Social Security Taxes

Posted by PITHOCRATES - January 14th, 2013

Economics 101

The Employer has to Write the Check to pay the Full Amount of Social Security Taxes

Social Security taxes are one of the biggest expenses businesses have.  If you look at your paycheck you will see some withholding taxes.  Included in those taxes you will see Social Security.  Or FICA (which includes both Social Security and Medicare withholding taxes).  These are your contributions for your retirement.  But you don’t pay them.

The Social Security contribution is ostensibly split into two parts.  There’s the employee contribution (those taxes withheld from your paycheck).  And the employer’s matching contribution.  But the employer pays the whole thing.  Just like employers pay for unemployment taxes, workers’ compensation insurance, disability insurance, health insurance (for the most part, some employees contribute a portion these days), life insurance, paid vacation, paid holidays, paid sick days and pension contributions (for those who still pay pensions).  All of these benefit the employee, not the employer.  Yet the employer picks up the tab for these expenses.  And Social Security is no different.

Actually, there is one difference.  All of these employer-paid expenses reduce the employer’s taxable income.  Except one.  The employee’s Social Security contribution.  The employer has to write the check to pay the full amount of these taxes.  Paying the full amount (both employer’s and employee’s contribution) reduces the amount of cash they have on hand to pay their other bills.  The full amount of these Social Security taxes influence hiring decisions.  And once they pay these taxes it’s income they’ve earned they no longer have.  But they still pay income taxes on it.  Despite the employee paying income taxes on this same income.

One of the Largest Expenses a Business has is Social Security Taxes

So the employee does not pay Social Security taxes.  It’s just another on a long list of expenses an employer has to pay.  That said the employee’s contribution does reduce his or her net pay.  When President Obama cut the employee’s Social Security tax rate 2% the employee’s net pay increased.  While the employer matching portion remained at the same rate.  Yet the check the employer wrote for Social Security taxes reflected this 2% reduction.  Because the employer pays all of these payroll taxes whether it’s unemployment, workers’ compensation or Social Security.  The following chart summarizes sample labor costs.  Both at the Obama tax cut.  And after it expired.  For an employee with a gross annual pay of $66,360 (for 47.4 weeks of work plus 4.6 weeks paid time off).

Note the 2nd largest cost after health care is Social Security.  Both the employer’s and employee’s portion add up to $9,027 (both at 6.2%).  Which is a lot of money.  If an employer has 15 employees that Social Security check they have to write totals $135,408.  Half of which does NOT reduce an employer’s taxable income.  Assuming an effective tax rate of 26% (for a small business owner filing as a subchapter S or an LLC where their business earnings flow through to their personal tax returns) that’s an additional $17,603.04 ($4,514 X 15 X 26%) of taxes the employer has to pay on income that they receive no benefit from.

Under the Obama tax cut this employee had $1,456 less withheld from his or her paycheck.  Or $52 less a week.  Or $5.60 less a workday.  Almost enough to pay for lunch.  Or enough to make you stop going out to lunch.  For the 15 employees that’s $780 pulled out of the local economy each week.  For a city with 500,000 workers that’s $26,000,000 pulled out of the city economy each week.  That’s a lot of economic activity.  That can provide a lot of jobs.  So why let the Obama tax cut expire when they have such a positive effect on the economy?

Social Security is Going Bankrupt thanks to an Aging Population

Because Social Security is going bankrupt.  And the solvency of Social Security isn’t helped when you cut the only funding mechanism for it.  The Social Security tax.  That 2% reduction in the tax rate cost the retirees some $176 billion each year.  That’s why they let the Obama tax cut expire.  $176 billion is a lot of money for a program going bankrupt.  And it’s a lot of money for a government that runs a deficit.  Which is the real reason why they wanted to let the Obama tax cut expire.

