How you can resist funding the government →
the payroll / social security tax (FICA) →
other exemptions/techniques
On a few occasions at The Picket Line I’ve mentioned the “payroll tax” — which is distinct from the federal income tax and is ostensibly used to fund Social Security and Medicare, with the money kept distinct from the general fund which is funded primarily by income tax and pays for just about everything else the federal government does.
The payroll tax is much harder to get out of than the income tax is, since there aren’t personal exemptions, deductions, credits or really anything else — you’re taxed from dollar #1 of your earnings on up to about dollar #85,000.
After that, your dollars are no longer subject to the payroll tax, which is one reason why
some people complain that it’s a regressive tax — one that hits poorer people harder than richer people.
(Another reason: the payroll tax only taxes wages, not capital gains, interest, dividends, and other such sources of income that are more common to the rich.)
While income tax rates have declined for most families in recent decades, payroll taxes have increased dramatically. , the percentage of government revenue derived from payroll taxes went up from 12 to 33.
In other words, Congress has quietly legislated a fundamental shift toward payroll taxes over ; these now provide nearly as much federal revenue ($506.8 b) as the income tax ($737.5 b).
I don’t mention this tax much here, but this is mostly because there isn’t an easy way out of it, the way there is for the federal income tax.
The idea that your payroll tax only goes to benefits like Social Security and Medicare and so isn’t as bad as your income tax (which goes to more nefarious government programs) isn’t entirely convincing.
Politicians didn’t waste much time licking their chops over this big pile of money before they figured out ways to grab handfuls of it to pay for things it was never intended for.
And, naturally, these programs accumulate the sort of absurd waste that is common to everything the government touches.
For instance, you’d think that Medicare, being a government monopoly whose clients don’t have any choice of competitors — or even a choice to withdraw from the program — wouldn’t need an advertising campaign.
You’d be wrong.
This year, the Medicare program is spending $30 million on advertising, including $600,000 to have the Medicare blimp fly over sporting events.
There are ways to get out of the payroll tax.
You can stop earning wages, for one — if you can figure out a way to make a living off of some other source of income.
You can work in the underground economy, or work as an independent contractor and simply (illegally) refuse to pay those taxes. Or you can be a member of a religious group that is conscientiously opposed to insurance (for instance because “god will provide”), that supports its dependent members, and that has existed continuously .
The Amish are an example of such a religious group; I’m not sure which other ones qualify.
In ’s Picket Line entry I wondered how someone like me could continue to earn a modest living but not have to pay the payroll tax.
I listed a few possibilities and wondered if there are any more.
I dug around on-line and found a few more classes of people who are able to legally “opt out” of the payroll tax, including:
State and local government workers participating in alternative employer retirement systems
Election workers earning $1,200 or less a year
College students working at their academic institutions
Household workers earning less than $1,400 per year
Self-employed workers with annual net earnings below $400
Ministers
I’ve still got some questions.
For one thing, what’s an “election worker?”
Is that someone who works at a polling place, or someone who’s hired by a political campaign?
Can someone earn $1,200 as an election worker, $1,400 doing “household work,” and $400 as a self-employed something or other — or are they mutually exclusive?
But even satisfactory answers to these questions won’t really address the problem.
I had been hoping to earn enough money next year to satisfy my budget for the year, but not enough to put me in danger of owing federal income tax.
Now I’m starting to think this is going to get more complicated as I’d like to avoid paying the payroll tax also.
Since I doubt I’ll be able to rustle up a congregation eager to pay me a salary as their minister, I’m not terribly eager to work for the government, I’m not Amish, and I’ll need more than $3,000 to meet my annual spending needs… that puts me in a bit of a bind.
I’ll feature a section from the upcoming edition of NWTRCC’s “Practical War Tax Resistance” series pamphlet #5 on low-income / simple-living as tax resistance.
I suspect that most of this section will end up being cut, for space reasons and because its subject matter is only tangentially related to the core topic of the pamphlet.
But it’s too good not to share:
How Does the Federal Government Get Your Money?
If one of your goals in resisting taxes is to stop funding the government’s war budget, it is worth investigating in what other ways the government gets its funds besides the federal income tax, and whether you can reduce your contribution to these funding sources in the course of adopting a low income lifestyle.
