Tax oppression of middle-class workers is exemplified by tax burdens that are shifted from employers to employees. Middle Class workers are victims of tax discrimination by two direct income taxes on wages: Federal Income Tax (FIT) and Federal Insurance Contributions Act (FICA). The FICA tax applies only to wages up to the income ceiling (capped taxable amount) of $102000 (2008). See Social Security Overview
Low wage earners with household incomes belowthe approximate $38000 eligibility threshold may have some or all their FICA taxes returned by the Earned Income Tax Credit (EITC). The combined effects of the Child Tax Credit (CTC) and the EITC often results in tax refunds that exceed the total FIT & FICA income taxes extracted from their paychecks. I do not disagree with this negative income tax philosophy of beneficial welfare for those that actually work; although tax and welfare policies could be improved by more transparency and simplification. This is the group that does the menial dirty work, get poorly compensated and receive little appreciation. Highly compensated sole household providers only pay FICA OASI taxes of $5406 (5.3% of the taxable capped amount). When the “provider” retires, the wealthy spouse enjoys “free” Social Security retirement benefits since no extra contribution or premium was paid to fund the spousal income. They both may also enjoy Dividend and Capital Gains tax rates of only 15%. That is less than the combined (employee/employer) total FICA/OASDI-HI of 15.3%.
The combined FICA/OASI taxable income of an upper middle-class working couple often exceeds the annual “capped” amount of $102000. They are denied maximum Social Security benefits because of disingenuous Social Security Administration wage indexation retirement benefit formulas that ignore the combined amounts of FICA taxes paid. They pay for their own retirement and that of a third party, as described in the paragraph above, who receives a free monthly check they don’t need. The individual median middle-class income is $70000. A working couple, each of whom may earn the median income of $70000 pays FICA taxes on $140000 of combined income. Their combined FICA/OASI taxes of $7420 are 37.25% above the $5406 paid by the highly compensated sole provider. Their estimated individual Social Security retirement benefit of $1899 (Jan 1, 2008) is below that of the maximum Social Security retirement benefit of $2185. The middle and upper middle class of wage earners that fall within the ($38000 - $102000) thresholds are the ones getting clobbered by fraudulent FIT & FICA income taxes. They pay more taxes and receive relatively less reimbursement than many wealthy pensioners who enjoy subsidized Social Security retirement benefits and 15% flat rates on dividend and capital gain income. The hardest hit by the FIT and FICA income taxes is a single upper middle-class employee who pays inordinately higher taxes (few deductions and exemptions and no tax credits) and receives significantly fewer benefits. This fraudulent process of income redistribution is the exact reverse of President Ronald Reagan’s theory of Trickle down Economics.
Social Security Benefit Amortization
The relative value of the wealthy spouse’s free monthly benefits may be estimated by comparing it to the costs of a lifetime annuity. In the example cited above, the estimated cost of an annuity to provide spousal Single Life Income with No Payments to Beneficiaries ("SL") of $1093 (50% * $2185) per month for a 65 year old female is $174,601. See Annuity calculator The real value of the Social Security benefit is grossly understated because the annuity is not protected from inflation (depreciated purchasing power). Also it does not take into account thatthe survivor may outlive the provider and the benefit increases to $2185 per month. A more realistic value of the freebenefit may lie in the range of $275k to $400k (depending on the gene pool of longevity).
NOTE: Used herein, the term middle-classworker does not differentiate a social or economic class. The term is loosely defined by the IRS tax code. It is the wage income group that fall between the points (approximately $38000 in 2008) where households become ineligible for earned income tax credits (EITC) and the taxable ceiling ($102000 [2008]) of FICA income taxes. It is this group that is most heavily discriminated against by the IRS, the Social Security Administration, and the politicians.
