THE SOCIAL SECURITY TAX: REFORMING THE MOST UNFAIR FEDERAL TAX
SYNOPSIS:The payroll tax is withheld automatically by the employer. This flat-tax is paid on all 'earned' income up to $132,900 per year. Any and all income above that ceiling is not taxed for Social Security.
But the Social Security tax begins at the low end of the income scale. Why should people who are poorer than anyone on Social Security send money to the Social Security Administration?
OUTLINE:
1. THE BASIC FACTS ABOUT THE CURRENT SOCIAL SECURITY TAX.2. THE FUNDAMENTAL UNFAIRNESS OF THE SOCIAL SECURITY TAX.3. RAISING THE FLOOR FOR SOCIAL SECURITY TAXES.4. AN INTEGRATED FEDERAL TAX ON ALL INCOME.5. THE EARNED-INCOME TAX CREDIT.
6. THE LIKELY IMPACT ON EMPLOYMENT IN THE UNITED STATES.7. POLITICAL REALITIES. 8. TWO PRINCIPLES FOR REFORMING THE SOCIAL SECURITY TAX. A. KEEP SUFFICIENT MONEY FLOWING INTO THE SOCIAL SECURITY SYSTEM. B. ELIMINATE THE UNFAIRNESS OF TAXING EXTREMELY LOW INCOME.THE SOCIAL SECURITY TAX: REFORMING THE MOST UNFAIR FEDERAL TAX by James Leonard Park
1. THE BASIC FACTS ABOUT THE CURRENT SOCIAL SECURITY TAX. Because FICA is withheld and paid automatically by the employer, most employees do not know how much they have been paying each year. They remember only their 'take-home' pay. (And most people cannot explain where the letters "FICA" come from. FICA means Federal Insurance Contributions Act.)But most taxpayers pay more in Social Security taxes than in federal income-taxes.
For the year 2010, the Social Security tax was a flat 12.4% on all earned income up to the ceiling. Half was paid by the employer
—6.2% and half was paid by the employee—also 6.2%.However, for the calendar year 2011, the employee's portion was reduced by 2 percentage points to 4.2% of wages, up to the ceiling of $106,800. This means that for the calendar year 2011, the employee paid 4.2% of the earned income and the employer paid 6.2%, for a total of 10.4% withheld from each paycheck for Social Security.
This temporary reduction was continued for the calendar year 2012, but the ceiling was raised to $110,100. Thus for the calendar year 2012, the employee paid 4.2% of the earned income up to the ceiling and the employer paid 6.2%, for a total of 10.4% withheld for Social Security from each
paycheck.For the calendar year 2013, the ceiling for Social Security taxes was about $114,000. And the tax rates reverted to the historic levels: 15.3%.
For the calendar year 2014, the ceiling for Social Security taxes was $117,000. And the tax-rate remained at the historic levels: 6.2% paid by the employee, plus 6.2% paid by the employer, for a total Social Security Tax of 12.4% of gross compensation up to a limit of $117,000. The Medicare tax remained the same: 2.9%
—half paid by the employer and half paid by the employee. This brought the total paid to the Social Security Administration to 15.3% of earned income.For the calendar years 2015 and 2016 the ceiling for Social Security taxes was: $118,500. The rates remained the same.
For 2017, the ceiling was raised again to: $127,200.
For 2018, the ceiling went up to: $128,400.
For 2019, up again to: $132,900.
As of January 2013, the Medicare Tax was raised for high incomes: Individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) pay an additional 0.9 percent.
Because the temporary reductions in Social Security taxes (for the calendar years 2011 and 2012) would have caused a large loss for the Social Security Administration, those billions not collected were made up from general revenues. Thus, income taxes collected from all income on a progressive scale paid part of the money needed by the Social Security Administration to continue paying Social Security benefits to retired people.
And because the regular income-tax rates were not increased for 2011 or 2012 to make up for this reduction in Social Security taxes, the loss to the Social Security Administration was actually made up by more borrowing by the federal government. And the income-tax payers are responsible for paying the interest on this new debt. If such temporary reductions in Social Security taxes had been continued, this might have marked the phasing out of the Social Security tax completely. If that happens—if all money needed by the Social Security Administration is collected by means of the regular federal income-tax— then the unfairness of the Social Security tax will disappear. All taxpayers will be taxed on a single, progressive income scale: As income increases, a slightly larger part of the top dollars are paid as taxes.Canada has a single, unified tax on all income, rather than one tax for pensions and another tax for all other purposes.