According to U.S. Budget documents, in 2005 the federal government brought in its revenue in the following ways:
43.0%
Income tax on individuals & families
36.9%
Social insurance taxes (FICA, self-employment tax, the “payroll tax”, Social Security/Medicare)
12.9%
Income tax on corporations
3.4%
Excise taxes
3.8%
Other (estate/gift taxes, customs duties / tariffs, Federal Reserve deposits, etc.)
Social Insurance Taxes
Although social insurance taxes are ostensibly collected to pay for programs like Social Security and Medicare, any surplus that the government collects but does not use to pay for these programs, it “borrows” to pay for other items in its budget, including the military.
For this reason, some tax resisters who do not disapprove of programs like Social Security and Medicare still try to resist these taxes.
In recent decades, the percentage of government revenue that comes from social insurance taxes has risen.
Today, most families pay more to the federal government in social insurance taxes than in income tax.
Corporate Income Tax
As an individual you can reduce your contribution to corporate income taxes by reducing your contribution to the profits of corporations, and the best way to do that is by reducing your consumption of corporate-provided goods and services.
The Indian independence movement boycotted goods that the British colonial occupation monopolized and taxed, such as alcohol.
Gandhi’s independence campaign encouraged Indians to produce their own salt and cloth, both to withdraw financial support from the British monopolies and to encourage the development of domestic industry.
Rebellious British colonists used a similar tactic during the American Revolution — making homespun cloth in patriotic “spinning bees” and boycotting British monopoly tea.
What would be a good equivalent of the patriotic spinning bee for today’s anti-imperialists?
What commercial transactions does the government tax that it would have a harder time taxing if they were the fruits of household industry rather than the marketplace?
One good candidate is home-brewed beer.
The federal excise tax on beer comes to about a nickle per bottle.
By home-brewing, you can resist this tax, learn a craft, and drink good beer — all legally!
It is a winning proposition any way you look at it.
Imagine “brewing bees” or “drinking bees” at which tax resisters belt out songs of liberty with gusto!
Wrote one home-brewer: “I like the symbolism of home brewing tax-free beer.
Gandhi’s campaign had a value that went beyond its bottom-line pounds-and-pence figure.
Spending time spinning cloth was a way of consciously participating on a daily basis in the resistance, and wearing the homespun cloth was a way of broadcasting your commitment to those around you.
Besides, brewing beer is fun and when you’re done you’ve got beer!”
Excise Taxes
The federal government taxes the sale of certain specific things like alcoholic beverages, gasoline, airline tickets, ammunition, vaccines, local telephone service, tobacco, cars & car parts, fishing equipment, and coal.
The receipts from some excise taxes fund particular programs, while others just go into the general fund.
For instance, the federal excise tax on gasoline funds highways and mass transit projects, while the federal excise tax on local telephone service may be spent on anything in the budget.
You can avoid excise taxes in a variety of ways.
For instance, you can avoid the excise tax on alcohol either by not using alcoholic beverages or by producing your own (it is legal to produce your own beer or wine).
You can avoid the excise tax on local phone service by using an internet-based voice-over-IP phone instead of a regular phone line — assuming you do not get your internet over your phone line — or, as many tax resisters do, you can simply refuse to pay it and subtract it from your phone bill.
Tariffs
Tariffs are taxes on goods imported into the country that are applied when the goods arrive.
The Washington Post reported in that “the average tariff on non-agricultural goods imported into the United States is less than 3 percent” but that “tariffs on a number of everyday consumer products — including clothing, luggage, dinnerware and handbags — range well into double digits.
The same goes for some food, such as butter and cheese.”
You can avoid contributing to these tariffs by purchasing fewer foreign-made products.
However, when you purchase from domestic producers, you contribute to their profits and therefore to the income taxes they owe and pay.
This is an example of where lowering consumption in general is the best policy.
Other Taxes
If you have less income, you will also reduce your state and local tax liability.
Many resisters are opposed to state taxes because of concerns such as unnecessary highway-building (which creates community displacement and habitat destruction), prison construction, and the death penalty.
Other Revenue Sources
The official revenue numbers do not tell the whole story.
Much of the money the government spends is money that it borrows.
In some years, this can rival the amount it gets from any particular tax.
For instance, in the federal government brought in $1,880 billion through various taxes, but borrowed an additional $568 billion.
