#2 Include Social Security and Medicare taxes when discussing tax burdens

Time to Change the Tax Discussion #2

This is the second in a five part series on Taxes.

Far too much of the discussion of tax burdens has focused on the federal income tax rates while the federal payroll taxes – Social Security and the Medicare tax – get minor attention. This was epitomized by Mitt Romney’s reference to 47 percent of Americans as not paying any taxes, when what he meant was not paying any Federal income taxes. This line of discussion ignores the fact that low income earners pay Social Security and Medicare taxes. Almost every economist would agree that these payroll taxes affect net pay and incentives in fundamentally the same way as income taxes and hence matter greatly. While true that these are earmarked taxes, they are nonetheless important contributions to federal revenue and affect deficits. In 2012 The federal income tax contributed 32 percent of total federal revenue, while social security and medicare payroll taxes contributed 23.9 percent.  Since these social insurance taxes are either proportional (Medicare tax) or regressive (SSI, since it stops after $110,000 in 2012), they substantially change the overall progressivity of the taxes. the following figure is from the Concord Coalition, based on US Treasury data.

https://spreadsheets.google.com/spreadsheet/oimg?key=0AqDf7XX8MI2BcGVxYmhHME92YWgtTXQ1bm84YTlpZkE&oid=2&zx=n74qil40ph5k

U.S. Treasury Department, Final Monthly Treasury Statement from Sept. 2012

http://www.concordcoalition.org/learn/budget/federal-budget-pie-charts

In an earlier blog (What are current marginal tax rates?), I calculated marginal tax rates for various levels of taxable income, which show that currently people earning $70,700 to $142,700 pay the highest marginal tax rates (38.1% including federal, SSI and Medicare taxes, higher if you add in Massachusetts income taxes).Warren Buffett basically referred to this same phenomenon when he said that his secretary paid higher taxes than he does on earned income.

Allowing the Bush tax cuts to expire will return those earning over $388,350 to paying the highest marginal rates (43.4% including the Medicare and ACA taxes).

For related discussion see the earlier blogs

#1 All Taxes and Budgets Should be Expressed as Dollars per Person

#2. Include Social Security and Medicare taxes when discussing tax burdens

 

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