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Small-Scale Question Sunday for November 5, 2023

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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How do income taxes work in the US? Let's say I am offered a salary of $100k, what's the rule of thumb to estimate my take-home pay?

For comparison, here's how it's done in Russia. Let's say I am offered 9M rubles per year. This amount includes my income tax that will be deducted by the employer and excludes my social security contributions that will be paid by the employer on top of 10M. There are just two tax brackets: 13% on the first 5M, 15% on the rest. So my take-home pay is 50.87+40.85=7.75M rubles annually.

From what I know about various EU countries, it's more or less the same, except the number of tax brackets is higher and there are additional concerns like having a (non-)working partner and/or underage children that affect the tax rate, but your income taxes are done by the employer.

US tax code is huge, byzantine and confusing. It's on purpose, because taxation is used as political football, and taxing or de-taxing various things (depending on whether enemies or friends do the things in question) is a favorite pastime among Congressmen.

Employer does usually deduct your taxes, but it's not where it ends, unless you are either rather poor or live very simple life. At the end of the year, you are supposed to check how much you owe, either by reading IRS instructions purposefully made as confusing as possible without rendering them in ancient Egyptian, or pay somebody to do it for you (most people choose the latter). Then you include various additions (e.g. if you own savings account, stock, had side income, etc.) and deductions (charity donations, secondary taxes - property, state, etc., and the football stuff). Then you send them a special form to the IRS, and if you owe the man, you must pay, if the man owes you, they'll eventually send you the money. Not submitting the taxes is a crime, especially if you owe the man (I am not sure they'd aggressively go after you if they owe you).

The whole system has some nice ideas in it (e.g. charity deductions make the US citizens one of the most prolific charity givers in the world) but, as a lot of other systems in the US, with time it grew into unholy monstrosity, and since so many political interests are baked into it, nobody can do any reasonable change, but only add more and more monstrous tentacles to it.

Russia has a lucky chance to reset its system pretty recently, and as far as I remember, banking/taxation were one of very small number of areas in Russia taken over by professionals who were listened to by the Powers That Be. I am genuinely surprised they ended up with the system that actually makes sense.

Let's say I am offered a salary of $100k, what's the rule of thumb to estimate my take-home pay?

There are multiple calculators online, but: a) take home pay doesn't mean you don't owe more on the tax day b) it depends on your state of residence (US is a federal republic, remeber?) and sometimes also city c) it also depends on whether you are married and how much your spouse makes, and how many kids you've got d) it also depends on crapton of other things. So the online calculators will only give you the ballpark figure, if you want something better, you pay an accountant or learn IRS's version of ancient Egyptian.

I am genuinely surprised they ended up with the system that actually makes sense.

There are a few major problems with it:

  • Income tax is a federal tax (actually, only property and land use taxes aren't), so regions are dependent on federal financial support
  • Social security payments are strongly regressive and are paid by the employer

But otherwise it's not remotely as byzantine as the US tax code.

so regions are dependent on federal financial support

That's a feature for The Vertical of Power, I am sure.

Social security payments are strongly regressive and are paid by the employer

The same is true for the US on the regressive part, but "paid by the employer" I feel is mostly a trick since it all figures in total cost per employee, and I'm pretty sure business owners can do that calculation (which is also true for the US, of course). Still, it is not exactly a "problem" as I see - it doesn't make anything different, it just looks different.

The trick means employees don't really feel these payments. Tye government is free to adjust the rates up or down without any reaction from the public.

Of course, it's old and true trick, which the US system uses much more extensively than Russia. I' just saying on the whole, it still makes Russian system look much less broken - which in general would be a weird thing for me to say, but I must admit the truth when I see it.