The “Unfairest” Tax

In the early 1990s I wrote a column for Georgia Trend titled, “The Unfairest Tax of All.” Today it’s much worse. The unfairness is so evident that you would think the talk show hosts and their callers, the chattering classes on TV and especially the politicians would be outraged, demanding change and vowing to defeat any Congress members who sought to prolong it.

But no, there are no angry calls, no demands for changes. Indeed, the outrage more often heard is against the income tax, even though income taxes have been reduced substantially in the past 28 years.

Even taxpayers and business owners affected most unfairly by the “unfairest” tax are seldom heard from. I’m referring, of course, to the FICA or payroll tax, which is levied by the federal government to fund Social Security, a most noble cause.

In addition, much of the money collected for Social Security has been “borrowed” by Congress and used to finance the overall government and keep the annual budget deficit from looking even larger than it is.

So the FICA tax is needed; it just should be levied more equitably.

The minimum wage worker, who just got his first wage increase in 11 years, pays the full 6.2 percent FICA tax on the first dollar of his salary and on 100 percent of the dollars he earns. His employer has to match those dollars at the same 6.2 percent, a total of 12.4 percent.

The wealthiest Americans pay on their first dollar but pay nothing on their last few million, nor do their employers, who usually are corporations.

Because the tax is not levied at all on dividends and interest, those whose income is derived mainly from those sources pay nothing at all.

When I wrote that column years ago, the FICA was leveled on the first $60,000 a year of a person’s income. Now it’s the first $102,000. It was unfair then but is much less fair today, when the average income for a corporate CEO in Georgia is $5.5 million a year and rising, and the average in states such as New York is much higher.

The FICA tax, as it stands now, is certainly redistributionist – that is it redistributes money from the poor to the rich, and from small companies to large ones, which are the only ones that can pay the kind of salaries that make FICA tax a minor nuisance rather than a major expense.

Warren Buffet, reportedly the richest American, admits he pays a smaller tax rate than his secretary. He’s one of many wealthy Americans who feel that isn’t fair, and that it serves neither the rich nor the poor well, nor the nation as a whole.

The annual salary for the FICA tax climbs each year, and at $102,000 it is levied on 80 percent of Americans. Why aren’t the other 20 percent paying their fair share?

Yet neither Republicans nor Democrats in Congress have shown a willingness to adjust this inequity. The Republicans, in most part, claim the Social Security system is unsustainable and should be privatized, which was attempted in 2005, but never came to a vote.

Democrats, for the most part, have treated the matter as a tax increase on their wealthiest donors, and thus have avoided the subject.

But now Barack Obama, the Democratic presidential candidate, has suggested a modest reform. He would levy the FICA tax on income from $1 to $102,000 a year, as is now done, then skip from $102,000 to $250,000 and levy the tax on salaries above $250,000.

That would be an improvement on the current system, but it doesn’t relieve the excessive responsibility on those earning less than $102,000, which is the vast majority, and who are paying a higher percentage of their income than the $102,000 to $250,000 group.

A truly useful proposal for all Americans and for small businesses would be to cut the FICA percentage from 6.2 percent to 5 percent, or 10 percent overall, and levy it on all income, from $1 to whatever Warren Buffett and Kobe Bryant earn, including dividends and interest.

That would bring in more money than the current system, and would be a tax cut for most Americans and a small increase for the richest.

It isn’t just a matter of fairness, it’s a matter of assuring that all Americans fulfill their responsibility to assure the nation’s economic and social stability.

The balance is out of joint today more than in the 1920s, and even more than in the days of the so-called “robber barons.”

Every earner should pay the same payroll tax. It’s that simple.

Categories: Guest Commentary