When the government needs to pay for their deficit spending the Social Security Trust Fund is just too tempting to pass up.  All those payroll taxes flowing into the Social Security Trust Fund.  Just sitting there.  Not being spent.  It’s just too much for a politician to resist.  So they raid the Trust Fund. They take that cash and spend it.  Leaving behind a bunch of IOUs.  Treasury bonds.  The kind that can’t be bought or sold.  Non-negotiable.  Which means the only way to redeem these bonds (and to repay the Social Security Trust Fund) is by raising taxes, further borrowing or reducing benefits.  Such as raising the age when you can start collecting Social Security benefits.  All of which we’ve used to try to forestall the inevitably bankruptcy of Social Security.

So Social Security is a very complex thing.  Social Security taxes are a tremendous cost burden on businesses.  And they pull a lot of spending money out of the economy.  Reducing economic activity.  Yet as much money as they pull out of the economy it’s not enough.  Social Security is still going bankrupt.  Thanks to an aging population (the number of beneficiaries is growing at a greater rate than those entering the workforce to pay for these benefits).  And even though the rate of money flowing into the Social Security Trust Fund is falling it’s still large enough for politicians to raid to pay for other out of control spending obligations.  Ensuring that Social Security will go bankrupt no matter what tax rates are.

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Class Warfare

Posted by PITHOCRATES - January 3rd, 2013

Politics 101

Over 99.5% of all Rich People ARE paying Federal Income Taxes

President Obama won reelection by denigrating Mitt Romney.  He didn’t win by running on a successful record.  He did not win by running on a plan to pull the economy out of one of the worst recoveries in history.  No.  He won it by getting people to hate Mitt Romney.  And by getting people to hate Republicans.  Who they painted as evil rich people who want nothing more than tax cuts for the rich.  And to take away birth control and abortion so only rich people can have access to them.  As well as taking welfare benefits from the poor.  It’s called class warfare.  And it can be very effective.  For it won President Obama a second term despite a horrible first term by almost any metric you measure it.  At least based on the majority of the electorate that just believed the rich aren’t paying their fair share.  So let’s just see who is paying what (see Table 3.  Number of Individual Income Tax Returns, Income, Exemptions and Deductions, Tax, and Average Tax, by Size of Adjusted Gross Income, Tax Years 2001-2010).

The above chart shows who are NOT paying any federal income tax.  Approximately 40% of all taxpayers.  Are these the evil rich people like Mitt Romney?  And those rich Republicans?  No.  Contrary to the Left, it’s not the rich.  They’re paying their taxes.  It’s the poor and the middle class not paying their fair share.  Those earning $5,000 and less pay virtually no federal income taxes.  Over 80% of those earning from $5,000 to $13,000 pay no federal income taxes.  You have to get up to those earning $25,000 or more before more than half of that income group pays any federal income taxes.

We don’t see who actually pays the majority of federal income taxes until we get into the middle class.  Where those who DON’T pay any federal income taxes rapidly drop away.  Those at the low end of the middle class taking advantage of the tax code to maximize their tax credits and deductions (mortgage interest, energy tax credit, medical and dental Expenses, child and dependent care credit, etc.) to reduce their tax bill.  While those at the higher end of the middle class are likely small business owners suffering a business loss.  Or a personal or business bankruptcy.  Approximately 0.8% of those earning $100,000 – $200,000 pay no federal income taxes.  While less than half of one percent of those earning $200,000 or more pay no federal income taxes.  Perhaps this tiny sliver of income earners are not paying their fair share.  But one thing for certain is that over 99.5% of all rich people ARE paying federal income taxes.

Those earning $1,000,000 and more account for less than 1% of Tax Exemptions and Deductions

So are the rich taking advantage of the tax code to reduce their taxable income and federal tax bill?  We hear a lot about tax loopholes.  Those perfectly legal tax credits and deductions written into law by the United States Congress.  That both those on the Left and those on the Right take advantage of.  Yet those on the Left have convinced enough of the electorate that these legal credits and deductions are tax evasion.  And that only the rich on the Right are using these to evade paying their fair share.  So who is taking the biggest advantage of the tax code to reduce their tax bill?  In 2010 this totaled about $3 trillion.  Is this why those earning $100,000 or more paid no income tax?  For those few not paying any federal income tax?  Not exactly.  (The dollar amounts in the following charts are in thousands of dollars.)

