Wednesday, June 2, 2010

Savings and taxes and bills

Do you ever sit down and do the math on what you save, how much you pay in tax, and what your real costs of living are? I will first rant on taxes. You have a job with a big company. Your company ships 35% corporate tax on earnings to the federal government, and in most states, another 7% to the state tax authority for corporate earnings, and let's say another 1-2% to local municipalities. That is 42% of income (revenue - cost of sales, operating expenses including your salary and of course in a circular argument, tax). That is just part of the deal if you want to run a business.

Any income left over to the corporation they then bank as retained earnings or send out to you and various stockholders in the form of dividends and capital gains. You, end user, are taxed again on this income now as personal income at 15% more or less at the moment.

The company when determining your pay scale has to factor in the cost of social security, medicare tax and FICA = 7.7% of your salary, just to hire you and give you a job.

You then pay another 7.7% of your salary to the Fed for the above, as well as somewhere in the 5-30% range for federal income tax depending on how much you make.

You will then pay state income tax somewhere between 0 and 11% (Hawaii).

After you paid all your taxes you can take your money and attempt to pay your bills. You can buy a house. You will pay property tax on the house, tax on the water heater bill, tax on the energy bill, tax on most of your supplies, a huge tax on any gasoline you buy, another huge tax on alcohol and tobacco if you are so inclined, tax on airline fees, safety inspection fees, and so on...and sales or service tax on virtually everything else you might purchase.

After all that is done you might have a few dollars left over. So you take it to a bank, or a mutual fund, or a company as a direct stock reinvestment, because you want to save your pennies for some day, like your parents taught you long ago. The bank will in all probability give you a rate of interest that does not exceed inflation, and the government will charge you tax on any interest gains, regardless if that rate exceeds inflation or not. The mutual fund will charge you 1-2% of your investment for operating costs and so on, and then the government will charge you tax on any gains you earn, even if they are deferred for 40 years, when you finally decide to take some money out. And the direct stock reinvestment will fluctuate wildly in price, hopefully not cutting your dividend stream - but don't worry, the government will also tax you on those dividends and capital gains, regardless if you directly reinvested them and never see a penny.

If you are savvy enough to invest in a municipal bond offering, you might avoid taxes but take on the added risk of a government entity (city, water plant, so on) default. It is sort of like loaning your reliable Uncle Carl money. He has always been there solid as a rock but sometimes he talks about remote desert islands and stuff. You just don't know.

While you are attempting to squirrel away these small dollars, governments around the world including yours, will enact unrealistic fiscal and economic policies that favor short term elections over long term solutions, resulting in the erosion of your existing capital, high volatility in any savings you have managed to squirrel away, and price inflation for things you need while your real wages either in inflation adjusted terms or relative to the price of various services like health care and education do not keep pace.

Now imagine you manage to deal with all this without totally flipping out man!, and put away somewhere in the 10-20% range of your gross income, which is admirable considering you are probably underpaid and overworked as it is, and the various governments took about 40% of your wages away before they were ever paid to you (at the corporate level), and then another 20% after they were paid to you (at the personal income level), and another 10% after you put all those dollars to work in the economy (at the sales tax/usage tax level). That means, if you follow the math here, that you are living on about 30% of your total value contribution (via the work you performed for the corporation, which is double taxed before you are ever paid) to society, and after 20% savings, 24% of your total value contribution.

Basically whatever you think you're worth, chop it into 4 parts and take an aspirin.

That is your thought for the day.


Steve said...

Ha Ha!!! YAY for puppies!!!

I am depressed now, I am going to pay a beer tax now and ponder my future. :)

Jennifer Harrison said...

Ok this made me sad too! I have been told we work for the US Government until August of every year. I doubt that is true, it is probably April or May, but STILL.