Taxes in Montgomery County, Maryland - An Example

The median family income in Montgomery County, Maryland was $103,476 in 2006. Half of the families in the county made more and half made less. This means that such a median family is making much more than the median income in most of the United States. But, it is also true that the cost of living is much higher in Montgomery County and taxes make no adjustment whatsoever for that fact. By the way, median household income in Montgomery County is considerably less, so do not confuse those two sets of numbers, as many commentators do.

Let us assume that this median income family has all of its income from being self-employed. We will discuss the case of income from a separate employer later. This family has approximately the following taxes applied to their income, assuming they are married and filing jointly, have one child younger than 17, and have $15,000 of itemized deductions:

Federal Income Tax Average Rate = 12.00%
Social Security Average Tax Rate = 12.22%
Medicare Average Tax Rate = 2.86%
Maryland Income Tax Average Rate Estimate = 3.73%
Montgomery County Tax Average Rate Estimate = 2.54%

The sum of these average rates on this family's income is 33.35%. More than one-third of their income is going to income taxes! In this calculation, I calculated the social security payment and then found the percent of that relative to the total income of $103,476, which is slightly above the cut-off upper income on which the 12.4% social security tax is levied. For the Medicare tax I did the same thing. The state and county taxes depend further on what part of the itemized deductions are due to state and local taxes, so I made a reasonable typical estimate of that.

Let us look at the case of family income for those not self-employed. The first thing to realize is that the employer figures up the total cost of employing an employee including all taxes paid on the employee, benefits for the employee, facility space for the employee on the job, added insurance costs, added equipment costs, etc. If he did not have to pay 6.2% social security tax and 1.45% Medicare tax on the employee, he would be absolutely as willing to give that money to the employee as to give it to the government. As a result, it is really a fiction that the employer is paying that money rather than the employee. Politicians love this little fraud because it hides, as so many other taxes are hidden, the true cost of taxes from the employee and most voters. This fraud does give the employee one little benefit however. Since the 6.2% + 1.45% = 7.65% of his income never appears in his salary, he does not have to pay federal, state, and local income taxes on that amount, while the self-employed person does. Ain't it a crock. Everyone hates the self-employed!

Suppose the family income earners above are considering whether it is worth their while to work an additional hour or not. If they do, what fraction of the income earned in that hour will go to government instead of to them? This is the same as asking what is the marginal income tax rate for each of the above taxes? Let's assume however that they are still a wee bit below the social security and medicare tax cut-off levels, as very many families will be. Then we have:

Federal Income Tax Marginal Rate = 24.00%
Social Security Tax = 12.40%
Medicare Tax = 2.90%
Maryland Income Tax Marginal Rate = 4.75%
Montgomery County Income Tax Marginal Rate = 3.20%

Thus, the total marginal income tax rate is 47.25%! Just in income taxes alone, $0.4727 out of each additional dollar earned is lost! Or, 28.35 minutes out of each hour worked is stolen! This is a situation a great many productive people are in. They have to really love their work or be really dedicated to achieving a goal requiring additional money to justify working this additional hour. If you wish to increase taxes on such people, are you really sure that you want to so discourage them from working as hard as they do? How many baby boomers might you induce to take early retirement, with the added strain that will put on the social security system and the loss of so much experience? Of course, at such tax rates, it makes a lot of sense for such people to work very hard on trying to earn additional money in ways that will not require them to pay so much in taxes. This tendency for people to work fewer hours as the taxes go up and to work harder to find tax loopholes or even to cheat on taxes, is why increasing tax rates does not always allow the government to collect more in taxes. The economy will grow less and over the years after a tax increase, this results in a large decrease in the taxable income compared to the taxable income which would materialize in those years at lower tax rates.

Of course, these income taxes are not the only taxes paid. You will also pay property taxes on your home and the land it sits on, sales taxes, taxes on utility bills, gasoline taxes, liquor and tobacco product taxes, motel and airport use taxes, fishing license, car registration, car pollution test taxes, dog licenses, marriage licenses, home title registration taxes, and higher costs for all products and services to cover the taxes paid by businesses, and many, many more taxes. So the income you have left after you pay the income taxes, is still going toward paying taxes in many ways. Taking these other taxes into account, the family earning just less than $102,000 will in fact pay out far more than half of each additional dollar of income on average in taxes. How discouraging!

So, stop and think. Are our governments really doing enough for us that we should be willing to give them more than half of all the value we create by working hard? I for one do not think this is anything but a slam dunk question. NO!!!! NO!!!!!!! NO!!!!!!!!!!!!!!!!