The Two Federal Income Taxes

All Americans actually pay two income taxes. We are, all of us, already aware of one of them; it's the graduated tax that we've had since 1911. Under the plan for the Federal Income Tax, each American serves each year as an indentured servant to the U.S. government, completing one or more pages of complicated forms in which we declare our income and plead our case to minimize our taxes. This tax is assessed according to what is called a graduated or accelerated scale, in some proportion to individual income. Low income Americans pay a low percentage of their income; those Americans who have higher incomes pay a higher percentage to the federal government, or so the theory goes.

But the Social Security Tax (FICA) is also an income tax. The assessment of the Social Security Tax differs in two importand ways from the other federal income tax.

1. All Americans pay the same rate, regardless of income level. Currently, the rate is set at 15.3%. Wage earners see this as a 7.65% deduction from their pay packets, which must be matched by an equivalent contribution from the employer. Self-employed Americans pay the full 15.3% rate in one lump.
2. There is a cap on the tax. At this time, the cap is set at an annual income level of $72,600. This means that the maximum Social Security tax to be paid by any American in 1999 is 15.3% of $72,600 or $11,107.80.

   $72,600 * 0.153 = $11,107.80

It should be pointed out at this point, that although the Social Security Tax is often spoken of as a flat-rate tax, it is actually a flat rate tax only for those Americans whose incomes do not exceed $72,600 per annum. For wealthier Americans, this tax is assessed in inverse proportion to income. The higher the income, the lower the percentage of income that will be paid in this tax.

It should also be pointed out that, in every year since the inception of the Social Security System, the Social Security Administration has collected more revenue in taxes than it has paid in benefits. The surplus revenue, each year, is "loaned" to the federal government, with no obligation on the part of the government to repay the loan. The use of surplus revenues in this manner allows the U.S. government to fund other programs for the benefit of groups and individuals that were not initially intended to benefit from the Social Security Act, without assessing other taxes to fund those programs.

The surplus revenues that are collected under the authority of the Social Security Act have become a stable feature of U.S. tax policy, whereby American workers are forced to bear a hidden and unwarranted proportion of the cost or our federal government. Each time that the cost of benefits paid by the Social Security Administration approaches the level of current revenues (but always before the costs actually equal the revenues), federal lawmakers fly into a panic about the impending "bankruptcy" of the Social Security System. "We must save the Social Security System", they cry. But what they really mean is "We must maintain a budget surplus in the Social Security System, so that our campaign contributors will not be inconvenienced by fair tax rates."

The end result of every crisis in the Social Security Administration budget is an increase in the Social Security tax rate and/or an increase in the income cap. Never has it been proposed that the U.S. government or the wealthy campaign contributors who control the federal legislatures should begin to repay the large debt already owed to American workers by paying some portion of Social Security benefits through an increase in the Federal Income Tax rate.

Yet, whenever, by some bizarre accident, the federal government should happen to carry a revenue surplus to a new year, there is always a long line of legislators proposing a decrease in the Federal Income Tax rate, generally in company with tax deductions that are only accessible to the wealthy and the upper reaches of the American middle class.