Are You Overtaxed?

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It’s almost April. And the taxman will expect you to reconcile your tax bill soon. Have you overpaid or underpaid on your 2015 tax obligation? If you overpaid, you gave the taxman an interest-free loan. If you underpaid, you better have the money to make the taxman whole.

Ah, the price we pay for civilization!

For the first time in my life, I decided to calculate my total tax burden as a percentage of my income. I wanted to see if the government owned more than 15 percent of my backside. Why 15 percent? I think that’s a fair contribution to the common good. Anything beyond 15 percent, though, strikes me as tyrannical. But we’ll talk about that later.

The Methodology

Calculating my total tax burden as a percentage of my income was pretty straightforward. I added up all the taxes Mrs. Groovy and I paid and then divided that amount by our total income. The only tricky part was estimating the sales taxes we paid in 2015. But I’ll explain how I did that shortly. Here’s the income part.

2015 Income

Thanks to the sale of a biotechnology fund that Mrs. Groovy and I had held for several years, we had a much larger income than normal. The sum of our wages, capital gains, dividends, and interest income came to $143,570. Not too shabby for a couple of former financial laggards.

2015 Taxes

Our federal, state, Social Security, Medicare, and property tax bill came to $25,171. To calculate the sales taxes we paid in 2015, I took our total spending of $32,385 and subtracted those spending items that were obviously not subject to a sales tax—things like property taxes, water bills, and gifts. These items totaled $10,578. I then took the result ($21,807) and multiplied it by 4 percent to get our sales tax bill. Why 4 percent? Good question. Not everything we bought was subject to the same sales tax rate. The sales tax on gas was much higher than 4 percent. Some food purchases were taxed at 6.75 percent. Others weren’t taxed at all. And who knows what hidden taxes were in the airline tickets we purchased? Four percent just struck me as a reasonable estimate. And based on that rate, our sales tax bill for 2015 came to $852 ($21,807 x .04).

For 2015, our gross tax bill was $26,023. But because of some tax-loss harvesting opportunities we took advantage of (our energy fund got clobbered last year), we paid more in federal and state income taxes than we should have. Our tax refund from the federal and state governments came to $4,014. This then means our total net tax bill for 2015 came to $22,009.

2015 Effective Tax Rate

Dividing $22,009 by $143,570 gives Mrs. Groovy and me an effective tax rate of 15.33 percent. Perfect. Mrs. Groovy and I paid exactly our fair share for civilization. But this effective rate was only accomplished because Mrs. Groovy and I maxed out our tax-advantaged retirement accounts at work ($24,000 each), and I maxed out my health savings account ($3,350). This meant that $51,350 was not subject to federal and state income taxes. Had we not sheltered that amount of money, our effective tax rate would have been much higher than 15.33 percent.

Philosophical Crap

What is a fair tax rate? For me, a fair tax rate is the rate necessary to buy an adequate amount of missiles, roads, courts, and alms. No more, no less. I also think a fair tax rate is a rate that applies equally to everyone. We all pay the same toll when we cross a bridge. The guy in the shiny new BMW pays the same as the guy in the 15-year-old jalopy. Why shouldn’t this equal treatment apply to taxes as well? After all, with a 15 percent effective tax rate applied to everyone, Oprah would contribute millions of dollars more to the common good than I would. To say she wouldn’t be buying her fair share of missiles, roads, courts, and alms is ludicrous.

But why 15 percent? I readily admit that this percentage is totally subjective. I think 15 percent is enough to pay for all the missiles, roads, courts, and alms we need. I certainly don’t know for sure. But at this point in my life—given my knowledge of government and my experience with our political class—I really don’t care. And here’s why.

Inefficiency. I worked for government for over 20 years. I’ve seen first hand how the sausage is made. It isn’t pretty. On most days, my co-workers and I gave the taxpayers about 3-4 hours of moderately conscientious labor. For every dollar the taxpayers surrendered to us, they got back about 50 cents of service. And I don’t think my small corner of government was an anomaly. I think government, by and large, is a case study in sloth and obstructionism (i.e., red tape). Why, then, would I want to give it more money?