Balancing the Rights of Owners and Workers
A fundamental dilemma facing the nation is how to develop policies that fairly balance the needs of workers and their employers. Workers must earn incomes that provide as a minimum, a moderate living wage with a cushion for savings, to meet future needs such as retirement. Companies must make a profit with a cushion for investments to enhance their own development. Contented employees are a company’s best assets. A worker’s best security is a good paying job. When balance is biased toward one side of the competition, the other side must inevitably suffer the consequences; unless there is an intervening force. It is the function and responsibility of Government to promote the proper balance among contending forces. It is not the role of government to choose winners and losers with tax and welfare laws that are indecipherable to the public it was created to serve. It is a fact that current government tax, welfare, and immigration policies weigh heavily against workers, favoring profits over wage income. Another problem facing workers is insuring adequate funds are available for retirement. Employers have over the past quarter century shifted away from Defined Benefit retirement contracts toward Defined Contributions. The value of these retirement nest-eggs are subject to the future performance of financial markets that may suffer greatly because underlying debt and unredeemable social obligations may cause a downgrade of US Credit worthiness. Because of current tax laws, funds withdrawn from tax-deferred accounts are subject to tax even if losses occur within the individual accounts. Many of those who suffer losses will be further penalized because of the income tax on SS benefits. Politicians have already proven they cannot be relied upon to keep their promises. After decades of political promises that benefits WOULD NEVER be taxed since income taxes had already been extracted on the contributions; in 1984 income taxes on Social Security retirement benefits began. The tax on SS benefits is concealed under a labyrinth of complex formulas and legalese that makes it difficult to determine the amount of the tax, but the cumulative annual amounts have grown from $3 billion (1984) to $16.9 billion (2006) and is projected to go higher as inflation pushes benefits above tax thresholds (not indexed for inflation) established for this relatively new form of government confiscation.
The Joint Committee on Taxation
(JCT) estimates that these tax subsidies, also known as tax expenditures, will amount to $945 billion in 2006 — over three times the projected 2006 federal budget deficit.2 http://assets.opencrs.com/rpts/RL33641_20060913.pdf Tax expenditures are often alternatives to other policy instruments such as grants. Consequently, national social and economic goals are sometimes met through the tax code rather than through direct expenditures. Regardless, many experts argue tax expenditures are often less efficient than direct expenditure programs in promoting these important economic and social goals. At the same time, still other tax expenditures appear not to meet any social or economic goal. In general, tax expenditures tend to reduce the progressivity of the income tax system, and add to the complexity of the tax system from the taxpayer’s point of view. Furthermore, unlike direct expenditures, the benefits of much of the tax expenditures go to taxpayers in the upper part of the income distribution, and they often subsidize an activity for which the taxpayer receives a benefit.
Special deductions, exclusions, exemptions and credits (sometimes characterized as “loopholes”) have been in the tax code since the passage of the progressive income tax in 1913. Since then, over 100 special deductions, exemptions, and credits have been added to the tax code.
The JCT estimates tax expenditures in terms of revenues lost to the U.S. Treasury. The revenue loss of a tax expenditure is a straightforward and easily understood concept — it is simply taxes not paid and represents revenues forgone by the government.
Comment: Interestingly, the JCT does not include the vast subsidies ($100s of Billions) to corporate America. Because of the various “Business Expense” deductions and “Business Tax Credits” US Treasury revenues from the Corporate Income Tax (an outrageous misnomer) have dropped like a rock since 1950, both in terms of amounts collected and as a percentage of government tax revenues. During the same period US revenues from the exclusive FICA income tax on wages has soared, while government debt and social insurance obligations have sky-rocketed. See United States Debt Numbers Mind-Blowing
GET INVOLVED!
Copy Tyranny of the Middle Class and paste it in an E-Mail to your representatives and senators. Ask them to address this grievance. Also E-mail to friends and family and ask them to repeat the process. E-mail all candidates running in next year’s elections. Tell them you will not support their candidacy until they pledge to correct this blatant injustice. Write letters to the Editor to inform the public of these grave injustices. Newspapers will be reluctant to publish such a controversial issue. Note: If they refuse to print your letter, tell them your will pay for an advertisement that says the same thing, except a note at the bottom of the ad will inform their readers the newspaper refused to publish your letter. That always gets their attention.
A massive grass-roots movement may compel politicians to insert justice into severely flawed tax and social welfare laws; especially if class-action lawsuits are contemplated that will force them to do their duty.Do your part!Join the Movement for “Justice in Government”!