Republic Rules - The U.S.A. is a great representative republic.

Before we get started, ask yourself: of every dollar I make, what percent do I end up paying out in taxes?

This will be the start to a series of discussions related to taxes, and how so many of them are somewhat hidden from view. Out of sight, out of mind. I hope to develop something of a shopping basket showing where the money that comes into a household is paid out… and how much of that goes toward taxes and government fees.

Let’s start with my least favorite bill… the cell phone bill. Although I have a family plan, I’ll just share the primary line and one extra… so we can develop a consistent way of looking at the numbers for a “typical household” that we are going to create.

First, I don’t even want to get into a discussion about the cell phone industry… I’ll save that for another time. Suffice it to say, I have a love-hate relationship with cell phones and I really don’t like the way the cell phone companies have deployed their billing models. But, that’s for later.

Here is what part of my last monthly bill looked like:

• Primary line
  • $129.99 - base package service with unlimited text messaging (family plan)
  • $7.52 - credits, adjustments, and other charges
    • 1.25 regulatory cost recovery charge
    • 2.55 state universal service
    • 3.72 federal universal service charge
  • $12.34 - government fees and taxes
    • 0.52 local wireless 911 surcharge
    • 3.99 state sales tax
    • 1.01 county sales tax
    • 1.62 county special purpose district tax
    • 5.20 city sales tax
• Second line
  • $9.99 - additional line
  • $1.78 - credits, adjustments, and other charges
    • 1.25 regulatory cost recovery charge
    • 0.21 state universal service
    • 0.32 federal universal service charge
  • $1.54 - government fees and taxes
    • 0.52 local wireless 911 surcharge
    • 0.34 state sales tax
    • 0.09 county sales tax
    • 0.14 county special purpose district tax
    • 0.45 city sales tax

So, $23.18 of a total of $163.16 goes for taxes and fees. That’s roughly 15%.

On the surface, that might not seem like much. Sort of like going out to eat and adding the tip, right?

The difference is the income taxes have already been factored in… we’ve already “tipped”. So, when we pay our bills, those are “after tax” dollars. Let’s say I pay a 15% of what I earn in income taxes, each dollar I spend to pay my cell bill will have roughly another 15% in taxes… for a total tax rate on those dollars of about 30%!

Here’s the rub: there’s still more tax hidden in those cell bill dollars. Remember, corporations don’t actually PAY taxes… they are middle-men collecting taxes from their customers (it’s built in to the prices they charge for their goods and services) and passing it along to government. See this post for more on the topic.

If I use AT&T as an example, their annual 10K SEC filing states they had sales of about $119 billion in 2007 and paid more than $6 billion in income taxes. So, about 5.25% of every sales dollar they collected was paid out to the government for income taxes.

That means the dollars that I earned and paid for my cellular bill… had an effective tax rate of about 35%.

Wow! But that’s not all… and here’s where it gets hard. AT&T had over $98 billion in operating expenses (the income tax figure above is NOT included in this amount). Operating expenses include everything they pay for as a part of doing business, from salaries to buildings to raw materials to office supplies. And, when they buy things, THEY pay some taxes… it might be the state and city sales tax for those office supplies to gasoline taxes for operating their truck fleets or whatever. You can’t easily find details about these tax payments, but I’d estimate they are 5% at the very least… and probably more. Perhaps studies have been done… I need to research that. But let’s use 5% for this example, OK?

Now, we’re up to 40% of the money I earn to pay for my cell bill actually goes toward taxes! In my opinion, that is too much.

An aside: it doesn’t stop there. Not to twist your brain too much (I know it hurts mine to think about it!), but some slice of what AT&T pays to their vendors goes to pay for THOSE companies’ income taxes, and there are taxes on things those companies buy… and so it goes. There are far more taxes being collected than meets the eye. That’s also why tax cuts have a greater impact than it might appear on the surface… the dollars that are “freed” up don’t sit still, they travel from one pocket to another to another, etc. and has a cascading effect that is incredibly complex.

We MUST get taxes under control… and the first step in doing so is to make them VISIBLE. The thing that sparked the birth of this country was an array of taxes that had collectively reached intolerable heights. I want to see transparency in taxes and government fees so we, the people, can EASILY know what they are and how much they are… and not get “nickeled and dimed” (I hate that!).

Now, back to your answer to the very first question I asked. How close were you in estimating the total rate you really pay in taxes?