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.
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.
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.
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.
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!
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.