Tuesday, November 26, 2013
The FICA Fix
The Federal Insurance Contributions Act (FICA) tax is one of the most regressive imaginable! It is also the key to preserving and expanding Social Security for all Americans. One of the most blatant lies of right-wing reactionaries is that Social Security (which they really want to "privatize) is going to bankrupt itself in the foreseeable future, unless we make substantial cuts in benefits, raise the retirement age, or perform some equally drastic operation before the sun goes down. Interestingly enough, they also insist that the cost of Social Security, Medicare, Medicaid, and similar "entitlements" is perhaps the most drastic cause of the catastrophic explosion of federal spending and the crisis over the national debt. (That charge is especially specious because these social programs are not even part of the national budget, but are funded separately as levies under FICA. The proceeds accrue to the Social Security Trust Fund, which, when supplemented by the revenue projected under the current system, is capable of paying full benefits until 2030, and slightly reduced benefits after that.)
The FICA levy appears as an item, totally separate and apart from the federal and state income taxes, that are deducted from paychecks. It totals 7.65% of our gross income, which is supplemented by another 7.65 % collected from employers. That combined revenue constitutes the Social Security Trust Fund. Of our individual contributions, 6.2% finances the retirement and other benefits subsumed under the Social Security Act, which was created by Congress in 1935. That act has been amended over the years to include survivor, disabled, and other benefits. The remaining 1.45% finances Medicare and Medicaid, which were enacted by Congress in 1965. Self-employed persons pay the full 7.65%, but are allowed to claim one-half of that contribution as business deductions. (It should go without saying that the current system was enacted by Congress after decades of debate and compromise and is not the result of some Utopian Ideal imposed from above by Socialists or other "social engineers.")
The regressive part is that FICA deductions financing Social Security are currently capped at 6.2% of incomes of $133,700 or $8,289.40 The $133,700 is the amount listed on line 37, Adjusted Gross Income AGI). That combines income from wages, taxable interest paid to you, state income tax refunds from previous year, pensions and annuities, Social Security income, and royalties or other stipends. It also includes deductions from self-employment tax and Student Loan payments. The reverse side of the page is where taxpayers list Exemptions and Deductions in order to arrive at Federal Income Tax Owed. Needless to say, it is also the place where lawyers and accountants work their "smoke and mirrors magic," taking advantage of the myriad loopholes that they and their predecessors have inserted to subvert the intent of the progressive income tax: "THE ABILITY TO PAY" and "FROM WHATEVER SOURCE DERIVED."
Every dollar of income over $133,700 on line 37 is "FICA free." <That is not true for the 1.45% that finances Medicare and other forms of health insurance. You may remember that several potential cabinet members in 2009 were "outed" for non-payment of that amount, which they "forgot" to pay for their employees, many of whom were undocumented immigrants. But that is an entirely different "can of worms," deserving it own scrutiny.> So those of us who make less that $133,700 a year <That includes me, and, I suspect, most of you.> pay the full the full tab: 6.2 %, $8,289.40. Those who have incomes of more than $133, 700 also pay 8,289.40 in FICA, but that figure constitutes a much lower percentage of their income. For those who make $250,000, the rate is 5.2%; for those who make 500,000, it is 2.8%; for those whose income is $1,000,000, the FICA deduction shrinks to .07% of total income. Beyond that threshold, the percentage becomes increasingly infinitesimal. Looked at from another perspective, the amount owed if the 6.2% rate were charged against the entire income of someone making $250,000 would be $15,500; for those making 500,000 it would be $31,000; for those making $1,000,000 a year it would total $62,000. For all of those citizens, the amount owed would be merely "chump change," a minor irritation approximating the annual fee, plus charges, at their country club, or the price of a second luxury car.
Obviously, FICA, as currently constituted, is absolutely regressive. It is manifestly unjust. It clearly contributes significantly to the unconscionable and unsustainable inequality that is destroying our political economy. But exactly how much government revenue does it fail to reach? How much more could the government actually raise if the $133,700 cap were removed, and every taxpayer contributed the same 6.2% of their AGI? With my primitive computational skills <my brother, Bob, who has a Ph.D. in physical chemistry from Princeton inherited nearly all the math genes in our family> I cannot calculate that precise amount, but I can put us in the same ballpark. The total AGI in 2010 was $8,039,779,000 <yes billions>. If that entire amount had been assessed at 6.2%, the total amount of FICA contributions would have been $498,466.91<on top of what is already in the SS Trust Fund>. That should keep the system running along smoothly for the foreseeable future. The AGI of the richest one percent of taxpayers was $1,517,146,000 <What does that say about the really rich 0.1 %?. You do the math.>. If they had been assessed the full 6.2% FICA tax, they would have paid a total of $9,466,305. The AGI of the top five percent of income receivers was $2,716,199,000. Assessed at 6.2%, that would have yielded $168,404.330. The AGI of the most affluent ten percent was $3,631, 364,000, which would have produced $2,251,445,000 in FICA contributions. (Incidentally, the AGI of that same top ten percent (13,503,349 individuals) was 45.2% of the total. These citizens also paid 70.6% of all income tax, but isn't that the whole idea of a progressive tax? The important number in income is not how much tax you pay, but how much you have leftover after you pay.
According to IRS figures, the "Income Split Point" occurs somewhere in the range between the top ten percent and the top five percent of taxpayers,The AGI threshold for inclusion in the top ten percent is $116,623; the threshold to make the top five percent is $161,579. That range encompasses $915,615,000 of total income tax paid, and is 11.4% of total AGI and 11.6% of that group's share of income taxes. So $133,700 is somewhere within that range, which means that those closer to the ten percent threshold are assessed the full 6.2% FICA levy, while those closer to the top five percent bracket contribute less. Why the FICA cap is set at $133,700-- smack dab in the middle of that cohort--is something that I have not yet been able to discover. $133,700 is obviously closer--by $17,077--to the ten percent threshold of $116,623 than to the five percent threshold of $161,579, but that doesn't tell us why that particular cap was chosen, let alone how much potential FICA revenue is lost in the process. That figure, of course, is in addition to the more than the ten million dollars already lost by not including the top five percent.
Of course, the most accurate way to calculate how much additional revenue would go into the Social Security Trust Fund each year if there were no "cap" on the amount levied by FICA. To do that, we would have to know the exact number of people with AGIs in excess of $133,700, and the total amount of their Adjusted Gross Incomes. Even if we could, however, it would do very little to alter the big picture. The easiest, fairest, and most
effective way to augment the SS Trust Fund would be to lift the FICA cap. That would not only eliminate any putative future shortfall, but would also reinforce faith in the Social Security system, to say nothing of the federal government per se. It would obviate, once and for all, proposals to "privatize" pensions and entrust our retirement fortunes to the vagaries of the stock market and the tender mercies of the very people who came perilously close to destroying the economy of the entire world. Nearly every American suffered a horrendous blow to her/his economic well-being, and whose ravages continue to plague us to this very day.
The biggest barrier to an equitable and productive solution to this manufactured panic, of course, is that such a proposal would unite in opposition most of the wealthiest and most powerful people in the nation--the very people who engineered our current economic disaster in the first place. Whatever their intramural differences on other issues, most would clearly regard this as an attack on their collective self-interest <dare one say their collective "selfish-interest"?>. The "one percent" and their minions have been waging "class warfare" on the rest of us for the last three decades. It is way past time to recognize that such a state of war exists and to "take arms" against it, and to use every constitutional means at our disposal to win it.