The Story of $100

Have you ever considered where most of the money from a transaction goes?  Do you think that corporate greed runs rampant?

Lets take this hypothetical (but mathematically accurate) example:

My company pays me $100.  My income tax liability is 20%, Social Security withholds 7.282%, Medicare withholds 1.7%.  This is an aggregate of 28.982%.  This leaves me with $71 after paying the $29 in taxes.

I go shopping with the $71 and spend it all.  The sales tax rate where I am located is 8.25%.  This means I was able to spend $65.59, and paid $5.41 in taxes.

If the merchant's profit margin is 30%, they made $19.67.  Corporate profits are generally taxed at around 40% (or more).  This means that they keep $11.81 and 7.87 goes to taxes.

At this point, the government has received a grand total of $42.28 of the original $100.

Assuming that the labor costs of selling the merchandise to me are 10% of what I spent (before tax), the  company spent $6.56 in labor to order, stock, sell the merchandise to me. Their employees also have to pay income tax, Social Security, Medicare, etc.  That takes approximately 15% out of their pockets.  This leaves the employee with $5.85 and the government with another $.98.

The employee spends his/her $5.85, paying 8.25% in sales taxes.  This means they received $5.40 in merchandise and paid $.45 in taxes.

I am not even going to get into taxes paid on electricity, etc.  At this point, the government has received $43.71 of that original $100.  I don't see how companies stay in business.

How much is 700 billion dollars... really.. ?

It is not my intent to discuss the politics or social consequences of the bailout.  This is merely an analysis of data.  If any of the data in this post is incorrect, please leave a comment describing the inaccuracy and cite the source of your information.

The government passed a 700 billion dollar bailout for the troubled financial services sector.  My first thought was that a billion is almost incomprehensible to most people.  Anything over a couple hundred thousand is nothing more than an abstract concept to most people.  I am not sure the politicians quite understand the scope considering that they regularly toss billions around like it is play money.  I want to put this in a better perspective because I don't think most people really grasp the concept.

Seven Hundred Billion: 700,000,000,000

If your calculator doesn't go that high: 7*10^11 (scientific notation)

This country has 303,824,640 residents according to the CIA Fact File (July 2008).

The estimated work force is 153,100,000 people (CIA Fact File).  The interesting thing is that this number includes unemployed people.  If you exclude them (they don't contribute a sizable amount of money toward taxes), this leaves us with 145,445,000 income earners.  This number is based on the unemployment figures at the time that I did the research (August I think).

Now comes the fun part.  The bailout comes at a price tag of:

• $2303.96 per person
  
• $4572.18 per worker
  
• $4812.82 per employed person
  

Now the first thing that comes to my mind is "WTF?".  I know I have better things to do with several thousand dollars.

Even if you spread this over a couple of years, the burden to the taxpayers is enormous.  This becomes more complicated by the obvious fact that we all don't make the same amount of money.

Recently I read an article on Rush Limbaugh's web site that debunks some myths about taxation and income.  I spent some time validating the data, and it checked out.  What surprised me was my misconception of how much people make on average, and how much tax they pay.

Before going over the numbers, I want to cover some basic facts.

• This is a rich country.  No matter how poor you think you are here, chances are you have it better than people in many other countries.  If you really think you are poor, try taking a vacation in sub-Saharan Africa, rural China, India, etc.  People flock to this country from all over the world in search of a better life for themselves and their family.

• Taxes are not evenly distributed.

• People are relatively ignorant about how much tax they pay, how much others pay, and how much is collected annually by the government.

• Most Americans don't have any idea of what "rich" really is.  If you live in a one bedroom apartment, have food in the refrigerator, running water, electricity, and air conditioning, you are rich.
  

Before continuing, I want to you to think about how much money the average American makes.  Do you think the top 10% of income earners are millionaires?  What about the top 5%?  

On to the numbers:

Income Percentile	Paid Percent of all Federal Income Taxes	Income is at least
Top 1%	39.38%	$364,657
Top 5%	59.67%	$145,283
Top 10%	70.73%	$103,912
Top 25%	85.99%	$62,068
Top 50%	96.93%	$30,881
Bottom 50%	12.83%	$30,881

According to the current tax tables for the 1040 form:

Adjusted Gross Income	Tax Liability
$30,881	$4,230
$62,068	$11,863
$103,912	$23,073
$145,283	$34,657

A great majority of taxpayers do not pay enough in taxes to cover the per-worker liability that I mentioned above.  This places most of the burden of the bailout is on the higher income brackets.

FOOTNOTES:

• I don't agree with all of Rush Limbaugh's political views, but I respect the fact that he is an outspoken financial conservative.  We need more people to take a stand on government and corporate finance.
• Tax data was obtained from multiple sources such as the IRS website and The Tax Foundation.  A lot of interesting information can be obtained by analyzing the data contained in this chart on The Tax Foundation's website.