U.S. Tax System Biased Against Rich or Poor?

So back on , I made a big deal about the Tax Foundation’s determination that about 41% of U.S. households will pay absolutely no federal income tax at all this year — a number that’s gone up by about half in the last few years. Almost all of these 41% are doing essentially what I’m doing — earning below the median income and taking deductions & credits.

So at first glance, it looks like low-income families are getting the best deal of all from the government’s tax policy. But if you read left-leaning blogs or op-ed authors, you’ll see claims that the U.S. tax system favors the wealthy and that this has been getting worse and worse. Who’s right?

Would you believe they’re both right?

The difference comes from looking at the federal income tax on one hand, and at the total tax burden on the other.

The payroll tax, a.k.a. FICA, takes a little over 15% of your wages starting with the very first dollar you earn. There is no standard deduction or personal exemption, and you can’t hide your income from FICA by putting it aside in a 401k plan. Most of this is designated a “social security” tax, with about a fifth of it called the “medicare” tax.

The theory behind these designations — “social security” and “medicare” — is that this is where your money is going: into accounts that will pay for your medical expenses and a retirement pension. In reality, the money just goes into the same big bag the government uses to pay for everything else, and if you get anything back from the government at retirement this’ll be determined by the politicians in power then, not by any sort of contractual obligation based on how much you’ve been paying.

Back in , the government projected that they were going to start running out of money to pay for social security benefits eventually, so they’d better raise the “social security” tax rate. But they didn’t take the extra money they raised with this higher tax and put it away to pay for social security benefits — they just went ahead and spent it, or used it as a cushion to help justify the recent reductions in federal income tax rates.

As a result, about three-quarters of us now pay more in FICA than in income tax. There’s no question that what’s called a “social security” tax is just another tax to raise money for government spending of all sorts. And while the federal income tax seems to give the poor a break, the payroll tax is its evil twin opposite: screwing the poor and giving the rich a free ride.

The “social security” portion of the FICA tax maxes out when your salary hits $87,000. Beyond that, you don’t have to pay any more. So a person who makes $87,000 pays $10,788 in “social security” tax, a person who makes $125,000 pays $10,788, and a person who makes $300,000,000 pays $10,788.

And unlike the federal income tax, which taxes income from capital gains, interest, dividends, etc. the payroll tax only taxes wages. If you work for a living, you get taxed — if you live off of a trust fund or investments, you don’t.

Also complicating the story are are state and local taxes, corporate taxes, excise taxes, and such. Excise and sales taxes are also regressive taxes — that is, they tax the poor at a higher rate than the rich.

Because of this, people like David Cay Johnston, author of Perfectly Legal: The Covert Campaign to Rig our Tax System to Benefit the Super-Rich and Cheat Everybody Else can claim that our tax system, far from being progressive, is essentially flat and heading in a regressive direction.

This is all at best tangential to the main thrust of The Picket Line — which is that, fair or unfair, progressive or regressive, your tax money goes to pay for things that are unjustifiable and resistance to taxation can be justified not from a personal feeling of getting ripped off or getting a worse deal than the fellow in the top hat and tails, but simply from not wanting to participate in activities you know to be wrong.

But I thought I should bring this up, because in my excitement to show how easy it is to legally avoid the federal income tax by lowering income, I risk being part of the deceptive chorus of people who like to claim that the U.S. tax system is somehow horribly unfair to the wealthy.

“Why shouldn’t we ask all of our citizens to bear some responsibility and pay some price?” asked Senator Chuck Hagel to a roomful of his colleagues on the Senate Foreign Relations Committee during their discussion about how things are going in Iraq and what they’re going to ask “our citizens” to do about it. What he was suggesting was the military draft. And what was significant about it was that he was on the record saying, “I would not favor going back to a draft.”

The Republican Senator now joins a handful of Democrats in calling for a return of the draft — ostensibly of course for nice reasons like “sharing the burden equitably” and so forth, but, more honestly-stated, because it is starting to look like only with slave labor can this monument to arrogance and stupidity that is our Pharaoh’s war in Iraq be built.