Taxes and Fiscal Incidence

Taxes and Fiscal Incidence

Hello $wanigans! Thanks for visiting The Green Swan. As you are well aware, it is tax season yet again. While nobody truly enjoys paying taxes, I find it helpful to get a bigger picture view. So today I hope to improve your perspective by helping you understand more about how much you pay compared to others, where your money goes and how it is used, and also the value you derive from the government (whether directly or indirectly).

Let me start by noting that in my research I found a number of different resources for this article which I’ve linked to throughout the post. While there may be a political bent to these resources, I wouldn’t know as I do not fancy myself as a politician and so took the info at face value which I hope you do as well.

Today we will be addressing how much we pay in taxes, what they’re used for and your correlated fiscal incidence. Be on the lookout for my post next Monday on a related piece…why the government doesn’t want you to retire early! In that post I’ll dive into my taxes and whether I’m a “net contributor” or a “net taker” and you can determine the same for yourself!

So without further ado, let’s jump right in!

Do You Pay Your Fair Share?

Personally, I think the idea of paying your fair share is a bogus concept that has become way too politicized. So let’s avoid the politics of it, and just look at how much folks pay on average by each tax strata.

First let me note that there is no reason to feel good or bad about where you find yourself in the chart below. That’s a topic for a different day, but let me note that while I pay much more in taxes than I receive back in value from the government, that hasn’t always been the case and it may not be the case in the future either. In a perfect world, over our entire lives it would be ideal if we all paid in as much as we received; however that isn’t and won’t be the case, especially in any given year.

The chart below is provided by the Tax Foundation and outlines both the average taxes paid by income strata (for 2012 which is the most recent year I could find) as well as an estimate on the value received from the government. Ignore the value received for now; we will get into that later.

Fiscal Incidence

While the tax info is a bit stale, it is still relevant and likely in the right zip code. So compare your income and taxes paid to see where you fit in or how you have shifted through different strata’s over the years.

Obviously the top 20% is a huge range of incomes, ranging from anything over ~$120K. That bucket would include not only my family, but also Warren Buffett and other billionaires who pay millions in taxes every year. Needless to say, the average taxes paid is skewed as a result and I would note I pay nowhere near $122K in taxes annually.

How Does the Government Spend Our Tax Dollars?

The spending of tax dollars by our federal, state and local governments can be categorized into 6 main buckets including: 1) Direct Benefits, 2) Pure Public Goods, 3) Population-Based Services, 4) Means-Tested Benefits, 5) Education Benefits and 6) Interest and Pensions.

Direct Benefits – Primarily includes social security and medicare and are characterized by programs that involve cash transfers or the purchase of specific services for individuals.

Pure Public Goods – Defined as goods which all can enjoy without reducing the benefit of others being able to equally enjoy. This category of spending includes scientific research, defense, spending on veterans, international affairs and environmental protection activities.

Population-Based Services – Includes services that generally need to expand as population expands and are provided to the whole group or community. Examples include policy and fire protection as well as roads and highways.

Means-Tested Benefits – Programs offered only to households below specific income thresholds. There are over 60 means-tested programs and include medicaid, food stamps, public housing, and school lunch and breakfast programs among others.

Education Benefits – Includes primary, secondary, post-secondary and vocational education to individuals.

Interest and Pensions – Interest payments on government debt and outlays for government employee retirement benefits.

Value Received from Government Spending

We are all different, but while I pay taxes for each of these categories I only receive benefit or value from a few of them. All individuals, including myself, take advantage of government spending on Pure Public Goods, Population-Based Services, Education Benefits, as well as interest and pensions (while we don’t directly benefit from payments on interest and pensions, we indirectly benefit from the work or service provided by government employees and the purpose for which debt was raised).

However, I am fortunate not to have ever needed the assistance provided by Means-Tested Benefits and neither do anticipate benefitting from Direct Benefits. Even if I live old enough to qualify, due to the funding status of Social Security and Medicare I expect the benefits from these programs to become means-tested programs or to no longer exist in their current form. Either way, I cannot count on them being there for me in retirement to benefit from.

