The 50% Myth: Taxes, Conservatives, And Single Payer Health Insurance

First posted at The Smirking Chimp, July 17, 2009.

I recently had an exchange here with a conservative who brought up what we call in the tax business "the 50% myth". In other words, taxes are so high here that they suck up more than 50% of your income between state, local and Federal taxes.
I've taken this one on before. Truth is, you could get kinda close, but not 50%.
Let's take the example of Mr and Misses example:

They're self-employed (so you can't accuse me of ignoring the employer portion of FICA). They have $250,000 of self-employment profits, and $200 of interest income (they apparently aren't real thrifty, or maybe all of their savings is in retirement accounts). Since self-employment profits are the most heavily taxed of all income, I use that for this worst-case scenario.
Let's put them in a high tax locale, Mountain View, CA. They own a $600,000 home (a bargain there, but they are available). Oddly enough, they somehow forgot to itemize their deductions (which they should be able to do with a mortgage on a $6000 home), but I did this to maximize their tax hit. I did allow them to take a $7200 adjustment to income for their $600/mo health premiums, though. Self-employed folks get to do that.
They spend $70,000/yr on goods subject to sales tax, and buy 1200 gallons of gasoline per year. They don't smoke, but they do drink a bottle of wine every night.
Let's look at their tax hit:
Federal income tax $47338
Self-employment tax (Medicare and Social Security) $31992.
CA state income tax: $15189
CA and local sales taxes: $5810
Property tax: $4858
Gasoline excise taxes (state and Federal combined): $767
Alcohol excise tax (state and Federal combined): $95
Total: $106049, or 42%. Hefty, but not 50%, either.
Plus, these folks are what we call "Five percenters". Only about 5% of US households make this much money. The vast majority of households pay far lower effective tax rates.
Also, I didn't give them any deductions. If I gave them the average deductions for people in their income group, they would pay about $17000 less in income taxes, reducing the percentage to about 36%.
Of course, I didn't give them any income in the lower taxed categories of preferred dividends and long-term capital gains, either. I just won't give these folks a break!
In most states, the income, property, sales and excise figures would be quite a bit less. I used CA for the "worst case scenario" effect.
Now let's tie this to single-payer health care. Based on years of spare time research, I've concluded that this might require as much as a tripling of the Medicare portion of FICA/self-employment tax. This would bring the medicare portion to 8.7%.
Let's see what that does to Mr and Mrs Example:
New self employment tax: $46492. This raises their total tax hit to $120549--48%! Still not 50%!
Of course, they have now shed $7200 in insurance premiums, and a $10000/yr family deductible. So, any year they actually get sick, they come out ahead, even after the extra tax.
Of course, the tax increase would be far lower for the more average American family with a $60000/yr income and 2 kids (Mr and Mrs Example also have no kids, so no exemptions or child credits for them!).
I defy any one of you out there (Yes, I'm talking to you, jimprits!) to challenge my calculations or show me what I'm missing. James PB, take note--it still costs money, and this is what you need to convince people to take on.
But before you do too much work, remember that I have the software at my fingertips to do this. I can change the particulars to your liking.
But you'll still have a real hard time breaking the 50% barrier.
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OK, then. Some have made the point that the health insurance premiums that they are still paying are effectively a tax. Let's see how that affects their tax burden.
Original tax burden $106049
Plus health insurance premiums $7200
Plus family deductible $10000
Total tax + health costs = $123249
49% of their income.
Remember, with a tripling of the Medicare tax but without the premiums and deductible of having private health insurance--in other words, with single payer paid for by payroll taxes--their tax burden was 48%.
Even some five percenters come out ahead with single payer!