Actually the USA has three different taxes on income: Alongside the money collected for Social Security, the Social Security Administration also collects a Medicare tax
—which is a 2.9% flat rate, with no income ceiling. 1.45% is paid by the employee; and 1.45% is paid by the employer, creating a total tax for Medicare of 2. 9% of all earned income. (3.8% for incomes above $200,000 or $250,000 as noted above) Since this is all real money paid by the employer, it is counted as part of the cost of having this employee on the payroll. The official division between employee and employer is only on paper. All of the money flows from the employer's bank account into the Social Security Administration.However, when we reach the ceiling of taxable income, currently 132.9K, any income we earn beyond that cap is not taxed for Social Security. In other words, if we ever earn $1,132,900 in one year, only the first 132.9K is subject to the Social Security Tax. And none of the next one million dollars goes to support retired persons.
Of course this also applies to the next million, and the next. No matter how much we earn beyond the ceiling for that year, we never pay another dime in Social Security taxes. What sense does that make?
For Social Security and Medicare taxes, only 'earned' income counts. This includes only wages, salaries, & similar income from working. Most other income
—say from selling stocks and bonds at a profit— is not 'earned' and therefore is not subject to SS&M taxes. Thus, another way to reform our system of taxation would be to tax ALL income on the same scale, without calling some income 'unearned'.2. THE FUNDAMENTAL UNFAIRNESS OF THE SOCIAL SECURITY TAX.
Anyone who has earned income pays a flat tax on that income. This means that people with very low incomes
—say $1,000 per year— are paying 15.3% of their income for Social Security and Medicare. (If you are following the numbers carefully, you see that this is the combined total, paid by the employer and the employee for both Social Security and Medicare.) Thus, for this very low-income employee, who earned only $1,000 in the whole year, the total paid is: $153.But when this person earns $100,000 per year, the flat tax for SS&M is still 15.3%. The total then paid for SS&M is: $15,300.
When our imaginary employee earns 100K, paying $15,300 for Social Security and Medicare does not seem intolerable. But how could this same person pay $153 for SS&M when he or she has only $1,000 in annual income?
If you like to play with these numbers, here is another example: If we earn $10,000, we pay $1,530 for Social Security and Medicare.
And you can use the same multiplier to discover exactly how much SS&M tax we are paying: We multiply our total earned income by 15.3%. For example, if our earned income is $40,000, our Social Security and Medicare tax is: $6,120.
It is easy to get people to complain about taxes. But who would say our present system is fair? Why should people with extremely low incomes pay any tax at all?
3. RAISING THE FLOOR FOR SOCIAL SECURITY TAXES.
One of the strangest implications of the present Social Security tax is that for the very lowest earners, the super-poor are paying money to people who are less poor. This is Robin Hood in reverse: Take from the very poor to give to the less poor.
Allow me to give a personal example: During most of my working life, my income was about $2,000 per year. So I paid Social Security taxes whenever I earned more than $400 per year. During some of these years, my father was collecting Social Security benefits. And even in retirement, his income was much higher than mine ever was. So I was paying the Social Security Administration, while he was collecting Social Security benefits greater than my total income.
I am now collecting Social Security benefits myself. When I reached retirement age, my income went UP 350%.
One simple way to cure this reverse Robin Hood would be to exempt the FIRST $10,000 of income from Social Security tax. People who are earning less than anyone on Social Security should not be taxed on their income. As the Social Security tax now stands, when we have extremely low income, we are supporting people who have more income than we do.
And the easiest way to raise this floor is to also raise the ceiling: If Social Security taxes do not begin until after one's income reaches $10,000 per year, then the ceiling for Social Security taxes might have to be raised to about $150,000 per year. This is just a guess, not based on any actual income data. And in order not to reduce the revenue for the Social Security Administration, it might be necessary to raise the income cap to $200,000 per year.
