Mr. FireStation has been tied up with a family emergency over the last week. Coincidentally, regular reader, “Klaus” Wentzel offered to step in with a post, which was great. Klaus and I have never actually met in real life, but he often shares very insightful comments. This post is based on one of his observations from a couple years ago that is relevant today. Thanks, Klaus, for stepping in. I hope to see some robust comments & questions this week!
A personal finance education question that I often ask people is, “What is your biggest household expense?” Most often I receive “my mortgage” as the response. I respond by asking, “your mortgage is really larger than all the taxes you pay?” You can hear the person adding up some of the taxes including Federal Income, State Income, and Real Estate Taxes. I continue guiding the person by asking them to add estimates for sales, gasoline, Social Security, Medicare, IRMAA, State Disability, and excise taxes. They very quickly conclude that taxes are their household’s largest expense by a lot.
The “My Mortgage” response often comes from people you think would have as much an understanding of their personal finances as corporate finance. The list includes CEO’s and CFO’s. My wife works one day per week as either an RN giving bedside care or as a University Professor because she wants to for personal satisfaction. She gets the same response from her peers. Over reliance on a tax guy to do one’s taxes shields many from really understanding what the drivers of taxes are and how much is being taken from you when you add up the numbers.
During January, I go through the previous year’s income and expenditures closely. I comb through my expenditures to look for expenses that are tax deductible. During this time, I also try to understand where the money is going to look for potential cash and tax savings for the upcoming year.
This pie chart below shows the bite taken out by the government over the last year.
Here is a summarization of how I accrued a 31% overall tax rate
• Social Security and Medicare = 8%
• IRMA = 1%
• State Income and Disability Taxes = 4%
• Sales and Excise Taxes = 2%
• Federal Income Taxes = 12%
• Real Estate Tax = 4%
Another number I calculate is the percentage that will go to taxes for each additional dollar of consulting income I earn. 24% Federal Tax, 15.3% for Self-Employment Taxes, 9.3% for State Income Taxes, and an increase in IRMAA that currently impacts my wife and by the end of 2023 will also impact me. The total government take will easily exceed 50%. Knowledge that the government will be getting more than I get to keep acts as a disincentive to work more consulting hours. During the past year I was able to keep my overall tax bite down to 31% by preplanning how many consulting hours I would work and contributing the maximum I could to my Solo 401k plan.
If more people started understanding the budgeting process and taxes, they would demand better than what we are getting from our government. There are current news stories that assert the Federal Government will be defaulting on their debts if the ceiling isn’t raised immediately. By reading the forums I can see that people are being emotionally manipulated by politicians and the complicit media. Many seem to be confused that the funds were already spent, and we must immediately raise the debt ceiling for the country to honor its commitments. They also seem to be confused that government can keep running up debt without consequences, because they are the government.
The Omnibus Spending Package that was rammed through the Nancy Pelosi-led lame duck House, is merely a budget for how the Federal Government could spend over the next year. The problem is that the Omnibus Spending Package calls to spend more than the taxes government will be receiving over the next year. There are two ways to fix a budget that exceeds your income. You can either revise your budget to reduce spending or you can rack up more debt on the nation’s credit card. If the government operated with the same degree of financial savvy as the average reader of this forum, they would look at their expected income for the next year and prepare a budget that would come in under available income and even leave some breathing room for unforeseen contingencies.
Expect instead to see a bunch of news before this plays out that the Republicans by not agreeing to raise the debt ceiling aredefaulting on the nation’s obligations. Also expect news that they are threatening to cut Social Security or Medicare to invoke an emotional response. The reality is the Federal Government must trade savvy spending cuts with a commensurate reduction in the increased debt ceiling.
They are playing political games with our children’s futures.
MrFireStation 
Great article, the government collects almost all of it’s revenue from less 50% of the people. Many individuals, with good educations, fail to understand just how much the government takes of their money.
LikeLiked by 1 person
Thank you. There are major holes in many ‘good educations’ because they think they can maximize their earnings by specializing and leaving the finances to someone else. The book, “The Millionaire Next Door” discussed how many of the people interviewed were actively working to maximize wealth creation while minimizing taxes.
