Taxes While Living from Paycheck to Paycheck

Spoiler Alert: The System is Rigged Against Most Americans

Most Americans do not earn enough money to invest in the present and the future; the median household income in America is about $60,000, which leaves about $54,000 after taxes, or $4,500 per month for all of their expenses. These Americans must cover their current expenses before they can save for the future; without enough to cover current expenses (or, in some cases, the foresight to limit current expenses), nothing can be saved for the future. These Americans, then, see their money leaving their pockets as it enters.

Early Life

Most Americans who ultimately live paycheck-to-paycheck grow up with parents living paycheck-to-paycheck. While they are children their parents are earning money from their jobs and then spending the money immediately on rent, food, and transportation. The well off of this group will have food for everyone for three meals a day; the tighter pocketed might have to be picky not only about what they eat but also about how often they eat.

Working Years

An American whose parents work paycheck-to-paycheck might finish high school but probably won’t go to college. They will probably start working at around 18, then, and will plan to keep working until they are able to collect social security benefits. A man in this circumstance will probably work continuously; a woman will try to work continuously but pregnancy and children can make it more difficult to work and create additional expenses. The marital tax brackets discourage marriage among lower-income parents, but even among married lower-income parents, staying home to care for the children is unrealistic when the other parent does not earn enough to cover for both.

When this American earns their paycheck, they must immediately use it to pay for things like rent, food, and gas; that is, they spend it. For these Americans, an income tax, a payroll tax, and a consumption tax are identical. Their income is entirely wages, so the income tax and payroll tax are both applied simultaneously, with the paycheck. Because this is paid before they consume anything, it is a prepaid consumption tax. When this American spends their money later that week or month, they will probably pay excise taxes as a postpaid consumption tax.

As this American gets older, additional expenses will likely crop up; children and medical bills take away from their ability to work and wages and add costly expenses to their budgets.

Ultimately, every dollar that most Americans earn during their working years is taxed with both the payroll and income taxes the second that it is earned. When they turn around and spend all of it, it may be taxed again with excise taxes. These three types of taxes, while they have different rates, functions exactly identically for the taxpayer, decreasing their immediate purchasing power. For most Americans, all of the taxes they pay are consumption taxes.


When this American retires, they will rely on social security to cover their bills. The American workforce has been shrinking, so the retiree - who paid a portion of their salary into social security for forty years - will now receive less in social security than he had paid while he was working, a unique double-insult for the impoverished, taking away their opportunity to save money while they work and then giving them less back when they need it and cannot work any longer.

Because they did not earn enough money to save when they worked, they do not have any sort of a nest egg to pull from; there is nothing else with which they can cover their bills. Many of these people will take further work that is not physically demanding and usually pays near minimum wage to supplement their social security benefits.

If this American had children, then they may be able to rely on their working children. Living with children can save money on rent and might push some of the costs for food onto their employed progeny; this sometimes is repaid by caring for the grandchildren while the children are working paycheck-to-paycheck and unable to build any wealth of their own.


When this American dies, there will not be significant assets because they were unable to save up and build wealth while they were alive. Therefore, there will be little inheritance that is passed on to the next generation, and there will be little available to free their progeny from their own reliance on their paychecks. So the cycle continues.

Next: Read Taxation while Saving for Retirement