About Those Federal Taxes

Virtually everyone who cares to has seen or read about a Mitt Romney YouTube clip where the Republican Presidential nominee talks about the 47% of Americans who pay no federal income taxes.  Romney's critics have pointed out that many of these citizens are retirees living on Social Security, members of the military, and the unemployed.  If Romney wants to discuss imposing new taxes on these Americans, his critics say, they're happy to have the argument.

While both Romney and his critics have their points, they all overlook a devil lurking large in the details.  Many people have jumped to the conclusion that 47% of their fellow Americans pay "no federal taxes" or, worse yet, "no taxes."  Anyone who pays a cent in sales taxes, property taxes, ad valorem taxes (such as a "tag tax"), local taxes, or state taxes can immediately correct the latter misunderstanding.  The former, however, is more pernicious.

Check stubs (for whose who still receive them on paper) and W2 forms distinguish among federal income taxes, FICA taxes, and Medicare taxes.  Together, FICA and Medicare taxes are known as the "Payroll Tax," and they typically account for 7.65% of the average American's wages -- that we can see.  True, a tax holiday has temporarily reduced the W2 Payroll Tax to 5.65%, tax relief most people certainly appreciate.

Those ever disappearing pay stubs, however, don't show the 7.65% combined FICA and Medicare taxes paid by the employer.  Anyone who is self-employed can certainly vouch for these taxes.  Not only that, but too many assume naively the employer really pays this additional 7.65%.  Instead, as part of passing along business expenses, employers reduce salaries by the amount necessary to pay these taxes.  This practice is really Economics 101.

Whatever their political philosophy, then, commentators need to acknowledge that via the Payroll Tax alone, the federal government currently takes 13.3% of most American workers' earnings.  This tax is levied against the first dollar every working American earns, with no deductions or exemptions.  The only wages exempted are those over a six figure dollar amount.  Many would argue, then, this tax is as regressive as taxes come.

In theory, even, separating federal income taxes from FICA and Medicare taxes makes no sense.  Workers are left with the idea that what they hope to receive from Social Security is repayment.  Such isn't and never was the case.  The money Joe Citizen pays to the system today goes directly to paying the benefit for someone who has already retired.  Joe Citizen, Jr., will in turn help pay his father's Social Security.

Whether the federal government takes money from your paycheck and calls it a federal income tax, a FICA tax, or a Medicare tax matters not.  Money the federal government subtracts, directly or indirectly, from your income is taxes paid.

If your current income and deductions are such that you pay "only" 13.3% of your income to the U.S. government, you owe no one an apology, and you aren't part of some underpaying 47%.  And a shrewd businessman like Governor Romney has to know it.