David R. Henderson  

Your Taxes at Work

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From Third Way comes this clever exercise in numeracy: seeing how important various parts of the federal budget are by translating it into what you pay in taxes for each part. So you plug in all the taxes you pay, including Social Security, and it tells you what you're paying for "defense," Medicare, Medicaid, etc. What I don't know is whether they attribute the employer's portion of Social Security to you. I did so when I tried out mine. I also don't know how, or whether, they allocate corporate income taxes and federal excise taxes. My guess is that they leave these out. Still, it's an interesting exercise.

Even neater is that you can dig into the details of each budget. So, for example, you can find out how much you pay for the Iraq and Afghan wars.

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CATEGORIES: Fiscal Policy , Taxation

COMMENTS (10 to date)
mark writes:

It's a nice idea although pretty simplistic in that it fails to distinguish income tax from payroll tax. As none of the SS or Medicare tax goes to pay for anything else, it's ultimately misleading unless the person filling out the form remembers to add that amount in. They should really break it up into two prongs, one for the payroll tax and one for the income tax and then add a third line which says "where did the rest of the spending come from?"

I liked the fact they show the TARP as a profit.

MRP writes:

The numbers don't seem to work out for me. I know my income tax v. entitlements will be off (pre-tax 401(k) contributions reduce only the former), but the ratio of Social Security to Medicare simply doesn't make sense. Shouldn't it be 6.2%/1.45% ~= 4.3, rather than 20.4%/13.1% ~= 1.6?

David R. Henderson writes:

Good question. Here's what I think is going on. Social Security benefits in 2010 were almost entirely paid for by Social Security taxes. But Medicare benefits in 2010 were far above HI taxes in 2010.

Ari writes:

The methodology assume that all taxes paid go into the general fund, which funds all of the things listed. Not so. Social Security is funded separately from a separate tax, and Medicare partially so. Much of transportation is funded through a gasoline tax, which they don't even ask people to enter, and which varies widely from family to family even among people with the same income.

So, a family that pays payroll taxes on $40k but $0 in income tax because of deductions and credits (notably the child tax credit that wipes out $2,000 of tax liability) will pay close to 81% of their taxes on Social Security, approximately 19% of their taxes on Medicare, and 0% of their taxes on everything else.

By contrast, a family with $1 million in income that pays $200k in income tax, $14,500 in Medicare tax, and less than $6600 in Social Security tax, has percentages allocated much differently. 3% toward Social Security, as opposed to 81% for the other family.

Ari writes:

Also, in 2011 more than 40% of the budget is not funded by anybody's 2011 taxes. It's funded by taxes in future years.

quadrupole writes:


When FICA and HI taxes were higher than expenses, where did the excess money go?

When (as in the last year) both FICA and HI taxes failed to pay for those benefits, where did the excess money come from to pay for them?

If you have two programs, which, when they are overfunded spill their excess into the general fund, and when underfunded draw to make up their deficit from the general fund... in what way are they not simply pouring their tax receipts into the general fund and drawing their expenses out of it?

Ari writes:

Excess FICA taxes went to buy the general fund's debt. The general fund owes that money back. It's different from just putting the money into the general fund in the first place.

Also, it's my understanding that the Medicare tax is not meant to fund all of Medicare. It only funds the inpatient hospital benefits of Medicare. The rest of Medicare is indeed funded through the general fund.

quadrupole writes:

So if I'm a large company, and I put money into my pension fund, and then borrow that money from my pension fund to pay dividends to my shareholders, leaving bonds behind and just saying that the pension fund was borrowing my debt instead of the bond market... how is that any different than this?

I would say the company above is simply paying out any retirement benefits from it's pension as an annual expense, that the pension fund is just a fiction.

When an organization lends money to itself, whether an individual, a company, or a government it's simply an accounting fiction... it's all the same general fund.

Yancey Ward writes:

Dollars are fungible. The general fund is the only thing you should focus on. The rest are intragovernmental accounting devices- nothing more.

As for the employers' portion of FICA, I think it logical to assume that the employer doesn't care much how his costs to employ you are apportioned between salary, benefits, and employment taxes, but it probably matters to the employee more, so assign all of it to the employee. As for corporate taxes, it probably makes sense to apportion it out based on consumption per capita basis- someone who consumes $100,000 pays twice as much of the corporate tax as someone who consume $50,000, say. Rough, but I think gives some sense of who bears the costs.

Ari writes:

The Social Security Trust Fund is an accounting fiction. But the accounting fiction is relevant if the question is "what are your taxes paying for." For someone who pays only payroll taxes, they are paying for Social Security and Medicare and getting a free ride for everything that's not Social Security or Medicare.

From a political economy perspective, such a person has no reason to favor cuts in spending on things other than Social Security or Medicare (or vote for politicians who support same), because those cuts won't reduce that person's tax bite.

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