Looking at a receipt the other day, I noticed that the combined state and local sales tax in my area (Silicon Valley) had reached 9.25%. Even as I type that, I find it hard to believe. It’s motivated me to write a brief piece illustrating just how much money the government takes out of your pocket.
The Question
Let’s say that you’re a self-employed software developer, earning $60K/yr. Let’s say you want to buy a $10 CD. How much extra income will you need to earn to buy it? ($10 is the wrong answer.)
Roughly Speaking
On every extra dollar you earn as a self-employed person (in Silicon Valley, w/ a filing status of Single) you pay:
- 15.3% Self-employment tax
- 25.0% Federal income tax
- 09.3% State income tax
and you pay a 9.25% sales tax on every dollar you spend.
Therefore, if you want to buy something for X dollars, you need 1.0925*X dollars in after-tax income. To have Y dollars in after-tax income, you need to earn Z pre-tax dollars, where (1 – .153 – .25 – .093)*Z = Y.
So, to buy a $10 CD, you need to earn $10 * 1.0925 / (1 – .496), or $21.68.
Does that seem fair to you?
Quibbles
I’m not accounting for the fact that SET is calculated on .9235 of self-employment earnings, or the fact that you reduce your gross income for income tax purposes by .5 of the SET. Those factors save you about 80 cents. Don’t spend it all in one place.
Caveats
Naturally, these figures will change quite a bit based on your particular situation; deductions can make a big difference. However you slice it, though, you’re working for the gov’t to a shocking degree. That’s not right.
