How Higher Taxes Saved Me A Boatload Of Money

When the state of California raised the sales tax by another 1% on April 1, 2009 I was pretty pissed.  What kind of government expects their residents to pay a whopping 10% tax on everything they buy?  Pedro doesn’t want to pay $200 in taxes on his $2,000 60-inch LCD TV.  Nancy shouldn’t have to pay $300 more on her $3,000 diamond encrusted bracelet.  And I certainly don’t want to spend $5,200 in taxes on a handsome $52,000 BMW!  That’s just ridiculous!

We the people of California deserve our luxury items just like every other parrot-brained consumer in America.  Who’s to dictate what we can and can’t waste our hard earned money on?  Certainly not some bureaucrat in Sacramento counting all his money under the table, no way!

GOVERNMENT WANTS YOU TO SAVE WHILE THEY SPEND

I was angry about the mismanaged state of our budget and so I went on strike.  I cut down my purchases so drastically that by April, 2010, one year after the sales tax raise, I literally had over $20,000 in extra spending money in the bank.  You see, I figure I spend about $20,000 a year for the past 5 years on stuff.  This stuff includes automobiles, watches, shoes, clothing, musical instruments, computers and so forth.

I could accept paying 8.5%, or $1,700 in taxes on $20,000 a year in stuff.  But, I drew the line at 10% and wasn’t willing to support government waste, greed, and mismanagement by contributing $2,000 a year in sales tax.  I’d rather just laze around and demand government help than contribute to a lost cause so I stopped consuming in California.

The $1,700 in California sales taxes I paid on average for the past 5 years literally declined by 95% last year.  Whenever there is something to buy in California, I think about the 10% sales tax and get sick to my stomach.  I end up putting the item back on the shelf and walk away.

THANK YOU CALIFORNIA

I just want to formally thank California for jacking up taxes so much.  It’s great that whether one is poor or rich, they are still going to have to pay the same 10% sales tax on basic necessities.  So thoughtful of you guys!  Without government mismanagement and corruption, I wouldn’t be $20,000 richer today.  I would have spent merrily all along, not thinking about where the tax revenue is going.

So thanks again guys for helping me save a boatload of money over the past year.  You guys might as well increase the sales tax to 30% for all I care.  You’ll really crush your tax revenue by causing a halt in spending.  Not only that, you’ll just have people move out of California.  Washington, here I come!

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Cheers,

Sam @ Financial Samurai – “Slicing Through Money’s Mysteries”

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Wow, 10%? That is huge. I’m in your neighboring state Oregon and we do not have sales tax. We have a 9% income tax which I really really hate. I would like a 5% income tax and 5% sales tax, but I doubt it’ll ever change. I think CA also has a high income tax right? Double whammy! Washington state up North only has sales tax and I think that’s best of all.

    As far as the increase from 33% to 35%. I don’t think it is that big of a deal since that will only be for the income above 250k. We had that tax rate before and it didn’t stop Bill Gates or Steve Jobs from working hard.

      • Mountn_Man says

        In Illinois we have a 5% income tax. I’m not sure the sales tax, I think the next county over is 6 or 7%, in my county, buying a $1 Coke at McDonalds cost $1.12. We have the state sales tax, county sales tax and what I call the nanny sales tax. As the nanny state feels its their role to tell me what I should and shouldn’t eat, and should I chose to disobey their wishes, they’re going to tax me.

  2. says

    In Michigan, we have a 6 percent sales tax and a 4.6 percent income tax.

    I am so sick about taxes that I might as well move to Canada and get some free healthcare out of the deal.

    I think people who love to spend will still spend. Of course, often times, that is the people that can’t afford it and will eventually go bankrupt. It is those with discretionary income and common sense that will reduce their spending.

