Column: Masking the real tax burden
Whether you filed your own income taxes this year or an accountant did it for you, chances are you probably don’t know how much in taxes you actually paid to the federal government. That’s because the way our tax code is designed — and the way taxes are collected — makes it difficult to know how much you even pay in the first place.
First, the tax code is a complicated mess of some 76,000 pages full of exemptions, rules, deductions and special provisions for different types of people. Some provisions tax your income, while others tax your income again but call it “capital.” And other provisions collect money for your social contributions, while yet another gets your money back because you have kids or have borrowed money to buy a house. Then, you pay state and local taxes, but they’re deducted from your federal taxes. The final result is so complicated that in America we spend over a $1 trillion complying with all the tax laws.
Then there’s the way Uncle Sam actually collects your hard-earned income, which makes it difficult for you to keep track of what you’re really paying every year. Take your withholdings from your paycheck. Half of the $3.2 trillion the federal government collected in taxes in 2015 came from the income tax. That’s on average $10,300 per taxpayer. Keep in mind, that’s an average, so some people pay much less and some people pay way more. Either way, imagine that you had to pay the entire amount you owe all at once on Tax Day. It would hurt and people would complain. But instead, most of our income taxes are stealthily and gradually withheld from your paychecks, making the whole thing less visible and painful.
Though it was politically problematic to say so out loud, then-presidential candidate Mitt Romney was right in 2012 when he remarked that 47 percent of Americans don’t pay any federal income tax. In 2015, 45.3 percent of tax “payers” didn’t pay the income tax. But not even those who owe zero federal income taxes get off scot-free. That’s because the government applies layer after layer of taxes on the same income, though it calls it something else so people don’t realize what’s happening.
Case in point: your federal payroll taxes. In 2015, the feds took $1.065 trillion from our collective paychecks for Social Security and a small part of Medicare. That’s a lot of money, but many don’t even realize that they pay much for that tax. That’s because it, too, is being withheld from your paycheck, the same pay check that your income tax is paid from. But then again, you don’t even think about it when Tax Day comes around because the whole amount has already been collected out of your paycheck.
However, imagine for a second what Tax Day would feel like if you had to pay both your income tax and your payroll tax in one big fat check.
Finally, and this is the biggie: There’s the fact that in many instances we don’t realize we’re shouldering the burden of a tax because we aren’t the ones sending the check to the Internal Revenue Service. Again, the payroll tax is a good example. The current tax rate for Social Security is 6.2 percent paid by employees and 6.2 percent paid by employers; for Medicare, it’s 1.45 percent paid by employees and 1.45 percent paid by employers.
But don’t be fooled again by this sleight of hand: Your employer’s share is often being coughed up by you as an employee in the form of lower wages. The same is true of the corporate income tax, which we now know is shouldered by investors in the form of lower dividends — but it’s also shouldered by workers in the form of smaller compensation.
At the end of the day, we taxpayers don’t exactly know what our burden to Washington really is, and the government wants to keep it that way.
Veronique de Rugy is a senior research fellow with the Mercatus Center at George Mason University.