This article is dedicated to the growing segment of American society that is awakening to the ideas that we are increasingly overworked and overtaxed. My goal is to determine an effective tax burden on the average middle-class American. I will leave it to the reader to judge relative severity of the burden as measured against associated “benefits” to which he is “entitled” from the system.

Deriving an average tax burden for an average citizen is a difficult task. There are more taxes than most realize and they are not levied equally. Income taxes are “progressive” meaning they are applied with increasing severity as you earn more income. Sales, excise, and embedded taxes fall heaviest upon those with a higher propensity to spend (the poor). And inflation taxes most harm those living on fixed incomes and who have significant non-inflation indexed savings (the elderly).

This is by no means an exhaustive analysis, but rather, a quick and dirty first cut to garner a rough approximation of where we stand as a society. There are ultimately philosophical implications and value judgments that need to be made when all is said and done.

SCENARIO: Our fictional middle-class American will earn $100,000 per year (for ease of calculations), and live in a major metropolitan area. In this case, we’ll say this individual lives a few miles inland from the sunny Southern California beaches. Average home values are roughly $300,000 in this region.

Income Taxes

Income taxes consist of direct levies from federal, state, and local goverments, as well as various payroll taxes that are assessed as a percentage of income. Payroll taxes are generally split between employers and employees, but the real effect is a an additional burden placed on employees.

Each employee has a discrete value to an employer, which ultimately flows down into a total compensation package. Legislative mandates to force employers to pay for fringe benefits (heath care), Social Security, Medicare, and other payroll levies is tantamount to decrementing employee income. The issue of “who pays for it” is merely window dressing to confuse the public. In this scenario we allocated the employer-paid component to 1/3 lower wages, 1/3 to shareholder profits, and 1/3 to higher consumer prices.

When all deductions, write-offs, and adjustments are made let’s say our beach loving SoCal resident faces a 15% net federal income tax, a 5% state and local equivalent, 8.27% Social Security, 1.93% Medicare, and 0.8% other payroll tax burden. This combines for a total decrement to income of 31%.

Embedded Taxes

One of the more populist political appeals for raising government revenues is to tax corporations. What most people fail to realize is that there is no such thing as a company. Corporate taxes fall upon shareholders with reduced rates of return on invested capital, employees with reduced wages, and consumers with higher prices. It turns out that goods and services throughout the economy are inflated by about 22% because of these embedded corporate taxes, tariffs, and other levies.

Currency Debasement – The Inflation Tax

One of the nastier secrets in our financial and political system is that Congress and the Federal Reserve have been colluding since 1913 to steal purchasing power from everyone who uses the U.S. dollar (USD). Our monetary system is based on debt, federal debt to be specific. Here’s how it works:

In 2009 it is estimated that with all of the various bailout plans, “stimulus” packages, and budget imbalances Congress will spend more than $2 trillion in deficit. How can our government spend $2 trillion more than it has in income? The Treasury Department issues bonds, about half of which are bought by private domestic and foreign buyers. This means that $1 trillion this year will come from private lenders. The other $1 trillion comes from the Federal Reserve buying the Treasury’s bonds. It does so by creating money out of thin air, which is then spent, circulating the new dollars throughout the economy and diluting the value of all dollars previously in existence. The subsequent rise in consumer prices is called inflation.

It is difficult to measure precisely how much purchasing power has been stolen from consumers since the Federal Reserve’s creation in 1913. One method calculates the price inflation of gold:

It turns out that every year the Fed has been in existence the fiat currency money supply has increased 4.13% relative to gold, holding economic output constant. This is a reasonable proxy for the inflation tax created by the silent partnership between the Federal Reserve and Uncle Sam. In total, the USD has declined in purchasing power by 98% since the birth of the Federal Reserve, the institution charged with protecting its value!

Putting It All Together

To complete our calculations we’ll have to draw a few more ground rules and assumptions:

Americans are notorious for not saving; rather, we are known for spending more than we earn. In this scenario, let’s assume that 45% of income is spent on items for which sales tax and embedded taxes apply. Further, let’s also assume that this individual has $50,000 in non-inflation indexed assets. This can be cash, cash equivalents, or fixed income securities that are vulnerable to inflation.

When all is said and done the outright confiscation to fund various government functions is 57% of income, or about 7 months of labor! There is a growing segment of our population that receives net wealth transfers from Uncle Sam. Many do not own homes, are relatively frugal, and use savings to speculate on inflation-advantaged assets.  Nonetheless, there are costs to everything. Taxes, regulations, and inflation distort labor markets and cause higher unemployment. So even those not paying income taxes, per se, are suffering from a less favorable labor market.

Since there are so many variables and assumptions that must be made you can view my spreadsheet here and make whatever adjustments you feel appropriate.

Long-Term Consequences

Suffering a 50%-75% reduction in income due to taxation and inflation means we must all work longer and harder to attain equivalent lifestyle outcomes. Throughout your working career this often means longer hours, greater resource input into increasing labor market productivity (higher education, certifications, etc.), or even holding second or third jobs. In the end it is perfectly reasonable to assume we all work for one to two decades longer than we’d otherwise have to in order to achieve retirement requirements!

At What Point Do We Call It Slavery?

What is slavery? Is being forced to work for an additional two decades before earning your retirement slavery? How about working between 6 to 9 months of the year just to pay taxes? How much stress in our lives to focus on career, at the detriment of family, friends, or other life interests is acceptable? Government is growing daily. New regulations, new taxes, and newly created dollars are taking more of our freedom every single day.

We walk around relatively freely, we spend our discretionary income generally in the manner in which we choose, and we can speak out against the system in the most insolent fashion. In many respects, America is still a land of freedom. But in many other not-so-evident ways, we have lost much of our individual liberties and a significant output of our life’s work.

There will come a point at which Americans, by and large, recognize they are being exploited and declare that enough is enough. My guess is this point is fast approaching.

One of the only ways to insulate yourself from financial serfdom is to abandon the paper money slowly shackling us: Sell your US dollars and other paper currencies and buy gold and silver:

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