Taxed onto Death

Taxes are an unfortunate, necessary evil in organized society with a centralized government. The reality is that laws must be made and enforced, roads built and maintained, treaties with other government negotiated, etc. There is no getting out of the fact that our government must receive money from the people in order to provide the protection and services that it does. In politics, however, there is a substantial debate over what the government (particularly on the Federal level) is responsible to provide and on the flip side how much money they need to carry out their duties. I have touched on the Federal governments responsibilities in the past and will surely discuss it many more times in the future. Today I will be focused purely on where the money comes from to pay for said services. Both the Senate (S.18) and House of Representatives (H.R.25) have bills pending to demolish the IRS and our entire tax system as we know it and put in it's place a national sales tax. This is such a bad idea that it borders on ridiculousness but I plan to unpack this plan in all seriousness to show just how ridiculous it is.

I will be the first to tell you that our current tax system is deeply flawed. It is overly complicated with abundant loop holes. Its convoluted nature makes it nearly impossible for the common man to navigate the best results without help while the rich and savvy exploit the system to avoid paying their fair share. Even when they do pay their fair share those of low income, without government support, are left with no way to save and get ahead. To illustrate this point I will use three different examples: a low income family of four, a middle class couple, and a single person with a high income. I will be relying on the 2015 Consumer Expenditure Survey for much of my data but will be rounding and in some cases adjusting my numbers to the particular cases at hand. Since wages, rents, food costs, etc. vary so dramatically across the nation I have tried to use fairly conservative numbers in the different categories.

Case 1)
A family of four (a couple with 2 children) lives off of a gross income of $30,000 a year. Because they are below the poverty line they pay nothing in taxes. They pay $1,000/month ($12,000 annually) on rent because their family size requires a certain minimum amount of living space. They pay annual utilities of about $3,000 (10% of gross income). They budge $500 a month for food and incidentals ($6,000 annually). They allow no more than $100 per person per year for new clothes and shoes which makes a total of $400 (this number is not only conservative, it is next to impossible to maintain but I'm going to roll with it). They have a single, older car that is paid for but between gas, insurance, and oil changes they spend about $3,000 a year on transportation (this does not include any car repairs that may be needed). Finally the family is fortunate enough to have modest health insurance. They avoid going to the doctor or getting medication unless absolutely necessary but still spend about $3,500 per year in health care costs between insurance premiums, co-pays, and medications. After all of these expenses the family is left with $2,100 for the year. This is their entire budget for any emergencies (medical, car breakdown, appliance replacement, etc.), care of pets, recreation, any overages on their already tight budget, plus any necessary child care over the course of the year. In a perfect world each member of the family could be allocated just over $40 per month for recreation and the family could just break even for the year. There is no room for saving money for a rainy day or for their children's education.

Case 2)
A middle class couple lives off of a gross income of $50,000 a year paying 25% of their income in taxes or about $12,500 annually. They also pay $1,000/month ($12,000 annually) on rent/mortgage but because they require less space they can afford a smaller place in a nicer neighborhood. Like the poorer family they pay 10% of their income on utilities or $5,000 annually. They have the same $500 per month ($6,000 annually) food budget but with only two mouths to feed they can make this budget stretch a lot farther on a wider variety of healthier foods as well as some luxury food items. They also have more money for clothing and can afford a nicer wardrobe at $200 per person annually or $400 total. They have a modest car payment in addition to gas, insurance, and oil changes and pay about $6,000 annually on transportation. Finally, they pay a bit more for a better insurance plan and are comfortable going to the doctor regularly for check ups. They spend about $4,500 annually on healthcare. This leaves $3,600 annually for emergencies, pet care, and recreation. That calculates out to $150 per person per month. This leaves enough money to put a small amount away in savings and still be able to go out and enjoy themselves on occasion. They are better able to take care of their physical and mental health and are less likely to get sick. Also, because they have better insurance coverage they are less likely to be financially devastated in the event of a major illness.

Case 3)
A single individual with a gross income of $100,000 a year pays 30% of their income in taxes or about $30,000 annually. They have a nice home for which they pay $2,000 a month ($24,000 annually). Like the other cases they pay about 10% in utilities or $10,000. They eat well paying an average of $750 a month ($9,000 annually) on food and incidentals. While the poorest family spends $100 per person in a year the wealthy individual spends $100 a month ($1,200 annually) on clothes for themselves. They also drive a fancy car and spend about $15,000 a year on transportation. For health care they have the best coverage available and can afford regular visits for massage and chiropractic at $6,000 a year. Even after all of this luxury the individual still has $4,800 left over at the end of the year for investment, savings, and entertainment.

I've summed up these three circumstances with the graph below:

Family size	4	2	1
Yearly gross income	30,000	50,000	100,000
Taxes paid	0	12,500	30,000
Annual rent/mortgage	12,000	12,000	24,000
Annual utilities	3,000	5,000	10,000
Annual food/incidentals	6,000	6,000	9,000
Annual clothing expenses	400	400	1,200
Annual transportation	3,000	6,000	15,000
Annual medical expenses	3,500	4,500	6,000
Remainder	2,100	3,600	4,800

With all of this data it is no wonder that the rich get richer while the poor are unable to get maintain their current circumstances. When one major illness or an unexpected car repair can devastate your entire financial circumstances you live in constant stress which can negatively impact your long term health and wellness both mentally and physically. It is no wonder that low income families rely on public assistance just to make ends meet. 