If so, this would be the new tax schedule: For all taxpayers, no tax on the first $10,000 of earned income. All income above the first $10,000 would be taxed, perhaps at the same flat rate currently used: 15.3%. And all income above the ceiling
—say above $200,000— would also be tax-free for Social Security purposes.For comparison, this is about the way our federal income tax works: The first $10,000 is not taxed
—based on exemptions, deductions, etc. When our income rises to a taxable level, we pay a smaller percentage of the lowest earnings and a rising percentage as our income goes up. This is the meaning of a "progressive income tax scale". The more we earn, the higher our tax on the top tier of our income.4. AN INTEGRATED FEDERAL TAX ON ALL INCOME.
Another easy way to solve the unfairness of the present Social Security tax would be to integrate the Social Security tax into the federal income-tax. This would make the bookkeeping much easier also. All income would be taxed using the same progressive scale. The Social Security Administration would get whatever part of the general revenues from taxes that it needs to pay out the benefits already promised. And income-tax rates would be adjusted accordingly.
This would eliminate the unfairness for people earning less than $10,000 per year. Those who had income below $10,000 per year, would owe no taxes to the federal government at all: no income tax, no Social Security tax, & no Medicare tax.
Those who have income above $10,000 per year, would pay an integrated federal tax on the amount above $10,000 using a progressive scale: For higher incomes a slightly larger percentage of the additional amount would be withheld for the integrated federal tax on income.
A single tax on income would be easier for most people to understand.
Already the federal income-tax begins at about 10K. Thus all income below that beginning threshold is not taxed.If the Social Security and Medicare taxes were integrated into a single federal tax on income, then the tax-tables would be adjusted for this integration. Most taxpayers would pay about the same amount. Incomes near the low end would pay less tax. Incomes near the high end would pay more.
A single, progressive tax on all income would be easier to understand and it would be much more fair than our current flat-taxes for Social Security and Medicare, which begins at the first dollar.
Here is a sketch of our recent progressive federal income-taxes: The following numbers are approximate
—and they change every year. Income below 10K, no tax because of deductions, exemptions, etc. Next 10K, 10% Next 25K, 15% Next 50K, 25% Next 90K, 28% Next 100K, 33% Next 200K, 35% Next anyK, 37% Thus, there were 8 tax-brackets. When our taxable income puts us into higher brackets, a larger percentage of those additional amounts is due. A ninth bracket has been proposed: When we earn more than a million dollars in any year, we would still pay all of the lower rates in the first 8 brackets and the amount above one million dollars would be taxed at a still higher rate than those listed here. If Social Security and Medicare taxes were integrated with the federal income-tax, the tax rates for each bracket might be about 10 percentage points higher.5. THE EARNED-INCOME TAX CREDIT.
However, instead of simplifying federal taxes on income, Congress and the President created an additional calculation in 1975. The Earned-Income Tax Credit was intended to solve some of the unfairness of the Social Security Tax by returning some of the money already collected in payroll taxes. A certain percentage of your taxable income is credited back to you when you go thru the process of calculating the EITC.
But the eligibility requirements are extremely complicated. The earned-income tax credit mainly benefits families with children. So, of course, some filers claim children who do not exist. About 1/3 of all claims for this credit are fraudulent. And about 30% of the money paid out should not have been paid.
Also many people who would qualify do not fill out the extra forms. The maze of questions and calculations is just too much.
Another unfortunate fact about the EITC is that it is paid only at the end of the year, when the taxpayer has completed those elaborate forms. Most low-income people would like a lower tax-rate during the year, which would mean more money in each pay-check, rather than a large refund for the EITC after taxes are filed. Also, steady-income is often spent more wisely than a lump-sum received all at one time. Some people will buy a new car or a new TV rather than putting their tax-refund into everyday expenses.
It would be much simpler just to reduce the applicable tax rates rather than continuing this complexification of the tax code. When tax reform is finally enacted, the EITC will probably disappear. It could all be integrated into a single federal tax on income, using a progressive scale and taking all children into account.
6. THE LIKELY IMPACT ON EMPLOYMENT IN THE UNITED STATES.
If tax reform eliminates taxes on the first $10,000 of earned income, then employers would take a close look at their payrolls.
If the company had only employees earning less than $10,000 per year, there would be no need to withhold anything for federal taxes. The lowest $10K would be tax-free.
Of course, most employers could not put everyone into this lowest tier of income. But it would encourage employers to hire more people at the lower end rather than more people at the higher end of the pay-scale. The tax paid for the low-end employees is dramatically less than the tax paid for the high-end employees.
