Is this including the use of tax advantaged accounts like HSAs/401Ks/IRAs/etc?
In the US, it should be possible to get a 95th percentile household income ($300k, married filing joint) effective federal income tax rate down to 10% to 15%. Including total health insurance costs (employer + employee) plus some amount of deductible/out of pocket maximum for a family of 4 would bump it up to 20% to 25%. And then on top of that would be state + local tax liabilities like property and sales tax.
All in, I bet total proportion spent on taxes is less than 40%, even in California, at 95th percentile income, and 30% in a state without income tax.
Edit: I’m probably understating my numbers by 5% due to forgetting about social security and Medicare taxes.
If this is MFJ two similar incomes, then Social security and Medicare is another ~14% (it'll say 7.65% on the tin, but really your wage is lowered to compensate for the 7.65% employer portion, working out to about 14% total). Effective federal income tax on $300k income is 20%+, not including healthcare. State tax is another 8%..
So that's 42%, not including healthcare costs. Which is gonna be easily another 5%+.
> In the US, it should be possible to get a 95th percentile household income ($300k, married filing joint) effective federal income tax rate down to 10% to 15%.
I cannot believe it. Do you have a worked example?
After standard deduction ($29k), AGI is about $217k. That's the 24% bracket (barely), which adds up to $34,337 + 0.24*$16000 ~= $38,200 federal income tax
$38,200/$300k = 12.7%
You can get even lower with itemized deductions: mortgage interest (might be over $40k) plus SALT ($10k) plus a few donations ($5k) => AGI of $191k => federal tax rate of under 11%
Of course, this is just federal income tax. Most people also pay FICA (medicare+social security) and state and local tax.
That is impressive. Thanks for the very thoughtful answer. Many times before, I have seen utterly bullshit tax minimisation claims on HN, but rarely an answer as good as this one!
Deeper question: Now that you provided a reasonably scenario where a household earning 300K USD combined income can "only" pay 12+% in federal taxes: Does this make sense from a policy perspective? My point: Should it be higher? It seems hard to pay for what a highly developed nation needs to pay for where 300K USD households are paying such measly federal taxes. (To be clear: I very well understand this is one component of total tax burden, but still a worthy discussion.)
It really isn’t worth discussing just federal tax liability in the US, due to how complicated the various taxing jurisdictions are and how diffuse various governing expenses are throughout those jurisdictions.
Especially when comparing to effective tax rates in countries with universal healthcare and different defined benefit pension schemes. For example, health insurance premiums in the US are a tax, due to the myriad restrictions on how premiums can be priced. Just not collected by the government, but it definitely is young and healthy subsidizing poor and sick.
Also, note that most of the reduction in tax liability is due to setting money aside for later use, so it is akin to deferring taxes, rather than just reducing taxes.
Another way to make sense of policy is that the federal US spend is 60% on defined benefit pensions for old people and healthcare for old or poor people, 17% on military, 13% on interest, and the remaining 10% for the rest of the federal government’s operations.
You also need to consider Fica (social security and medicare) and state and local taxes. Personally, my partner and I made about $470k last year and (filing MFJ) our combined rate will end up being about 28% ($80k federal tax, $30k CA state tax, $20k fica).
Which IMO should be higher! But also I'd want that to include universal healthcare (my employer and I pay combined about $20k/year or another 4% between premiums and deductible+copays) and generally a better social safety net.
American taxes are so complicated. Let's add another 1-2% for the mental cost of having to know all this stuff, or pay someone else to know it. It's just crazy.
It’s incredible the US has any other economic output, considering the effort spent on taxes.
At one of my businesses, we remit 4 separate sales taxes to 4 separate governments, and each has to be itemized, so receipts are multiple pages long for no reason.
Then there are myriad possibilities for being exempt from either all or some of the taxes, and those records have to be kept in case of an audit.
There must be enormous amounts of tax evasion too, the attack surface is so great no one can audit it all. The most tax advantaged account, a Health Savings Account, lets people set money aside today, invest it, and let it grow for however long they want, and then withdraw it for healthcare expenses, all tax free.
But the healthcare expenses can be from any point in time in the past. A 30 year old can save their receipts for purchases ranging from over the counter painkillers to childbirth bills from the hospital, and then reimburse themselves when they are 80 years old.
How can it even be possible to audit someone’s healthcare expenses that happened 50 years ago? The counter party will surely no longer have the records to cross reference, so it’s basically the government taking people’s word for it.
Taxes are a lot higher because the higher brackets kick in at a much lower income while cost of living is similar. A top 5% income is not enough to live a dignified in London where most of those jobs are but it’s high enough that the government won’t let you make more. Very sad situation. Top 5% income in the UK is probably more like top 20% in the USA
