What's your effective taxation rate? Have you ever bothered calculating it?
There are two rates that matter. The first is the total taxation rate. This is the percentage of your wealth that the red market is directly confiscating. The second is the marginal taxation rate. That is the percentage of wealth the red market confiscates if you do additional productive work. For example, your average taxation rate might be 25% but your marginal rate is 40%. If you get paid $10k more, you only get $6k more after taxes.
I'm in the 25% federal tax bracket (approximately). However, I also pay 15% in Social Security and Medicare taxes. Half the tax is paid by my employer, but it's still a tax. If the employer-paid tax were less, that would be more money available for wages. Also, my employer pays unemployment insurance, but I won't include that in this calculation.
My employer has to pay property taxes and taxes on his profits. This takes away from the money that is available for salaries. I'm not including this in my total so far.
I won't include state income taxes in this calculation, which varies by state. That's another few percent.
So far, I'm at a 40% taxation rate. If I buy something in a store, I pay a sales tax of around 8%. That brings my total taxation rate to 45%. However, that store has to pay income taxes on its profits. The income tax rate on businesses is around 25-40%. If you figure that the business has a goal of 10% profit margins, that means that it actually has to have a margin of 12-14% to make its after-tax profit target. My price is 2-4% higher because of the taxes the business I'm purchasing from owes. It's even higher if you take into account income taxes paid by the suppliers of the store; all of them have higher prices because of the taxes they owe.
That brings my total taxation rate over 50%.
There's no "free market" in taxation rates. Everyone pays the same lousy rates.
There are other taxes. I have to pay property taxes on my residence. Even if I rent, my landlord has to pay property taxes and passes the cost to me as part of my rent. Further, due to the property tax expense and his own income taxes, my landlord has to charge me higher rent to make his target return on capital. However, I can live in a lesser residence than what I can fully afford and minimize the effect of this tax. It still adds 1-2% to my total tax burden.
There's the inflation tax, which erodes the value of cash in my pocket and bank account at a rate of 6-10% each year. I can minimize the amount of cash I hold to dodge this tax. It's easier for wealthy people to dodge this tax, because they keep most of their savings in inflation-protected assets.
The government imposes regulations on my employer or other businesses. These regulations have compliance costs, which show up as higher prices. For example, it's common for corporations to pay 1% or more of their profit or more on tax compliance and accounting regulation compliance.
The government's regulations and Federal Reserve interest rate subsidy cause most industries to be controlled by oligopolies. Due to the oligopolies, I pay higher prices and receive lower quality products, compared to what I'd receive in a free market. The oligopolies can extract a higher profit than they could in a free market. In other words, they collect economic rent. This is effectively a form of a tax. The portion of my purchases that go to excessive corporate profits is a tax.
I buy electricity from a company that has a government-endorsed monopoly. My local phone service is from a company with a government-endorsed monopoly. My internet service is from a company with a government-endorsed monopoly. My cell phone is from a company with a government-endorsed oligopoly. I pay higher prices because of these monopolies.
There's the "planned obsolescence" tax. Large corporations intentionally make low-quality products. For example, a car is designed to last only 3-5 years, so you'll buy a new car. A light bulb is designed to burn out after a certain period of time; it is possible to design longer-lasting light bulbs, but they aren't sold because then you won't buy as many. As long as all cartel members offer the same low quality, there's no market penalty for offering a low quality product. Further, most consumers are poorly educated; even if a corporation didn't follow the cartel rules and offered high quality, they would not get enough additional sales to compensate for the cost of higher quality.
The Federal Reserve encourages most industries to be an oligopoly or monopoly. The Federal Reserve makes sure that employment is always around 5%, which decreases the bargaining power of workers. Whenever unemployment starts getting too low, the Federal Reserve raises interest rates so employers lay off workers. I have a "voluntary" employment agreement with my employer. However, due to the huge bias caused by the Federal Reserve and government regulations, this is not an equal bargaining relationship. Most employers have a monopoly/oligopoly market position. Quite frankly, it makes no difference if they hire extremely skilled workers or barely qualified workers. There's no market for the extra value a highly skilled worker could provide. Due to the unfair employment environment, I pay a "tax" in the form of a lower salary than I would receive otherwise in a truly free market.
There is the commuter tax. The average American spends 2 hours per day commuting. If you assume a 9 hour workday, this is a tax of 2/11 or 18.2%. Workers need to move to a centralized location to work so that their employer can spy on them and make sure they are working. Workers are not evaluated based on actual work performed; they are evaluated based on time spent working. If you could work at home and get all your work done in only 5 hours, your employer would feel cheated. Zoning regulations force work locations to be distant from residential areas. Under a decentralized economy, people would work in their basements or in small businesses near their homes. The time spent commuting is purely wasted, both the actual time wasted and the cost of commuting, by car or by public transportation. There's no reason why people can't work in or near their homes, other than the exploitative nature of the current economic system.
That's what makes this calculation so hard. I don't just pay direct taxes myself. Whenever someone I do business with pays a tax, they pass the cost back to me. Taxes paid by my employer show up as lower salaries. Taxes paid by businesses show up as higher prices. Government regulations are also taxes, because of the effort expended ensuring compliance. Oligopolies raise prices. This is a form of a tax because government policies encourage oligopoly formation. Due to the lack of a free market, I receive a lower salary than I would in a truly free market.
Adding up all the taxes I was able to identify brought the total to 50%. I live in a state with relatively high taxes, making my burden higher. There probably are some taxes that I haven't noticed or included here. My total effective taxation rate is probably 66% or mote. If you include everything, it might even be as high as 90% or 95% or more. It's hard to tell, because many of these taxes are cleverly hidden. Frequently, when other people pay taxes, the cost frequently winds up being passed on to me, which makes me the effective payer.
With a taxation rate of 50-95% or more, there would be incredible productivity gains from working in an agorist economy.
Wednesday, October 17, 2007
What's your effective taxation rate? Have you ever bothered calculating it?
Posted by FSK at 3:44 PM