One way the federal government borrows money is by selling U.S. Treasury Bonds; the original purchasers of such bonds are loaning money to the federal government.
The government can also manipulate the money supply for its own benefit.
By doing so, it can use inflation to quietly tax people and to reduce the value of its debt.
John Maynard Keynes wrote: “A government can live for a long time… by printing paper money.
That is to say, it can by this means secure the command over real resources, resources just as real as those obtained by taxation.
The method is condemned, but its efficacy, up to a point, must be admitted.
A government can live by this means when it can live by no other.
It is the form of taxation which the public find hardest to evade and even the weakest government can enforce, when it can enforce nothing else.”
The resistance and conscientious objection of Amish people to social insurance tax forced the government to change its tax laws.
Some Amish people felt that government-sponsored social insurance programs were both mistrustful of God and destructive to the mutual support that forms an important part of Amish community life.
When the Social Security program and its social insurance tax became mandatory, many refused to pay the tax and refused to apply for benefits.
14,000 signed a petition to Congress asking for permission to opt out of the program.
The IRS began to try to enforce the law by seizing money directly from resisters’ bank accounts.
Amish resisters responded by closing their accounts entirely.
The IRS then began to seize money from the cooperatives that purchased the resisters’ products, and then finally to seize the resisters’ property.
The local IRS Chief of Collections said: “People have no right to use their religion as an excuse not to pay taxes.”
After a number of sympathetic resisters had been subjected to IRS seizures — in one case they seized a man’s horses as he was using them to plow his field — public outrage and Amish petitions finally convinced Congress to give the Amish the legal right to opt out of Social Security and cancel the outstanding tax bills of 15,000 resisters.
The Amish and Other Exceptions to Social Insurance Tax
In general, social insurance tax (also known as “FICA”, the “payroll tax”, or the “social security/medicare tax”) is hard to avoid if you earn your income in the above-ground economy.
Your employer is required to withhold money from your paycheck starting with the very first dollar you earn, and you cannot qualify for a refund no matter how little you make.
If you are self-employed, be aware that social insurance tax is assessed on incomes much lower than the minimum threshold for the income tax.
For most people, the threshold is $400 per year.
For an employee of a church or church-controlled organization, the threshold is $108.28 per year.
In addition, if you are self-employed, you are required to pay the tax by certain deadlines, four times a year.
The federal penalties, both civil and criminal, for refusing to pay social insurance tax are the same as those for refusing to pay income taxes.
The IRS does not distinguish between these two kinds of taxes in terms of applying penalties.
There are a few exceptions from the general rule that everyone must pay social insurance tax.
An exemption applies to the Amish and a handful of other religious groups that have been around at least since and that have religious scruples against participating in social insurance plans (see the sidebar).
If you do not earn any income — that is, if all of your income comes from interest, capital gains, pre-existing savings and the like — you do not have to pay social insurance tax on that money.
In addition, there are a few job categories that can provide income exempt from social insurance tax:
State and local government workers who participate in alternative employer retirement systems
Election workers (people who are employed by the government to staff polling places during elections) who earn $1,200 or less a year
College students who work at their academic institutions
Household workers (housekeepers, maids, baby-sitters, gardeners, etc.) who earn less than $1,500 from an employer
Self-employed workers with annual net earnings below $400
Paid ministers, members of religious orders, and Christian Science practitioners who elect to be exempt
Richard Winchester calls our attention to a method that some self-employed people are using to successfully and legally escape social security taxes:
I wonder to what extent this sort of technique is practical for individual tax resisters.
How’s that IRS private debt collection agency program going?
Let’s ask the National Taxpayer Advocate:
It is not meeting revenue projections.
It is not more successful than the IRS at finding hard-to-locate taxpayers.
It is significantly less successful than IRS employees at fully resolving taxpayer past due accounts.
And:
The I.R.S. had expected private companies to collect $88 million but has now lowered that to as little as $23 million.
The collectors are paid almost a fourth of the money they bring in.
When the costs of government oversight are added in, [National Taxpayer Advocate Nina E. Olson] said, the program may even lose money.
Indeed:
Significantly, and contrary to projections made as recently as in , the expenses of the program to date exceed the revenue the program has generated.
“The cash economy is growing.
The percentage of all income subject to third party information reporting fell from 91.3 percent in to 81.6 percent in .