This clearly shows how our economic system, including taxes, favors the wealthy and it only gets worse when you look at incomes that range to $1 million and more. A poor family that pays no taxes takes home $30,000 annually. A  single person who makes $100,000 takes home 70% or $70,000. Since our tax brackets cap out at $39.6% for incomes greater than $500,000 a person who grosses $1 million will have a take home of about $600,000. 

Now that I have covered our current tax circumstances let's take a look at the congressional proposal. House Bill 25 and Senate Bill 18 both call for a flat 23% sales tax across the board. There does not seem to be any exceptions for necessary items such as food or health care costs but there is a "Family Consumption Allowance" which consists of a monthly rebate to low income families to offset tax collection. Let's see how this works by the numbers using my previous 3 cases.

Case 1)
A family of four (a couple with 2 children) lives off of a gross income of $30,000 a year. They pay $1,000/month ($12,000 annually) on rent. They pay annual utilities of about $3,000 (10% of gross income). They budge $500 a month for food and incidentals ($6,000 annually). They allow no more than $100 per person per year for new clothes and shoes which makes a total of $400. They spend about $3,000 a year on transportation (this does not include car repairs). They spend about $3,500 per year in health care costs. This means the family's total annual spending is $27,900. At a rate of 23% they would be charged an additional $6,400 for taxes. Which means their actual yearly spending would be $34,300 or more than their yearly income leaving them in perpetual debt. If the family is able to navigate the application process and are approved for the "Family Consumption Allowance" then they would, theoretically, be back to net 0 on taxes with their $2,100 reminder, but this money now has less buying power as they would still be required to pay taxes on any purchases they make with said money.

Case 2)
A middle class couple lives off of a gross income of $50,000 a year. They also pay $1,000/month ($12,000 annually) on rent/mortgage. They pay 10% of their income on utilities or $5,000 annually. They have the same $500 per month ($6,000 annually) food budget. They have a clothing budget of $200 per person annually or $400 total. They pay about $6,000 annually on transportation. Finally, they spend about $4,500 annually on healthcare. Their annual outflow would be $33,900 on which they would pay 23% in taxes or $7,800. They do not qualify for the rebate and so this leaves $8,300 annually for emergencies, pet care, and recreation. This is substantially more than the current system but the loss of buying power will reduce the amount of actual benefit the couple receives from this money.

Case 3)
A single individual with a gross income of $100,000. They pay $2,000 a month ($24,000 annually) on their home. Like the other cases they pay about 10% in utilities or $10,000. They pay an average of $750 a month ($9,000 annually) on food and incidentals. The wealthy individual spends $100 a month ($1,200 annually) on clothes for themselves. They also spend about $15,000 a year on transportation. For health care they pay about $6,000 a year. Their annual outflow is $65,200 and at 23% tax they would pay approximately $15,000, or half of their previous tax contribution. This means that they are now left with a surplus of $19,800, almost four times their previous surplus. Like the other cases they suffer a loss of buying power but this is insignificant in the face of their monetary gains.

To look at the situation as pure numbers we see the following:

Family size	4	2	1
Yearly gross income	30,000	50,000	100,000
Annual rent/mortgage	12,000	12,000	24,000
Annual utilities	3,000	5,000	10,000
Annual food/incidentals	6,000	6,000	9,000
Annual clothing expenses	400	400	1,200
Annual transportation	3,000	6,000	15,000
Annual medical expenses	3,500	4,500	6,000
Total expenses	27,900	33,900	65,200
Taxes paid	6,400	7,800	15,000
Rebate	6,400	0	0
Remainder	2,100	8,300	19,800

To get a real comparison let's look at what remains to each group under the current system vs. the proposed sales tax:

Family size	4	2	1
Yearly gross income	30,000	50,000	100,000
Remainder current	2,100	3,600	4,800
Remainder proposed	2,100	8,300	19,800
Difference	0	4,700	15,000

It is clear that this system does nothing to aid low income families, makes marginal gains for the middle class, and substantially benefits the wealthy. Given that the necessities of life require spending 93% of a low income family's wages, 67.8% for the middle class, but only 65.2% for the wealthy individual it is clear that this system can do nothing to help low income individuals. Furthermore, a wealthy individual can choose to spend less and save their money, further reducing their input into the tax system. Low income families, who are barely getting by, have no such luxury.

If the spending percentage holds steady for wealthy individuals (and it is more likely to go down considering the trend) then a person who earns $1 million in a year would spend about $652,000 (65.2%) and pay taxes of approximately $150,000 (23% of money spent). Under our current system, if they don't find a way to get out of it, a millionaire would contribute almost $300,000 in taxes annually. From this single individual it would be a loss of $150,000 annually in tax revenue. The loss of tax revenue would be substantial across the population necessitating steep cuts to Federal programs. Since there seems to be no move to reduce military spending, which accounts for the greatest portion of government funding, these cuts would almost certainly come at the expense of social programs, many of which are geared at assisting the poor and elderly. This would, of course, make it more difficult for low income families to make ends meet, let alone get ahead in life. 

A solution to our tax problems needs to be found, but a national sales tax is not the answer. Closing loop holes, simplifying tax code, and ensuring the wealthy pay their fair share is the only way we can protect the poor and insure adequate government funding.