# News What Are Payroll Tax Supported Programs to You?

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1. Jul 6, 2011

### Staff: Mentor

This thread is motivated by discussion of what taxes to include in an accounting of peoples' tax burden. The short background is that people on the left tend to want to include the payroll taxes and people on the right don't. The simplest/safest logic says that taxes are taxes and all should be included, but there are implications to that position that are never addressed. The purpose of this thread is to deal with those implications. First, some samples of recent conversations. The first two quotes go together, the last two are separate.
Now first a quick admonishment: people make mistakes and are sometimes careless with their wording, but we've had this conversation enough for everyone by now to know what the others are talking about. So while WhoWee's post was missing a qualification ('federal income taxes', not just "taxes"), OmCheeto should have known what was meant. ParticleGrl made a similar error in the last quote which implies that the upper class don't pay much more in $$, when the reality is they pay vastly more in$$ and just not much more (or less, depending on how you slice the data) in %%. So please: don't nitpick when you know what the person means. And I'll be addressing some of the other comments below as well...

Now, for the meat. First, let me summarize the taxes in question:

Social Security: 6.25% up to $106k income, then nothing above that. (temporarily reduced for this year) (both the employee and employer pay equal taxes at this rate) Medicare: 1.45%, flat. (both the employee and employer pay equal taxes at this rate) Unemployment: Varies by state, but is typically flat, but with a cap. (paid by employer) Now, if bundled together (either with both portions or just the employee portions) and considered as a plain ordinary "tax", the "payroll tax" is regressive as the largest piece is capped at a certain income level. So as a fraction of their income, people with high incomes can potentially pay a significantly lower %% than people with low incomes. Easy, right? Well, not so fast: All three of these programs are insurance programs, designed to relieve the general public of the responsibility of paying for these things out of pocket. They are not part of the normal function of government and were added less than 100 years ago in a pretty major shift in what the government does. For social security and unemployment, benefits are directly tied to contributions (the more you pay in, the more you are eligible to get back) while Medicare has equal benefits for everyone, but contributions are still tied to income on a flat basis. Conservatives argue that: 1. These services displace services that in the past and in part today, citizens paid for on their own. That makes them different from, say, paying the President's salary and buying warships, which has always been a core function of government. 2. Because these are services previously and partly today financed privately, shifting them to government without changing the cost structure would be an enormous wealth redistribution. Medicare is already a redistribution, since the tax is flat in percentage and not fixed-fee like private insurance, while liberals call Social Security "regressive" because the rich don't pay above a certain$$value of their income for it. Addressing a concern in a quote above, that's what I meant by saying the rich are largely ineligible for SS: contributions and benefits are both capped above$106K, so people who make above that are not taxed nor do they receive benefits for additional income. Ie, someone who makes $213K a year is taxed on and receives benefits on less than 50% of their income: so they are mostly ineligible for Social Security. 3. The implication of #2 is vast. Today, Social Security and Medicare are fiercely lobbied for and defended by older people. We'll likely see some fierce defense in this thread. The basic argument against massive restructuring (favored by many younger people) is 'I paid in, I should get that money out'. But oops, problem: that logic is only valid if you consider SS and unemployment as insurance/investment programs tied to what you paid in. So this is the key thesis: If you want SS and unemployment to be considered ordinary taxes, you must then also be willing to divorce the benefits from the pay-in. Logic demands that you can't have it both ways. But of course, that logic is not acceptable to many people on either side of the aisle and support for the programs would almost certainly collapse if that happened. So to say the thesis again from the other direction: If you want to consider SS and unemployment to be pay-out based on what you pay-in investment/insurance programs, you logically cannot consider them to be "regular" taxes. 4. Even setting all of the above aside still does not logically allow liberals to combine these taxes with other taxes. The response for a conservative is easy and based on contribution: if you want to consider pay-out based on pay-in for taxes, then fine: The President works for the top half and not the bottom half of the population. The Navy only protects the top half. Only the top half can be allowed to visit national parks. Drive on an interstate. View the Hubble Space Telescope website. Get a weather report. Etc. Etc. Etc. If you want to get paid back what you paid in, then those in the bottom half can have back what they paid in to Social Security, but they paid nothing for any of these other programs and shouldn't use them. Sound good or do you want to have someone else pay for your cake and eat it too? Last edited by a moderator: Apr 26, 2017 2. Jul 6, 2011 ### russ_watters ### Staff: Mentor I forgot one. 5. Time. Taxes and benefits are separated by time, so while a young worker can claim to be paying a lot of taxes, and old worker is getting a lot of benefits. If you instead look at lifetime contributions vs benefits, you'll find that at best (for liberals) they cancel out and result in a net of zero (implying we should not be counting this with other taxes) and at worst, you'll find that for some demographics - all at upper income levels - the net gain/loss due to the program is hugely negative. In other words, taken cumulatively, the program goes beyond progressive (beyond infinitely progressive) for some demographics, with some people paying in while others get paid out. See samples here: http://en.wikipedia.org/wiki/Social...curity_benefits_under_differing_circumstances In one demographic, (married, with one worker), the program has increasing benefits up to a$50k income, then a decreasing benefit. If you're single and successful, you get hammered, with net benefit going very negative for high wage earners.

Some of this data was a surprise to me. I didn't realize that the SS program already had some welfare-ish structure to it and see that even with the pyramid-scheme type structure, not everyone even turns a profit. There are winners and losers. Particularly for single, upper income people, you'd be better off throwing the money under a mattress, much less investing it yourself.

