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.