Federal, State, Sales, Excise, and Property Taxes Add Up
Daniel Klein teaches economics at Santa Clara University. Allan Raish is a tax consultant and CPA living in Santa Clara, California.
*Rates are incremental and apply to taxable income (income after deductions and exemptions).
**California taxes may be deductible on next year’s federal tax calculation.
If a college teacher living in California who earns $75,000 per year publishes an article in Ideas on Liberty, and FEE pays him $100, how much do the federal and state governments take? How much does he get to keep?
Here is the pertinent information about the direct takings of such earnings:
2002 Federal Tax Brackets and Rates*
Single Person Married Couple
Income and Rates Income and Rates
Up to $6,000 10% Up to $12,000 10%
to $27,950 15% to $46,700 15%
to $67,700 27% to $112,850 27%
to $141,250 30% to $171,950 30%
to $307,050 35% to $307,050 35%
above that 38.6% above that 38.6%
Federal “Payroll” Taxes—Social Security & Medicare
If you have an employer you pay 7.65 percent and your employer pays 7.65 percent of the first $84,900 of earnings. (And your wages reflect that burden.) Each pays 1.45 percent of everything over $84,900.
If you are self-employed, you pay 15.3 percent of the first $84,900 of earnings and 2.9 percent of everything over $84,900.
2001 California Tax Brackets and Rates***
Single Person Married Couple
Income and Rates Income and Rates
Up to $5,700 1% Up to $11,500 1%
to $13,600 2% To $27,300 2%
to $21,500 4% to $43,000 4%
to $29,900 6% to $59,700 6%
to $37,700 8% to $75,500 8%
(2002 brackets and rates were not available at time of publication.)
The Tax Bite at the Margin
The payment from FEE would be counted as “self-employed” earnings, so the college teacher would have to pay 15.3 percent in levies supposedly for Social Security and Medicare. After deductions and exemptions, his taxable income is in the range of $55,000.
If he’s married, here’s what happens to the $100 payment: Governments take $48.30 and he keeps $51.70.
If he is single, governments take $51.60, and he keeps $48.40.
Furthermore, out of the retained portion he pays sales taxes (about 9 percent in Santa Clara County, California), property taxes (on the condominium he owns), and excise taxes (on the alcohol, gasoline, and telephone services he buys, for example).
Of the additional $100 he receives from FEE, all told, governments will take over 55 percent.
“ . . . The land of the free, and the home . . . of the . . . brave.”
Though FEE usually pays its authors, we instructed it not to pay us for this article. We care for FEE not as much as we care for ourselves, but a lot more than we care for the federal and California governments. Better that FEE have the money than the governments, even if it means fewer dollars for us.
