It's Tax Time: The Tax Liability of a Philadelphian on the Poverty Line

Apr 5, 2007 by

Revised thanks to the careful reading of Mai Mai Lin! 

 Taxes are due this year on Tuesday, April 17th. (Usually, taxes are due on April 15th, but the 15th is a Sunday, and the 16th is a holiday this year.)

2006 Tax Schedule for Single Status Filers

  • 10% on income between $0 and $7,550
  • 15% on the income between $7,550 and $30,650 and $755.00 extra
  • 25% on the income between $30,650 and $74,200 and $4,220.00 extra
  • 28% on the income between $74,200 and $154,800 and $15,107.50 extra
  • 33% on the income between $154,800 and $336,550 and $37,675.50 extra
  • 35% on the income over $336,550 and $97,653.00 extra
  •  

    Taxation at the Poverty Line

    Currently, I live in Philadelphia, and am “employed” as a graduate student. As a result, my income puts me in the 15% marginal tax bracket. According to the 2007 Health and Human Services Federal Poverty Guidelines, the 2007 poverty line is $10,210 for a one-person household (i.e. my living situation). While I do make more money than the poverty line, it might be interesting to examine how much a single person living on the poverty line in Philadelphia must pay in taxes. It’s a surprising amount!

    First of all, a person making $10,210 owes Federal taxes. Luckily, such a person qualifies for the Standard Deduction ($5,150), and one exemption ($3,300). Assuming the money was not earned through investing, the person also qualifies for the Earned Income Tax Credit, equal to $412 – 7.65% * (x – $6,740) = $147. Thus, the person’s taxable income would be $10,210 – $5,150 – $3,300 = $1,760. As $1,760 is taxed in the 10% tax bracket, the taxes owed would be $176. After accounting for a $147 Earned Income Tax Credit, Federal taxes owed would be equal to $29.

    Pennsylvania residents must pay 3.07% income taxes on all income above $0. So, a single person living on the poverty line must pay $10,210 * .0307 = $313.45. Residents of Philadelphia working in Philadelphia must pay a 4.26% wage tax. Thus, a person on the poverty line would have to pay $434.95 in Philadelphia wage taxes. So, an impovershed Philadelphian would have to pay $777 in taxes, 7.6% of their income!

     The government also takes deductions from the payrolls of the poor. Although these deductions often are for the benefit of the poor, the poor must pay them nonetheless. Both Medicare and Social Security are “split” between the employer and the employee. (I say “split” in quotes, as if the employer did not have to pay for these social services, the money could be paid to the employee instead.) Medicare is a fee equal to 2.9% of gross income, split between the employer and the employee. Social Security is a fee equal to 12.4% of gross income, split between the employer and the employee. Thus, after receiving his income, an employee must pay 1.45% of his income to Medicare and 6.2% of his income to Social Security. A person earning $10,210 would have to pay $633.02 in Social Security taxes, and $148.05 in Medicare taxes. (These figures do not include the amount paid by the employer.) It should be noted that income above $94,200 in 2006 is not subject to Social Security tax. This cap, however, does nothing to help the poor. After paying for Federal, Pennsylvania, and Philadelphia taxes, along with Medicare and Social Security, a person is only left with $8,652. So, the government effectively takes 15.3% of the income of a person living on the poverty line.

    While not all purchases are taxed, many purchases that a person makes are subject to sales tax. Sales tax in Pennsylvania is 6% and sales tax in Philadelphia is 1% for a combined sales tax of 7%. If someone chose to spend all $8,652 of their net earnings on items subject to Philadelphia sales tax, he would only be able to purchase $8,086 worth of goods. Thus, the government would have through a combination of taxes reduced his purchasing power by 20.8%.

    Conclusions

    From the above exercise, we can see that a person living at the poverty line in Philadelphia must yield between 15% and 21% of his income to the government. Heavy government taxation at all levels reduces the ability of people living on the brink of poverty to purchase the goods and services they require, and may cause them to need more social services. Although some may think that only the rich have a substantial tax burden, it is worth remembering that the poor must pay a large portion of their income to the government as well. While the dollar volume may be far smaller for the poor than the rich, the percentage of income is high in both cases.

    1 Comment

    1. Bob Oliver

      Interesting story on taxes. It is amazing what Philadelphian pay! Having worked in the city years ago it seemed as if you were nickeled and dimed daily. Probably still the case today.

      Still, one thing is certain. There is a way to pay no taxes and not go to jail…don’t earn any money.

      I spoke with a tax advisor a few years ago and he laughed when I complained about paying taxes. Said he: if I gave you a million dollars and you had to pay Uncle Sam $350,000, would you turn down my offer? Of course not. So while we all hate paying them, the fact that we have to pay them only means we are making money.

      You make several excellent points in your blog. I was thinking of your note and remembered a couple ways I’ve “saved” money recently. Instead of a latte I’ve gone to regular coffee, saving $1.75 a day. At the end of the week I take that savings ($8.75) divide it by 2 (just do..) and have $4.38 to invest.

      Believe it or not, I now have 12 shares of Starbucks bought in the last two years from dollars saved by switching from latte to regular.

      Yes, I have will have to pay some tax when I ultimately sell these shares, but the way I look at it is the same as the million dollars above…it’s free money in my mind.

      Any event, you are correct that taxes are high! But mostly unavoidable.

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