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.
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.
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!
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!
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