Moreover, the IRS expects the number of individual returns from small business or self-employed taxpayers to grow by about 33 percent , while the number of individual returns from other taxpayers is expected to decline by about 2 percent over the same period.”
, the IRS assessed $10 million in penalties against professional tax preparers for various forms of preparer misconduct.
But the agency only managed to collect $2 million of this $10 million.
It seems that tax preparers know the difference between a dog bark and a dog bite.
For tax year , the IRS identified more than 1.2 million cases in which someone failed to file a tax return even though they had taxable income.
In cases like these, the IRS creates a substitute tax return for the person, which (usually) results in a “default assessment.”
But, “the IRS collected just under two percent of the taxes assessed through the automated process, a sign that this method is not increasing filing and payment compliance.”
The IRS responds: “We… do not agree with the suggestion that dollars collected is the best measure of the effectiveness of these assessments.
Each assessment abated or adjusted reflects the submission of a return or other response by the taxpayer after the ASFR default assessment has been made — a clear indication <voice="darth vader">the taxpayer has been successfully brought into compliance</voice>.”
“A disregarded entity is a single member Limited Liability Company (LLC) that has not elected to be classified as a corporation.
It is called a disregarded entity because the owner reports business activity as if the entity did not exist.
For example, if the single member is an individual taxpayer, (LLC transactions are reported on the owner’s Form 1040 as if it is a sole proprietorship.
The compliance detection issue results from the owner of a disregarded entity using the tax identification number of an entity that does not have a filing requirement.
The IRS document matching program cannot match the disregarded entity income with the true owner and the income may go unreported.)”
“The earnings of an S corporation are taxed as ordinary income to its shareholders.
Unlike partnership or sole proprietor earnings, however, S corporation earnings are not subject to self-employment tax.
This difference in treatment gave rise to a tax planning strategy that treats shareholder compensation payments as distributions of profit to avoid payroll taxes.
Under this approach, officer/shareholders take no salary or a nominal salary and receive the remaining compensation as tax-free distributions.
The corporation saves payroll taxes and the shareholder ultimately pays only income taxes on his or her share of the corporate profits and avoids paying Social Security and Medicare taxes.”
However… “the IRS has repeatedly challenged and won the shareholder wage issue in court, [but] it is still used as a tax planning strategy.”
The IRS reported 18% more “Taxpayer Delinquent Accounts” in than in .
81% of these accounts involved tax years before , and many are “inactive.”
The Taxpayer Advocate purports to believe the following:
The United States tax system is based on a social contract between the government and its taxpayers — taxpayers agree to report and pay the taxes they owe and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so.
Without that unspoken agreement, tax administration in a modern democratic society could not function.
Thus, the government’s ability to raise revenue through voluntary tax compliance — the most efficient and economical form of tax compliance — rests on taxpayers’ belief that the government will honor its end of the social contract.
This “unspoken agreement,” says the Taxpayer Advocate, is overdue to be spoken — in the form of “a formal Taxpayer Bill of Rights” (which, since “a tax system that embeds rights also expects its taxpayers to conduct themselves in such a manner as to ensure those rights are not abused,” will also be “a statement of taxpayer obligations.”)
Naturally, this articulation of the unspoken agreement is not going to take the form of an actual negotiation or agreement.
It’s to be a top-down declaration emitted by Congress or the IRS for our benefit.
Joseph Thorndike, at the Tax Analysts blog on Forbes, brings to light this remarkable quirk in U.S. tax law:
The Cold War ended more than 20 years ago, but the battle against global communism rages on — at least in the pages of the Internal Revenue Code.
Lawmakers… forgot to repeal a provision of the tax law exempting employees of Communist organizations from having to pay Social Security taxes on their wages.
(They are similarly forbidden from collecting Social Security benefits derived from those wages, since wages and benefits are linked for all of us.)
When enacted, the Social Security provision was intended to be a punishment; lawmakers didn’t think people trying to overthrow the government should be able to participate in that same government’s premier social program.
In fact, the provision was prompted by press reports that jailed Communists were happily collecting Social Security checks while sitting in their cells.
But today, it’s hard not to wonder if young Communists might not actually welcome their banishment from Social Security.
As tax lawyer Libin Zhang has pointed out:
What was a penalty in might be a blessing today.