    A lot of rich people are rich because they don’t spend. I am sure they will still work as hard, but they may curb their spending. There is a huge difference between making 250k and being Bill Gates. (That was in reference to the comment above)

  3. says

    Taxes are a negative incentive, and consumers will adjust their behavior accordingly. For us in Oklahoma, an almost 9% sales tax in Oklahoma means that we’ve increased our online shopping drastically in order to minimize the sales tax bite. It even makes the $75 we spend each year for the Amazon Prime shipping program worthwhile. It means more buying used goods through craiglist, yard sales and ebay. It means doing without. And it’s one of the reasons I grow a lot of our own food in the backyard garden. Besides the many advantages of a home garden (quality, organic, convenience, stress relief, etc.) the fact that the state gets zip/nada/niente in sales taxes from every cucumber, tomato and spinach leaf is a sweet sweet bonus.

  4. says

    What a fantastic motivation to save! I think when they are projecting revenue increases, for things like taxes or even things like water usage, they often ‘forget’ that people will tighten their belts. This just makes them have to come back to the table for more later, because it’s not like they actually figure out to lighten spending (you know, like people and families have to do).

    Articles like this remind me that, while as bad and mismanaged as Michigan has been over the last decade, we don’t hold a candle to the mess that is California government. Good luck (and happy saving)!

  5. says

    10% Sales tax is ridiculous! I don’t even live in Cali and it infuriates me!!!

    With such an high tax rate, the side effect will be a robust black market (if it’s not already strong out there)! And you’ll have people driving out of the state with a big box truck to buy all their stuff in a cheaper tax rate state (plus the merchandise is probably cheaper outside Cali too).

    Maybe if Meg is elected, she can change things to a degree… But maybe not, totally crazy government out there!

    • says

      LOL, thnx for the infuriation! Good point about the black market.

      1: Here’s your $150,000 Porsche 911!
      2. Thanks! What shall we list the sale price at? $20,000?
      1. Sounds good!

      Meg is like 50% BEHIND Jerry. Oh well!

  6. says

    6.25% sales tax and zero income tax in Texas.

    Oh, and with such smaller revenues our state government is doing just fine. If you really care about your taxes, I honestly can’t understand why anyone would want to live in a state as messed up as California.

    • says

      California is only fiscally messed up. Other than that, the state is beautiful. Many in California would rather cut off their left pinky toe than move to Texas b/c they’ve gotten accustomed to paradise.

    • Correction says

      Texas actually has an 8.25% sales tax. At least for the past 13 years I’ve lived here. Although no STATE income tax, property taxes are through the roof. We pay approx $14,000 on our home, although we own it outright. Always seemed insulting to me.

  7. TaJ says

    Does anyone actually do that? I mean, who goes “oh no, I’m making too much money – I’d better stop making so much money or I’ll have to pay more taxes”? The points on the scale where that actually matters would seem to be on the lower end, where making too much money can actually set you back, not on the higher end, where taxes just mean you make less net profit.

    I’m not saying that there aren’t taxation levels where that becomes true, but we’re nowhere near that point on the Laffer Curve.

    Which isn’t to say I LIKE paying taxes. I certainly enjoy living in a state with no state income tax.

    • says

      Yeah, isn’t this sort of like the (irrational) argument I’ve heard that you shouldn’t accept a raise if it pushes you into the next tax bracket? Because then you’d have to pay the government more money.

      Except, you’d also forfeit the percentage that wasn’t touched by the increase.

  8. says

    Warrren and Bill, God Bless them are multi-billionaires. if they put 10 billion (less than 20% of their net worth) in a 2%CD, they would be earning 20 million per year in interest.
    I am not jealous, they earned their money! I want to be the “B” word too!

    When you are in that income bracket, you truly don’t care about taxes, its like a mosquito on an elephant!

    But taxes make a huge difference in behavior of those who make 100,000-5million/year. Tax income, NEVER hits the projections of the tax and spenders, because it DOES affect behavior.

  9. Robert Muir says

    “Does anyone actually do that? I mean, who goes “oh no, I’m making too much money – I’d better stop making so much money or I’ll have to pay more taxes”?”