3. Jul 6, 2011

### Jimmy Snyder

Fire companies used to be private too, so those taxes shouldn't be counted. Unless you consider that fire prevention is a benefit to the entire community. Is social security for poor people only, a benefit to rich people?

4. Jul 6, 2011

### Staff: Mentor

While it's partly about history, it isn't completely about history. Fire companies for centuries flip-flopped between being public and private and ultimately it was realized that like the Navy, it just couldn't be done effectively if done privately.
Well certainly, particularly in cities, fire protection is a community benefit, since the close proximity of buildings makes it possible for fires to spread.

For social security, I don't see what you are trying to say. I don't see a private/public (fire), rich/poor (SS) parallel. Please explain.

5. Jul 6, 2011

### WhoWee

The real loser when it comes to Social Security, Medicare, and Unemployment is the small business owner. They pay matching taxes for the employees benefit - even if the business owner can't take a paycheck for him/herself. The other item the employer pays is Workmen's compensation - another insurance program enforced as a tax. Further, the business owner is typically not eligible for unemployment or worker's comp.

6. Jul 6, 2011

### Jimmy Snyder

I mean that society in general benefits from the social security of its individual citizens. If not, then why is the govt in the pension business in the first place?

7. Jul 6, 2011

### WhoWee

Actually, SS has also been expanding it's Disability programs the past few years - things like Bi-polar disorder.

8. Jul 6, 2011

### mheslep

A standing argument against any government based pension or welfare program is that it promotes dependency, whatever the positive benefits of such a program to society. And of course the reason for the government to engage in pension or other benefit programs need have no connection to a benefit for society (whether it does or not), but only to buy more votes and to further itself, i.e. further government.

9. Jul 6, 2011

### OmCheeto

Everything was private in the beginning. I would imagine it was a libertarian paradise, filled with monkeys. And before them, prokaryotes, et alii.

10. Jul 6, 2011

### mheslep

Most firefighters in the US are volunteer.
http://www.bls.gov/oco/ocos329.htm

Last edited by a moderator: Apr 26, 2017
11. Jul 6, 2011

### Staff: Mentor

How so?
I don't know/I don't see it. Since it is your argument, why don't you tell me?

12. Jul 6, 2011

### Staff: Mentor

Last edited by a moderator: Apr 26, 2017
13. Jul 7, 2011

### mheslep

Yes I know, the volunteers are not private for profit, but it does imply they are not government employees and tax supported.

14. Jul 7, 2011

### Staff: Mentor

Ugh, enough! Volunteer fire departments are an interesting case, but they aren't part of the payroll tax, so they aren't relevant to this thread. No more of this read herring/hijack: either address the issue raised in the OP or don't post in this thread! Really, no one has yet addressed the thesis.

15. Jul 7, 2011

### Jimmy Snyder

Yikes.

16. Jul 7, 2011

### OmCheeto

Ok. If we allow you to leave out the payroll taxes, then you have to allow us to count the state and local taxes. As I understood Ron Paul's version of how our governments should run, the Feds should be reduced to their basic constitutional functions, and leave the burden of extra items they've taken on to the state and local governments.

From ParticleGrl's link in the jet thread, http://www.itepnet.org/whopays3.pdf, it looks as though all but one state have regressive tax structures. The averages on page 7 show that the lowest quintile pays ~11%, while the top 1% pays ~5%.

So if you add all of the taxes together, leaving out the payroll taxes, the poor are still paying.

top 1% --> 22.5% fed + 5% state = 27.5%
bottom 50% --> 0% fed + 10% state = 10% (interpolating the graph)

If we reduce the federal government like everyone wants, then the burden will shift to the states. With the states being unable to print money like the feds, they are either going to stop providing services, go broke, or raise taxes. And with the regressive nature of the state tax systems, it's obvious to me that the tea-partiers really haven't thought this out beyond the ends of their collectively extended fingers.

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My apologies if I've not addressed the OP, but not addressing all taxes strikes me as the equivalent of telling people to; "Ignore that man behind the curtain!"

Last edited by a moderator: Apr 26, 2017
17. Jul 7, 2011

### WhoWee

Spending cuts do not equal "going to stop providing services" - it means less spending. If we learned anything from the stimulus program it it that when programs are too big - there is waste - hence the shovel ready revelation. Apparently, they just threw money at everything they could find in their wish list and still couldn't spend it all?

Can we agree the individual states can focus more on local spending specifics than the federal government?

Often in these discussions we compare apples to oranges - a good example is when turbo discusses Medicaid in Maine and I'm talking about a major metro area the problems - the problems and situations are night and day. Often I agree with what he says (as related to Maine) but it's not true in Chicago or Detroit.

18. Jul 7, 2011

### OmCheeto

Is the stimulus spending still going on? And no, that was not a rhetorical question. Outside of PF, I do not follow things very closely.
Yes. But by no means does local spending mean that something can't go horribly wrong.

Well, it is apples and oranges: Washington and Florida. Every state has a different tax structure, and you can't ignore that fact.
I think I missed the Medicaid in Maine discussion.

Last edited by a moderator: May 5, 2017
19. Jul 7, 2011

### WhoWee

20. Jul 7, 2011

### Staff: Mentor

You are not addressing the point of the thread. The point of this thread is to discuss the implications of including the payroll taxes. I'm trying to find out if you (and others) have thought through what it means to include them. For all the discussion of the issue, I've never seen anyone who wants to include them discuss the implications, which leads me to believe that it's not a thought-through opinion.

Please! Can anyone deal with the implications of what it means for the programs paid for by the payroll tax?