“Keep your eye on one thing and one thing only: how much the government is spending. Because that is the true tax.” – Milton Friedman
There are many forms of taxation in the United States that typically fall into one of three categories: income taxes, sales taxes and property taxes. Put simply, you are taxed when you earn it, taxed when you spend it, and taxed when you own it. Each of these tax types often take multiple forms. For example, income taxes include the federal income tax, state income taxes (in most states), corporate income taxes, Social Security taxes, Medicare taxes, capital gains taxes, and inheritance taxes. Sales and property taxes likewise take multiple forms.
Because taxation is spread across so many different types, it is often difficult to know exactly how much is paid in taxes. An honest form of taxation would be one where it is easy to determine how much tax is being paid. One of the most honest forms of taxation is the sales tax as it is a separate charge when purchasing an item, and it is easy to understand how much you are paying in taxes. You are reminded of the price of government every time you shop.
Using the Milton Friedman definition of the true tax rate, calculating the total tax is relatively easy. Total federal, state and local government spending amounts to $12.8 trillion in FY 2025. With a current GDP of $29.2 trillion, this means federal, state and local governments spend about 43.8% of your income. If this were shown when spending $100, you pay $56.20 for the item and $43.80 in taxes. That would require a sales tax rate of 77.9% (Math: $56.20/$43.80 = 1.779)
There are two main reasons the government would not want an honest tax where you see the true cost of government in one location. First, a 77.9% sales tax would lead to the formation of black markets where people avoid paying the high tax rate. As an illustration, New York City has the highest cigarette tax in the United States at $6.85 per pack (equivalent to about an 80% sales tax). By comparison, states like North Carolina, South Carolina, Georgia and Virginia have total tax rates below $2.00 per pack. As a result, smuggling cigarettes into New York City is rampant. The Mackinac Center estimates the majority of cigarettes smoked in NYC are smuggled. Like cigarettes, if all taxation were concentrated in one place, black markets would immediately form to avoid the tax.
The second reason the government does not let you see the full tax bill at once is to maintain power. Morgan Housel stated it perfectly: “Politicians do not win elections to make policies; they make policies to win elections.” To help win elections, their goal is to minimize the visibility of the taxes you pay, and to maximize the visibility of the benefits you receive. There are several ways that are used to minimize tax visibility:
Tax Withholdings: People think in terms of their take-home pay. If people had the cash in the checking account and had to write the checks to the IRS, people would be more upset about the taxes they pay.
Payroll Taxes: Unlike business owners, regular employees see 7.65% of their income come out of their paycheck for Social Security and Medicare. What they do not see is the 7.65% paid by their employer. People who run their own business get to experience the self-employment tax of 15.3% to pay the full price of Social Security and Medicare.
Tariffs: Shoppers see the state sales tax line on their receipt. They do not see the tariff paid and incorporated into the sales price of the item.
Gasoline Taxes: The federal government and most states tax gasoline at a fixed amount that is included in the posted sales price. There is not a separate line item on the receipt for the gasoline tax.
The desire to show high visibility for benefits while keeping costs hidden shows up in our recent tax changes. The tax elimination on tips and overtime are very visible as the change will show up in paychecks and tax refund checks. The increase in tariffs is hidden as it will be built into the cost of goods purchased with no indication about which part of the price is due to tariffs.
If you find the thought of a 77.9% sale tax rate outrageous, I agree. Here’s the catch: this is what you are already paying today for state, federal and local government spending. Unlike an honest sales tax, most of the costs are spread out and hidden.