    Absolutely! Especially at the higher income levels with a high marginal tax rate. There have been several editorials lately that were kicked off by the Chicago professor’s >$250K income rant. Here’s one from the NY Times:

    http://www.nytimes.com/2010/10/10/business/economy/10view.html?_r=1&ref=your-money
    “I can afford higher taxes. But they’ll make me work less.”

    I take care of small business computer networks for a living and folks ask if I can work on home PCs. With all the hassle of the billing paperwork and paying my marginal tax rate, it’s just not worth it, so I usually don’t do it. That’s why you have to pay $100+ to a plumber or electrician to just show up.

    • Kim says

      No, you don’t get it – the marginal tax rate of the rich isn’t so because they earn less – it’s because the income outside of the rate is in tax-sheltered activities – mini bonds, IRAs, T-notes, off-shore accounts, and asset appreciation. They’re not making less, they’re just ensuring that it is not taxed.

      • says

        That’s the super rich.. i.e. multi-millionaires. For the rest of the mere affluent earning $500-$1mil, it’s a different story and results in less desire to work for sure imo.

        People get the two confused.

  10. says

    The situation in my country is completely different. I wish we payed anywhere between 6-10% – Hell no! We pay a whooping 19% in taxes! Corporations pay on top of that an additional 10% on sales, regardless if there was any profit in the transaction… And taxes on personal income are around 10% as well…

    And yes, everyone hates paying taxes over here as well… ;)

  11. says

    I’m also tired of the tax beast… We pay 20% in state taxes (CA) before we’re able to purchase anything. Then I look around at other states and find they don’t have potholes that could break necks, traffic more than half the day, schools shutting down, and the largest welfare system in the nation. Add on top of that county’s like LA have now added on an additional 1% tax to help build up the mass transit system. A system that is to dangerous for anyone with money in their wallet to ride on.

    CA may be a nice place to live but I pray for the day my job moves so I can move with it.

  12. says

    The tax rates are ridiculous here! It does give me an incentive to shop around. I have two small cities nearby my house, and one as a 9.5% tax rate while the other is only 8.75%. I always do my grocery and household shopping there.

    When it comes to buying bigger things…internet!

  13. says

    Not so much spending, but I’m actually thinking about MOVING :) I can actually deal with state tax, sales tax and everything else that gets thrown my way, but the nexus tax that might pass will effectively make the tax 100% on some of my earnings, which no one in the right mind would live with.

    You see, when the government decides to ask online retailers who have affiliates working for them in California to collect sales tax for every California customers, they just plan to cut out the affiliates in the state. Me, being in California, means that part of the revenue goes to 0.

    If I move, California is not only going to not get any additional revenue from this online sales tax, they are going to lose my payroll taxes, income taxes AND the sales taxes I pay when I consume over here. And let’s not talk about my family’s consumption too…

    I love California but between building my own business and talking to some lifeless person over at EDD to justify why I’m requesting for aid, I’m picking the former.

    • says

      Nexus tax? Never heard of it! But, sounds like it could be called the Death Star tax instead if you are left with zero!

      What are you going to do with the house you recently bought though if you move?

      • says

        Nothing is decided yet, but I can either buy a house there and move there myself and fly back and forth or setup an office there and hire an assistant to help with everything and handle all the administrative stuff where I travel between both places. There are so many conferences in Las Vegas that if I go to all of them, I’m there every other month anyway, but both scenarios mean I’m keeping two houses, which is expensive but not as expensive as the 100% tax.

  14. says

    P.S. My thoughts on taxation: The most legitimate uses are for defensive military purposes, the courts, police, etc… in a couple of words: law & order. People need law & order to deal with each other and prosper. Beyond that I think that Bastiat has it right regarding unforeseen and hidden effects of every tax, subsidy, monopoly, nationalization, tariff, special-interest regulation, deficit, and inflation that is done. Nothing comes for free.

