Who pays the highest tax?

by Rocket Finance

If you click over to Plonkee Money today, you will find that our posts are similar. We wanted to figure out who pays the most money in taxes – someone in England or a person in Wisconsin. We agreed on a baseline profile:

  • Family of four (two dependents)
  • Single income of $50,000 annually
  • Homeowner

My family and I recently moved to Colorado, but I decided to set our profile in Wisconsin since I still own a home there and because I am more familiar with their tax code. Recognize that there a many variables when figuring tax rates between countries – the biggest lie in the area of health care. The UK has a nationalized system of healthcare that increases a person’s tax rate, however a person will arguably spend less on healthcare during the year. Another difference is the complexity of the United States tax code. I am using a very basic profile here, so the taxes are pretty straight-forward. The reality is that there are many ways to avoid certain taxes. If you want to hire a tax attorney or start a home business, you can greatly reduce your tax liablity. I read once that forty different US tax preparers were give the same profile and each one of them came up with a different tax liability. A flat tax with no deductions would be a great thing for this country. . .

But I digress – back to our family of four with an annual income of $50,000. In the course of the year, they will pay the following taxes:

  • $2,369 in state taxes
  • $3,000 in property taxes. This is probably a low estimate, but I don’t want to be accused of exaggeration. Property tax rates in Wisconsin are among the worst in the United States. The taxes on our two-bedroom home with 1240 square feet were $1,980 annually.
  • $1,981 in federal taxes. This amount was reduced by $2,000 after subtracting the child tax credit.
  • $3,100 in social security taxes. . . too bad this money is not being invested.
  • $725 in Medicare taxes.
  • Most municipalities and counties do not have payroll taxes in Wisconsin.
  • Phone/internet/tv taxes are usually around $150 annually depending on what services you decide to purchase.
  • The last time I registered my car in Wisconsin, the fee was $58.
  • The Wisconsin effective sales tax rate is 5.5% in most counties with 5% going to the state and .5% to the county. I estimated that this family will spend around $20,000 per year on items subject to sales tax. There is no sales tax on groceries in Wisconsin, but taxes on gasoline and eating out are often taxed higher than 5.5% depending on the municipality. To be conservative, I will estimate that this family will pay $1,000 in sales tax.

So, in summary, a family of four, making $50,000 per year will pay $12,383 in taxes. Their effective tax rate is 24%. Remember that this is a bare-bones example. The family could greatly reduce their tax liability easily in three ways: give money to charity, start a home business or begin to contribute pre-tax dollars to an IRA account.

How does our fictional family compare with Plonkee’s example?

  1. 10 Responses to “Who pays the highest tax?”

  2. By bluntmoney on Aug 17, 2008 | Reply

    Fun post! I enjoyed the comparison between your fictional Wisconsin family and Plonkee’s fictional British family. As you noted though, I think it’s pretty hard to compare since so much changes based on where you live in the U.S., especially with regard to sales taxes and property taxes.

  3. By rocketc on Aug 17, 2008 | Reply

    There are so many details in the US tax code. I just remembered that I did not allow for the deductions of mortgage interest . . . I don’t think it would take much to make this person’s federal tax liability “0”.

  4. By plonkee on Aug 18, 2008 | Reply

    Brilliant.

    As with the US, here in the UK you can reduce your tax liability by contributing to a pension, but there’s no mortgage interest deduction.

    In any case, the tax burdens are surprisingly similar but of course they cover slightly different things. And it’s generally accepted that the cost of living is higher in the UK – your spending money wouldn’t buy as much here.

  5. By Deamiter on Aug 18, 2008 | Reply

    As plonkee noted, the cost of living is higher in the UK so the comparison might not be entirely valid (even if you did think of everything…)

    I’d be very interested to see the tax rates for both country’s median incomes — maybe I’ll have to crunch some numbers for myself!

    Very interesting stuff — thanks for the article!

  6. By rocketc on Aug 18, 2008 | Reply

    and which country’s tax rates are the most “progressive” meaning the rate increases as income levels increase. I know that WI taxes are some of the most progressive in the nation.

    Not sure how progressive the UK’s rates are.

  7. By deepali on Aug 18, 2008 | Reply

    Another tax issue would be dividends/interest/capital gains tax…

    And how easy is it to start a home business? I am skeptical. 🙂

    Can I suggest a followup? It would be interesting to also see what people spend money on in the US vs the UK. IE, how much is a mortgage payment, what is spent on healthcare, etc… since cost of living is coming up as an issue…

  8. By rocketc on Aug 18, 2008 | Reply

    home businesses are pretty easy . . . if you do anything to generate income from you home, you can report it and use the deductions. blogging, babysitting, and more are all examples of easy home businesses.

  9. By Jim on Aug 18, 2008 | Reply

    Your fed income tax rate looks high to me. How did you get that figure??

    With $50k in income a family of 4 would have a standard deduction of $10,700 and exemptions of 4x $3400 each for $24300 in deductions. That would make taxable income $25,700. Tax on that is $3,076. Then minus $2000 in child credits would give a federal bill of $1,076.

    Jim

  10. By LivingAlmostLarge on Aug 19, 2008 | Reply

    Why not consider a higher cost of living in the US when comparing? Like NJ or Conn?

  11. By rocketc on Jan 28, 2009 | Reply

    It’s been a while . .. Jim, I think your numbers are more accurate than mine.

    Living, that is a good idea, but it might be a wash – I have two thoughts:

    Almost no family of four could afford to live in NJ or Conn on $50K.

    The high property and state taxes in WI almost make it comparable.

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