You are about to have a "Matrix"-like experience; an experience in which you will see, perhaps for the first time, what the REAL tax situation is in the USA. If you don't want to know the truth about this, if you'd rather continue to live in ignorant bliss, then please do not read on.
It is our goal to pay as much as possible in payroll and corporate profit taxes. Not because we are stupid, but because it is our goal to be as wise and successful as possible, and the more successful a company is, the more it ends up paying in taxes.
We are writing this section for a couple reasons. One of the benefits of owning your own company, as opposed to simply being an employee, is that you (1) generally have a "big picture" of how business, economics and finance works, and (2) you are free to speak your mind without being silenced by your boss. Of course, in our case, our "bosses" are really our customers, which leads to another reason for giving you this information: We believe you have a right to know what you are actually spending in terms of taxes and related fees -- a figure that is systematically hidden from you through obscurity, distraction and various complicating methods. You might also be a victim of the misinformation some politicians and media have promoted in order to advance their own agendas (usually involving some attempt to pit groups of people against each other so as to attain a political end).
The purpose of this page is to educate the reader on basic economics and how it is related to taxes. In the process, you'll be amazed to see how much taxes you are already paying. For the sake of simplicity we will avoid including an analysis of profit and property taxes, and simply stick to payroll-related expenses.
A Real Life Example (using 2002 figures)
The most difficult and stressful part of our business is trying to understand the tax-accounting responsibilities. According to the IRS's estimates, it takes on average over 250 hours to learn about and complete the tax forms we file each year for our business -- that is more than one month's labor just to fill out tax forms. The tax code was not written with simplicity in mind. It doesn't go to great lengths to help one minimize his tax burden and contains a number of "gotcha's" if you make mistakes -- even honest ones (ask me how I know this). The tax code alone is among the few reasons that we have sometimes thought about "hanging it up." You'll see why, below.
For our example, we're going to choose the lowest federal tax bracket, 10%, and a small company similar to our own with only a handful of part-time workers. We're starting there because you will find that for every untaxed dollar a low income person gets to spend, about another dollar disappeared in the form of various taxes.
"But I thought that low income people didn't pay hardly any taxes." Wait and see. Consider a part-time employee in Oregon earning $8 per hour, 20 hours per week, or about $692 per month. Let's assume that he is single with no dependents and rents an apartment. The question is: "How much did he end up with to spend on something besides taxes, and how much was actually spent to provide that income?" Here are the deductions from that typical paycheck over a year, accounting for likely tax refunds from the State and Fed:
Gross Payroll for Year
Federal Income Tax
Social Security Withholding
Oregon State Income Tax
Total taxes and withholdings
Net Payroll after Taxes
After these withholdings, the employee is left with $584 per month, but there were more expenses that haven't yet been counted. In addition to the deductions from the paycheck, the employer also has to pay a number of taxes and fees that could otherwise have gone to the employee. They are as follows:
Gross Payroll for Year
Social Security Withholding Matching
Medicare/Medicaid Withholding Matching
Federal Unemployment Insurance
($67 - $515)
State Unemployment Insurance
($250 - $448)
Workers Benefit Fund (Oregon)
Workers Compensation Insurance
Total of other typical employment costs
Total Payroll Cost for Year
So the employee ended up with $7005 in his pocket, but the actual cost to the business (and therefore the customers) was approximately $9916. This represents the cash/payroll cost ratio: The amount of cash an employee received to spend on goods, divided by the actual cost of that payroll. At this point, you can see already that an employee receives about 70% of the money paid for payroll costs.
Businesses don't pay taxes -- people do
We've been alluding to the cost to customers for an important reason. Our imaginary employee now has $7005 in his pocket that took $9916 to generate (not counting payroll management costs). The employee will spend this money on material goods needed for living. All companies vary in their internal financial structures. Many manufacturing companies approximate this:
Overhead and Administrative Costs
Notice that, in our oversimplified example, payroll costs make up 25% of the costs of good you might purchase, but from above, we know that 30% of that is going to tax and related compulsory costs. This means that the $7005 that the employee received is really only worth $6480. Why? Because a significant portion of the cost of everything from a loaf of bread, to electricity, to rent -- pretty much everything we purchase and use on a regular basis just to get through life -- has "hidden" taxes in it. So not only are their taxes withheld from a paycheck, not only does an employer pay additional taxes on payroll, but you pay additional hidden taxes every time you buy something.
Well, it is actually worse even than that. Most of the goods we purchase are from retailers, not manufacturers. They bought the product from another company, which means that the 50% cost of materials cost also includes some additional hidden tax costs. This reduces the useful cash to $6217. We need also to consider the overhead and administrative costs, which usually represent utilities, expensed goods and miscellaneous expenses. Like the material costs of goods, about a small percentage of these can be attributed to indirect tax-related expenses, reducing the "tax-free" money to about $6085. One could go farther with the iteration, but it becomes less and less meaningful to do so.
What does it all mean?
For every $10000 or so generated to cover payroll, about $6000 is spent relatively tax free by even the lowest-taxed person. The effective tax rate for the least taxed among us is approximately 40%! And this doesn't take into account corporate profit taxes, property taxes, and other hidden taxes. A frustrating element here is that, if one just counts the state and federal income taxes, the employee may believe that his tax rate is merely 8%.
Once you've finished retching over this realization, recognize that if you are in higher federal or state tax bracket, your situation may be even worse.
Why are we telling you this?
First, because it is so often on my mind that I just had to "get it out." You deserve to know the truth, and we don't see many people speaking it when it comes to tax policies and their effect on employees.