Younger employees nowadays might prefer to forgo paying Social Security Tax and give up on the fragile likelihood of receiving Social Security checks in their retirement.
Of course, young Reds might have a hard time using this tax break since… the tax law depends on a cross-reference for its definition of a “Communist-action organization, a Communist-front organization, or a Communist-infiltrated organization.”
The reference is meaningless, since no one is keeping lists of those organizations anymore (at least not officially).
You never know, of course.
As Zhang suggests, “An employer could voluntarily send in a registration form and see how it goes.”
But if they’re going to give it a shot, they better move fast.
In a sign that lawmakers are finally catching up with current events, the congressional Joint Committee on Taxation has identified both the charity disallowance and the Social Security exemption as examples of “potential deadwood” lurking in the code.
Zhang’s blog post reprints the applicable part of the Internal Revenue Code that releases from social security tax any payments for…
…service in the employ of any organization which is performed (A) in any year during any part of which such organization is registered, or there is in effect a final order of the Subversive Activities Control Board requiring such organization to register, under the Internal Security Act of , as amended, as a Communist-action organization, a Communist-front organization, or a Communist-infiltrated organization, and (B) after .
Alas, Zhang says, “[t]he mandatory registration requirements of the Internal Security Act of were repealed in after some court cases found them to be unconstitutional [and] the Subversive Activities Control Board was abolished in .”
So there is probably no final order “in effect” requiring any organizations to register under the exempting act.
I’ve been slacking a bit in my reporting, but a lot has been coming across my
screen in recent weeks:
Some resisters describe war tax resistance as something they do so they
can live with themselves, or something they do to assuage their
conscience about where tax money goes. Being able to live in alignment
with your beliefs is a profound form of self-care — think about the
dis-ease you experience when you do something against your beliefs. War
tax resistance not only brings you into alignment with your beliefs
about war, it can also help you integrate your beliefs on other issues.
If you’re self-employed as a sole proprietorship in the
U.S., you’re
supposed to pay self-employment tax on all of your profits, just as though
you were employed and it was your salary. But if you’ve organized yourself
as an “S Corporation” — you can instead pay yourself a specific salary
out of your profits and you’ll only owe self-employment tax on
that. Seems an arbitrary and even sketchy loophole? Tax expert Peter J.
Reilly says it’s “a valid self-employment tax avoidance strategy… organizing as an S Corporation and avoiding self-employment tax seems like a no-brainer for a sole proprietor”
though he also warns that “you really should not use the strategy to avoid
SE/payroll
taxes entirely.”
NPR
looked into
Why More Americans Are Renouncing
U.S.
Citizenship and concluded that there isn’t one single cause, but
instead it is the result of “dominoes falling, one after another, leading
to an unexpected outcome.” But all of the dominoes have to do with taxes,
and how the U.S.
tax system makes life difficult for citizens living overseas.
Tax Resistance in Spain
Professor Roberto Centeno, writing at El Confidencial, made a bit of a stir by arguing that since much of the Spanish government debt is not legitimate, the people of Spain do not owe it and ought not to pay for it through their taxes.
Excerpts:
Following the marvelous example of civil dignity that Henry David
Thoreau gave us with the practice of disobedience against unjust taxes,
created and used against the interest of the citizens, now more than
ever it has become indispensable to put an end to the
particracy of
lies and corruption. And to do this by means of an exemplary action of
tax withholding against the enrichment without reason of the political
and financial oligarchs, by means of those taxes created and a debt
assumed to defend their interests, and so it will be them who reassume
this debt or answer for the consequences of its nonpayment.
It is a debt of the regime, a personal debt of the government that
contracted it, because it does not comply with the essential requirements
of a legitimate debt, which would be that it was contracted for the
exclusive benefit of the people.
I feel like I have way too little context to make sense of all of this, but various industrial and commercial unions are squabbling over whether to
support a business strike
in the Dominican Republic over the expansion of a value-added tax there.
Tax Resistance in Argentina
, twenty “productores,
industriales forestales, empresas de servicios, y colonos” (roughly:
“manufacturers, foresters, service businesses, and farmers,” I think) in
Colonia Delicia decided to stop paying taxes in protest at the poor state of the government-maintained roads.
The businesses say that the poor condition of the roads is making their
businesses impossible to operate.
