If you just graduated from college, let Restore Accountability be the first to congratulate you! The “real world” has been waiting to see what you can add to this great country.
While some of you are just excited to leave school for good, most of you are excited about that first big paycheck!
Unfortunately, I have some bad news.
Many of you who will receive your first big paycheck will plan for it to be much larger than it will actually be. This is not because you accepted a bad job, but rather, because the taxes taken out of your paycheck are much higher than expected.
At a time when many graduates are swamped when they graduate college with student loan debt and other expenses, federal taxes are one thing many grads are not prepared for. Let this article be a primer on what federal taxes affect your paycheck, and what that those tax dollars go to.
According to the Economic Policy Institute, the average young grad makes about $40,000 right out of college. So we will let that be our benchmark salary. That means if you get paid monthly you will be collecting a paycheck of about $3,300every month before taxes. Depending on what state you live in, your $40,000 salary will see a state income tax rate anywhere from 0%-10%. It is true that a growing number of millennials choose where they live, so state and local taxes, that are spent fairly close to home, do not come as a shock. However, the biggest chunk of taxes collected from your paycheck will go to the federal government, which could be spent in your neighborhood or all over the world.
Every paycheck, assuming a $40,000 salary, the federal government will collect about 20% of your hard earned money. For our college grad that makes a $40,000 salary, that’s a little under $700 every paycheck, or $8,000 over the course of your first year! Coupled with student loans, rent, and basic living expenses, a reduction of $700 every month seems like a lot. Where does the money go?
The first federal tax we will start with is the payroll taxes imposed under the Federal Insurance Contributions Act (FICA). FICA is a tax of 7.65%, found on every paycheck, that funds Social Security and Medicare. 6.2% of the FICA tax goes towards Social Security and 1.45% goes towards Medicare. In addition, your employer matches both of these taxes for a grand total of 15.3%. These FICA taxes make up a third of total federal revenues. In addition, these entitlements (Social Security, Medicare) makeup more than half of the total federal budget.
Yet, these payroll taxes are not enough to meet the future commitments owed by these programs under current law. For example, Social Security (think SS FICA tax) has been running a cash-flow deficit since 2010, and the trust fund isexpected to be depleted by 2034. Coupled with rising cost to healthcare programs like Medicare, the national debt, and rising interest on the national debt, generations just leaving college now will have a major crisis on their hands in the near future if nothing is done to protect those generations.
The second federal tax on your paycheck is the federal income tax. For a person earning a salary of $40,000, the effective tax rate is about 12%. That 12% collected from your paycheck helps pay for the other half of the federal budget which includes income security programs like unemployment benefits and welfare programs such as food and housing assistance (18%), national defense (16%), net interest on the country’s debt (6%), and finally, all other federal expenditures like transportation, education, and scientific and medical research (7%).
If you’re seeing the federal budget explained for the first time, it may be a shock to you that over half of the budget goes to entitlement programs. However, even after taking out all these taxes, there is still one more hidden tax left. In 2015, 16% of our spending was paid for with borrowed money that is added to the $20 trillion national debt. Save for entitlement and benefit programs, the Congressional Budget Office (CBO) projects that interest payment on our debt will be the largest budget item in 2024, costing $800 billion! This is all money that is spent today that will have to be paid back by recent graduates with interest.
While there will be no tax that shows up on your paycheck, borrowing from the future is essentially the equivalent to a tax increase.
If you are struggling with how much taxes are taken out of your paycheck now, just imagine what lawmakers in Washington will have to raise them to when all of our budget is consumed by entitlements and interest on the debt.
Ignoring the biggest problems like the national debt and entitlement programs is what Washington does best. Our founder and former Senator Tom Coburn created this organization to start conversations about those problems. For recent graduates’ sake, starting to debate and address these issues could help save future paychecks from disaster.
