For our example, we will be using rounded figures – for actual 2012 tax rates, see page 2..
Joe earns $3,530 every month to support his wife and two children.
We are using an average tax rate of 15%, so 15% of his income goes straight to the government – even before he receives his paycheck
That brings his take home pay down to $3000.
When Joe buys a house, The real estate agent earns money and they pay taxes on that income. If he has a mortgage, the bank earns money on the mortgage. If he insures the home, the insurance company is also making money. The county earns money on the property taxes he pays each year
Utilities – $300
Water, Electricity, Gas, Phone, etc. are needed whether you own your home or are renting. Those utilities companies pay taxes on any profit they make.
Food–$600 (based on $50 per week per person)
The grocery store earns money and they pay taxes on that income
This does not include the purchase of the car, but only the gas and maintenance.
Joe purchases most of his clothing at second hand stores.
Charity–$353 (Joe tithes to his church)
This leaves $97 per month for Joe to spend on entertainment or hobbies, etc.
If Joe is able to shop wisely, he might be able to reduce his food or clothing budget, allowing him to have more “disposable” income for himself and his family.
If Joe is required to pay more in taxes, he has less to spend on housing, clothing, food, gas, etc.
So there is less in profit for the businesses he deals with.
Because those businesses he deals with don’t earn as much in profit, there is less income for the government. The higher tax rate does not make up for all the income lost because Joe does not have as much money to spend as he did before.
Now George earns $7,060 a month. He also has a wife and two children.
At the 15% tax rate, George’s take home pay is $6000.
Because he has a larger home, he pays more in housing, property taxes, insurance and utilities. He probably has a nicer car, and buys nicer clothes.
Because George has more money left over after his necessities are paid for, he has more to spend on entertainment or hobbies.
He may purchase a boat. Not only will he pay taxes on that boat when he purchases it, the business where he purchased it, will make a profit from the sale – thus they will pay more in taxes. He will spend money at the gas station to purchase gas for the boat, and he will also spend more money to purchase the equipment he needs to use the boat.
He may decided to pay someone to mow his yard for him or to paint his house. George is providing jobs for others and the people he hires are required to pay taxes on their income.
He may even decide to take a risk and invest in a new business venture.
If George is required to pay more in taxes, not only does he have less to spend on the things he needs, he may have to mow his yard and paint his house himself, so he is not providing jobs for others. The businesses he deals with won’t earn as much in profit, and the people he once hired won’t earn any extra income, so there is actually less income for the government.
The higher rate of income tax does not make up for all the income lost because George does not have as much money to spend as he did before.
Actual Tax Rate
If Taxable Income Is: The Tax Is:
Not over $17,400 10% of the taxable income
Over $17,400 but not over $70,700 $1,740 plus 15% of the excess over $17,400
Over $70,700 but not over $142,700 $9,735 plus 25% of the excess over $70,700