Our tax return is an interesting cross-section of the current federal tax system -- in one way quite typical (net result) and in another not so typical (how we got there). While my wife is a salaried worker, I am self employed, and that introduces somewhat self-canceling distortions. The two salient features are the self-employment tax, which doubles Social Security and Medicare taxes on income up to $106,800, and the individual 401k, created in I think 2005 for solo self-employed taxpayers, which allows solo self-employed people over 50 to contribute up to $54,000 yearly to their retirement plans, deducting that contribution from their taxable income.
The individual 401k is an offset to the self-employment tax and a massive incentive to save for retirement (that is, if your income is moderate; if you earn say $1 million a year, shielding up to $54k doesn't loom so large). If your tax bracket is, say, 25%, you only keep 75 cents on every dollar that you're entitled to contribute but fail to contribute. The huge allowance, though, is a tough swallow: it can approach 40% of gross income.
The self-employment tax, on the other hand, amounts to over $8,000 of what you would pay as a salaried worker if you hit the $106,800 cap. This, however, is partly offset in that the amount by which it exceeds normal SS/Medicare taxes is deductible from your income taxes, shaving off whatever percentage of the total you pay as a federal tax rate.
Before the individual 401k was created, the self-employed could put 20% of their income into a retirement account. The additional tax break accessed by maxing out on the individual 401k can pretty closely offset the self-employment tax.
That's a lot of twists and turns to end up back on Go. While this particular combo of privileges and liabilities may not be particularly typical , the pattern -- particular breaks offsetting particular vulnerabilities -- probably is. For the wealthy, of course, the breaks far offset the special liabilities -- e.g., ridiculously low taxes on investment income offsetting relatively high (but not high enough) taxes on salary.
My household's total tax excluding sales taxes -- federal, state and property -- is 23.7%. My guess is that with sales tax added we almost exactly match the 27% of GDP that all levels of U.S. government are estimated to extract in taxes (again, according to Leonhardt) -- compared to an OECD average (in 2006) of 35.9% (in that year, the U.S. total was 28%).
My wife and I are not self sufficient creatures. Various levels of government educated our children, clear snow off our streets, protect us from violence at home and invasion from abroad, maintain public infrastructure (or used to) and insure that we won't be destitute or forced to go without needed health care in old age. Our taxes are way too damned low. And Mitt Romney's are way way way too damned low.
If we Americans can control health care inflation (admittedly a big 'if'), our budget problems would be easy to solve -- if we did not have an insane anti-tax culture.
UPDATE 4/16 Coincidence of the week: in an email today, the Obama campaign invites supporters to compare their tax rate to Romney's:
You could be paying a higher tax rate than someone making $100 million this year. And that's just how Mitt Romney wants to keep it.
It's not hard to see why: Romney personally benefits from the unfair system, taking advantage of loopholes and tax havens that aren't available to middle-class families.
Check out our new tax calculator to see how your rate compares to Mitt Romney's -- and how the Buffett Rule would change that. Then pass it along to your friends.