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My Effective Tax Rate

I just got my W-2 for last year, which, when combined with Turbotax or similar, allows me to calculate my income tax rate.

The direct, visible tax rate I’m paying — including federal and state taxes — is about 33.4%.

By any honest measurement, this is far below what I am actually causing to make its way into the government’s coffers. First, my Social Security tax and Medicare taxes are matched by Facebook — 6.2% and 1.45%. I never see this money in my “income”, but Facebook views it as a cost to employing me, so this is exactly equivalent to me paying all of these taxes as a slightly elevated pay rate.

Then there is the VPDI, “voluntarily paid disability insurance”, which, like most government schemes, isn’t really voluntary at all. I can choose to participate in my company’s plan, or I can pay the state — my choice! I of course chose to not pay the state, but essentially this is also a tax (since I wouldn’t carry disability insurance otherwise), albeit one that I get a service out of (of course, some people would claim this of all my paid taxes).

When these are taken into account, my income is taxed at more like a 38.1% rate.

And then, I buy things. I bought a car and paid sales tax on that. Every time I go to the store, I pay sales tax there. Where I live in Palo Alto, the sales tax rate is 9.25%. That’s right, everything I buy, I give another almost 10% to the government. Taking into account the approximate sales tax I paid, using some rough but not unreasonable estimates I made using data from my Mint.com records (I used reasonable assumptions, such as all gas, dining, and entertainment was purchased in state; shopping was half online; travel was mostly reimbursed and not counted, etc), my tax rate goes up to 39.6%.

We’re at nearly 40%, and that’s just the stuff that’s easy to figure out. I pay more for my housing because of property taxes. I pay all sorts of government taxes when I travel (occasionally they are enumerated and they often add 40% to the base rate).  I’m sure there’s a lot I’m missing too. How much do all of these things add to my total tax burden? I figure it’s almost impossible to tell. And that’s not unintentional.

I have a friend who recently calculated his income tax rate, and it came to about 1/8th of mine because he and his wife (one of whom is currently collecting unemployment benefits) are paying two mortgages. Viewing the unemployment payments as a reverse tax, their effective tax rate is well below 0%.

So the guy who made all the “right” decisions — studying hard and busting my butt to be worth a decent income; working through school to avoid student loans; not buying a house circa 2006 because I did the numbers and decided I couldn’t afford it; saving on my own for retirement — now pays at least 40% of his income to taxes, while others who bought the house, financed the car, and take the revolving door job — get net reimbursed with that money.

God bless America.

3 Responses to “My Effective Tax Rate”

  1. cm Says:

    Practice empathy… bitch.
    :)

  2. Chris Vincent Says:

    I would agree there is a lot wrong with our tax system. But I am less concerned about your friend’s unemployment than I am about companies like GE who can afford to pay taxes and yet are also actually paying effectively less than 0%.

  3. Chris Vincent Says:

    Also, I wouldn’t feel so sure of your “non-revolving-door” job. Unless you take on the risk of owning your own company, any job in any industry is potentially a revolving door. There’s nothing inherently special about software engineering except that the market happens to be favorable right now. It’s also a relatively young occupation, with bright, starry eyes, not yet jaded by the inevitable commoditization of all forms of production. There will be a day when people on unemployment are people who did make the “right” decisions. In fact, that is often the case today, with colleges providing degrees that are turning more and more into a dead-end with regards to a career.

    Until you’re writing your own paychecks, just feel lucky that you’re getting anything at all and fall in line.

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