A consumer's guide to taxes: how much do we really pay?

USA Today (Society for the Advancement of Education), May, 1993 by George Nastas, Stephen Moore

For most Americans, tallying all the various taxes to which we are subject is a hopeless--and depressing--task

MOST AMERICANS complain that taxes are taking a larger bite out of their incomes than ever before. During the month of April, tax-filing time, they complain most bitterly. Yet, do workers know how much they really pay in combined Federal, state, and local taxes each year?

In 1960, middle-income Americans paid less than 30% of their earnings in local, state, and Federal taxes; today, that figure is up to 40%. Moreover, many middle- and upper-income families living in the states that have the highest rates, such as New York and California, pay nearly half their incomes in taxes. High taxes reflect the growth of government, at all levels, in the U.S. since World War II.

The following is a new and easily understood method of measuring the impact of taxes on the finances of American workers. Calculating how much extra middle-income workers must earn to purchase various goods and services--a new car, computer, annual college tuition for their children, or a year's supply of gasoline--after taxes are taken into account is a good measure of their impact. The main reason people work is to earn money to buy the things they want, but much of American workers' income is consumed by taxes. The question is, how much? Let us take as a standard example the purchase of a new car with a sticker price of $10,000. Because of taxes, the average worker will pay significantly more than $10,000 to purchase that automobile.

In an average-tax state, a middle-income worker with earnings of $34,000 must pay $17,038 to purchase a $10,000 car--$10,000 to buy it and $7,038 for sales tax and the income and payroll taxes on the earnings used to pay for the vehicle. He or she must work three and one-half months to buy the car, then two and one-half additional months to pay the taxes on the income used to purchase it. For self-employed middle-income workers, the true cost of that auto is $18,320, because they are subject to a 14.1% self-employment tax, to cover the employee and employer shares of Social Security and Medicare (FICA), on their incomes.

In a high-tax state, such as California, the pre-tax cost of the automobile is $18,776 for a wage earner and $20,186 for a self-employed worker. In a low-tax state, such as New Hampshire, it runs $15,540 and $16.-708, respectively. In the five states with the highest taxes, wage earners have to lay out roughly $2,000 more to purchase a $10,000 car than they do in the five states with the lowest rates.

Taxes also affect the true price of a variety of other products and services. In an average-tax state, the amount of earnings needed to pay for a $1,500 computer is $2,556; a self-employed worker will need $2,748. To pay $8,000 tuition at a private college requires $13,107 and $14,092, respectively. The typical driver spends $479 a year on gasoline, excluding taxes. The income needed to purchase it, after accounting for all taxes, including the Federal and state gasoline levies, is $1,065. Self-employed workers must earn $1,145 to purchase the same amount of fuel.

As such examples demonstrate, taxes take a much larger chunk out of Americans' incomes than generally is realized--which leads to these rules of thumb on taxes: * In high-tax states, the true price of goods and services is roughly twice the retail price at the store. To figure how much income is needed to purchase an item, multiply its price by two. * The rule of two applies to self-employed workers in most states. Half of their earnings are consumed by taxes. * In low-tax states, the true price of goods and services, including all taxes, is one and one-half times the stated price. To figure how much income goes to purchase an item, multiply the price tag by 1.5.

Calculating the tax burden

The purpose of this article is to provide practical and understandable examples of how much middle-income workers actually pay in taxes for goods and services by showing how much extra a person must expend for major purchases. All of the following examples examine the taxes paid by a married couple with taxable income between $34,000 and $53,400.

There are four types of taxes that raise the "true" price of a product. Ignored are the impact of business taxes, which ultimately are borne by workers and the owners of capital, and the employer portion of FICA payroll taxes.

Income tax paid on the worker's earnings. On taxable income between $34,000 and $53,400 per year, a 28% marginal Federal tax rate is paid on all additional earnings.

Payroll tax. For most workers, this constitutes a 7.65% levy on earnings on top of the income tax. Self-employed workers must pay a self-employment tax that raises their effective payroll tax rate to 14.1%.

State income tax. Rates vary widely, from a low of zero in 10 states to a high of 12% in North Dakota.

State and local sales taxes also vary from state to state and even among localities within states. The highest combined state and local sales tax rate is 10% in Louisiana, but many states have no sales tax.