The chart below outlines the spending in each category in 2010. Again, I couldn’t find any more recent data than this, but if you happen to know of a resource feel free to forward on to me. The primary source of this info is the Heritage Foundation; however, I sourced the pretty chart from this report.

Fiscal Incidence

Fiscal Incidence

For those unaware, fiscal incidence is a concept in public finance that refers to the combined overall economic impact of both government taxation and expenditures (thanks Wikipedia…). Said differently, it is the net of taxes paid and value received from the government.

So while I pay federal income tax, state income tax, county real estate tax, FICA tax (the Social Security and Medicare taxes taken out of paychecks automatically), state vehicle tax, gasoline tax, and how could I forget…sales tax too. I could even be leaving some out, who knows!? It’s easy for me to quantify most of this with exception to maybe sales and gasoline tax which would be tedious to estimate with any degree of confidence. But the others are fairly easy to track and monitor and as a matter of fact I’ve been doing that ever since my wife and I got married in 2008.

As for the value received, the chart above is in billions, but I think the more important value would be by individual. So I’ve gone ahead and provided my estimates. While it isn’t perfect, I feel it is good enough for government work…

Direct Benefits – $4,100 per American, based on estimated US population of 324.8 million per Census

Pure Public Goods – $3,300 per American, based on estimated US population of 324.8 million

Population-Based Services – $2,700 per American, based on estimated US population of 324.8 million

Means-Tested Benefits – $8,350 per low-income American, based on an estimate of 100 million people by the Heritage Foundation

Education Benefits – $12,600 per enrolled student, based on estimated enrollment of 60 million per year

Interest and Pensions – $1,600 per American, based on estimated US population of 324.8 million

So how much value do you receive from the government? While today my wife and I each receive approximately $11,700 in value from our federal, state and local governments, I also note we both benefited from 13 years of public school education (K-12).

On a combined basis, any tax we pay over the estimated $23,400 in government benefits we receive would mean we are net contributors to society. Which is all fine and dandy, by the way, I don’t mind being a “net contributor”. And the reason is because I was a “net taker” for the first 26 years of my life and may be one once again when I’m out of the workforce.

Based on the 2010 estimates above, I was a net taker to the tune of $468K! That’s $163.8K in education benefits and $304.2K in pure public goods, population-based services, and interest and pensions. Factoring in my wife, we are a combined net taker of $936K. Again, this isn’t an exact science given we did contribute some tax from working part-time jobs in high school and college, we’ve been paying sales and gasoline tax and the total benefit received would be different each year based on the evolution of government spending. But that is more or less on the margin of things. In my wife and my first 26 years we’ve been big “takers”.

So it is about time my wife and I become net contributors, we have our debt to society to repay. For the last five years we have been doing just that, paying a boat load of taxes which are well in excess of the benefit received. Will we eventually pay for the hole we dug the first 26 years? Maybe, but then again we do plan on retiring early…hence my post next week on why the government doesn’t want you to retire early!

Tax Season

Hopefully this post has helped get you jazzed up a little more for tax season! Your W2’s from your employer should be ready soon, if they aren’t already, and with that it’s time to get a jump on it. Get started early to maximize your 2016 taxes with TaxAct! Note, that this is an affiliate link. By clicking my link and utilizing TaxAct, I may get a small fee which helps support the operating costs of The Green Swan.

I personally utilize TaxAct’s services myself. It’s easy and much cheaper than hiring someone to do it for you. TaxAct can help simplify the process for you, ensuring you get all the credits and deductions applicable, and taxes aren’t as complicated as they’re cracked up to be! You can do it and here’s to hoping you get a refund!

Thoughts?

While I mentioned in the intro paragraph that I don’t like paying taxes, at least now I have a greater perspective for how much I pay and the value received. How about you? Let me know your thoughts in the comments below, but let’s try not turn this political! Thanks.