  15. says

    Holy crap sam. Those taxes are outrageous! I know you’ve posted before about extending your retirement by moving to a state with low taxes, but Honestly I didnt really figure that the 1-2% that you would gain is all that big of a deal. I didn’t know you were paying 10% sales tax on everything you buy + a personal income tax. In Wyoming, the state charges 4% sales tax, and counties have the option to add more on. I think most counties have added on 1%, and I think 2 have added on a 6th percent, each asking citizens of the county every 4 years if they approve of a 6th penny in sales tax. The other 21 counties in the state have a 4% sales tax rate.

  16. Mark says

    It should be noted that the state sales tax in California is actually 8.25%, not 10%. Cities and Counties DO levy their own additional sales taxes though, thus the higher taxes you see in some localities. Los Angeles for example is at 9.75% while San Francisco is at 9.5%.

  17. says

    Other side of the country here in NY with the 2nd or 3rd highest income taxes (plus NYC taxes if you make money in NYC) and I am glad how else would I pay for all those fantastic non-congested roadways, how about all those on 99 weeks of unemployment, social security that seems to be working really well….

    /end Sarcasm.

  18. says

    A 10% state sales tax is ridiculous. That actually discourages consumption. I don’t think that a 2 to 3% federal tax increase is a disincentive to work. If rates ever go over 40% that is a different story.

  19. says

    >Do you think people will stop working as much once their Federal Income tax rates go from 33% and 35% to 36% and 39.5%, respectively?

    Let’s say someone make 400k a year.
    Next year they’ll pay an extra $4,500 in tax. (400k-250k)*3%

    This is not peanuts, but if they are netting $33,333 a month, the extra tax ($375/month) shouldn’t be huge deal.

    disclaimer: I don’t make more than 250k so I am talking out of my ass here.

    • says

      Cool, at least you admit talking out of your ass! :)

      Someone who makes 400K doesn’t net $33,333 a month, they GROSS that much. Their net is closer to $20,000 a month. Try paying $100,000 a year in taxes already and see how you feel if you have to pay $10,000 more!

      • Our Life Inc says

        For the work less if taxes increase question…I imagine this would depend on your line of work. If you are a salaried worker, then how would you deliberately work less to avoid paying more in taxes? I imagine this would generally apply to more hourly workers or people who, as Robert Muir said, have opportunities to earn “side income” or something. Of course, I am salary, so I can’t see taxes taking me down from 45 to 50 hours a week to 35 or 40! But I also make far less than 250k, so who knows!

    • Correction says

      on area one fails to consider is couples filing joint accounts. As my first dollar earned would be taxed at my husband’s top rate, it discourages me from going back to work after having kids, for certain. If I have to turn over almost 40 cents of my first dollar plus pay for childcare, parking downtown, etc.. it is absolutely the biggest financial factor in my decision to stay home.

      Irony is that if there were greater financial incentive for me to return to work (ie, lower taxes), the federal government would most certainly be getting more taxes from my productivity.

  20. says

    Would you be okay with this tax if there was no income tax in CA? Wasn’t one of your rec.ent articles about increasing the tax on everybody? This certainly is one way to do that. It’s kind of like a flat tax, except of course, that you also pay federal and state income taxes too.

    I personally would be okay with taxing everything at 10 or 15% if it meant I could eliminate some other tax..but to do both, well that’s just lame.

  21. says

    to Sandy’s point, sure, consumption tax , or sales tax is much more tolerable relatively speaking to other taxes given you have full control. to FS’s point, i agree . . . start buying camels and grow your own garden. times are changing :)

  22. Aloysa says

    In my country we used to pay 18% VAT on EVERYTHING. We didn’t have sales tax, we had VAT and every time you’d see a price it would already include VAT. It was a long time ago, so now I wonder if VAT stayed the same or was raised. Sales tax in the state where I live now is 6.85%. Comapring to Cali, we are damn lucky.

