Chapter 1: Taxation Overview

As we approach Tax Day, it’s a moment to assess our financial obligations. This year, April 15th falls on the 18th, and it’s time to evaluate our Federal Income Tax responsibilities. Ideally, throughout the past year, we’ve withheld enough to receive a refund, or perhaps we’ve withheld too much.

Calculating the exact tax owed often requires the assistance of tax software or a professional accountant. In addition to federal taxes, we also have state and local taxes to consider. Just how much do working individuals pay in taxes?

The intricate federal and state tax forms serve to clarify our liabilities to various government levels. When you tally up all these taxes, many working Americans might be taken aback by the total. Living in a state with a sales tax only exacerbates this situation.

On the federal level, wage earners are responsible for federal income taxes. Most Americans earn their income primarily through wages, which also incurs additional payroll taxes. These include Social Security, Medicare, and unemployment insurance taxes. Notably, payroll taxes effectively double the burden since employers match the contributions made by employees.

According to the Tax Policy Center, around 80% of taxpayers end up paying more in payroll taxes than in income taxes. This percentage increases when factoring in the employer's contributions. The overall Social Security tax stands at 12.4% of wages, while the Medicare tax is set at 2.9%. Depending on income levels, federal income tax rates can range from 10% to 37%.

For those residing in one of the 42 states with a state income tax, the rate can soar as high as 13% of their income. Additionally, 45 states impose sales taxes that could add up to 7% on most purchases.

Property taxes on homeownership and excise taxes on items like gasoline, alcohol, and airline tickets further compound this financial strain. Moreover, estate taxes kick in upon an individual's passing, making it challenging to pinpoint an exact tax burden for anyone.

When considering these factors, it becomes clear that most income earners feel overtaxed. The rising public debt, now surpassing $31.5 trillion, poses significant concerns. With an economy generating $25 trillion in annual GDP, this debt level is alarmingly high.

In just the past four fiscal years (2020-2023), the federal budget deficits have added $9 trillion to this already substantial figure. As discussions surrounding the debt ceiling grow imminent, the focus will likely shift to strategies for addressing the deficit. The two primary options on the table are to either increase taxes or cut spending. Given that many Americans already feel overburdened by taxes, a tax increase is generally unpopular.

However, cutting spending presents its own challenges. Approximately 60% of government expenditures are directed toward entitlement programs, such as Social Security, Medicare, and Medicaid. Around 10% is allocated for interest on public debt, with the remaining funds split between defense and social programs.

Given the current political climate, reducing social program funding is unlikely. Similarly, with global instability, decreasing defense spending would be a tough sell. Since interest on public debt remains non-negotiable, the focus inevitably turns to entitlement programs, which are often politically protected from cuts. So, what’s the solution?

Both Social Security and Medicare face insolvency within the next decade unless significant reforms are enacted. The challenge lies in crafting a strategy that curtails entitlement spending while ensuring these programs remain viable for current retirees.

Finding an optimal solution is difficult, but raising the retirement age to at least 70—and possibly even higher in the future—may be the most viable option. This approach would require individuals to work longer, thereby contributing more, and delay retirement, resulting in decreased spending. While this solution may not be universally palatable, it could represent a compromise that many Americans would accept.

The first video, "Can the US Rein in Chronic Federal Deficit Spending?" delves into the persistent issue of federal deficit spending and its implications for taxpayers.

Chapter 2: Who Bears the Tax Burden?

Understanding who ultimately pays taxes is crucial in the debate over tax policies and reforms.

The second video, "Who Pays Taxes?" explores the distribution of tax burdens and the complexities surrounding who contributes to federal and state tax revenues.