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This week marks the approximate half-way point between budget season and tax season. As such, 90ways' Dissect-O-Stat column will explore the ins and outs of your taxes dollars. No, this will not be the article that every tax code reading, accounting-porn loving H&R Block employee has been dreaming about since last April. We will not discuss alternative minimum taxes, nor will we give you the inside scope on this year's hottest tax shelters
. What we will do is explore how money goes out of your pocket, into government coffers, and back out to... well, we'll see.
We pay taxes in several ways. For the purposes of this article, we'll set aside most state and local taxes, as well as sales and property taxes. When it comes to the Federal government, your taxes begin with something called FICA, an acronym for the Federal Insurance Contributions Act. This law requires your employer to withhold taxes from your paycheck, and is different from the Federal Income taxes which are due every April 15 and with which we are all so familiar.
FICA taxes do not vary by income. In accordance with FICA, everyone contributes 6.2% of all income up to $96,000 to pay for Social Security and 1.45% of all income to pay for Medicare. Each of these percentages is matched by your employer. Total tax receipt for these two programs make up nearly half of all Federal tax receipts in a given year -- but more on that in a minute.
In addition to FICA, Americans pay the Federal government tax on income and tax on capital gains. Income tax varies based on how much money you earn. Individuals making less than $7,500 pay about 10%, individuals making less than $30,000 pay about 15%, individuals making less than $70,000 pay about 25%, and individuals making more than $150,000 pay about 35%. Given typical allowable deductions and these tax rates, middle class taxpayers typically pay more
in FICA than they do in income tax.
US tax rates -- and the number of tax brackets into which Americans are divided -- have fluctuated substantially over time. In 1913, tax rates ranged between 1% for the lowest earners and 7% for those making $500,000 or more. More recently, tax rates on the highest earners have been as high as 91% (in 1964) or as low as 28% (in 1986). The number of brackets has ranged between 24 in 1954 and 3 in the late 80s and early 90s. The most significant correlation between the rise and fall of tax rates (at least until this decade) was the United States' engagement in global conflict. During World War I and World War II, tax rates in the highest brackets remained in the 90% range. This correlation is stronger than any political party-related correlations.
What's more is that tax rates are fungible even within a given year. Especially toward the upper brackets. Last year, the First Family paid
$187,768 in federal income taxes on taxable income of $618,694. Vice President Cheney paid $529,636 in federal taxes on taxable income of $1,961,157. That's 30% and 27%, respectively, neither of which meets the 35% expectation. (Incidentally, according to his tax return, Vice President Cheney and his wife grossed over $8mm last year, but had only about $2mm in taxable income because they gave away about $6.5mm to charity.)
One of the reasons for this discrepancy is that capital gains are taxed lower than the highest income brackets. The highest paid individuals in the American tax system pay 40% of their salary in taxes. However, the capital gains tax is 28%. That means that if you gain a substantial portion of your income through the sale of stock or other investments - which many, many wealthy people do - you'll be taxed as if you are earning about $70,000.
Comparing tax revenues across nations isn't really a fair thing to do. But if one did so, the United States would come out at the middle to upper middle end of the list. The highest tax bracket in the most heavily taxed nation in the world, Sweden, pays about 55% tax rate (compared to that 35% figure in the US). At the other end of the scale, nobody in the United Arab Emirates pays income tax.
Once your taxes leave your pocket, they go several places. First and foremost, they go to pay for Social Security and Medicare. Taken together, these two programs total nearly 50% of the annual federal budget. In fact, the U.S. Social Security program is the largest government program in the world. The remaining 50% of the budget is typically called "Discretionary Spending." Of this remaining amount, about 40% goes directly to military spending, about 30% pay interest on money the government is borrowing, and the rest (about 20% of total taxes collected) goes to everything else - education, environmental protection, medical research, loans to small businesses, building highways and roads, agricultural subsidies, you name it.
For a really awesome and detailed map of where all that money goes, click here
. For a more simplistic view of non-discretionary spending, click here
In some ways, looking at the way all this money is used is enough to make a guy a libertarian. Half of all our tax receipts go, essentially, to a program that makes us save for our retirement. Social Security is essentially our financial nanny. Now, obviously it's more complicated than that - for example, it protects in case of disability and acts as a vehicle to spread risk. But, strictly speaking, the Social Security system is nothing special.
Of the half of our tax dollars that don't go to Social Security almost 75% goes to pay for wars or debt. Once again, this kind of lets the wind out of your sales. Actual government spending on actual government programs represents only about 25% of your annual tax dollars - and that's counting a whole lot of overhead as "actual government programs."
Democracy and money are intimately intertwined -- and not just at election time. One of the things that makes social change so difficult in the political arena is that our 100 Senators and 435 Representatives spend their time wrangling over only 25% of the total government pie.