Today is Tax Day — the deadline for filing taxes on income earned in 2016.
For those of us who are not busily trying to file at the last minute, it’s a useful moment to reflect on just how much Americans pay in taxes each year.
Middle-class American families face a 28 percent federal marginal income tax rate. Including state and local income taxes, this rate can exceed 33 percent.
Even taking into account lower marginal rates at lower income brackets, middle-class families pay an effective combined federal and state tax rate of roughly 25 percent of their total earned income.
Consider the case of a middle-class Colorado family earning $100,000 per year in combined income. Under current tax thresholds, this family faces $21,000 in federal income tax and nearly $5,000 in state income tax for a total combined effective income tax rate above 25 percent.
And that’s just the start. All employees face another 8 percent payroll tax bite on their earnings. This is matched by another 8 percent payroll tax paid by their employers. Economists agree the employer portion is largely funded by lower employee salaries and benefits. So adding this 8 percent employee payroll tax and a conservative share of the employer payroll tax means our middle-class family’s effective total tax rate rises to over 33 percent.
But let’s not stop there. State and local sales taxes of several percent on almost everything consumed besides housing drives up the tax burden even further. Let’s say our middle-class family spends $27,000 of its remaining $67,000 on housing and spends the remaining $40,000. In Colorado, where the average state and local sales tax rate is 7.5 percent, this family will spend $3,000 in sales tax, raising its effective total tax burden to over $36,000 or 36 percent.
Then there is property tax, which depending on the state can add several more percent to a family’s tax bill. Colorado’s relatively low property tax of 0.6 percent of value equals an average tax bite of 2 percent of income, or $2,000 for our family. Adding this property tax raises its tax burden to over 38 percent of income or $38,000.
Then we have to account for hidden taxes. The biggest of these is the gas tax. On average, Americans pay 50 cents of tax on every gallon of gas. In Colorado, the tax is 40 cents per gallon. This means the average driving family pays $400 a year in gas tax.
Other major hidden taxes on flights, cellphones, and so-called “sin” products like alcohol cost hundreds of dollars more each year. Same with the relatively new taxes on health care and insurance premiums.
In fact, it’s nearly impossible to account for all the taxes Americans pay. Tolls, permits, fees, surcharges and fines are all taxes in another name. These can easily reach thousands of dollars each year. But as a conservative estimate, let’s say all hidden taxes increase the tax burden of our typical family by $2,000 a year.
Total it all up and our middle-class family pays over 40 percent of its income each year in taxes. That’s its effective — not marginal — tax rate. That’s $40 out of every $100 earned not going to their family, community and small businesses but taxed away to be spent in far off capitals by bureaucrats on their own priorities and friends.
The Steamboat Institute’s first event on April 15, 2009, was a taxpayer rally, where average people voiced their frustration at sky-high tax rates funding out-of-control government spending. Under this tax burden it’s easy to understand why.
The new presidential administration and U.S. Congress plan to address tax reform in the coming months. For middle-class families, relief couldn’t come soon enough.
Defenders of the high-tax status quo will try to politicize reform and paint any tax relief as a tax cut for “the rich” and “the 1 percent.” But as this analysis shows, it’s middle-class American families struggling with daycare costs, affordable housing, and long commutes who have the most to gain — or lose.
Jennifer Schubert-Akin is the CEO of the Steamboat Institute.