This is the time of year to be thinking about taxes. We believe that each investor has a unique tax situation, and we are concerned about their marginal tax rates in the selection process of individual securities for their fixed income portfolios. We believe the last elections were a watershed event for tax rates, and that marginal tax rates are likely to rise in the future. This will probably make tax-free securities more attractive compared to taxable securities for some investors in the future.
The Tax Foundation publishes some interesting data about taxes and their impact on our daily lives. As a way to show how much of our income we pay in taxes, they created Tax Freedom Day. If we assume that we pay our taxes before we can use the rest of our earnings, this would be the day that we are "free" of paying taxes and the rest of our earnings go to us. The later in the year we reach Tax Freedom Day, the more time we are working for the government and the less time we are working for ourselves. This is a valuable way of measuring the bite that taxes are taking from our paychecks, and allows for comparisons over time. The chart below shows Tax Freedom Day for the last 27 years. The axis on the left shows the number of days it takes to get to Tax Freedom Day and the graph shows the results over time. We reached a high of about 123 days in 2000 and now are working about 116 days for the government.
How much do you pay in Federal taxes and how much do you pay in State & Local taxes? The chart below begins in 1900 and shows the number of days over time you work for each of these.
If you are wondering how many days you work to pay for your taxes compared to how many days you work to pay for housing, the chart below gives you the answer. We work 77 days to pay Federal taxes, 39 days to pay State & Local taxes, and 62 days to pay for housing and household operation. Federal taxes is the largest category.
You may also be wondering how the different taxes break down by type of tax. Below is a chart that shows the types of taxes. For example, out of the 77 days you work to pay for Federal taxes, 30 days go to pay for social programs such as Social Security and Medicare.
The amount of time you spend working for the government depends upon where you live. The chart below shows you will be working harder for the government if you live in New York than if you live in Montana. The states in dark blue mean that Tax Freedom Day occurs later in the year than the light blue and white states. We would encourage you to visit the website for the Tax Foundation for further information. We have provided a link to their website on our blog for your convenience.
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