Two part-time employees earning $10,000 each would be cheaper than one employee earning $20,000. Spreading the available work over more people would save taxes.
Let's consider a more realistic example: The employer has one employee being paid $50K per year who is now reaching retirement age. This employee could be replaced by another employee with the same pay. Or the employer could hire two people half-time each to take over the job. For the retiring employee, the Social Security and Medicare tax was 15.3% of all earned income above 10K, which is 15.3% of 40K
—$6,120. For the two replacement employees working half time each, the new Social Security tax would be 15.3% of the income paid beyond the first $10,000 for each, which is 15.3% of 30K—$4,590. In other words, having two half-time employees do the same total work saves $1,530 in Social Security and Medicare taxes.To make up for this loss of cash for the Social Security Administration, the ceiling on taxable income would be raised to either 150K or 200K. And each employer would withhold more money from the paychecks of people who are earning incomes above 127.2K.
This change in the Social Security tax would stimulate employment because taxes would be $1,530 less for two half-time employees doing one job.
7. POLITICAL REALITIES.
Given that politicians must make any changes in taxation, the first change
—creating a new floor for Social Security taxes— is more likely than a change that will cause us to pay more when we have higher incomes. The Social Security tax would still be a flat tax, but it would cover a different segment of earned income.After such subtle changes have been the law for a few years, it might be politically possible to make more radical changes, such as combining all three federal taxes into one tax on income.
8. TWO PRINCIPLES FOR REFORMING THE SOCIAL SECURITY TAX.
A. KEEP SUFFICIENT MONEY FLOWING INTO THE SOCIAL SECURITY SYSTEM.
Whatever changes are made in the taxes for Social Security, the total amount of money going to the Social Security Administration must not be reduced. This is called being "revenue neutral". Changes that would increase the cash-flow into the SSA would be acceptable. Increased revenue would help solve the long-term problems of Social Security.
Preserving or enhancing the in-flow of dollars could be achieved by raising the ceiling on income taxed for Social Security. Currently about 85% of all earned income is taxed for Social Security. Raising the ceiling to $250,000 could tax about 90% of all earned income. And eliminating the ceiling altogether, would tax 100% of earned income.
The tax-rate for Social Security could also be raised. Or Social Security taxes could be rolled into a unified federal tax on income. This would require adjusting the income-tax tables (based on new progressive rates). The Medicare tax would also be included in the expanded federal tax on income, along with the Social Security tax.
Social Security taxes could also be assessed on a progressive scale: The first part of any income would not be taxed at all. The second part would be taxed at a low rate. The third part would be taxed at a higher rate. The fourth part would be taxed at the highest rate. This is called a progressive tax schedule.
B. ELIMINATE THE UNFAIRNESS OF TAXING EXTREMELY LOW INCOME.
Here are four different ways to reform the most unfair federal tax: (1) STOP TAXING INCOME BELOW THE POVERTY LEVEL. (2) STOP TAXING INCOME BELOW THE LOWEST BENEFIT-LEVEL FOR SOCIAL SECURITY. (3) STOP TAXING INCOME BELOW THE THRESHOLD FOR FEDERAL INCOME-TAXES. (4) STOP TAXING THE FIRST $10,000 OF INCOME.Created October 12, 2011; Revised 10-13-2011; 10-15-2011; 10-19-2011; 10-26-2011; 11-2-2011; 11-4-2011; 12-7-2011; 4-7-2012; 4-11-2012; 10-23-2012; 2-24-2013; 1-4-2014; 1-11-2014; 2-25-2014; 8-7-2014; 1-25-2015; 12-31-2015; 1-24-2017; 3-29-2019;
AUTHOR:
James Park is an independent thinker, presently living at the lowest level of Social Security benefits, which is about 100% of the federal poverty level. At this low level of income, no income taxes are due. But whenever his earned income rises above $400 per year, he still pays Social Security and Medicare taxes. (He does not qualify for the earned-income tax credit.) Raising the floor for SS&M taxes would relieve him of all taxes, since his is already far below the taxable level for income taxes. Integrating all three taxes into one tax on income, would also render him exempt from all federal taxation.
Much more will be learned about James Park from his personal website, which is linked below.