LikeLike
Great post. The reality is, that sooner or later, those already paying 50% will be tasked with paying a lot more because only the producers have sufficient assets to cover the debts our society is racking up. I fear it is simple economics, eventually they will have to come after assets to cover the interest on those government credit cards, and 50% may then seem like a bargain. As you accurately say, we have to get spending under control, but when greater than 50% of the population have no “skin in the game” and receive freebies that politicians dole out for votes…it’s likely just a matter of time.
LikeLiked by 1 person
Half the people living off the other half. Margaret Thatcher said, “The problem with Socialism is eventually you run out of other people’s money to spend.”
LikeLiked by 1 person
Preaching to the choir, Chief. Taxes are the main bite. Budgeting is not emphasized (nor even taught) by schools (that run on debt). But even if people knew how, any demands for more responsible governance would fall on deaf ears in government. Why? Because the de-facto duopoly have created dominance over people, so that they do not need to be responsive. They perpetuate power via lip-service and apending. We, the people, follow their “lead” to penury.
LikeLiked by 1 person
Budgeting is not taught in most schools. However, I attended high school for my first two years in a small school district in a blue collar town in Southern Indiana. The high school is rated a 3 out of 10 in GreatSchools.org, with a 1 being the worst. The low rating is probably a factor of the low percentage of students that went on to college. The students went into the trades instead. Anyway, my point is, it wasn’t an elite college prep school.
The State of Indiana had a core requirement that all Sophomores had to take a personal finance course where you learned how to balance checkbooks, budget, invest and do taxes. The course was taught in very simple language that was workbook based. The teacher was a small businessman, who owned a Kentucky Fried Chicken Franchise. He taught the class, because he wanted to help teach kids how to operate their small trade related business.
Fast forward to having children of my own, who were going to an elite Catholic College Prep High School. Several other fathers and myself approached the high school president about adding a Personal Finance Course and its importance in our achieving success. They told us they were looking for the right course that would also give AP credit. I think they are missing the point. The seemed to miss the message that personal finance is simple and you don’t need a knowledge of multiple variant Calculus to apply it successfully. I would that the KFC small business owner I had any day over the fancy course any day. Of course I am teaching my children the concepts and I often here the comment, “Why don’t they teach this in school?”
LikeLiked by 1 person
I’m with you! KISS (Keep It Simple, Stupid). In my youth, my mom taught me how to budget, using pencils (with erasers), pads, envelopes with cash regularly added that was intended for long-term purchases (instead of purchasing with loans or credit). She learned from her mom during the Great Depression. They survived. I survive. Modern money theorists portray debt as our “friend”, not our “enemy.” Dante would caution: “Abandon hope all ye who enter here” – for there is no exit from falsehood.
LikeLiked by 2 people
I think it would be interesting if you took each of your categories and figured out what percentage goes toward health care. In a system of employer based health insurance, everything you purchase will include a health insurance cost and when you get to taxes, oh my, I bet some of that goes toward health insurance also. If we had a single payer system, costs could go down in a lot of areas and taxes would not rise all that much in a progressive tax system. Has anyone done this math yet?
LikeLike
Single payer means we will get the equivalent to “Speedy the DMV Sloth” deciding when we will get the emergency surgery.
LikeLike
you don’t know that
LikeLike
In Canada, they already have Single Payer and Speedy the Single Payer Sloth deciding when people can get their much needed treatments. If people have the money they come to the USA to buy it here.
Don’t let the Single Payer proponents fool you. Single payer is really about having half the US population trying to pass the cost of their healthcare to the half pays for almost all government services.
LikeLike
I think it’s about 60% of our population is already on some form of gov. health insurance–counting medicare, medicaid, military, public servants. So about 40% of us pay for that as well as our own health care costs :). Please keep in mind we live in the USA and not Canada — our plan will not be Canadian. Health Care For All Minnesota (HCAM) and Physicians for a National Health Plan (PNHP) are good resources. Senator Marty has a good plan for Minnesota, that is on his website. Signing off now on this topic so I don’t hog this blog :).
