The 50% Myth (Part 2): Taxes, Single Payer, and The Typical American

First posted at The Smirking Chimp, July 20, 2009.


This is part 2 of a series of articles that I am writing about taxes, single payer health insurance, and the hand wringing of American conservatives that the lowest tax burden in the developed world might increase if we get any sort of health care reform.
In part 1, I dispelled the "50% myth"--the assertion of many whining crybaby semi-anarchist libertarian/conservatives that combined taxes in the US consume more than 50% of most people's income. Of course, some have refused to believe the facts without actually refuting any of my calculations.

In order to challenge the 50% myth, I made the couple in my first example a high earner family with no children, living in one of the highest tax burden communities in the US (Mountain View, CA--home of Google!). This time, I'm making the family more "typical". Let's call them the Moretypical's.
Mr and Mrs Moretypical live in a locality with a more typical cost of living and tax burden. It's one I'm very familiar with--Denver, CO.
They have 2 children (ages 10 and 12), and live in a 3 bedroom, 2 bath house valued at $230K. They have mortgage and student loans. They go to church, and throw $20 in the collection plate every week.
They're both self-employed, so they directly pay both halves of the payroll tax (self-employment tax). Their health insurance premiums are $1000/mo, with a $10K/yr family deductible (pretty typical). Due to some bad luck on the injury and illness front, they spent the whole $10K deductible. They also racked up $2000 in dental bills in 2008.
Since Colorado has no sales tax on groceries or services, let's say that they spend about $25K/yr on taxable goods. They buy 1200 gallons of gasoline per year, and drink a bottle of wine every night. Since they have two children, they'd rather drink 2 bottles, but the budget won't allow it.
Colorado has a property tax on cars and trucks (ownership tax). This is based on the age, value, and weight of the vehicle. They own a couple of 5 year old, not too fancy cars. Their ownership tax is $153 for 2008.
They have $200 of interest income and $15 in dividend income for 2008. They paid $1000 in student loan interest, $10K in mortgage interest, $1200 in real estate tax (liberal Denver has a much lower mill levy than the surrounding red counties), and $1500 in CO income tax.
All told, they have $21305 in itemized deductions. They also get a $2000 tax credit for having 2 children.
This brings their Federal income tax to $434.
Their self employment tax (on $75000 of profit) is $10597.
Their Colorado income tax is $1072 (CO has no child tax credit).
Let's look at their overall tax hit:
Federal income tax $434
Self-employment tax $10597
CO state income tax $1072
CO and Denver sales taxes $1930
Property tax $1200
Gasoline excise taxes $485
Alcohol excise taxes $384
CO vehicle ownership tax $153
Total tax burden--$16255, or 22% of gross income.
22%! Not even halfway to the often claimed 50%!
Now let's add in health insurance and deductibles as though they were an additional tax:
Taxes $16255
Health insurance premiums $12000
Family deductible $10000
Total--$38255, or 51% of gross income!
OK, so we got past that 50% figure. But only by adding in the cost of health care. Their health care costs are more than their total tax burden.
I know from professional experience that these numbers are in no way far-fetched. I've seen far worse examples in real life.
All things considered, the Moretypical family is probably also drowning in credit card debt, and may be close to bankruptcy.
Let's see what happens, though, if we triple the Medicare portion of the payroll/self-employment tax in order to pay for single payer health care. In this scenario, of course, their health insurance premiums and deductible go away, and are replaced with the increased tax:
New self employment tax: $14614
New increased Federal income tax due to loss of health deductions $3426
New CO income tax $1993
New total tax burden--$24185, or 32% of gross income.
32%!
Lessons learned:
1. No way on earth does the typical American pay anywhere close to 50% of their income in taxes. Not just income tax, but all taxes combined!
2. By adding tax and health care costs, many families are exceeding 50%.
3. If we had a single payer, no deductible health care plan, funded by a tripling of the current Medicare tax (I'll explore that issue in my next article), the majority of Americans still wouldn't be paying anywhere close to 50% of their income in taxes and health care combined!
Libertarians/conservatives/neo-anarchists out there reading this:
Show me where I'm wrong! Show me where my calculations are incorrect or incomplete! Refute this liberal financial professional! I freakin' dare you!
JamesPB and other idealists:
This is reality. You want single payer? OK, then you need to convince people that they'll come out ahead by paying more tax and less for health care. This can't happen without some sort of tax increase. There isn't enough fat, even in the military budget, to pay for this without raising taxes.
If you need help with numbers to persuade people, I'm here. I can easily back up every number in this article.
Coming soon--how to pay for this.