Corruption. I don’t think government is any more corrupt today than it was 50 or 100 years ago (just do a Google search on Tammany Hall or read the book Plunkitt of Tammany Hall). The problem is that the government’s footprint today is so much bigger than it once was. In other words, the impact of corruption is small when the government spends 5-10 percent of GDP and regulates 15-20 percent of all commerce and trade. When the government spends 30-40 percent of GDP and regulates 70-80 percent of all commerce and trade, the impact of corruption is enormous. Why, then, do I want to give more money to a government that has fewer and fewer constraints and believes it is perfectly ethical to sell favors to the highest bidder? What will the extra tax dollars buy me? Better schools? Safer roads and bridges? Cleaner water? Or will those extra tax dollars just get diverted to those with the best lobbyists?

Tyranny. Suppose for a moment that government was much more efficient and much less corrupt. I would still be reluctant to give it more than 15 percent of my labor. Why? Because the hallmark of freedom is being able to use the bulk of the money you earned for your needs and your purposes. Yes, society, as represented by the political majority, has needs and purposes as well. And it has the right to force you to help fund them. But this right shouldn’t be unlimited. At some point, the political minority should have the right to tell the political majority to shove it. No, military-industrial complex, we’re not going to pay for 10 new aircraft carriers. No, college-industrial complex, we’re not going to give everyone a “free” college education. Absent any check on the political majority’s power to tax, we’re all just slaves. We work and toil and earn bread, and the political majority (i.e., big finance, big industry, big labor, big education, etc.) gets to eat it. What fun!

Final Thoughts

Okay, groovy freedomists, that’s all I got. How did you do this year on taxes? Did you give the government an interest-free loan? Did you have to send the government a check to make up for a shortfall in your fair share? And what is your fair share? Is it the same for everyone else? And how much of a claim does the political majority have on your paycheck? Is this claim unlimited? At what level of taxation do you cease to be free? Are you still free if the political majority forces you to spend 20 percent of your income on government services? How about 30, 40, or 50 percent? I would love to hear your thoughts. Cheers.

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14 Comments

  1. Ron Cameron

    I read an article where a self employed father and son figured out ALL the taxes they’d spent, including sales tax, taxes on services that appear on our bills, internal gas tax etc. The number was close to 50%.

    50%!

    I think we got -so- taxed we just forget about it. Just like $2.39 gas. It isn’t $2.39. It’s $2.399.

    Now, if you’ll excuse me I’ll think more about how an “Internal Gas Tax” can be applied…

  2. Miss Jaime

    Yes there needs to be a few changes to our government or we’re going to end up like Greece. Let’s remember that all kinds of people go into government work just like all kinds of people go into the private sector.

    Speaking of free college, my mom went to college in Russia back when it was part of the soviet union, my mom is Russian. She said that since so many Russians wanted to go because uni was for free, the government made a really strict entrance exam. That was their way of dealing with supply and demand.

    My mom had to take it twice. There really is no such thing as a free lunch.

    • Mr. Groovy

      Hey, Jaime. Great points. When I worked for government, most of my co-workers were good, decent people. But we all embraced the culture of sloth that dominated our workplace. And our bosses allowed this culture to take hold because there was no penalty for lousy service. We got the taxpayers money regardless of how hideously we performed. So, yes, things definitely have to change. We have to figure out ways to align the interests of bureaucrats with the interests of the taxpayers. And this means the bureaucrats have to suffer if they do their jobs poorly. Absent these checks, though, our only defense is to limit the damage by limiting the tax bite.

      And, yes, a strict entrance exam is a great equalizer. We decided to go another way, however. We have no admission standards for “higher” education. Anyone with a pulse can find some college willing take his or her money. We also have a lack of academic rigor on campus today. Virtually every college has enough phony-baloney courses and degree programs to keep the party-animals around. No, our way of doing higher education leaves millions of young people with marginal skills and tons of debt. But, hey, the one-percenters of the college-industrial complex (i.e., top administrators and full-time tenured professors) are doing well. Isn’t that what really counts?

      • Miss Jaime

        I have a question and I don’t want to hurt your feelings but why did you continue to work for the government?

