Sunday, July 31, 2011

"Entitlements" part 2

As should be clear from the previous post, if everyone in the USA currently earning $106,800 or more were to suddenly get a raise of $1,000,000 or even $100,000,000 per year, that wouldn't add one single dime to what any of them would pay toward Social Security. Oh and one more thing I forgot to mention. This is referred to as a "payroll" tax for a good reason. It is not imposed on investment income. So if you don't actually do any work, but simply collect millions (or billions) from your investments, you pay no Social Security tax at all.

Now let's take a closer look at the second part of the payroll tax: Medicare. As opposed to Social Security, which is usually taxed at 6.2% (actually 12.4% -- see previous post), Medicare will take "only" 1.45% out of your wages (actually 2.9%). Sounds like a bargain. Why so little? Because the Medicare portion, unlike that for Social Security, doesn't have that $106,800 limit. Since it's unlimited, it can be considerably less, because much higher incomes are also being taxed (though once again, investment income is immune). Which makes you kinda think: if Social Security were an unlimited tax, we wouldn't have to pay nearly as much for it, would we?

And speaking of that $106,800 limit, what's that all about? Where does that figure come from? Beats me. Maybe someone reading here can enlighten us. If it's an arbitrary number, which it certainly appears to be, then why not make it $206,800? Or $300,000? Or $1,000,000? Or $100,000,000. Or why not just remove the Soc. Sec. limit altogether, and tax it the way Medicare is taxed?

If in fact the limit were removed altogether, then this tax, which is such a huge burden for so many working people, could be lowered considerably. AND, with some astute actuarial assistance, a figure could be arrived at that not only lowered the percentage, but also made up for whatever shortfall now exists in the Social Security trust fund. End of crisis!

But why stop there? Social Security is, at present, what is called a regressive tax -- because the more money you earn over and above the limit, the less percentage of your total earned income you pay. If the limit were removed, it would be what is called a flat tax, with everyone (aside from those with unearned income) paying the same percentage. Many would consider that fair. But that has not been the policy in the USA with respect to income taxes, which have for a very long time now been progressive, with those in higher income brackets paying a greater percentage of total income than those in lower brackets (theoretically, since wealthier people typically find all sorts of convenient loopholes).

Once upon a time, during, say, the Nixon era, those in the highest income brackets paid a considerably higher percentage in income taxes (again, theoretically, since there were many loopholes for the wealthy), with the top bracket taxed at 70%. A few years ago, the top fell to 39.6% and with the Bush cuts (still in effect) that dropped even lower, to 35%. Nevertheless, federal income tax remains a progressive tax, with lower income people paying a lower percentage. Seems fair to me, since the higher your income, the less of it you actually need.

So why can't our payroll taxes, for both Social Security and Medicare, also be progressive? And if Medicare can be taxed on a progressive basis, then surely the actuaries can come up with a formula that would, miracle of miracles, actually put Medicare on a sound financial footing, thus eliminating that "crisis."

Gosh, what am I missing here? What is it I don't understand? Oh yeah. The wealthiest of the wealthy, our bankers, our financiers, our captains of industry, the ones whose reckless investment practices and selfish outsourcing and downsizing led to the collapse of our economy just three years ago, these people don't want to be taxed at all, period. On principle! After all, isn't taxation simply theft?

(to be continued . . . )

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