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Surprise! Your Tax Burden Is Lighter than You Think


Tax refundWith all the talk about taxes and whether we should lower them, you'd think that the citizens and corporations of the United States face steep tax rates. You'd be wrong, though. When it comes to taxes, things are not as they appear.

There are many ways to evaluate tax rates, and most of them point to our tax burden being rather low. For example, look at our average -- or effective -- tax rate, which you can arrive at by dividing total federal tax revenue by our nation's gross domestic product. For 2011, the average tax rate in the U.S. is an estimated 14.8%, according to the Congressional Budget Office. That's the lowest rate since 1950.

Here's another comparison point: The folks at Citizens for Tax Justice -- an organization advocating for fair taxation of the lower and middle classes -- determined that our total federal, state, and local taxes in 2009 amounted to 22.6% of our GDP. Among the 28 member nations in the Organization for Economic Cooperation and Development, that puts us in 26th place, with only Chile and Mexico having lower overall taxes.

Tax rates in America haven't always been this low. Per CTJ data, our top marginal income tax rate has fallen from 94% in 1945 to 35% in 2011.

On the corporate side, recent tax rates are also at a record low. According to the Office of Management and Budget, the average corporate tax rate paid was just 1.3% in 2011, down from 7.2% in 1945.

Such low rates, in turn, are reflected in the national budget. According to data from the OECD, corporate taxes contribute much less to national revenue in America than in most other nations. That rate is about 25% lower than the OECD average.

The Problem With Low Taxes

As good as it sounds on paper, a low-tax environment has significant drawbacks. Countries need to take in tax revenue in order to keep governments and societies running. Because we pay less in taxes than most developed nations, we get less in return. Plenty of high-tax-rate countries, for example, cover health care for all citizens.

What we do pay goes to support various government agencies. They pay for roads and courts and police forces and schools and parks -- and much more. Without our Federal Aviation Administration and its regulations and air traffic control system, our skies would be chaotic. Without the Food and Drug Administration, our foods and medications would be far less safe.

In fact, you may be surprised at how little you actually pay for various public services:

  • If you think we spend too much on education, know that it eats up only 4.8% of your tax bill.
  • Energy and the environment take up just 2.1%.
  • Immigration, law enforcement, and justice: 2%.
  • Natural disaster responses? Just 0.4%.
  • As you might suspect, the big-ticket items are defense (26.3%) and health care (24.3%).

Support Sensible Changes

It's clear that our tax system isn't perfect. In fact, there are lots of problems. Our tax code is far too complex, at nearly four million words. Various loopholes and tax breaks cost us $1 trillion each year. Tax cheats cost us close to $400 billion annually.

As I see it, those who think we pay too much might want to encourage those in power to close more loopholes and chase down cheats. Meanwhile, consider that even slightly higher taxes might -- just might -- mean extra revenue being put to good use, paying down debt, improving our nation's infrastructure, and serving Americans in countless other ways.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned.

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Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

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The entire premise of this article is really ridiculous. The "suggestion" to accept "even slightly higher taxes" is absolute crap. If Selena and anyone else attempting this could prove that government would treat the extra money ripped from us like most households do, then maybe there would be a discussion. However governments do not live within their means. Period. Historically they are the most inefficient of any organization and so do not deserve any more of our hard-earned money.

November 15 2012 at 6:35 PM Report abuse rate up rate down Reply

Check my math but if 47% pay no taxes, that leaves the tax burden per person (on 53% of the population) at much higher than assumed. Only 53% of Americans pay tax to lower the defecit, and pay the interest on the debt. If the low point of being a middle income earner is 250,000, then anyone over that is probably paying about 30%, since we assume that the top 3% pay only 13%. The corporations and small businesses pay as little tax as possible( ask their high powered accountants about the loopholes) and often operate at a loss,to avoid paying any tax, or do so every 3 or 4 years to satisfy the IRS and their sharehlders. You figure out how much income tax is neeeded to lower the defecit, and pay down the debt over ten years and then divide that # by the number of actual taxpaying individuals and corporations, and see that we have already gone over the cliff. And there is no life line, and you can call all the friends you want.

October 25 2012 at 8:30 PM Report abuse rate up rate down Reply

Another big expense to the taxpayer is interest on the debt.

January 30 2012 at 5:50 PM Report abuse rate up rate down Reply

Wow, just imagine if they also included sales tax, and all the other small taxes and fees hidden in everything we buy. Just because our federal tax rate is low, does NOT mean that we pay little in taxes.

Perhaps if the 47% of Americans who pay NO income tax at all and the only taxes they pay are the ones when they spend their welfare checks at the local wal-mart

January 30 2012 at 3:42 PM Report abuse +1 rate up rate down Reply

Lets not forget all the other taxes we pay; property taxes, just look at your cable and telephone bills - filled with taxes and fees, and then don't forget the sales tax. If you add it all up, it's quite a bit.

January 30 2012 at 2:05 PM Report abuse +3 rate up rate down Reply

I have more money stolen from me by the government than I spend on food and housing.

January 30 2012 at 1:30 PM Report abuse rate up rate down Reply
1 reply to Jeremy's comment

So does every millionaire:-) I pay much more in health care (lousy HMO) than in mortgage.

January 30 2012 at 3:23 PM Report abuse rate up rate down Reply

Sayyy, Citizens for Tax Justice; when you say you are advocating for lower tax rates for the poor and middle class, aren't you forgetting one thing; aren't these the people who fall in the group of 49% of Americans who DON'T PAY ANY TAXES. Sounds like a great gig to make a big salary, got any openings.

January 30 2012 at 1:24 PM Report abuse +2 rate up rate down Reply

This article like so many like them are just flat wrong. Over the last 5 years I have seen my property taxes increase while the value of my home goes down. I have seen sales tax increase at least 2% while my buying power goes down. Yet I hear how we are under taxed give me a break. Im not opposed to the rich being rich but lets be honest they can afford another $5,000 a year better than I can afford another $1,000 then there is the poor. I have seen so many times people dont work a day all year and collect $8,000 tax return how is that fair.

January 30 2012 at 12:46 PM Report abuse +5 rate up rate down Reply
1 reply to feets07's comment

I totally agree. I just sent money to the federal that could have paid for a late model used car in cash. This isn't a low amount as this article claims. And if only the government could run more efficiently, there wouldn't even need to be an income tax.

January 30 2012 at 1:23 PM Report abuse rate up rate down Reply

If you think the libs have the answers, look at bankrupt California, the most looney lib state.

January 26 2012 at 7:31 PM Report abuse +6 rate up rate down Reply

Yes we are sooo lucky we don't pay more to the educrats, lawyers, politicians and all other federally paid parasites. How about we close federalism all together and stop being billed for any of it. We 50 state govts to do the job and we already over pay them. Fire the leaches end the fed! Got gold?

January 26 2012 at 3:46 PM Report abuse -2 rate up rate down Reply