Taxes are made complex so you won’t understand them.  If you understood, you would fire the politicians that make them.  Here is a test: How much goes to the Federal government related to a $100 purchase you make, $10, $20, $30?   If you are a middle class taxpayer, the answer is $50-$60.  Since you probably find this hard to believe (as I did), I show details below.

I calculate the Federal burden on you and people like you, not rich people.  I use taxable incomes from almost zero to levels well within the middle class.  The result shows the Federal government has a major impact on everyday life.  In a sense, it places a $50-$60 drag on your $100 decisions.  The Federal government is just too big.  Its size and power have attracted greedy corrupt power hungry people.  It causes big problems and it’s intrusions into the economy eventually make things worse.

The overall lesson is simple – vote for people that want to shrink Federal government; vote against those that want to grow it.

Here is the setting.  It’s year-end, when people do a lot of discretionary spending.  You buy a present for someone with a price tag of exactly $100.  It was made in America out of components made in America and by American labor.  You bought directly from the manufacturer.  The question: what is the total Federal “take” from you and those that should benefit from the purchase?

Here is the breakdown of the Federal “take” related to a $100 purchase.  The meaning of each line is explained below the table.

Marginal income tax rate (defined below)          15%                             10%

Your income related taxes                                 $43.37                         $33.87

Manufacturer’s corporate tax                             $  4.31                         $  4.31

Shareholder income tax                                     $  0.60                         $  0.40

Laborer’s income related taxes                          $13.28                         $11.09

Component manufacturers corp. tax                  $  1.89                         $  1.89

Total Federal “take”                                          $63.45                         $51.56

Here are the details behind the above numbers.  Grinding through this may be the only way to be convinced.  Each step is simple.  The assumptions are straight forward and reasonable.

First is how much extra must you earn to have $100 after paying Federal Income & FICA taxes?

This is where the “end of the year” aspect comes in.  Your “marginal tax rate” is the percent you pay on the last money earned in a year.  I’ll show the details for people in the 15% bracket believed to cover most readers of the blog.   If you are single and your taxable income is between $8K (K = thousand) and $32K, your marginal rate is 15%. (Below $8K, it is 10%.)  For a couple, the range is $16K to $64K.  (Below $16K, it is 10%.)  The above table covers a very large portion of the middle class.

FICA adds another 15.3% (half paid by an employer or all by the self-employed), for a total of 30.3%.  You must earn $143.47 to cover Federal taxes and leave $100 for a purchase.  That is,  0.303 X  $143.47 = $43.47, the tax, leaving $100 for the purchase.

Second is how much Federal Corporate tax did the item manufacturer pay related to the $100 sale?

If the manufacturer profits 8% ($8.00) on the sale after it pays its 35% Federal Corporate tax, it had to have $12.31 of “before-tax profit”.   The manufacturer paid $4.31 in Corporate tax.   That is,  0.35 X  $12.31 =  $4.31.  (Note, the effective Corporate tax rate on sales is 4.31% under my 8% after-tax profit assumption.  We use this number below.)

We must make a few more assumptions about the manufacturer and others involved:

1)      The manufacturer pays half its $8.00 profit to shareholders, who also are in the 15% bracket.  (The rest is retained for new product research or whatever.)

2)      Manufacturing cost ($100 – $12.31 = $87.69) is evenly split between labor cost and purchased components.

3)      The laborers are in the 15% income tax bracket.

4)      The component manufacturers all have an 8% after tax profit structure.

The shareholders of the manufacturer will pay income tax, 15% of $4.00 is $0.60.

The laborers will pay 15% income tax and, together with the manufacturer, another 15.3% FICA.  The total Federal “take” for labor is  0.303 X $43.84 = $13.28.

The component manufacturers will pay $1.89 in Federal Corporate tax.  That is 0.0431 X $43.84 = $1.89.

The Federal Income Tax rates can be found at:

http://www.irs.gov/formspubs/article/0,,id=164272,00.html

The IRS site has links to all the rates used above.

The post below is available elsewhere on the Net, but I wanted it here because it fits in with other posts.  It was created by an economist with impressive credentials.  See    http://davidk.myweb.uga.edu/    

There are two major points:  1) The obvious point about progressive taxation and people's natural reactions to it, and 2) The way words can be used to distort the underlying reality of the situation. 

The coming election is about much more than one person vs. another.  It’s about killing the American Dream (Life, Liberty & Pursuit of Happiness).  Here’s how it could work.

I believe the American Dream depends largely on two things – a healthy two party political system and a market economy.

The wisdom of a two party system is, for any given office or legislature, there is a party-in and a party-out (watching the party-in like a hawk).  It is an essential part of the checks and balances of the American political system.   For any given issue, there are usually two main competing points of view.  The two party system generates healthy dialogue.  Back-and-forth discussion between people of opposing perspectives is a primary aid to learning about and refining issues.

One party systems inevitably lead to oppression.  Over time, the power hungry and ruthless get rid of the moderates within the party.  Notice how the Democratic Party has become less and less tolerant of dissent within.  Joe Lieberman went from VP candidate in 2000 to out-the-door for his support of the war in Iraq.  On most everything else, he is a solid liberal.

There is no doubt that a market economy generates prosperity for all but a small percent of the population.  Poor Americans are better off than a large percent of the rest of the world.  The market economy depends on voluntary choices for transactions.  The larger the government's percentage of economic activity, the less voluntary are the choices.  Involuntary economies don't work.  For 70 years, the Comminist Party planned the Soviet economy (with life & death control of the people) and it's economy never prospered.

It is no accident that George Soros and other commited Socialists are solidly behind Obama.  The Democratic Party is being hijacked by these Socialists and Obama is a tool for that effort.  Here is how election of Obama will destroy the two party system and our market economy.

Right now, the bottom 50% of income taxpayers pay about 3% of the income taxes.  If entitlement programs are expanded to benefit more than half the voters, those voters will almost certainly keep voting for the party than bestowed those entitlements.  Within the last year, there was a push in Congress to expand certain health benefits to families with incomes over $50K.  Also, there were several attempts to put millions of illegal aliens on a quick path to voting.  Obama’s election would guarantee these efforts succeed.  More than half the voting population would be beholding to Democrats for goodies.  They would have an unbeatable majority.

The health care industry is about 16% of the economy.  Socializing this industry plus increasing capital gains tax will put the country into a depression.  Then, Obama will expand government to address the problem.  The American economy will end up about as healthy as the Soviet economy was for 70 years.  And over 50% of the voters will keep electing the people that caused and continue the situation.

All good people of both political parties have to do to let this happen is nothing.