Second, part of our goal at The Rosary Shop is to provide employment opportunities to people in the community, especially people recently laid off or otherwise "on the ropes." We're a life-line, so-to-speak. It is frustrating to us to see that roughly half of the money we spend on payroll costs never actually directly benefit the person who did the work and desperately needs the income. We also know a number of people that we'd like to help but can't because the costs of employment are so great. We recommend that, whenever you have the opportunity, that you vote to reduce income, payroll, property and profit taxes. The number one reason for general unemployment in the USA is the costs of employment, especially the taxes. If you received your COMPLETE paycheck ($826) and had to write a $320 check to the government each month for taxes, you'd NEVER put up with this (and the government knows this, which is why it extracts the money via the present methods). After housing, taxes are usually the largest expense people pay, whether they realize it or not. But because the taxes are so well hidden and distributed, most people never even think about it -- they're just happy to get some piddly amount back at the end of the year (not realizing that this means they paid too much, and that they already paid at least 40% in taxes).
We STRONGLY OPPOSE any initiative to increase the tax rates. We are disturbed by the deceptive and sometimes borderline extortive methods some public agencies use to do so. Taxes are already WAY too high and are causing lost jobs and income for the people who need it most.
It is our opinion that most people know how to handle their money and needs better than disinterested government agencies. We are not libertarian -- we believe that government is a helpful good and the some taxation is necessary and helpful to the general population, especially to support public defense, safety and health. But we do not believe that the current tax system is generally presented accurately or truthfully in terms of its total costs.
How can you reduce your tax burden?
We aren't professional accountants or tax advisors; you should consult one if you are serious about reducing your taxes legally. In our own situation, we make sure that we itemize so that we can receive any child-related, mortgage interest and education loan tax credits.
The only effective way to reduce payroll taxes is to reduce payroll, which means that we reduce our spending so that our reduced payroll can cover it. We don't reduce spending so that we can somehow slight the government -- kind of shooting ourselves in the foot to spite someone else -- but because we recognize that we really need much less than we used to buy. A consumptive lifestyle is a very expensive one. By reducing our purchases, we are able to share the savings with others who have need of employment or other benefits that the company can provide. So method two, after attempting to get credit for every legitimate write-off, is to reduce expenditures and income.
Does the government really care about employment?
The reader should have noticed that the tax burden forces employers to reduce their payroll. This means that increased taxes, whether someone told you they were "corporate" or not, reduce your spending power. They also reduce a company's ability to hire employees, since the payroll tax burden is so high. Reduce payroll taxes, and you can increase employment.
Another interesting element of the tax code that we think should be changed is the costs of unemployment insurance. Unemployment taxes are generally based on the first several thousand dollars paid to each employee. Therefore, the tax encourages companies to hire fewer employees and work them harder as opposed to hiring more employees in a less stressful work environment. If you are an employer, you can sometimes reduce your annual payroll tax burden (FUTA, specifically) by about $500 per employee by reducing head-count. If the government was truly interested in helping businesses hire employees, they wouldn't have structured the code this way.
Pitting People Against Each Other
One of the more disgusting techniques used by publicly funded agencies -- especially some here in Oregon -- is to pit groups against each other and make hyperbolic threats about the consequences if people don't pay more taxes. The first method is usually used when a tax reduction is being floated by a politician. Some public groups respond by claiming that the politician is just helping out his "rich" friends. And we're all jealous of the rich, right? We'd like them cut down to size -- our size -- right? The truth is that, according to the IRS statistics for 2000, people (or couples filing jointly) who earn $26,000 or more in a year pay 96.09% of the federal taxes. The remaining 4% of federal income taxes are paid by the lower 50% of income earners, earning under $26,000 per year. In addition, it is usually the more affluent of our society who provide jobs and income to others. To say that a tax reduction is a "tax cut for the rich" is a lie. Tax reductions benefit everyone who works and pays taxes (and most people who don't).
The second method, recently employed by several public agencies in Oregon, is to claim that any reduction in fundings will result in chaos, sickness and even death. Oregon has enjoyed double-digit revenue increases during each business cycle, going from about 15 billion in revenue to around 30 over the last decade or so. Unable to continue to support this unrealistic growth, state revenues are not increasing as quickly as they used to. Rather than live within their means, state agencies attempted to increase what is already among the highest income tax rates in the nation. Using clever rhetoric, they would show how, for only $12 per month, we could keep Oregon from sliding into the Pacific ocean. Thankfully, the majority of taxpayers didn't buy it, and it was rejected, but it nearly passed. The margin was too close for comfort.
Among the more disappointing elements of this public debate was the position that our own diocese took. They publicly supported the tax increase, and certain diocesan offices publicly said that all Catholics should support it "as a matter of faith." They were way off base.
Our position is this: If 40%+ of the earned income is not enough to support public agencies and activities, then no amount ever will be. To improve the living situations of our workers and to provide jobs to more people who are seeking them we need to reduce taxes, not raise them.
Would we ever be happy?
Some people just need something to complain about. One could reasonably ask me if the tax rate could ever be at a point where I'd stop my griping. There are two answers. First, our complaint is not merely the actual size of the tax burden, but the fact that it is done in such a way that the real cost is hidden from the people footing the bill. Second, when the lowest income earner is effectively paying 40% taxes on earned income, any reduction is a welcome one. If there is a perfect number, I don't know what it is. What I do know is that 40%+ is too much and can't be sustained forever.