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Saturday, June 14, 2008

Barack Obama's Regressive Payroll Tax Canard

Barack Obama recently proposed that along with taxing the first $102,000 we also tax all income over $250,000.Here is how he justified his plan.

The presidential candidate told senior citizens in Ohio that it is unfair for middle-class earners to pay the Social Security tax "on every dime they make," while millionaires and billionaires pay it on only "a very small percentage of their income."

The 6.2 percent payroll tax is now applied to all wages up to $102,000 a year, which covers the entire amount for most Americans. Under Obama's plan, the tax would not apply to wages between that amount and $250,000. But all annual salaries above the quarter-million-dollar amount would be taxed under his plan, Obama said.

Of course, this explanation belies the way in which Social Security, that which your payroll tax goes to, is supposed to work. The payroll tax works like. The more you put into the system in taxes the more you receive in Social Security benefits. In other words, someone that made $100,000 their entire careers would get much more in Social Security benefits when they retire than someone that made $30,000. What is really regressive is that someone that made $100,000 needs their benefits significantly less than someone that made $30,000.

No other tax works like this. A wealthy person doesn't have more access to welfare, unemployment, or any other service. In fact, some services work in the exact opposite way. Food stamps, for instance, are only available to those below a certain income level even though they contribute far less to the system.

What Barack Obama is proposing would be a fundamental shift in the manner in which Social Security would work. Under his plan, your first $102,000 would be taxed and earn you credit to go toward your retirement income. Anything over $250,000 would go strictly to pay for the retirement income of someone else. Think about how unfair that is for someone that is wealthy. Let's say you make $500,0000 a year. Your first $102,000 is taxes at the 6.2% payroll tax or just under $6,500 yearly. That tax earns you a credit to go toward your retirement income from Social Security. Then, another $250,000 is also taxed at 6.2%, or just over $15,000, and this will go to paying for someone else's retirement income. In fact, for the first time, Barack Obama will introduce a tax that someone has absolutely no access to. While the wealthy are quite unlikely to use services like food stamps, Medicare, unemployment, at least those are available to the wealthy in case they ever got poor. This new tax on any income over $250,000 would go exclusively to pay for the Social Security retirement income of someone else.

By proposing this new tax he has implicitly admitted that Social Security is a failed system. That's because the sort of tax he is proposing was never meant to be included in the system. Social Security was always meant to be a forced retirement savings. Everything you put into the system was supposed to come back to you when you retired. By putting in a tax meant to pay for someone else's retirement, what Barack Obama is really doing is income redistribution. While, under the right salesperson (say someone extremely charismatic) it can be sold politically, income redistribution has all its roots in Socialism.

In fact, this new proposal is a double whammy on the really wealthy, because Obama plans to raise their regular income taxes as well. Not only does he want the Bush tax cuts to expire but he wants to raise their incomes another 3%. This means that someone making $500,000 could face up to an extra $30,000. Keep in mind most of these taxes go to entitlement programs that go to providing for the less fortunate. Thus, the typical wealthy person could face $30,000 in extra taxes to pay for services that they will likely never use.

Then, he has the chutzpah to claim he is doing this in the interest of fairness.


Anonymous said...

You make a mistake that many make (which is the intent of the government). The 6.2% rate for OASDI is for the employee, and the same rate again for the employer. Since the "employer's contribution" is none the less part of every employees reimbursement package, the real rate is 12.4%.

The entire "employer's contribution" aspect can only be to help hide the true tax rate from those taxed.

Double all your numbers.

Anonymous said...

I would like add to anonymous' comment.

Chances are good that the people that make over $250,000 are self employed, and therefore will have to fork over the whole 12.4% themselves.

So, with our $500,000 wage earner, the additional 12.4% on the money earned over $250,000 would stick them with a new $30,000 in taxes.

stevenberk said...

In fact, the effect of a much larger marginal rate will be LESS revenue--high income people will report less income (defer, evade, avoid, reduce). also, they will not hire the nannies, landscapers, te al, that they did in the past. Result, less tax revenue and less private sector employment.

stevenberk said...

Another problem: Unearned income is not subject to FICA and so will not be used to pay for the excess demands on Social Security. Workers will subsidize other workers, but non workers will not. A welfare system that is paid for entirely by workers.

Other anomalies: if you have a windfall year and pay uncapped FICA, you still have no promise of any benefits unless you put in 40 quarters. If you die, your heirs get nothing--unlike an IRA. If you visit the USA and work, you get nothing when you leave---unless tax treaties protect you. And I wonder if this uncapped FICA will survive challenges by tax treaty countries. Recall that tax treaties are US law.

BAsically, if Social security is to become a welfare system, let's do it above board. Let all tax payers pay for it, not just workers.

But make it clear: WELFARE. You are getting more than you put in. The Upper middle class are carrying your ass.

Anonymous said...

I can understand why this isn't really "fair" but it is not "fair" to people who are born in lower income families who are not given the tools to succeed (financially) or the opportunities that people with more money have. I do feel the wealthy should be obligated to help those that are less fortunate. Its not always about only doing what helps you. Our country cannot prosper in the long run if people only think about themselves rather than as a collective whole. In the long run, if we have a strong middle class that is better for everyone. But if we continue with the way our system is set up now, the middle class will continue to shrink and we all know based on other countries that having only rich and poor does not make a country strong.

Anonymous said...

Very interesting comments. Maybe it shouldn't be catagorized under social security if it is actually "welfare". So do you think that we should just continue with the way it is set up under Bush's administration? What is your solution?

Obviously with the way our systems are failing, our down economy and the rapid decline of the middle class something new needs to be proposed.

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Alex Zorach said...

There are always different ways of looking at situations involving money, income, and taxation. Here's how I look at this scenario.

Anywhere in the U.S., if someone earns income of $1 million a year, even if they have over half of that taken in tax, they will still have so much money left over that they could, after one year, invest the sum conservatively and live off the interest from that one year's savings for the rest of their life.

On the other hand, if someone earns about $35K and lives in one of the expensive east-coast cities, even without a family, they may have trouble making ends meet.

How is it just, fair, or even marginally acceptable to make someone pay any tax whatsoever, if that person is working full-time and is not earning enough money to pay for the basic necessities of life, including housing, food, medical care, clothing, and other necessities?

Here is how I look at money:

Earning money, holding money, and spending money is a privilege, not a right. Money comes with responsibility. I am grateful for every penny I have ever earned.

I have always had more than enough. I have no objection to paying tax so long as the money is used wisely. It troubles me, however, when the government uses my money in ways that are wasteful.

I think there is nothing wrong with progressive tax rates on the rich. They have more than they need to get by. They should have to pay before people who don't have enough to get by have to pay a cent in tax. And who is to say that they deserve the money anyway? Some wealthy people earned their money through hard work, whereas others earned it through inheritance, luck, or, in the worst cases, through dishonest means (think Madoff, Enron, etc.).

It's always good to work to reduce government waste. Government waste is worth getting upset about. But progressive taxation isn't.