Here are two questions to ponder:
Why does government cost so much?
And why doesn’t a paycheck go as far as it used to?
The answer is not inflation. It is more complicated and perverse than that.
Let’s say you’re a single person working 30 hours in California making the minimum wage of $8 an hour.
That comes to $12,480 a year. Based on federal tax tables, as a single person you’d owe $1,481 in taxes minus $115 under Earned Income Credit if you were basically your own independent household.
Your monthly gross income would be $1,040. That is under the $1,211 threshold per month you need to qualify for food stamps in California. So wouldn’t it make more sense and cost less money if instead of taking $1,366 in taxes from a single taxpayer working a minimum wage job 30 hours a week and returning that money in the form of subsidies such as food stamps to let them keep it to begin with?
Increase the minimum wage a dollar an hour as California is doing next year and that person is making $14,040 before being dinged for $1,676 in federal taxes. Since they’d no longer qualify for an EIC, they are now taking home $12,369 a year. That’s a gain of $1,255 a year. But if you dropped federal taxes on their income at $8 an hour instead of giving them a mandatory pay hike to $9 an hour, they would have $1,481 more in their pockets.
In other words, someone working 30 hours a week at minimum wage in California would be better off to the tune of $226 a year or $18.80 more a month if they were free of federal tax obligations instead of being given a pay raise.
Add in state income tax and the number rises.
Regardless of the official poverty level, we are taxing individuals that qualify for a wide array of government subsidies so they can survive day-to-day. Instead of taking money they earn and then effectively laundering it through the bureaucracy it would be much more cost effective to let them keep it.
Taking the middle ground of various think tank studies, government tends to take around 20 cents out of every $1 it collects from taxpayers and then returns it to them in the form of some type of government program whether it is transportation funding for freeways or food stamps. Call it bureaucratic overhead for the legions of regulators and paper pushers needed to process the taxes and regurgitate it in the form of government programs.
That’s not to say raising minimum wages isn’t justified or needed. But if the goal is to raise the economic lot of those toiling at the lowest income level it would be more cost effective for all of us and more beneficial to the individuals if they simply weren’t taxed in the first place.
There is a dirty little secret about effective tax rates and how much those in various tiers from the bottom to the fabled “One Percent” pay in taxes. Tax brackets went for long periods without ever being indexed for inflation.
That allowed government to vacuum in more money as pay rose and income rose even if it did not keep pace with inflation.
At the same time that essentially took more money out of the pockets of rank-and-file taxpayers. Meanwhile, consumers were paying more for products produced by manufacturers who were also being taxed at rates that were not adjusted for inflation.
The reason government costs so much has as much to do with our unrealistic desire to have them cover all sorts of expenses for us that go beyond the basics as it does with the fact it has been fueled by repeated windfalls created by failure for stretches of multiple years since the 1950s of not adjusting tax rates annually for inflation.
And it is income taxes collected almost exclusively by federal and state governments that are the basis for slowly but surely sucking the life out of paychecks.
Given how we go about taxing people it isn’t amazing at all that our economy has reached a point where real economic growth is stagnant if that.
The Byzantine way we collect taxes as reflected in the nonsensical instructions of 1040 forms and a federal tax code that would give Arnold Schwarzenegger double hernias if he tried to lift it does more harm than good.
But it is effective at one thing: It keeps anyone from having a clear day-to-day picture of what is really happening to their money.
It has created a system where people who get tax refunds each year act as if it is a bonus or free money. In reality it was their money in the first place that the government did not legally need under tax rates to take from them and then return it without interest.
Try keeping money due the IRS from them for one to 11 months and see whether you don’t have to pay interest.
The way we tax struggling wage earners in this country on the lowest tier needs to be rethought.
There shouldn’t be hoops they have to jump through to essentially get money back that is theirs in the first place, nor should they have to take it in the form the government dictates through specific subsidies.
It is time to understand that government also helps create poverty and inflation with the way they tax.