Thursday, April 15, 2010

Tax facts: stuff we should all know, but often don't


Most of us pay two kinds of federal taxes: payroll tax and income tax. Income taxes are the bite the Feds take out of our wages. Payroll taxes are what we put into the big government pot to fund Medicare and Social Security. Three quarters of tax-paying households pay more in payroll taxes than in income taxes.

Payroll taxes aren't "fair" if you mean we don't get exactly what we pay for. But things even out.

People do not receive benefits equal to the payroll taxes they paid. Those who die at age 70 will receive much less in Social Security and Medicare than they paid in taxes. Those who die at 95 will probably get much more.

With more of us dying at older and older ages, this looks like a good deal that is getting better -- that is, if we can keep politicians who work to protect rich people from taxes from taking away what we have been promised ... this might be a fight.

For low income people, the burden of federal taxes is offset by the Earned Income Tax Credit and this year by tax credits that are part of the economic stimulus. But even with the credits, 90 percent of everyone pays some federal tax.

When you add together income taxes, payroll taxes, taxes on any invested savings people may have, and excise taxes, the federal tax burden for median middle class households (around $50,000 income) is 14.2 percent. And then there are state taxes that vary widely.

Less people owe taxes this year. How come? Because less of us are working. And the federal deficit will rise -- in part of course because the government is spending money on important things like unemployment benefits and COBRA subsidies -- but also because less people working means less taxes paid to government.

Happy tax day. The older I get, the more I believe that taxes are the price we pay for civilization. It's a lesson grown ups can appreciate.

All numbers cited here, and the quotation, are from an excellent David Leonhardt article in yesterday's New York Times.

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