Hidden Government Costs Hit Your Wallet
Henry K. Hebeler
8/19/08
So you may think you are only paying income, property and sales tax. Wrong! You are paying for the government labor to administer and collect the taxes. You are also paying for all of the taxes on the materials used to get you the final product. And you are paying for the additional effort required by the retailer to administer and collect the taxes.
The additional administrative costs problem may be the worst in the medical field where medical offices now employ many more people than the professional staff in order to handle the bookwork of Medicare patients. Of course the major exceptions to this are those medical professions where Medicare doesn’t cover the costs, i.e., dental, hearing and eye care. Still they require some effort to cover those things covered by private insurance, but they don’t have to provide all of the incremental labor associated with submitting the bills to Medicare, waiting for a reply, resubmitting the result to a Medigap insurer, waiting for the insurer’s reply, and then finally billing the patient for the incremental cost that’s left.
Our family and retired friends have found that many times, the interval between the visit to the doctor’s office and our final bill can exceed a year. Since all of the medical staff and their suppliers must be paid before the doctor’s office finally gets the checks from Medicare and the Medigap insurer, your medical bills have to include the cost of borrowing the money in the interval. Throughout this process we get a number of reports on what’s allowable and what’s not--almost always aggregated with other items still in progress in a mess that’s virtually impossible to untangle. I remember that my father used to just throw all of these reports unread in his top drawer and discard them when the drawer got full. This used to drive my sister nuts, but it probably was the most practical thing to do.
Medical costs may be the least problem to you who are young and healthy. You don’t get off scot free from hidden government costs though. Let’s first look at sales taxes.
We only see the sales tax on the retailer’s bill. The retailer pays sales tax on the goods it buys from the wholesaler. The wholesaler pays sales tax on the goods it buys from the manufacturer. The manufacture pays sales tax on the goods it buys from subcontractors. The subcontractor pays sales tax on the materials it uses. And so on down to the point where the basic material comes from the ground—and property taxes are due. Actually, property taxes are involved in every step of the way, but we’ll leave those out to simplify the results.
In a product area where the labor costs and profit are a small part of the costs, say only 10% of the total cost, then a 9% sales tax like we have in our area really is a 24% sales tax when considering the product passes through only four hands on the way to your home. A 5% sales tax translates to a 13% sales tax in the same situation.
On the other hand, a product that has a high labor content, say 50%, at each of the four steps with a 9% sales tax would really cost you 12%. If the labor content was 50% and the sales taxes were 5%, the net sales tax to you would be 7%.
How do income taxes come into this? You pay income tax on all of the labor that went into the product at each step along the way. Suppose the labor content was 50%. If the average income tax of the workers was 20% and the profit was 10% at each of four steps, you would be paying 14% of the price for income tax along the way. If the income tax was 10%, you would be paying 7% of the price for income tax. Remember that the income tax includes that of the top bosses, administrators, and hands-on labor. Also remember that we haven’t accounted for Social Security and Medicare.
So, leaving out property taxes, Social Security tax and Medicare tax, if the sales tax is 9% and income tax is 20%, we are paying 24% tax for a low labor product and 26% for a product that averages 50% labor and profit at each of four steps. At the other extreme with 5% sales tax and 10% income tax, we are paying 13% tax for a low labor product and 19% for a product with 50% labor and profit at each step. Of course these are just rough figures because everything we buy is going to have different net taxes.
One of the main ways that the federal government has to reduce taxes is to push responsibility down to the state level. Medicaid is a primary example of this, but it also applies to many other areas including education and law enforcement. We still pay a tax, only to a state instead of the federal government.
The main point is that actual taxes on the things we buy are far greater than that sales tax number we see printed on the receipt. By analogy, the same is true of our property tax rates. So when someone says that the federal government is going to increase its services but not income tax for the average person—Watch out! The average person will pay for it one way or the other.
The other point to keep in mind is that increased government services and regulations can have a far greater effect than the increase in government payroll. This in itself is costly because both the average pay and retirement benefits for government workers far exceed the averages for those in the private sector. But the greatest effect is on the increase in labor needed in the private sector to satisfy the government requirements and administrative effort. The medical profession is a prime example of this, but it’s not the only one. I worked for thirty three years in the military and space fields. For every government oversight person assigned, we had to employ many more of our own employees to respond to the government’s questions and keep extra records.
All of these things are hidden costs. It’s impossible to find out the total, but almost anything we buy has hidden sales tax, income tax, Social Security tax and private sector overhead costs that far exceed that which we think we are paying in that simple sales tax number!
It’s even more sobering to consider all of the other kinds of taxes we pay beside sales, property and income tax. The various taxes that get added to telephone bills, gasoline, cable, etc., are staggering. Those already getting taxed on Medicare see how fast these taxes can increase. Then there are taxes on trusts, estates, large gifts, licenses, permits, cigarettes, liquor, power, water, corporations, inventory, worker’s compensation, employment, unemployment, imports, exports, hotels, entertainment and almost anything else you can think of. I like Ronald Regan’s definition of a taxpayer: “That’s someone who works for the government but doesn’t have to take the civil service examination.
Then there’s the non monetary aspect of all of this. More and more people have to engage a professional or use one of the commercial tax preparation programs. The instructions for a 1040 return have grown to be a book, and even then, they don’t have all of the forms and information like they used to. Now you’ve got to go to the Web to download additional instructions and forms as well as other instructions to fill out the additional forms. Trying to understand all of this and getting together all of the information for a tax return takes a huge amount of time whether you or someone else actually prints the final result. We long ago reached the point where tax returns and their instructions needed to be simplified. Come on Congress. Do something to help us with this! You are destroying our leisure life by taking our money and our time.