So I got into a discussion last night with one of my buddies and it was a very, very enlightening conversation. Being that it is tax season and a lot of my self-employed friends are having to write gigantic checks to Uncle Sam, taxes have been a hot topic on a lot of people's minds. When I say taxes, I am referring to Federal Income Tax. Please disregard Social Security and Medicare Tax (Payroll Tax), State Income Tax, State Sales Tax, Local Sales Tax, Capital Gains Tax, Property Tax, Estate Tax, Enterprise Tax, Federal Corporate Income Tax, State Corporate Income Tax, Local Corporate Income Tax, Business Origination Fees, Tariffs and Duties, Gift Tax, Drivers License Registration Fees, Court Filing Fees, Parking Meters, Toll Roads, Security Taxes (Airlines), Bus Fares, Sin Taxes (Cigs, Alcohol, Gasoline), Museum Admission Fees, Water and Sewage Bills, and Stamps. Please forgive me if I forgot to mention any and obviously those taxes vary wildly depending on where you live and what you do each day.
None of those taxes seems particularly bad by itself, but the people who are smart/dumb enough to add them all up before calculating their effective tax rate are the ones walking around with a frown every spring. I'm not here to demonize and attack a minority in America (the 1% who we all secretly wish we could be) or talk about taxes being too high (in fact, I think certain taxes are actually too low). I am here to show to you all how truly convoluted our tax structure is and hopefully point out some fun facts about taxation that influence my thinking.
The key point that jumped out at me was how much bigger Federal Income Tax is than all of the other taxes. If we take a quick look at a typical case for a moderately successful married couple's largest tax burdens they look like this:
Federal Income Tax: $25,000
Federal Social Security and Medicare Tax: $7,000
State and Local Sales Tax: $3,500
Local Property Tax: $3,000
Now why is this shocking enough for me to take time to write a post about? Because think about which level of government actually provides you with tangible benefits. When people defend taxation, they immediately go to the big 3: Safety, Roads and Schools. My safety is provided to me by the local police and fire departments. The roads I typically drive on are county roads, although I occasionally use state and federal highways. I don't yet have children that attend schools, but appreciate that parents get babysitting provided for their kids for 15 years. I am myself a product of public babysitting (no offense to people trying to change that, but you are the one's who best understand what I mean.)
What do those three things have in common? They are locally funded! Your Property Taxes and Local Sales Taxes are paying for the public schools in your area, the fire stations in your neighborhood and that cop driving down your street. They are also paying for those beautiful streets and sidewalks as well as that huge brick library that you rent kindle books from. Oh yeh, those measly funds are also expected to cover parks, courts, the airport, public golf courses (yay!), emergency management, gigantic convention centers that no one really wants, and of course, those lovely buses that are always going somewhere.
If you take a step back and think about it, your local dollars go a long way. Some of it good, some of it bad, but you can generally see where the money being spent is in some way, shape or form making your city more livable for at least some portion of it's residents. You benefit from living in a more developed and awesome city.
When you move to the state level, things get a little more fuzzy. Your State Sales Taxes and the number of point-of-service taxes help pay for some obvious services: state highways, drivers licenses, state troopers, state parks, state courts and public colleges. The state also starts to get into some of the more re-distributive spending. That is spending that is in no way ever intended to benefit you at all. These expenditures include Medicaid, Children's Services and Unemployment Benefits. There are scenarios where people you know may need those services, but taxes wouldn't really be on their mind if they did. A number of those re-distributive services are assisted through Federal block grants.
If you have read this far and have finally made it to the Federal level, you are going to need 7 lawyers and a crazy straw to be able to tie most things back to you individually. I can't possibly list all of the things the Feds are doing, but that is because no one in Congress can either. Let's hit the 5 biggest expenditures:
Medicare and Medicaid: 21%
Social Security: 20%
Defense: 20%
Safety Nets: 13%
Veterans Benefits: 7%
Those 5 cost centers account for 81% of the $3.6 trillion federal budget. Every one of those is a nationwide safety net in case you are unable to care for yourself, except for Defense and Vet benefits, which accounts for about a trillion dollars spent every year to ensure the Canadians don't try to take Detroit from us. I'm not arguing about whether or not safety nets are good or bad, I'm just saying that independent people don't use them.
I think the facts here point to one clear principle: Local Taxes benefit the entire community while Federal Taxes can be considered a combination of charity and paranoia. So why are federal tax receipts four times larger than all local taxes for the entire country? That's what I wonder. If you read through all of this, you are braver than most and hopefully a better informed voter for it!
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