LikeLike
Carol,
You respond that Klaus, that he “doesn’t know that”, regarding health decisions being slowed in a single payer system, but there are many current examples around the world of exactly that result with single governmental healthcare systems. Canadians regularly come to the U.S. for healthcare because it may otherwise take many months (or years) to get similar services in Canada. If they can get them at all. Someone in government is setting those priorities. It’s inevitable in a single payer system that priorities will have to be made. It’s a scarcity system by design by being funded by tax base. It’s all seems fine and good until it’s your health (or life) that is at risk of being prioritized below or behind another’s.
You also state, “ If we had a single payer system, costs could go down in a lot of areas and taxes would not rise all that much in a progressive tax system.” To turn the tables a bit, what exactly is your evidence for that statement? Every governmental function we currently have has over bloated budgets after just a few years. Government bureaucracy has a clear history of causing higher costs for most things it controls. Why would you believe healthcare would be any different, if run by the government?…$5000 toilets come to mind.
LikeLiked by 2 people
Thom H, Great post. I started responding before seeing your write-up.
My wife, the Nursing Professor tells me about the rampant price gouging that is a function of Congress’s largest donor, Big Pharma. The USA has half the world’s prescriptions and pays 55% of the world’s prescription cost for 5% of the worlds population. There are numerous laws that protect Congress’s largest donor.
How would corruption improve with Single Payer?
LikeLike
ThomH and Klauswentzel — these are very interesting questions. I will ask those I work with on Single Payer, who have a much stronger background than I do, and see what their answers are. I don’t want to hog this blog on this issue. If you are interested in the answers I get back please e-mail me at Blanche.Hall@gmail.com. Thanks. I am guessing that corruption could be dealt with more effectively in a streamlined payment system vs. the never-ending maze of avenues we have right now, i.e., next to impossible to track? (Have you seen the payment maze?) But I’m just guessing, I’d like a more official answer. All that single payer really is is ‘one payer’ healthcare wouldn’t change, only the way it’s paid for. My largest concern is will we have fascism then? A perfect blending of corporate controlled/for profit, government sponsored healthcare? I just have seen an idea better than Single Payer, especially now since private equity firms are purchasing ER centers — yike.
LikeLiked by 1 person
ER’s being bought by private equity is a good example of the price gouging and corruption that I alluded too. It doesn’t necessarily have to be private equity. There are large medical groups consolidating their local markets. After they consolidate the local market, they jack the prices up.
There is a well known Medical Group in a mid-sized Minnesota town that is consolidating Medical Group’s in other states, and guess what? They are jacking the prices up.
I had a hernia surgery around ten years ago, and opted to go with a cash pay surgeon in Las Vegas because he was one of the few in the country who was not using mesh at the time. His price was competitive with the co-pay for my insurance, but he offered a straight-forward flat fee for a better surgeon. He told my wife and I about the horrors of ending up in a investment company owned ER in Las Vegas where you are likely not able to bring your best negotiation game.
You don’t hear Congress jumping up and down that they need to stop this gouging by their largest donors.
Another educational exercise I recommend is checking out health sharing ministries. The Mennonites have had one for years. The Catholic one is called Solidarity. Compare their cost versus what you and your employer are paying. You will be amazed at the price difference when the insurance does not have to insure a 5′ 2″ 300 pound, type II diabetic, alcoholic, chain-smoking, methamphetamine addicted person for the same cost as one who makes better health choices. They also have a program that takes on people with pre-existing conditions, but they work with the person to treat the underlying cause through proper diet and exercise to get them off their meds.
LikeLiked by 1 person
Top notch post and before reading it I said to myself….taxes. I don’t go to the extremes you do on categorizing but I appreciate it. During my employment decades so many coworkers would talk about the value of their mortgage deduction. Seldom did they understand when I asked why they would spend 66 cents on interest to save 34 cents in taxes. You have to thank the National Association of Realtors, Mortgage Lending Industry, and tax preparers for that one!
I do state that I struggle with whether to do an IRA to lower my taxable income. At age 60, I don’t envision ever needing that money either in a taxable or deferred account and when I have to take my RMD from all of my deferred accounts my tax rate will still be high. I guess that will be when charitable giving ramps up
LikeLiked by 2 people
Taxes are the proverbial ‘elephant in the room’ – so big and so familiar, they don’t get talked about.
LikeLike