Why Do Payroll Taxes Get Ignored?

"Tax the rich! We are the 99%!"

It is the rallying cry for Occupy protesters nationwide. Of course, that overly simple statement does not answer the fundamental questions surrounding how you define rich and how you define poor. Nor does it acknowledge that among the "99%" there are people making enough to support a family of four with a nice house in the suburbs and a relatively new car while others in their group have not held a job in 2 years and run out of food before the end of the month. At what point does that family of four become rich and at what point did that person on Food Stamps become poor?

Attempting to define those groups is difficult. It is less difficult to understand why many Americans are upset with the current state of the economy. With 8.6% unemployment and hundreds of thousands giving up on seeking employment, the country does not feel good about itself right now. Millions of Americans are working in low paying, dead-end jobs despite possessing college degrees and various skills that should make them eligible for a better wage. Meanwhile, many unskilled workers without a college education work in high paying government jobs, funded by taxpayers who have a much lower income. It makes you wonder why the protesters don't chant against government workers who make a lot of money, have the best health care benefits and still have guaranteed pensions...some of which is paid for by the population toiling in lower income positions.

However, in all of this tumult, the protesters have missed the most obvious error in the current tax code that truly does favor the wealthy at the expense of others. One that is so fundamentally unfair to the middle and working class that it defies reasonable explanation. The payroll taxes, otherwise known as FICA taxes, consist of a 12.4% Social Security tax and a 2.9% Medicare tax. This tax is split evenly between you and your employer and only applies to the first $106,800 of annual earned income.

Those last two words are crucial. FICA taxes only apply to earned income. That means that people who make their money from capital gains, dividends or passive income from rental units or royalties do not pay the tax. Most very wealthy individuals make the lions share of their annual income via these means.

Beyond what kind of income is FICA taxed, did you catch the dollar amount at which the tax is capped? $106,800. Thus if you make the real median household annual income in the United States, which was $49,445 in 2010 according to the U.S. Census Bureau, you will probably pay FICA taxes on every single dollar of it. However, if you are fortunate enough to earn $200,000 in the same year, you would only pay FICA on a little more than half of it, while every dollar above $106,800 is FICA tax free. I have no problem with the corporate matching dollars ending at $106,800, but why does the individual share of the tax end there?

To be fair, the wealthier you are, the more income taxes you pay. Thus, it is not rainbows and puffy clouds for the top income earners. Their effective federal income tax rates are usually much higher than the lower income, who in many cased do not pay any federal income tax at all. However,  middle and working class families are also eligible for major deductions and breaks in the tax code including breaks for mortgages, children and education related expenses.

Each special interest group has it's own lobby and often secures tax breaks for themselves. However, the FICA tax system is the one that rips money from the pockets of lower income Americans while giving a big break to higher earners. By giving those breaks, FICA rates are kept artificially high on the people who can least afford it and who tend to be the most reliable consumer spenders when they have more money.

The Republican candidates for President have been debating among themselves how to fix the federal tax system, the Simpson-Bowles commission came out with a novel proposal and just about every tax foundation or research association in the country have put forth some plan to simplify and flatten out the tax code in the United States. There is a grand acknowledgment among Americans that our tax system is unfair, complicated, burdensome and punitive. You don't have to be a Tea Partier or an Occupier to believe it. The question is how to we fix it? That is a better discussion to engage in than trying to use the current tax system to beat down the wealthy or reward more special interest groups.

That said, if we are stuck with out current tax system for now...let's all point our fingers at FICA taxes and make some easy common sense changes right away.

 

 

 

 

 

 

Filed under: National Goverment

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  • The author's confused about the SS cap. The cap limits not just the amount of income that shall be taxed but that amount collected then also dictates the amount that a recipient will receive at retirement.

    Example: You make $51K a year, another guy makes $510K a year (10 times what you make). You and your employer kick in 12.4% of $51K each year, the other guy and his employer kick in 12.4% of $102K (not 12.2% of $510K).

    When you both retire, even though his income was 10 times what yours was, his Socialist Security check will be 2 times what yours is (actually a little less... progressives sneak in everywhere!). He was taxed twice as much as you (not 10 times as much) and he thus receives approx twice as much as you (not 10 times as much).

    I hope that helps.

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