Tuesday, June 24, 2008

Some Thoughts on Taxes, Part 1-FICA

I wrote last week about social security. By now, I guess you've probably heard that Barack Obama wants to eliminate the $102,000 income ceiling for social security tax. But there's a catch... he doesn't want to do that on anybody who makes less than $250,000. This would be retroactive, so the guy who makes $40k would pay on 100% of his income, the guy who makes $250k would pay on 100% of his income (with no corresponding increase in benefits), but the fellow who earns $240,000 would be only paying on 42.5% of his income. The purported logic of this is to shield the "middle class" (more on that magic number later) while only soaking the 3% of taxpayers who make a quarter-mil or more a year. It has the added benefit of giving a sweetheart deal to the vast majority of folks who support Obama, but let's not get cynical when analyzing hope and change. There was an article a couple of days ago in the Wall Street Journal that deals with the economics of that change (some of which I agree with, other parts of which I depart from). I think if you really want to "save" Social Security, then eliminating the cap (and thereby converting SS to more of a pure welfare program) is eventually going to be done, whether it's "fair" or not. If so, I say it's better math to do it for everybody. We all pay medicare tax on our entire incomes... if all of FICA goes that route, it at least makes the program less regressive than it is now. Not that I like it, but that's better than targeting the tax like Obama does. Let's assume that this happens, eventually (or that my reader makes under $102k). That means that combined medicare and SS tax is 15.3% on every dollar you make. You may not see half of it (7.65% paid by your employer), but that's part of the cost of employing you that your employer could put in your pocket if Uncle Sam didn't take it first. For lots of Americans, FICA is bigger than their federal income tax burden (for many it's bigger even at the 7.65% level). So, from here on out when we talk about taxes, let's not forget that even those who pay "n0 taxes" pay the FICA, and that 7.65 or 15.3% should be added to their effective tax rate. So somebody in the 28% bracket really pays over 35% on their last dollar, or 43% if self-employed (or if you impute the employer's portion as lost income).

Notice I haven't given hardly any opinions yet, just a basic primer for this stuff. More to come.

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