How Much Tax you Really Pay on a Purchase – Your Tax Rate is Higher than you Thought!

Apart from debt, on of the greatest stumbling blocks to building wealth is taxes. Don’t get me wrong, I do believe that tax is the price to pay for living in a civilised society. But the amount of tax we pay is way too high.

Look at Corporation Tax for example, it is a tax on a tax on tax. Every company in a supply chain has to pay tax and this means that at every point in the supply chain, prices get jacked up by the current corporation tax rate of 20%. Look at the following illustration to see what I mean:

If you go to a furniture store and buy a table, how much tax do you think you pay on the table? Most people will only think of the corporation tax paid by the furniture store and the VAT on the table, but in reality, you pay much more in taxes than you think.

Let’s have a look at the entire process used to make tables to see how much tax you really pay

    • Lumberjacks – Cut the trees to sell to saw mills. They pay taxes on the profits they make so naturally they will increase their prices to account for this thus passing on the taxes to the customers. This is the cost of doing business and it is a ‘hidden tax.’
    • Transport Company – Transport the logs from the saw mills. Again they have to pay taxes and they also increase their prices to account for this.
    • Sawmills – The saw mills turn the logs into lumber. They also have to pay taxes and thus they too increase their prices to account for this. As you can see, there is already taxes on taxes on taxes.
      Manufactures – The manufacturer turn the lumber into tables. They also have to pay taxes and thus they too increase their prices to account for this.

  • Wholesaler – Buy tables in bulk from the manufacturer and sell them in smaller amounts to the retailers. They too have to pay taxes and thus they too increase their prices to account for this.
  • Retailer – When the retailer buys the table, they are already paying taxes on taxes on taxes on taxes on taxes. They too have to pay taxes on profits so they will once again increase prices to account for this. As a customer and end user of the product, you can see how many times you have paid tax on the same product!

During each exchange from raw lumber to finished product, to all shipping and storing, the cost of the product increases to account for all taxes each party is responsible for.

Just remember that no company “pays” any taxes. They are always passed on to the consumer as higher priced goods. You’d do well to remember this the next time you’re shopping for a bargain.

By the time you go and purchase a product, you are paying a portion of dozens of taxes on taxes and even paying taxes on the cost of paying taxes. And this is not the worst part!

People like you and I have our own taxes to pay. We pay Income Tax, Council Tax and NICs – as far as I’m concerned, NICs are a tax. I know what you are thinking, employers pay NICs (and contribute to your pensions) on your behalf so it can’t all be that bad but just remember that employers pay you less than they otherwise would have giving you the illusion that they are paying your taxes.

So if you are a basic rate tax payer, you pay 20% Income Tax, 9% NICs and about 7% Council Tax. So on a purchase of £100, you are already paying £36 in taxes before any of the corporation tax is accounted for!
Taking into account VAT of 20% and the hidden corporation taxes of about 25% as illustrated above, you end up paying a whopping £81 in taxes for a £100 purchase. Your effective tax rate is 81%!

For every £1 you are and spend, about 81p goes to taxes. So for the £100 table above, £81 went to the government. The other £19 went to pay the lumberjacks, truck-drivers, saw mill operators, manufactures, whole sellers and retailers.

Putting this another way, everyday for the first 10 month of the year, you get up early in the morning, spend an hour or two in rush hour traffic, put in 8-12 hours at work, drive home through rush hour traffic and every penny you earn goes to the government. That leaves you with two month every year to earn enough money to pay all your bills, housing, food, clothes, transportation and every thing else you require.

So the next time you think that greedy corporations are the reason why you are poor, think again. The government through taxes are hindering your wealth creation ability.

But it gets even worse, the government has racked up debts running into the billions. And guess who has to pay that back? Yes, tax payers like me and you. I believe that tax rates will only increase in the future in order to pay the colossal sums the government borrowed in order to bail out the banks. As tax professional, I fear for the majority as taxes are already at obscene levels.