Monday, July 11, 2011


++ When discussing the fact that almost half of Americans do not pay any income taxes some folks say that they are not off the hook altogether because they are paying federal, and sometimes state, “payroll taxes”, like the FICA tax.

That argument doesn’t cut it with me. FICA “tax” is made up of payments to Social Security and Medicare. These are not true “taxes”.

Payments to Social Security are contributions to a retirement and disability fund. Individuals who pay into Social Security will receive a pension for life upon retirement, with benefits also available to surviving spouses and children, and are eligible to receive benefits if they become permanently disabled.

Payments to Medicare are a form of health insurance premium, the benefits of which are available upon reaching age 65.

State “payroll taxes” usually consist of contributions to an unemployment, disability or family leave fund that provide specific benefits in specific situations.

Regardless of how the mechanics of the Social Security and Medicare “funds” actually work, payments for FICA is not an income tax. The way the Tax Code is currently written, the cost of government is truly born by only half of those receiving its benefits.

++ I have been a vocal supporter of the concept of licensure and registration of 1040 preparers from the very beginning. However I do take exception with some of the individual regulations and requirements that are or will be in place.

It now appears that in addition to having to take a test to prove to the IRS that I know what I have been doing, without incident, for almost 40 continuous years now, and pay to waste two (2) hours each and every year sleeping through a repetitive sermon on ethics (if I am not honest and ethical at this point 2 hours a year of preaching ain’t going to make me so), in order to continue to practice my chosen profession, I will also be required to send my fingerprints to Washington.

Do the members of all professions that require a federal license have to provide their fingerprints as part of the initial application process? Will CPAs and attorneys who apply for a PTIN be required to submit their fingerprints?

I seem to recall hearing somewhere that once the fingerprints are submitted they will be compared to a national database to see if the applicant is a convicted felon, and that once this check has been completed the fingerprints will be destroyed. If this is truly the case I suppose it is another one-time inconvenience that I will simply have to “grin and bear”. But if the fingerprints will be kept forever in some kind of federal file then that is another thing altogether – something that I oppose.

So, what is the story on the fingerprints?

++ With recent talk of balancing the budget leading once again to the simple solution of “tax the rich, because they can afford it”, let me quote from a TWTP post of a few years ago with my thoughts on this solution -

I am also against taxing the rich simply ‘because they can afford it’. Recent studies have shown that the ‘rich’ already pay more than their share of taxes. The Tax Foundation’s TAX POLICY BLOG recently posted “
Tax Burden of Top 1% Now Exceeds That of Bottom 95%”.

I do not believe in a highly ‘progressive’ tax system that ‘punishes’ such positive behavior as ambition, entrepreneurship and just plain hard work with a higher tax rate.

It is argued that the rich should pay more because they ultimately get more benefit from the programs and protections of the government (although those who pay absolutely no income tax seem to me to be getting much more benefit from government). With a relatively flat tax system the rich would still pay more than the not so rich – 25% of $1 Million is a lot more than 25% of $50,000.”

Close the loopholes and do away with all the various special interest deductions and credits – yes (as I have done in my series on re-writing the Tax Code). But do not just automatically raise the tax rate of the successful.


1 comment:

Anthony said...

"Payments to Social Security are contributions to a retirement and disability fund."

No they aren't. They are payments to a "pay as you go" system. "In this context, it would be most accurate to describe Social Security as a transfer payment--transferring income from the generation of workers to the generation of retirees--with the promise that when current workers retiree, there will be another generation of workers behind them who will be the source of their Social Security retirement payments." (

The social security trust fund has enough assets in it (in the form of treasury securities) to pay for about 4 years of payments. Your payroll taxes go to pay current recipients. Any promises of future payments to you (and there really are none) are not backed by any actual assets. If you are going to describe that as a savings account, then it is a Bernie Madoff type savings accounts. However, it is probably more accurate to describe it as a regressive tax combined with a social welfare program, since unlike Bernie Madoff, the government doesn't really hide the fact that there's no real trust fund.

"Individuals who pay into Social Security will receive a pension for life upon retirement, with benefits also available to surviving spouses and children, and are eligible to receive benefits if they become permanently disabled." No, we might receive a pension for life upon retirement. Or Congress might raise the age beyond our life expectancy. Or Congress might implement means testing. For those of us under the age of 40, this is quite likely, actually. And the payments aren't determined pro-rata based on the contributions. People with low income will receive much more than they put in. People with high income might not even get back what they paid in.

And that's just social security. Medicare tax is even more obviously a tax, because what you receive has almost nothing to do with how much you've paid in. If medicare taxes are not taxes, then what about property taxes which are used to pay for parks and libraries? Would you say that these are not taxes, but are actually membership dues?

You're right that FICA is not an income tax. It's more accurately described as a payroll tax or maybe an earned income tax. At least, this is true until 2014 (I believe that's the year), when medicare taxes start being charged on unearned as well as earned income.