Taxes and Hidden Taxes…How Much Is Enough?

During the fiscal cliff kerfuffle the President and his acolytes succeeded in their quest to implement the divisive class warfare mantra of the election, i.e. impose further taxes on the evil rich.  As that election battle proceeded a basic tax question was often raised by many taxpayers--not just the rich: “how much is enough”?  Americans also voiced concerns and discussed fuel costs, inflation, the cost of government and how these costs might be reduced.  Nevertheless I believe that most Americans do not realize they are paying numerous “hidden taxes” due to government. 

In some discussions a 50% maximum threshold for all taxes was mentioned (e.g. Sean Hannity-almost nightly).  Additionally the Federal Government was cited as not the only authority with a hand in the taxpayer’s pocket.  It was pointedly noted that states, cities, and counties levied taxes… that real estate, personal property, estate, capital gains, fuel, sales and excise taxes were competing for pieces of our hard earned paychecks...and finally that fees, fines and licenses existed…all of which were meaningful and on the rise. 

Currently the federal government uses marginal income tax rates ranging from 10% to 39.6% which are applied to adjusted gross income to define our tax bills.  The states add tax burdens  ranging from a low in Alaska of 7.0% to highs in Connecticut, New Jersey and New York of 12.3%, 12.4%, and 12.8% respectively.  Hence a combination of federal income taxes and state tax burdens--without considering the myriad “other” taxes--place top earners very near the 50% threshold (e.g. if you earn an adjusted gross income of $400,001 as an individual or $450,001 if filing jointly in NY, the tax rate would be 35% + 12.8%=47.8%). 

But the costs/burdens of the federal government (and state govs.) go well beyond their tax regimens.  Our current government, in particular, has burdened us with other meaningful costs (read hidden regressive taxes) that include energy, regulatory, legal/litigation and more recently ObamaCare.  Further hidden taxes can be cited such as inflation, Fed interest rate policy, tariffs and waste and fraud.  Together with all other taxes the combined “tax” load on Americans, both individuals and couples, is well above the numbers found on their federal and state income tax forms.

A Few Key Statistics

US population  (2011) Total=306,110,000; Adult population=243,955,000 (US Census Bureau)    

US households (2010) Total=115,538,000; Persons per household=2.59  (US Census Bureau)

Federal Income Tax Revenues (2011) Individual Income Taxes Collected=$8.093 trillion (US IRS)

Number of Passenger vehicles=254,400,000 vehicles (2007)  (US Bureau of Transit Statistics)  

Government Regulation
Government regulatory costs, benefits, overuse/abuse, even constitutionality are often discussed with little agreement.  To address these factors, the Competitive Enterprise Institute, the Small Business Administration (SBA) and the Heritage Foundation conducted extensive studies (between 2008 & 2012) that stated the costs associated with regulations ranged from $1.75 trillion to $1.80 trillion.  Further regulatory costs are expected to grow rapidly since the Obama administration has added 11,327 pages of new regulations between 2009 and 2011.  The growth of regulations accelerated in 2012 with the number of pages expected to exceed 4,450. 

The 2008 Small Business Administration study calculated regulatory burdens at $1.752 trillion.  The study suggested that 70% of the total or $1.236 trillion were economically driven costs, that environmental regulations added $281 billion; tax compliance another $160 billion and homeland security startlingly topped $75 billion in cost.

Using $1.70 trillion as a reasonable estimate of total regulatory costs, these costs by comparison are almost double the yearly income taxes collected from individuals and cost each adult approximately $6,960 annually.  Yet regulations also provide benefits.  Democrats insist the benefits exceed the costs in opposition to Republicans who believe the reverse.  For this analysis one third of the annual cost per adult is believed to be unnecessary and a hidden tax of $2,320 per adult.    

ObamaCare

ObamaCare taxes became effective January 1st.  Estimates of the act’s costs over ten years run from $700 billion to $1.1 trillion or $70-110 billion per year (CBO est.=$1.1 trillion).  Yet if the past is prologue the track record of the Congressional Budget Office or Bureau of Economic Analysis (CBO or BEA) in estimating government program costs means ObamaCare’s actual price will double or even  triple in two or three years.

Upper income earners will suffer the brunt of the tax increases.  Individuals earning $200k+ per year or couples taking home $250k+ will pay a 0.9% Medicare tax increase on wages above those amounts and an added 3.8% tax on investment income.  Employers (with 50+ associates) will face partially paying for their employees insurance or remitting a $2,000 penalty for each employee. 

Health care insurers, drug companies and medical device companies will also pay higher taxes and fees.  Most notably medical device manufacturers will endure a 2.3% excise tax on sales.  These are just three of twenty additional new taxes/fees directly related to ObamaCare.  Administration officials and ObamaCare supporters argue that much of the extra tax load is borne by business not individuals…but the end user (a consumer) will ultimately pay all the taxes, penalties and fees.

Given a preliminary estimate of $1.0 trillion in cost for ObamaCare the average adult’s share per year will run $410.

Energy  

Energy policy or a lack of a policy has cost individuals and households a significant and growing percentage of their income.  On Obama’s inauguration day the average price of a gallon of gas was $1.82.  Subsequently the average price skyrocketed to over $4.00 per gallon. 

Gasoline consumption per driver varies from 281 to 729 gallons per year based on a variety of assumptions/factors.  Government statistics (albeit dated) indicate that approximately 200 million+ drivers operate passenger vehicles in the US.  A number of studies performed by the US Energy Information Agency and the Department of Transportation have posited that the average household consumes 1,100 gallons per year.  Thus if an average household contains 2 adults the gallon usage per adult equals 550 gallons. 

Although oil is a fungible commodity I believe that an energy policy aimed at real energy independence would have held a gallon of gasoline below $2.25 a gallon (vs. $3.55 now).  A simple calculation demonstrates that current policy is levying a hidden tax on adults of at least $750 per year.

Legal/litigation

The costs associated with civil litigation (aka torts) exploded in the 1970’s and 1980’s.  The costs and side effects of the system soon captured the attention of economists who recognized its economic drag.  As a consequence numerous studies have been conducted to quantify the costs/benefits and the costs of excessive/unnecessary tort actions.

Three studies are referenced with regularity.  Towers Watson calculates the per person cost of frivolous tort actions at $838 or $1,052 per adult.  The Tillinghast estimate touted by the U.S. Chamber of Commerce puts the price per person at $880 or $1,100 per adult.  The Pacific Research Institute’s study generated a stunning estimate of $2,457 per person which translates to $3,071 per adult.  Each of these studies has been criticized for being inaccurate.  Critics contend the studies are totaling the costs of all tort litigation.  In contrast others believe the costs are understated since the fear of a tort action negatively changes behavior, risk taking and investing; costly factors that are very difficult to measure and quantify.

A comparison of the U.S. civil system and similar systems in Europe and other industrialized nations generally indicates our system is twice as expensive.  Those systems require that the losing litigant pays the winners legal fees and do not allow contingency billing to name just two differences.  In summary a cost of $1,050 for every adult appear reasonable given the evidence highlighted above.

Hidden taxes/costs are increasing and quite meaningful to most American budgets today.  A total of the four discussed above equals $4,530.  These costs are not just largely hidden but are regressive in nature and have a greater impact on low wage earners and the elderly.  These costs also push many taxpayers into an ever growing group that involuntarily tithes over 50% of their income to government.   Congress and the President could materially reduce these costs by recognizing their existence and by legislating straight forward solutions.  Instead we get the politics and theatrics of the fiscal cliff nonsense that accomplished little over the past few months.