking about social security as the “third rail” – the electrified one, like on some commuter train systems. You just didn’t mess with social security! Over the last ten years or so, it’s been brought up more and more as the Baby Boomers have aged and that huge group of people moves into retirement. They will strain the limits of the social security and medicare systems like they have never been strained before. A short discussion may be found here.

For most of you this is not news. I only say it because I thought the poster had a good point – the lion’s share of the tax discussion seems to be about income taxes, and about personal income taxes at that. That puzzled me a bit, so I did a bit more research. It didn’t take much.

This data is from 2008, but 45% of government revenue comes from individual income taxes…that’s a significant fraction. The same source (the Tax Policy Center) quoted that over the last 5 decades, the Federal government has collected from 14.4 to 20.9 percent of GDP, with an average of 18.2 percent. Individual income taxes averaged just over 8 per cent of GDP.

What the poster was correct about, and I just found in my research, is that somehow, as a percentage of GDP, our tax revenue for 2009 and 2010 was supposed to be under 15 percent. This may be an effect of the so-called “Bush tax cuts;” I’m not sure.

What none of this talks about, of course, is the additional state and local tax burdens, which vary widely. Add roughly another 10 percent of GDP for state and local taxes( various sources I read said quoted numbers like this), so people are paying, in one way or another, somewhere around 28-30 percent of GDP as taxes.

Are we overtaxed? That depends on your point of view, your income, your location, and the benefits you feel you receive from your government. I love Millennium Park in Chicago. It’s beautiful, it has a great concert pavilion with a state-of-the-art sound system, and it’s very well-maintained. It has a free concert series in the summer that is second to none. I don’t pay for it, because I don’t live in Chicago. Do all Chicagoans feel it’s a good use of their tax money? Probably some do, and some do not. Same with forest preserves in DuPage County, where I live, which are tax-supported. Schools are always a flashpoint for taxes because (a) everybody went to one and is therefore an “expert,” and (b) you can see, to a point, where your money is going. (I realize I simplify here.)

One of the problems with Federal taxation is the people who pay the most probably derive fewer direct benefits from those taxes. Sure, we all benefit from a strong military. Our Social Security payments are based, to a degree, on what we paid in. (We’ll see how long that lasts.) But watching our tax dollars – at least the 50 percent of us who pay federal income taxes – go to things we consider wasteful or politically motivated makes people frustrated and angry.

That was always the problem with Welfare. Not that people didn’t need help; but that not everyone on it needed that much help. Whatever they are calling the food stamp program today, which is huge, is another. Michelle Obama wants to lecture us about what we should feed our kids but people using Federal assistance to buy food can make unhealthy choices. Some really unhealthy choices.

It adds up. And I think the tipping point is small businesses that are taxed as part of personal income in that $ 200,000 to $ 1,000,000 zone, maybe higher. Those folks aren’t rich; they are running a business without the breaks Jeffrey Immelt can get for General Electric. They are supposed to be the backbone of American business but it seems they are never treated as such, with more regulations and more taxation. My father got out of his private engineering practice for just that reason, and went over to the “dark side” of the County Building Inspection Department. Any small businessman with three or four employees will tell you how difficult that is to maintain. I think that will be the focus of my next little piece, whenever that may be.

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