Multiple Taxes for the Poor
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In the past, conservatives in the US have maligned double taxation, particularly on dividend income. The theory goes that a particular dollar is taxed as it passes through the corporate structure, then taxed again as it reaches the shareholder.
In this article, I would like to point out the multiple levels of tax applied to the common W-2 paycheck, which will be illustrative for later discussions. For the purposes of this article, we will focus on federal taxes with no deductions, credits, or other complicating factors. This discussion will also focus on US federal rather than state taxes. The subject of this discussion will be a single citizen with $51,939 W-2 income per year (median US income).
We will call our young fella "George".
The Numbers
Federal Tax
The effective federal tax rate for this individual will be 12.2%, which isn't a terrible starting point. As a result of this tax, George is going to owe the IRS $6336.
Social Security Tax
Social Security taxes are a flat tax of 6.2% each for the employer and employee. The IRS will now collect $3220 from George.
It is interesting to note that Social Security taxes actually stop at $118,500, so those with an income higher than this will actually begin to reduce the effective tax rate (advantage: wealthy).
Medicare
Medicare taxes are also a flat tax of 1.45% of gross income each for the employer and employee. George will fork up another $753.
Totals
Up to this point, we are up to $10,309 in taxes, which represents 19.8% of George's annual income before applying any state or local taxes.
Comparison to Dividend Rates
The "qualified" dividend tax rate for Mary, who makes $51,939 as dividend income, is 15% even if Mary makes twice the income! In addition, Mary pays no Social Security or Medicare tax. Mary's effective tax rate is 15%!
A Final Slap
One final slap in the face that isn't factored in until George begins to draw Social Security income is that this check will - once again - be taxed! We won't factor that in, but talk about double taxation... again and again!
Final Comparison
| name | starting cash | federal taxes | social security taxes | medicare taxes | cash left |
|---|---|---|---|---|---|
| George | $51,939 | $6,336 | $3,220 | $753 | $41,630 |
| Mary | $51,939 | $7,791 | $0 | $0 | $44,148 |
Fair?
Nothing about this is fair. Income is income, regardless of the source. I'm all about stopping double-taxation that applies to corporate taxes and dividend income... but let's stop the triple and quadrouple taxation of normal W-2 income on ordinary citizens first if we are so concerned about fairness.
Anyone who disagrees is likely benefiting from the inequality of this system of taxation.
Category: taxes.