Politics Relationships

Taxes. How Much Does Our Government Really Collect on Each Dollar as It Changes Hands?

Ultimately most of it, as that dollar moves through circulation and is eventually added back into taxable income. With financial leverage more than all of it can flow back to the Treasury in the form of taxes.

taxes collectedThe physical paper dollar will be re-spent a great number of times and can create something referred to as a multiplier effect explained in the article linked below. 

Because economic exercises often watch the movement of physical paper ignoring taxes to show the benefit to an economy, the hypotheticals often do not withhold along the way, that which is taken away from you. 

The question above asks what the governments “collect” might be and I have expressed it in an oversimplified preparation below.

This exercise also ignores the value of what you receive for what you spend.  It also ignores taxes collected on the items during the course of being manufactured.  Finally, there are  taxes paid by that manufacturer and by their employees in making the item.

This also ignores the velocity of money, explained in this article from 2012

collect taxesSimply put, depending on how many times an after tax dollar or what remains of it, (best seen if the taxes are withheld and removed from your check) again becomes subject to income tax.

Let me explain how. Let’s assume your average tax rate is 15%.- the second lowest rate of 7 different rates for 2016. This would not be your highest tax rate paid on some of your income- just the average amount of tax on your income.

According to the IRS tax table the 15% rate covers single filers earning between $9275 to $37,650.

If after all of your deductions you fall in that category you owe 15% on your taxable income.

So on that dollar you will pay 15 cents.  If you spend a dollar,  you still owe the IRS 15 cents of it which you might pay from other dollars not the one you just spent.

But let’s take the 15% out now. Let’s say as mentioned above that you have it withheld from your check and you only spend the after tax dollar – what is left over.

So you receive a dollar bill missing 15% and go to the store and give the clerk the dollar with a small piece – again 15% of it missing (clipped off) so 85% of the bill, equal to 85 cents.  (yes I know, the bank would give you a whole dollar back for any bill more than half complete but that is not the point)

The store has overhead it deducts, some for payroll. Let’s imagine the whole  85 cents goes to the clerk as part of their pay. Let’s also presume they are in the same tax bracket as you are. They get handed your 85 cent paper bill with the missing piece but also since they also pay out 15%. which equals 12.75 cents, so more is clipped off the dollar bill, they only receive a bill that is  72.25% complete.

Thus far the government has your .15 plus 12.75 cents more or 27.75 cents.

Let’s Repeat the spending process. Next the government gets 15% of what’s left- .7225 X .15 which is 10.83  cents.

As you can see they get less because there is less of a bill left to be charged 15%.

Passing through just three people the government already has 38.58 cents of the dollar. But the dollar doesn’t stop moving there. It gets spent over and over and over.

It is constantly being whittled  away. By the tenth person only .1967 of the original dollar bill remains. By the 25th person only 1.7 cents -so less than 2 cents remains. Where did it go? The other 98.3% is now in the US Treasury.

Fortunately this is not how we actually remove taxes from our money but you get the point.

Because you are continually removing a fraction from what is a smaller and smaller amount, you will never arrive at 100% of the dollar.

There will always be some fraction of it left, like a person moving 1/2 the distance toward a line.  Next 1/2 of what’s left, then 1/2 of what’s left, etc..  You get increasingly closer but never touch the line.

Our government appears to think it owns all of your money.

So what do you have to say about that?

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