Tax Talk

Today I finished my 2012 rendering unto Caesar what is Caesar's.  The woikas were here for a couple days this week, so maybe that's why I'm feeling so philosophical about that.

Anyway, here are my thoughts and summary for the year.  Last year (2011) my effective tax rate was 14.9%.  This year it was 15.7%.  The main causes for this were:

1. My wages/salary decreased by $1000-$2000 (depending on which number you look at).  The root cause of this was a poor bonus multiplier due to my company's bottom line suffering from the poor economy.
2. The principal on my mortgage is decreasing, resulting in fewer deductions due to mortgage interest payments.
3. I made fewer charitable donations that I could claim as deductions.

The total lesser amount in deductions was a little bit over $2,000.  Thus, this year I am paying $400 more in taxes compared to 2011 despite my income being reduced.  That's $400 more, NOT $400 total.  Just to be clear.

The tax preparation software I use gives a nice table of where the U.S. Government spends its money, so I thought I would graph it so you can get a better idea of where the money is spent.

As I think I said last year, a very large chunk of the "budget" (if you can really call it a budget) is on entitlements.  Social security is a big chunk, but then assistance programs are another very large chunk (unemployment, medicaid, food stamps, etc.).  Assistance programs total 25% of all federal dollars spent, which is more than they spend on national defense.  It's also interesting to note that a lot of the programs like education funds, law enforcement, etc. that get threatened to be cut in a budget crisis are probably not where the real "low hanging fruit" is.  Just sayin'. 


I think some analysis is also needed in light of the whole political stuff going on about how the budget is going to be "cut".  In 2012, the government spent $3.5 trillion.  The revenue (this means taxes) for 2012 was only $2.45 trillion.  If you do basic subtraction, that means that our congress men and women approved spending that was $1 trillion more than what they "earned".  I don't know about you, but I consider that fiscally irresponsible.

Let's remove some of the 0's and give an example.  Say you make $100,000 per year, which is a fairly decent salary in many cases and probably puts you in the top 20% of earners in the U.S.  If you live within your means, after you pay social security taxes, income taxes, put money in your 401(K), etc., you probably actually spend about $60,000 in living your daily activities.  Now, let's say you decide to act like Congress.  First of all, you decide you don't need to be so anal, and you don't create a budget.  Then, you decide you don't need to put all that money in your 401(K) and social security.  Instead, you just go ahead and spend $140,000 on living for the year as you go deeper and deeper into debt charging stuff on your credit card each year.

If we look at it another way.....there are about 314 million people in the U.S.  Assuming life was fair (which it isn't), that means the federal government spends about $11.2 billion $11,200 per person per year for every single person in the U.S.  That means also that the government is getting close to $7.83 billion $7,830 in taxes from each person in the U.S per year.  I'm feeling above average....  I don't know about you, but I don't think I'm paying my fair share.  I don't think they should be spending that much on me in the first place either.

And those "across the board" cuts that are happening in government?  Yeah, they're not so much cuts as they are a reduction in the rate of how fast we're going into debt, and those "cuts" are in the tens of billions, which you might think at first sounds like a lot but is not that much when you're talking about trillions to start with.  To go back to our previous story, that means that instead of spending $149,500 next year like you had intended, you've decided to spend $140,600 instead.  All assuming you will still be making $100,000 in income.

Out of curiosity, I also made one more graph just to see where my money goes and to compare it to my 2009 analysis.

I found it interesting that my federal tax rate is only slightly higher.  The reason why the percentage in this graph (13%) doesn't match the effective tax rate is because the effective rate is calculated using the total after you deduct social security, while my number uses the number before you deduct social security taxes (and other pre-tax things).  Social security taxes are lower, but it's important to note that those lower rates expired at the end of 2012.  In 2013, expect the social security rate to be back at 6.2%.  You may have already felt this pinch in your paychecks in 2013.  I'm putting a higher percentage of my money in my 401(K).  And, state income tax is significantly lower.  My health care premiums and deductibles are not an unreasonable amount of my income, but at the same time I'm a fairly healthy person.

That's enough numbers for the day.  Go forth and work for the rest of March for the government, and then use the rest of the year to make money for yourself!

Late evening update:  Pops and Linda have corrected my math.  See the strikthroughs and corrections above.  The billions per person was kind of boggling my mind and didn't hardly seem possible, and I guess I should have questioned that more.  At least now I know how to get more comments!  Just post some of that "funny math".  :-) Let me know if more of my math needs to be corrected.  How embarrassing for an engineer!