Money Math: Tax Impact
Money magazine has five short money math tips in its January issue and I'll be sharing/commenting on them over the next few days. Here's one for today:
How much do I need to earn, before taxes, to buy what I want?
The math: Multiply the cost by 1.4. (That assumes a 28% federal tax rate.) To pay for a $10,000 home theater, you must earn $14,000.
Ouch! The tax man certainly has an impact here!!!
I also like to look at this question from a "how much time did it take me to earn this?" For instance, if you make $20 per hour, it takes you five hours to buy something worth $100. Whether or not purchasing something specific is or isn't worth five hours of your life is then for you to decide.
Add sales tax and that 28% can quickly become upwards of 35%. Yikes.
Posted by: Kevin | January 04, 2008 at 02:22 PM
I think more people should do the hour/dollar conversion. I think more people would stop to think if they had to spend 5 hours of their life to get something. I know that mode of thinking really changed my situation. Selling chunks of my time/life for various things.
Posted by: Rev | January 04, 2008 at 02:24 PM
I need to use these tips when considering a purchase. Sure puts things in perspective. I like both of these ideas. When using both ideas together, you figure a $100 item would take you 7 hours of work to earn enough to pay for it, if you earn $20 an hour ($100 times 1.4 divided by 20). That's almost a full work day for many people. Sure makes you think twice about how bad you want/need that item. Thanks for the tips!
Posted by: Rob | January 04, 2008 at 03:07 PM
This is always a good way to put the "fairtax" that was discussed on this blog previously, into perspective. For example, you have to earn $14,000 to pay for a $10,000 home theater under the current system, however under the fairtax you would have to earn $13,000 (It would cost $10,000 + 30% tax and you aren't taxed at all on your earnings).
Obviously a simplified example which doesn't factor in all the moving parts, but I just thought it was a good way to put the fairtax argument into perspective.
Posted by: Tim | January 04, 2008 at 03:17 PM
On the other hand, if it is something you would buy anyway, a necessity, a low bracket would be more appropriate, say 10-15%, or at most your gross rate, say 20%.
It does make you think about how much your time is worth. At what point is your time more valuable than what it might buy?
Posted by: Lord | January 04, 2008 at 05:36 PM
I use a straight 50% markup for tax; it's much easier to compute.
Posted by: Carl | January 04, 2008 at 06:47 PM
When I was in high school I had a lawn maintenance business with my brother, and before we would buy anything we'd always think about how many lawns we'd have to mow in order to pay for it.
Knowing this kept me from buying a lot of unnecessary things.
Posted by: Fiscal Musings | January 04, 2008 at 11:48 PM
And, frankly, 35% is probably too low for most middle-class folks.
Here in Michigan, I just paid a 6% state tax on a new car. There are also titling fees (which are just fancy words for taxes).
So, even though I bought a frugal $3,500 car, I paid $210 in use taxes and $25 in licensing fees.
Since my income is taxed at 4.35% and I'm in the 28% bracket, my total upcharge was almost 40%.
What's amazing to me is (as a wise reader above noted) the hourly charge.
If I had bought a new vehicle (my boss encouraged me to do so), I would have paid about $26,000. At a reasonable rate of pay, that's 6 *months* of full-time work. Yikes.
Posted by: orthros | January 05, 2008 at 11:06 AM
the big question is how do i find a cpa. i could look in the telephone book but then they are all the same.
Posted by: stephen | June 17, 2009 at 12:22 PM