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Hidden Taxes

 


It's tax planning season! You are trying to get all the exemptions and deductions that you can claim so that you are paying only the bare minimum tax requirement. At the end of the exercise, during filing the tax returns, you will know your effective tax rate. This rate can vary from 10% to 40%. Let's consider an average 30% Federal (including Social security and Medicare, don't forget these taxes!). In states like California, you are paying additional 10% State income tax. So your effective tax rate becomes 40%.


It is definitely painful to shell out this much of your hard earned money. But it doesn't stop there. Add property tax on your house. Assuming $200K income and a $1MN home price, 1% property tax means $10,000 or 5% of the income. Your tax bill has already grown to 45%. If you are renting, your landlord will make sure to pass on the property tax they are paying, on to you.


That's not enough either. Now let's assume that you are able to save 5% of income (good for you if you save more than 5% with this high inflation), which means you are spending 50% of your income on your needs and wants. Barring groceries, you will be paying 10% sales tax on your spending or in other words, another 5% of your income goes to (sales) tax. Your tax bill now stands at 50%! Half of your income is going towards taxes and no I am not talking about high income earners.



Secondary Tax

Does it stop there? Have we counted everything? Have you considered what happens to the 50% that you spent on your necessities? Assume you are paying businesses and professionals to get a haircut, auto insurance and everything in between. Assume the cost of those businesses to be 50% with the remaining 50% as their profit before taxes. Most businesses will pay 20% tax on this 50% profit or 10% of the money they got from you (another 5% of your income). If the businesses didn't have to pay this tax, they would have (in theory) reduced their price as much. This means you are indirectly paying that much additional tax. Now your tax bill stands at 55%!


Tertiary Tax

Phew! Looks like we accounted for everything or did we? Now consider the 50% cost for the businesses you are dealing with. Their suppliers, employees have to pay taxes on their income, naturally they will add that as a premium while offering their services and goods. Assuming 20% tax rate (on the lower side) adds another 5%. Again the premise is that, if they didn't have to pay those taxes, they would have charged that much less to you for the products and services you buy.


That means your tax bill stands at a staggering 60%! 


The suppliers and employees of the businesses you are dealing with, are in turn spending their money with the secondary tax implications we saw before. While the effect of these higher order taxes is less on you, it’s nonetheless, far from zero.


So, you are paying at least 60% tax to the government in one or the other form. And this is the US, not any socialist country! So don't be fooled by the federal tax rate of 30%, you are actually paying more than double, without realizing it.

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