Fun With Numbers And Tax Rates

Many conservative blogs are getting excited over data which shows that the federal income taxes paid by the top 1% has passed that paid by the bottom 95%. It is curious that they ignore a significant amount of tax revenue between the 95th and top one percentile, presumably because this gives them the appearance of reaching a meaningful milestone. Of course the only way that the top1% can be paying comparatively more in taxes despite recent tax cuts is that we have even greater income disparity than in the past.

Besides ignoring a significant chunk of tax payers, these numbers have limited meaning as they ignore payroll taxes along with a number of other regressive taxes. Payroll taxes represent a greater share of taxes than the income tax for many workers. On the other hand, just as conservative claims that the rich pay too high a share need to be taken with a grain of salt, progressive complaints about the payroll tax also ignore an important aspect of the tax.

Payroll taxes for Medicare are collected on all income levels but payroll taxes for Social Security are collected on the first $106,800 (which rises annually). That might seem unfair at first glance but it actually makes sense as Social Security benefits are also calculated based upon only replacing such income. While the taxes are calculated to somewhat benefit lower income workers over higher income workers there is a serious danger in making them even more progressive. If higher income earners had to pay taxes on all income but only received benefits based upon lower levels of income Social Security would turn into more of a welfare program and those making over $106,800 would see it as a very bad deal.  The system now receives broad based support (except from the far right) as everyone receives comparable benefits. If the system were to penalize high income earners we would likely see erosion of support, which would ultimately place those with lower incomes who are more dependent upon Social Security at risk.

There is plenty of room for debate as to what appropriate tax levels are. Unfortunately there is also a lot of room to confuse the issue when looking at tax rates.

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9 Comments

  1. 1
    Jim Z. says:

    If I recall correctly from research I did a few years ago, the salary cap that FICA taxes was set at 90% of all Americans’ wages in 1983 when the Greenspan Commission reforms were set in place. in other words, Congress felt, as you do, that the remaining 10% of wages, those of the very highly compensated, should not be subject to the tax for the reasons that you state. As you note, the current cap is $106,800. But if that cap had risen since 1983 to continue to capture (i.e., tax) 90% of wages, the cap would be pushing $140,000 or $150,000. Such an adjustment would go a long way towards closing the projected actuarial gap that the Social Security Administration estimates in its annual update of the 75-year SS Trust Fund projection.

  2. 2
    Ernie Vogel says:

    #tcot » Fun With Numbers And Tax Rates Liberal Values http://bit.ly/kDfPy

  3. 3
    Eclectic Radical says:

    “Such an adjustment would go a long way towards closing the projected actuarial gap that the Social Security Administration estimates in its annual update of the 75-year SS Trust Fund projection.”
     
    Such an adjustment should be one of the things on the table, but it is important to remember that the ‘projected actuarial gap’ is just that, a projected gap and not yet a real gap. Social security requires tinkering every thiry years or so, to adjust it to real conditions as they have become ‘on the ground.’ An increase ‘for inflation’ back to the 90% mark is only logical, among other things. An investment of general budget dollars into the trust fund also makes sense. Both of these methods have been used to ‘save social security’ in the past and much of the blood and thunder in the political arena over social security now is out of ideological opposition rather than practical fiscal concern.
     

  4. 4
    Ernie Vogel says:

    #tcot » Fun With Numbers And Tax Rates Liberal Values http://bit.ly/kDfPy

  5. 5
    John says:

    Ec-Rad is right. Social Security is doing fine and it’s problems down the road are easy to fix.

    Medicare, as it is now, is the fiscal “time-bomb.”

  6. 6
    Eclectic Radical says:

    To the best of my knowledge, Medicare is not a ‘time bomb’ either. The big problem with Medicare is that President Bush (the most recent model) invested in expensive and speculative privatization schemes that don’t cost the government any less money and frequently provide an inferior product to consumers. This has negatively affected the bottom line, particularly when some of these private programs actually end up costing the government more than it costs to cover actual Medicare consumers itself.
     
    To be baldly honest, there are no fiscal problems with entitlement programs that can’t be solved by making the effort to do so. The problem is that the GOP is not about making an effort to provide good government, but rather going to a lot of work to show how bad government is.
     

  7. 7
    Ron Chusid says:

    Bush’s Medicare privatization plan has added to Medicare’s financial problems without providing any benefit.

    The problem with the projections is that they show what financial problems will be present if no changes are made. If you were to take a private business and analyze its future in this manner many businesses would appear to be at risk of going under at some future point as well.

    In reality such projections would make no sense for a business as the business would change in response to the changing conditions. Similarity adjustments must be made in Medicare due to the aging population and increased cost of new medical technology but that does not mean the program is not viable.

    Conservatives often misuse the projections to claim that Medicare is not a model which can be used for health care. At the same time, when a Medicare model is suggested (as with a public plan) they also claim that private insurance cannot compete with a public plan.

    The reality is that, despite the projections, Medicare provides health care more efficiently than private insurance does. If cost was the only issue then we would be better off changing to a single payer plan. Of course conservatives who complain about the cost of health care reform will never go for that.

  8. 8
    John says:

    I feel a need to clarify. Medicare shares the same problem of other insurance programs: rising costs. Medicare is a great program, but it’s been bastardized by the Medicare Modernization Act of 2003 (MMA). Medicare Advantage and Medicare Part D created a role for for-profit insurance companies where there had not been one before. It forbade the government from negotiating with Big Pharma. Tommy Thompson complained about that as he was leaving HHS.

    I don’t think its the government aspect, but rather the for-profit company aspect introduced by the MMA that threatens Medicare.

  9. 9
    Eclectic Radical says:

    “I don’t think its the government aspect, but rather the for-profit company aspect introduced by the MMA that threatens Medicare.”
     
    I’ll certainly agree with that. I’ve never made any secret of my view that the privatization of social services is not about ‘cutting expensive programs’ but about greasy government pork for corporations. Medicare privatization, prison privatization, and the corporatization of welfare on the Wisconsin model all make money for big companies at the government’s expense and generally end up costing more than the original government budget for the same items.
     

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