Have you ever wondered about how many tax dollars you really pay when you buy an American-made product?
Let’s assume that you want to buy a new coat for $100. The first thing you need to understand is that an average of $22 of the cost of that coat is something called an embedded tax, a tax collected at each stage of the manufacturing process. These imbedded taxes are then passed on to you, the consumer, on top of the manufacturing costs.
This means that the actual cost, which includes production, marketing and profit, is $78 ($100 minus the $22 embedded tax).
But that’s not the only tax you must pay!
You must pay taxes on your wages in order to have the $100 you need to buy the coat.
Let’s say that you earn $25 per hour. If your federal income tax rate is 20 percent, you will need to work five hours to have $100 after paying the IRS tax ($125 minus $25 in taxes).
But wait! There is still another tax.
It’s the 7.65 percent FICA tax that you must pay and the 7.65 percent FICA tax your employer must pay to fund Social Security and Medicare costs. You pay half of the tax and your employer pays the other half.
You may say: Well, you don’t pay his half of the tax, he does. And that’s true, but it is still a tax on your wages. To clarify that point; If your employer did not have to pay a tax on your wages, he might have been able to pay you that much more in wages.
Regardless, that means that your FICA tax is still a part of the total tax liability that must be included in the total purchase cost.
So you must work about another half hour to earn enough to pay for the FICA tax and extra IRS tax. That adds approximately $12 more to the federal income taxes you must pay for the coat.
OK. Let’s add it all up: $78 (cost of production, marketing and profit) plus $22 (embedded production tax cost) plus $25 (federal income taxes on your wages) plus $12 (FICA and extra IRS tax on your labor) for a total cost of $137 (production, marketing and profit cost of $78 + tax cost of $59).
So, if you calculate the tax cost as a percentage of the actual production cost ($59 divided by $78), then the tax cost equals about 76 percent of the $78 actual cost!
Now, if you add in your California sales tax (7.5 percent), local sales tax and your California state income taxes, as I do, I’m sure that your total tax liability on the purchase of that coat can easily approach 100 percent of the total cost of manufacturing, marketing and profit.
This means that, because of taxes, almost everything you buy that’s made in America costs you about twice as much as it does to produce and sell it. I don’t know about you, but I’m taxed enough already!
There is an old expression: If you subsidize something, you will get more of it. If you tax something, you will get less of it.
Our current tax laws create a disincentive to work, as well as an incentive to work outside of the law.
For hard workers, this means that the more you work, the less you get to keep.
There is a better way to fully fund our government. It is called the Fair Tax Initiative. The fair tax law would tax consumption, and reward work. Check out the Fair Tax Website at http://www.FairTax.org for more information.
Today our workforce is about 62 percent of what it could and should be, so let’s get people back to work and return our country to prosperity!
Jim Driver lives in Rough and Ready.