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The April Fools

That would be people like my wife who continue to work. Here is how her income is taxed:

  • Federal tax rate of 28% (her wage puts us in this bracket)
  • State tax rate of 6.5%
  • Social security – her “share is 7.65%, her employer pays 7.65%, but since we know that the incidence of this tax is mostly on workers, this is closer to 15% on her)
  • Since she is married to me, and I have health benefits with my job, she is not able to claim health benefits from her job. Nor does her job permit her to receive the equivalent, or any amount of compensation that is paid for every worker’s health insurance. Estimated value: $1,000 per month, or $12,000 per year. So, this is an annual margin to pay attention to, though it is not unreasonable to convert this to a wage equivalent.

These are wholly aside from the taxes she pays on almost anything she buys. Now in what follows I am playing fast and loose with the numbers else I bore you with fancy pictures and imagined income, but to consider a typical $50,000 salary:

  • she’s liable for $14,000 in federal income taxes (that’s more than I am technically liable for despite my larger salary – what’s that about gender equality?)
  • she’s liable for $3,250 in state income taxes
  • she’s liable, directly for roughly $3,800 in payroll taxes
  • she’s liable, indirectly, for roughly $3,500 in payroll taxes
  • she’s liable for $12,000 in lost compensation since her company pays everyone health insurance benefits as part of the compensation package yet does NOT pay workers who do not take such benefits. In other words, her true compensation (ignoring other benefits) would be $62,000 if she were not married to me and did not already have health insurance via me. While there is very little good reason for companies to be paying workers in kind for a particular good/service we like to consume (ignore the historical tax reasons), I see no reason why otherwise identical people should get paid differently. How’s that for gender equality?

Now, from a practical perspective, the reason why her employer does not pay her for the value of unpaid health benefits is that the employer does not actually see lower health premium costs if she does not accept the policy, or so I suspect. My understanding (not articulated by her employer to her of course) is that when you are part of a group health insurance policy, the global premium from the employer to the insurer is fixed and is a function of expected number of employees covered and their relative risks. So, though her dropping out of the insurance pool should reduce the costs to the insurer, it does not, for now, reduce costs to the employer. That said, if every employee opted out of health coverage it would be hard to take seriously any justification for not paying out the value of the benefits (or some fraction thereof) in cash.

Taking the very simplified information from above, on a salary of $50,000, she ends up walking home with $28,950. But that salary of $50,000 actually captures the net payment to her from the employer, which should be $65,500 (the employer share of payroll taxes and contributions to health premiums included now but which do not have state and federal income taxes deducted from). Putting this all together, each year my wife’s “supposed” compensation should be $65,500. And each year she walks home with $28,950.  This is an effective marginal tax rate on her annual work effort of 56%.

Say what you will about the 1% and how privileged both myself and my wife are to have been born to the United States (both to rather poor families in poor circumstances, but ignore that for now), that’s a pretty hefty marginal tax rate on her work effort, especially given the type of work she does (maybe more on that in a future post), which includes wiping the asses of complete strangers. A lot. 

And then of this $28,950 that she is so blessed to keep, she pays 50.6 cents per gallon of gas in NYS excise taxes and 18.4 cents in federal – so just driving each year (600 gallons of gas burned) costs her another $414. And I’d estimate that 2/3 of her spending ends up being taxed at the 8.25% sales tax rate, meaning she dishes out another $2,354 in sales taxes to the state/county each year. And then of course is the embedded higher prices she must pay for almost anything else she consumes because of the various regulations that businesses must adhere to (not all bad of course and things we’d happily pay for if priced a la carte) such as FCC taxes on the phone plan she has, taxes and fees and licensing on the car she drives, and so on, which I’d estimate easily at 10% of her gross salary, but to be generous we’ll call it less than 5% of her take-home salary – meaning about another $1,000 in costs she pays. 

Putting this all together, for a pretty tough job that required $50,000 in debt to obtain schooling to train for (and several years of lost wages), my wife ends up taking home and obtaining about $25,000 worth of goods and services, or an implied annual tax burden of 62%.  Now, $2,000 per month of extra take home free income is, ipso facto, nice. But not given the effort one must make to obtain it. No reason to comment much more here, aside from the following:

  • if women tend to be second earners, as they sadly are in our house right now (I’d LOVE to have her be the big time breadwinner!), then we have a tax and regulatory system that is entirely biased against them. A woman earning $50,000 faces, in this example, nearly a 2/3 tax burden. On what planet is this intended? 
  • given the way our finances and life is set up, we may actually be better off divorcing, though I am sure divorce lawyer fees have been driven up to arbitrage the difference
  • we are not really very near the 1% (as if that should matter anyway)
  • you can see that we are questioning whether we want to work this hard for this kind of reward. Again, you may say these are first world problems, but they have far larger repurcussions that I think are obvious. I already gave up a fairly lucrative consulting gig because I was tired of working at tedious tasks at 2 in the morning just to keep half of what I was being paid – i.e. it wasn’t worth it. 
  • No amount of carve outs, exemptions and the like can “fix” this, assuming anyone wants it fixed.
  • We are at an income and life stage where there aren’t great ways to reduce this tax burden, unlike perhaps, people who are far wealthier and have far more income than we do. 

Much more to say of course, but as I look at it, we are complete suckers. 

7 Responses to “The April Fools”

  1. Gabriel Wittenberg says:

    Any how generous you were with your assumptions. They will say “but WC, what about the roads! Who will pay for the roads!”

  2. Harry says:

    I have been seeing ads on TV about how hospitable New York State is for business, and now WC comes along as the skunk at the party.

    By the way, you forgot about municipal income taxes,state and federal unemployment taxes, and real estate taxes. It could be worse: you both could be working in Manhattan, which does not have a nearby Wegeman’s.

  3. Harry says:

    As a corollary, you could open a business in New York and deduct the losses from Adjusted Gross Income. For big losses, go into chickens and you can depreciate your tractor and manure spreader, and maybe the chickens.

  4. Harry says:

    Also, for not only WC and others pushed into higher marginal tax rates, triple tax-free New York municipal bonds become attractive, raising those bond prices for those who hold them already, and encouraging New York municipalities to borrow more money to spend on public works designed by politicians, who are much better at allocating capital resources than, well, anybody. Higher marginal rates, especially for married female nurses, is a win-win, and WC gets a tax shelter carved out for him, maybe enough to buy a canoe.

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