Thanks for taking a look!

The Green Swan

 

Save

share on:

23 Comments

  1. I hate tax season 🙁 Actually, I used to love it when I was a single gal with my little Mini, supporting my mother and two houses. That has all melted away and now I’m married with a double income. The crappy part is, although we both earn good money, his income doesn’t have ANY taxes taken out of it throughout the year. That leaves for a HUGE tax bill come April. Oh well, I guess I need to feel fortunate that we are also in that far right block of the chart – although not nearly as far right as Mr. Buffet 🙂

    1. Well at least you get a “free” short term loan from the government until you have to pay that tax bill in April!

      Thanks for the comment, Mrs. MMM!

  2. I’m not much of a fan of ‘tax season’ either. Although being a small business owner every month is technically tax season considering payroll taxes, sales taxes, etc. Thanks for breaking out the various types of government benefits and services. Good info!

  3. Great job trying to quantify what for most people is just a big, black nothing that some of their hard earned money disappears into.

    Personally, my values very much align with contributing to society as long as you are able to, so I generally don’t mind paying my taxes. On a conceptual level I know that the taxes I pay contribute to putting in place the social safety nets that me or someone I hold dear are bound to be dependant of at one point or another.

    When it comes to the more concrete, political aspects of tax levels and up or down and what not, I am far too busy doing other things that I actually enjoy rather than engaging in political nuance. As a result, I cast my vote according to my values, and put enough trust in the system that those in charge know what they are doing, and live with the consequences, trying not to complain! 🙂

    1. I agree, that’s a great philosophy. And if people aren’t willing to trust the system then they should either try to effect change or leave. While things aren’t perfect, we have it pretty good here in the States.

      Thanks for the great comment, Lars-Christian!

  4. So your post prompted me to do a calculation on how much our household has paid in taxes since we’ve started working. My best estimate is >$600,000 so far (excluding various sales taxes) over an approximate 15 year full-time working period. Now that the number is staring me in the face, I don’t know how to feel about it. That’s about $15,000 per year over a 40 year lifetime for two adults. So based on your great analysis, we’re still short of our fair contribution to the pot. Guess we have to keep grinding!

    Congrats on the new site skin…looking good!

    1. Thanks, MYF. This new site skin has been some hard work in the making, I’ll tell you that. No easy feat to change themes and then hoping that all the same plugins work…I think I’ve got most the kinks worked out but it has been a disruptive process.

      Now regarding the numbers, I think my analysis is good until someone tells me I missed something somewhere. I’m no expert. But assuming it is sound analysis and the figures are in the right ball park, I agree that you are still a “net taker” just like me. The conclusion is it takes a lot of working years to pay off the debt to society owed largely from an upbringing in the public school system.

      I hope you stay tuned to the concluding post next week! Thanks for the comment!

  5. I’m not a fan of tax season but it’s not for the reason of the benefit or cost. I just hate that the whole system is so complex I need software to interpret the rules. Still as we start to explore the world of my wife running self employed I’ve noticed the existing tax structures favor the self employed. As such maybe I’ll start to find it more enjoyable to learn if it results in meaningful cash back. Until of course I adjust my withholding to receive nothing… then again it will just be drudgery…

    1. Haha drudgery is a great word for it!

      How ridiculous is it that there’s a while industry built around helping people do their taxes?! That is a sign it is way too complex!

      There are some good tax breaks for small businesses, the self employed and even those who work from home. My wife temporarily worked from home and it was nice to write off some of those costs.

      Thanks for the comment, FTF!

  6. I may be weird but I LOVE tax season. I think it’s super fun to plugging in the numbers and watching things get calculated in real time. If it wasn’t for e-filing I would do it all by pen and paper. I actually learned how to do it this way and then use to double check it against a program when I first learned how to do taxes. So I love showing my friends how to interpret their taxes and still have most of the various line items memorized. I am such a tax nerd.

