Sunday, October 04, 2009

Who's Paying For All This?

One of the issues associated with any proposals, whether for health care, defense spending, or entitlements of any kind, is paying for it. Typically, federal tax revenues pay for the stuff we want government to do for us. Today I came across this article about personal income taxes. So I located the original document. The chart says it all.

If your income is below $40K and you are not filing as Single, Married Filing Separately, or are elderly, the odds are heavily in your favor that you won't owe any taxes at all. You may even get more money from the government if you qualify for the Earned Income Tax Credit, which is paid even when you have zero tax liability so long as you meet the rest of the criteria. Once th $50K mark is met things start to turn around, and do so dramatically.

Now, one can argue about whether or not the wealthy are paying their fair share, but they are clearly paying something. One cannot say with a straight face that those who are most in need are the most disadvantaged by the current tax system. The middle class, depending on the income range used to define it, may be the sector in most need of relief although I doubt they will get any.

One has to ask the obvious question here, and it is a policy question that needs to be addressed; how long can we continue to have this disparity? Especially if we are not going to dial back entitlements, continue to add new tax breaks, and generally spend, spend, spend? Endless borrowing and waiting for savings to materialize only goes so far. The tax code needs an overhaul, of that I am certain but I am also certain we need to make some tough choices. It is not the poor who will bring the economy back, they are struggling as it is even with favorable tax treatment. It won't be the rich. That leaves the middle class and things are not looking good there either.

When you decide you want Uncle to do something for you, ask yourself who is paying (or going to pay) for the whatever it is you want. Will it include you or are you merely the happy recipient? Then ask yourself if that arrangement is truly just and fair.


Moonglum said...

That's a very interesting chart. I really want to see it with the 15.3% flat tax (to 102k) that we all split with our employers (or pay ourselves if self-employed) included. Those figures of no "income tax liability" are thrown around a lot, but while FICA isn't income tax it is a good chunk of change anyway.

At the lower end, I assume you'd still get 0 or negative from the EIC et-cetera, but I bet there are a lot fewer zero payers in the 20-60k range if you include the social security and medicare payments. Then, oddly, at the high end it probably pick up again thanks to the 100k cutoff.

Thanks for the link!

Kheris said...

I am a tad confused by your comment.

The FICA (Soc Sec) is a split between employer/employee and the self employed pay the whole thing. You get the FICA back later in the form of Social Security payments. This includes disability under Soc Sec, spousal payments, etc.

Certain public servants are exempt. Federal employees under the old CSRS retirement system for example. The CSRS employees, having never paid in never get a dime later. The only way they would see any money is if they work 10 years in a FICA covered job.

The Medicare tax pays for Part A, hospitalization, which is free (no premium) to everyone 65 or older. Part B is the part you pay premiums for when you sign up.

Neither Medicare nor FICA are part of the revenue stream to fund the government, aside from the specific roles they play as noted above. Does Congress engage in a subterfuge by borrowing from the Soc Sec account on occasion? Yes they do and they should be made to stop. But we want what we want.

Moonglum said...

FICA is a combination of Soc Sec (6.2%) and Medicare (1.45%), with your employer covering the other half. As you say, it is supposed to cover certain government services, but you can't opt out. That, in my opinion, makes it a flat tax (regressive if you include the cap).

The reason I brought it up is because it is never included in those analyses of how different groups pay no income tax. I would be very interested to know if contribution to the FICA funds also vanished at low incomes. If so then we are doomed on universal health care, if not, then something similar (ala medicare) could be set up.

Which gets back to your initial question of "who's paying for all of this". Any additional funding needed would probably be covered under the federal insurance contribution act (FICA), and if only a fraction of the country contributes, as you point out, it is doomed from the start.

I apologize if I am being unclear.

Kheris said...

Here is the Wiki entry about FICA. I would agree that it is regressive as written. Is there any reason to change it and, if so, is the political climate going to support a change?

Everyone pays FICA who is in a covered job up to the wage cap. So you are paying the FICA even if you are as poor as a church mouse. I should mention that some jobs that are not covered for Social Security are still on the hook for the Medicare tax. CSRS employees, for example, do not pay into Social Security but do pay the Medicare tax.

The issues around Medicare and Social Security are such that keeping them separate from the income tax in any discussion is probably appropriate. The chart as written reflects just the tax on income that we all pay in April and I think that is relevatory all by itself.

Thanks for the additional explanation.

The North Coast said...

It's very easy to get confused by who gets the benefits of "entitlement" programs and who pays for them.

When most folks out here think of "entitlement programs" they think of welfare programs for "po" people.

However, whatever bones are thrown to the poor and almost-poor are a pittance compared to the vast "shadow" Corporate Welfare System. The fact is that most industries are the recipients of substantial subsidies, and even much of our road, airport and port infrastructure is built to benefit specific industries and sometimes specific players.

Look at any big box retail outlet built in the past 15 years, and chances are that that store got a $4M subsidy at least. You name the industry, it is probably the recipient of tens of millions in subsidies, including the housing, airline, and agricultural industries.

The rich are the chief beneficiaries of Corporate Welfare and are probably substantially undertaxed relative to the benefits they receive from our government.

Rather than raise taxes on the rich, however, it would be better to start unwinding the corporate welfare and let market efficiencies operate to weed out obsolete and inefficient industries (big box retail, auto manufacturers, airlines)so that the industries we need can succeed.

Most of all, we can begin to see what really pays for itself and what doesn't. But the best result of all could be a level playing field for newcomers and fresh opportunities for those struggling to escape poverty.