  23. says

    In Arizona our sales taxes on nonfood items are almost 10% and the state found a way to raise our income taxes without officially raising them, simply by recalculating the way they’re figured; the city of Phoenix recently slapped a tax on food and instituted fees to use city parks. Does the sales taxes keep me from buying big-ticket items? No…unemployment serves that purpose.

    But when I have a chance & can get free shipping, I do buy things online instead of locally…and I’m not fessin’ up and paying local tax on those purchases.

  24. chew on it says

    I would love to see the implementation of FairTax. Everybody pays their fair share of tax according to their own consumption. No more filing those pesky tax forms.

  25. says

    Sam, I agree we pay more in taxes than most states, but our property taxes are much lower than same value homes in other states.

    Plus, you can just order everything from Amazon.

    • says

      I don’t think homes are the same value in California though. California homes are on average 30% more than the rest of America. In SF, the median home price is $600,000, or TRIPLE that of the national $190,000 median for example!

  26. says

    I guess my experience makes me think you sound like a whiner. I paid 9.75% where I lived in the states and now I pay 15% in New Zealand.

    I suppose you could always move to a state without sales tax. Try Oregon. It’s all California transplants so you’ll fit right in. ;)

  27. TripleSigma says

    What about the stealth tax in the debasement of the USD$.

    Nobody complains about the dollar losing value or “real” inflation which is a tax that punishes hard working savers regardless of state…..
    Sadly most people think this is a good thing because it “helps exports” which is a joke.

    • says

      I’m a saver, and I don’t mind the weak dollar. There is no real inflation and rates will stay low for a looong time.

      I am buying real estate now though. No brainer imo with rental yields at 7-8%.

  28. Mike@atfinancialplan.com says

    Canada is starting to look good. I think the VAT is 17%, plus the income taxes that are similar to ours. However, that cost includes all the health care. What do you get for 10% in California? Probably not that much service.

    More insidious about CA is the aggressiveness of the state tax authority. I remember reading a story of a resident who bought a very expensive car. Because government knows your income and apparently can tie that purchase to it, they went after her to find out how she could afford such an expensive car. (At is turns out, she got a big lump sum from an insurance payout on her wrecked car – which she turned over as a down payment on the new car). Sick.

  29. says

    Wait, I’m confused? Obama keeps telling us that raising taxes is good for us and reminds us about how well the economy did under the Clinton tax rates. Surely, the government can make better use out of our funds than private industry and citizens, no?

  30. says

    No worries with people stop working Sam. I pay 45% on my next dollar and I keep working for more ;-) hahaha!

    I would feel better with a base taxe of 20% and a luxury taxe on goods. At least, I wouldn’t have the feeling that I pay for everybody all the time ;-). More thoughts on taxes on today’s post (great coincidence, isn’t?)

  31. says

    Unfortunately, many are not as wise as you are, and will continue to spend and be raped by the taxes. Myself, I left California in the 90′s. The cost of living was too much for the lifestyle my husband and I wanted for ourselves and our family. Subsequently, we have lived very well in various less expensive areas and amassed a substantial retirment fund tin the process.

  32. Josh says

    Hey Sam,

    Great point about the demotivating effects of increased taxation. I do think that there will be a significant number of intelligent middle-upper class people that will just decide to ‘coast’ once taxes hit a certain threshold. It’s only logical since more effort will only put more money into the governments hands to waste.

    California has a long way to go to recover from the mess they’ve gotten into and I definitely don’t plan on funding that recovery any more than I have to.

    My best,
    -Josh

  33. Liz says

    I pay more in bottled water costs than I would in taxes. I have to buy the water, because the pipes in my metro area have only had patchwork since the Great Depression, and the water is periodically polluted with, among other things, lead and raw sewage.

    So for the love of all that is holy, every time I hear so much whining about taxes this and taxes that, I really wish people would remember that taxes also buy us stuff. And if you’re not buying in to the cheaper economies of scale available through things like municipal water, you might be paying even more in other ways. (And before the Randians chime in, no, I do not believe the free market can or will provide a cheaper, more effective solution to a product that is necessary for basic human survival).

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