If you spend any time listening to conservative blowhards or reading the financial press, you will hear cries of “Double taxation!” whenever the government taxes those who are diligently sitting around growing wealthier because they are already rich. And so we cut the long term capital gains tax rate down to where Warren Buffet pays half the marginal tax rate of a country doctor.
There is some truth to these pathetic cries. We do indeed have double taxation on investments, and we also have an implicit property tax on investments when you factor inflation. (Inflation makes breaking even look like profit for tax purposes.) But what many pundits and politicians fail to realize is that we also have double taxation of labor. Have a look at this tax table:
Current tax rates over a range of scenarios going from aggressive tax reduction (heavily mortgaged home; silver health coverage from employer) to passive filing (no health insurance, renting a home).
For a family of 1 adults and 0 children.
Nominal
Income |
Total
Income |
Payroll
Tax |
Income
Tax |
Total
Tax |
Average
Rate |
Marginal
Rate |
$5,000 |
$5,383 |
$765 |
$-383
to $-383 |
$383
to $383 |
7.1%
to 7.1% |
7.1%
to 7.1% |
$10,000 |
$10,765 |
$1,530 |
$-332
to $-332 |
$1,198
to $1,198 |
11.1%
to 11.1% |
21.3%
to 30.6% |
$20,000 |
$21,530 |
$3,060 |
$640
to $1,054 |
$3,700
to $4,114 |
17.2%
to 19.1% |
20.6%
to 28.1% |
$30,000 |
$32,295 |
$4,590 |
$1,543
to $2,554 |
$6,133
to $7,144 |
19.0%
to 22.1% |
23.8%
to 28.1% |
$40,000 |
$43,060 |
$6,120 |
$2,571
to $4,054 |
$8,691
to $10,174 |
20.2%
to 23.6% |
23.8%
to 28.1% |
$50,000 |
$53,825 |
$7,650 |
$3,600
to $5,929 |
$11,250
to $13,579 |
20.9%
to 25.2% |
23.8%
to 37.4% |
$60,000 |
$64,590 |
$9,180 |
$4,629
to $8,429 |
$13,809
to $17,609 |
21.4%
to 27.3% |
23.8%
to 37.4% |
$70,000 |
$75,355 |
$10,710 |
$6,103
to $10,929 |
$16,813
to $21,639 |
22.3%
to 28.7% |
30.1%
to 37.4% |
$80,000 |
$86,120 |
$12,240 |
$7,818
to $13,429 |
$20,058
to $25,669 |
23.3%
to 29.8% |
30.1%
to 37.4% |
$90,000 |
$96,885 |
$13,770 |
$9,533
to $15,929 |
$23,303
to $29,699 |
24.1%
to 30.7% |
30.1%
to 37.4% |
$100,000 |
$107,650 |
$15,300 |
$11,248
to $18,493 |
$26,548
to $33,793 |
24.7%
to 31.4% |
30.1%
to 40.2% |
$110,000 |
$118,415 |
$16,830 |
$12,963
to $21,293 |
$29,793
to $38,123 |
25.2%
to 32.2% |
30.1%
to 40.2% |
$130,000 |
$138,934 |
$17,869 |
$17,235
to $26,781 |
$35,104
to $44,650 |
25.3%
to 32.1% |
24.2%
to 29.1% |
$150,000 |
$159,224 |
$18,449 |
$22,004
to $32,101 |
$40,453
to $50,550 |
25.4%
to 31.7% |
26.8%
to 29.1% |
$175,000 |
$184,587 |
$19,174 |
$28,064
to $38,751 |
$47,238
to $57,925 |
25.6%
to 31.4% |
26.8%
to 29.1% |
$200,000 |
$209,949 |
$19,899 |
$34,125
to $45,544 |
$54,023
to $65,443 |
25.7%
to 31.2% |
26.8%
to 33.8% |
$300,000 |
$311,399 |
$22,799 |
$61,300
to $77,409 |
$84,099
to $100,207 |
27.0%
to 32.2% |
32.0%
to 34.8% |
$500,000 |
$514,299 |
$28,599 |
$119,904
to $145,864 |
$148,503
to $174,463 |
28.9%
to 33.9% |
36.6%
to 39.9% |
$1,000,000 |
$1,021,549 |
$43,099 |
$291,319
to $333,964 |
$334,418
to $377,063 |
32.7%
to 36.9% |
36.6%
to 39.9% |
$2,000,000 |
$2,036,049 |
$72,099 |
$634,148
to $710,164 |
$706,247
to $782,263 |
34.7%
to 38.4% |
36.6%
to 39.9% |
$5,000,000 |
$5,079,550 |
$159,099 |
$1,662,635
to $1,838,764 |
$1,821,734
to $1,997,863 |
35.9%
to 39.3% |
36.7%
to 40.0% |
For the 2013 tax year a single wage earner – someone who actually earns her income vs. simply waiting for assets to appreciate – pays a combination of income and payroll taxes which approach a 30% marginal rate rather quickly, very quickly for those who rent their home and pay for their healthcare directly instead of through an employer. Even those who live their lives as the tax code sees fit see a marginal rate of 30+% on wages above $70,000/year unless they give away a big chunk and/or put it in a retirement account. While $70,000/year is not chump change, it is not enough to be truly rich. The working class pays some significant marginal taxes.
For those who work for the working class, double taxation sets in. Consider a physician assistant with an annual income of around $100,000/year and a maxed out mortgage. Her marginal tax rate is about 30%. True, some of this tax is payroll taxes which will add to future Social Security earnings, but it still feels like 30% overall.
She has some flexibility in how many hours to work. Her back deck is looking scruffy and could use a new coat of Thompson’s Water Seal. Should she spend less time in the office so she can do it herself, or should she put in the hours and pay a painter with the extra money?
Well, if she puts in the extra hours, the government takes 30% of the extra money she earns in order to pay for the labor of the painter. Taking time off to do the deck herself begins to look promising. But if the painter works faster or charges less per hour than 70% of her marginal salary, she may still come out ahead paying the painter. It depends on how much she enjoys working outside vs. working at the office.
But we aren’t done. Unless our painter is running a cash only business, he has to pay taxes too. Let’s put him between the aggressive and passive tax payer range and say he pays a 25% marginal tax rate. The amount of money that the painter actually receives is thus (1-30%)*(1-25%) = 52.5% of what our doctor earns in order to pay him. That is, our painter is seeing 47.5% of his pay go to the government.
Our painter struggles and patients wait for an appointment as our physician assistant decides on a four day workweek in order to take care of that deck herself.
Double taxation of labor is at least as big a problem as double taxation of capital. Keep this in mind the next time you hear a conservative whining about double taxation.