        • Mr. Groovy

          Hey, Jaime. I love it! Not hurting my feelings at all. Definitely a moral failing on my part. For the first half of my government career, I was a bum. I gave the taxpayers lousy service and I had the rationalizations to justify it. But at some point the rationalizations rang hollow and I began to feel shame. Fortunately, I was able to reinvent myself as a database programmer and escape the culture of sloth. I worked by myself and was no longer dependent on co-workers to get my job done. I was thus free to work as hard as wanted. And I can honestly say that for the last 8 years of my government career, I gave the taxpayers great value for the tax dollars they surrendered to pay my salary. On most days I got to work about an hour and a half early and worked right through lunch. My co-workers thought I was a freakin’ lunatic. So while I ended my government career on a high note, I’m still not a hero. I never challenged the system. If I had been more honorable, I would have abandoned public service and did something to change things (e.g., write a book, start a blog, etc.). That I made peace with the culture of sloth still haunts me to this day. So there’s your answer in a nutshell, Jaime. I didn’t leave government–or try to change its wicked ways–because I didn’t have the guts to do what was right.

          • Miss Jaime

            I think you’re being too hard on yourself Mr. Groovy. Besides I’ve seen a lot of laziness in the private sector. That culture of sloth exists there too.

            I worked for a call center once where people would do their best to avoid phone time. I’m not kidding!

            I don’t think you’re a bad person, just human. Lets not beat ourselves up over the past. My bf worked for the gov. as a software developer once.

            I don’t think public service is a bad thing. Pretty sure most people that work for the gov. want to go to work, pay their bills, raise their kids, have fun on the weekend, etc. And to a lot of people a job is a job.

            • Mr. Groovy

              Hey, Jaime. Mrs. Groovy agrees with you. She also thinks I’m being too hard on myself. And, yes, public service isn’t a bad thing. Most of my co-workers were good, decent people. But we were in a screwed up environment that rewarded (or failed to punish) slothful behavior. And it took a very strong character to overcome those twisted incentives. I wasn’t able to do it until late in my career.

  3. Hey, Stockbeard. I hear ya. Mrs. Groovy and I were lucky because we were able to shelter half our income (thank you 401(k) and 403(b)). If we didn’t live in a low-cost state and didn’t have a paid-for home, I’m sure our effective rate would have exceeded 20 percent. It would be nice if we didn’t have to “work the system” in order to get a lower rate. “Working the system” favors the smart and/or the moneyed (i.e., the dreaded one percent).

  4. With all things said and done, we paid more than 20% in taxes this year. Ouch. Mostly because I didn’t handle my tax-free account well, made a few sales of stock I shouldn’t have, etc… hopefully we’ll reduce that next year

  5. “Are You Overtaxed?” No.

    After paying about $4,000 the last few years, we made some adjustments (i.e. switched from ‘Married’ to ‘Married But Filing at the Higher Single Rate’ and making additional payments with each paycheck) and we’re getting back ~ $1,200 between federal and state this year.

    When it was all said and done, my tax preparer – I don’t mind paying for the convenience of not dealing with it all – informed me our effective tax rate was 19% last year. Not too bad and truth be told, I wouldn’t have a problem paying more. A robust tax system – ideally partnered with an efficient expenditures (e.g. parks, infrastructure, etc.) and redistribution (e.g. social safety programs) system is a must for a high functioning and moral society.

    • Hey, James. 19 percent isn’t bad. I’m not completely comfortable with 15 percent. A 15 percent flat tax on all income would only fund about half of all federal, state, and local spending. But I think we definitely have to draw the line. Maybe 20 percent is more appropriate. I just have no faith in the ability of our political class to solve problems. All I see coming our way is more debt, dependency, crony capitalism, crony socialism, and cultural decline. Someone has to rattle the cage. And since it isn’t going to be our “leaders,” it’s got to be us. And a tax revolt would do a heck of a lot more than voting.

      • Absolutely agree that a key consideration, whatever the tax rate, is efficiency. Not only would each dollar go further if managed efficiently, the citizenry would have more confidence and there would be less angst about paying taxes. Great topic, my friend.

  6. Wow, Mr. Groovy, I’ve never given much thought to my fair share of taxes as a percentage of income. But you’ve given me a lot to think about now. My household isn’t what I’d call typical. Quite a bit of our income isn’t taxable and we spend 30% of our income on healthcare resulting in a sizeable tax deduction. But just as a general rule, 15% sounds like a reasonable number. For 2015, we received a small tax refund, which is pretty much what I aim for.

    • Mr. Groovy

      Hey, Gary. Yeah, Mrs. Groovy and I were just discussing what we felt was our fair share and we were wondering what others thought. I try not to be cynical, but I just don’t have any faith that our government will spend our tax dollars wisely. So why feed the beast? Your healthcare bill is pretty scary. But that’s a topic for another rant. Thanks for stopping by. Always appreciate what you have to say.