Two Boston University economists have exposed one of government’s dirty little secrets: using layers of taxes to obfuscate the true level of taxation.  According to Laurence J. Kotlikoff and David Rapson “our all-in marginal tax rate is 40%, give or take a bit.”

Their research indicates that we actually have a surprisingly “flat” marginal tax rate across a very wide income range.

The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3%, the median tax rate is 41.8%, and the standard deviation of all of those rates is 5.3 percentage points. Basically, most of us pay about 40%, plus or minus 5.3 percentage points.  That’s not a big range, particularly when you notice that it covers an income rise of 2,500%.

Considering the federal government has gone to great lengths to pander to the wealth envy of the “two Americas” crowd by implementing a “heavily progressive or graduated income tax” (straight out of the Communist Manifesto) I am shocked to see that the sum of all taxes yields a flat tax rate.

So, why do I call this one of the government’s dirty little secrets?  Because politicians know that most citizens only measure taxes individually.  Very few voters actually consider the net effect of all the taxes they pay.

You can read Kotlikoff and Rapson’s full report here.  It should be noted that they only included federal taxes plus state sales and excise taxes, not local ones.  In Alabama the state tax rate is 4%, while most localities tack on an additional 2 to 5%.  Huntsville shoppers pay 4% in local taxes (3.5% city, 0.5% county).  Depending on what percentage of your income you spend on taxable items your marginal tax rate might be around 43%.

It is disturbing to think that the government eventually takes 40% of what you work hard to earn.  It can seem just a little esoteric when we’re talking about income, but just imagine that you were a farmer and the government simply took 40% of your harvest every year.  Seems a bit excessive to me.

How do you feel now that you know that - regardless of your income level - the government takes 40% of everything you earn?

Related content:

This entry was posted by Brian on Sunday, February 25th, 2007 at 7:24 am and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Please note the copyright policy.