    1. Haha that is kind of weird! 🙂
      But that’s ok, I’m a tax need too. I have a fully detailed excel file built to track historical and estimate future tax expenses! I do take a weird satisfaction from doing my own taxes. 🙂

      Thanks for the comment, Mustard Seed!

  7. Great collection of stats! Not just the tax season but every tax-decimated paycheck gives me heartburn. I would argue that taxes are one reason (not the only one) I plan an early retirement.
    a) during the accumulation phase I get the impression I’m on a hamster wheel.
    b) during retirement, an annual budget somewhere in the mid-five-figures is really all we need. And miraculously, that’s also a very tax-efficient spot of the U.S. tax law. Demanding a more luxurious retirement, some nasty marginal tax rates will kick in and that means more years on the hamster wheel, see point a).

    Stay frugal and tax-efficient everybody!

  8. You actually made me think differently with this one, and I thank you for that. I love the “net contributor” vs. “net taker” concept, and have to agree that we were all “net takers” for the first few decades of our lives. Time to give back for a while, before we become “net takers” again in early retirement! Congrats on introducing a novel way at looking at our wonderful government.

    1. Thanks Fritz! It’s an interesting way to look at it as we all work to support the society we live in and do benefit from. Glad it gave a bit more perspective on it all.

      Thanks for stopping by!

  9. I think Mustard Seed Money needs some help if he LOVES tax season 🙂 , just kidding.

    To be honest, I’m at the point now where tax season really frustrates me. Besides the overall complexity of the income tax code (not to mention being audited a few years ago for a simple honest mistake – I won’t go into the incredible inefficiencies of that process), it’s hard to swallow what we are paying in income taxes.

    I understand that we are fortunate and are (now) highly compensated for our work. But it took a lot of hard work, hustle, and risks to get here. Our federal income taxes alone are significantly over the average median household income for a year.

    I don’t mind paying taxes and helping my fellow citizens. Given what we are currently paying, I’d feel better about it if there wasn’t so much waste and inefficiency.

    1. You’re not the only one who feels that way, I can assure you that. The progressive income tax system does hurt, and it is pretty astonishing how much money goes out the door. Writing this post and going through the exercise was in part to help me feel better about how much I’m paying today.

      Thanks for the comment, N2S!

  10. Great analysis on the contributor/beneficiary of the average tax payers. I gotta say that I never thought of it that way.

    I must admit that when it comes to filling my taxes, I was not a huge fan at the beginning, until I learned about all the deductions and benefits. Now I am actually looking forward to filing my taxes as I often get a decent tax refund.

    1. It’s always great finding ways and strategies to reduce the tax liability! Hopefully you get another decent refund this year! I did last year because of my solar panel write off but no big write off this year for me.

      Thanks for stopping by, Leo.

  11. Similar to Mustard Seed, I kind of like tax season. I enjoy seeing how the numbers shake out and if my additional withholding hit the mark or not. I kind of treat it like a game. Of course when I changes jobs and forget to include additional withholding on my W2 and end up owing a big tax bill in April (happened to me last year), then tax season isn’t so fun!

    Interesting perspective in this post. It’s no surprise that rich pay much more than they take from the system and poor receive more than they pay in. I think it would serve a lot of people some good to look at this and run the numbers for themselves. We tend to lump all high earners into the same boat as the super rich who are able to shield more of their money from taxes. I don’t have a problem with this as long as it’s through legal means. I mean, has anyone ever finished their taxes and thought the number was too low and decided to pay more?

    1. Mustard Seed, you and I are one in the same in our nerdiness over taxes! That’s a benefit to blogging, I can feel normal among like minds!;)

      I hope everyone is a little more cognitive of their taxes after reading this post. Any extra insight into your own personal finances can help. And I agree with you that having the improved perspective into how much tax we all pay and the value received is beneficial!

      Thanks for the comment, GFY!

Leave a Reply