In 2010 taxpayers claimed in total about $3 trillion in exemptions and deductions.  The deficit in 2010 was about $1.3 trillion dollars.  So perhaps this is the reason why we had a deficit in 2010.  This is what the Left would have us believe.  It’s those tax loopholes that the evil rich take advantage of to avoid paying their fair share of taxes.  The only problem with this is that it’s not the rich taking advantage of these tax loopholes.  It’s the poor and middle class.

Those earning $1,000 and less account for less than 1% of these exemptions and deductions.  Those earning $1,000,000 and more also account for less than 1% of these exemptions and deductions.  It’s those earning from $1,000 to $1,000,000 that are taking advantage of these tax loopholes.  Especially those earning from $50,000 to $200,000.  The only income groups claiming 10% or more of the nearly $3 trillion in exemptions and deductions claimed.  So not only are the evil rich paying federal income taxes whatever they claim as exemptions and deductions doesn’t even come close to what the poor and middle class are claiming.

Prosperous Economic Times brought about by Tax Cuts INCREASED Tax Revenues

These numbers don’t exactly support the claim that the rich aren’t paying their fair share.  They’re paying federal income taxes.  And what tax loopholes they exploit hardly makes a dent in the amount of tax revenue the IRS collects.  Which can only mean one of two things.  Either the poor and middle class need to pay more federal income taxes.  Or the federal government is just spending too much.  Well, as we just witnessed in the fiscal cliff debate, President Obama and the Left want to raise taxes.  Blaming the record Obama deficits on the Reagan and Bush tax cuts.  Their deal includes higher income tax rates on households earning $450,000 or more.  But NO spending cuts.  Which will be a problem.

In 2010 the total adjusted gross income totaled just over $8 trillion.  Most of which came from 4 income groups.  About a trillion each from those earning from $50,000 to $75,000, from $75,000 to $100,000 and from $200,000 to $500,000.  Those earning from $100,000 to $200,000 earned in total almost $2 trillion.  Which means the new higher tax rates aren’t going to bring in much new tax revenue.  Because they aren’t taxing the people with the money.  The middle class.  And with some additional spending instead of spending cuts the deficit will only grow larger.  So this whole fiscal cliff debate was nothing but theatre.  For it wasn’t about deficit reduction.  It was about politics.

The Left wants to destroy the Republican Party.  And to do that they need to turn prosperous economic times brought about by the tax cuts of the JFK, Reagan and Bush administrations into the source of all our problems.  Yes the economy boomed, goes the argument, but at what cost?  Massive deficits.  Deficits not brought about by tax cuts.  But by spending.  For those prosperous economic times brought about by tax cuts INCREASED tax revenues.  The deficits resulted from spending increases greater than the revenue increases.  But with a successful campaign of class warfare they have revised history.  Those deficits are now the result of the rich not paying their fair share.   Which helped them increase tax rates on the rich today.  Because the Left got everyone to hate the rich.  And the Republican Party.  Even though the rich are the only ones paying their fair share.  In fact, they’re paying more than their fair share.  But the majority of the electorate doesn’t know this.  Because of that successful campaign of class warfare.

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Taxing the Rich in America, Taxing Everyone as Rich in Europe

Posted by PITHOCRATES - September 24th, 2011

Spending is so Great the Only Way to get Serious Deficit Reduction is with Spending Cuts

Dan Greenhaus with BTIG looked at Obama‘s proposed Buffet Tax.  Crunched the numbers from the 2009 U.S. tax returns.  And found that the Buffet Tax is more politics than deficit reduction (see A Little Bit Of Math On The ‘Buffett Tax’ by Joe Weisenthal posted 9/19/2011 on Business Insider Politix).

Nonetheless, if we add up the $1,000,000 and above categories, we get taxable income of $623.6 billion that resulted in $177.5 billion in income tax paid, a rate of less than 28.5%. If we were able to somehow change that tax rate to say 35%, an increase of more than 7 percentage points, the income tax paid in 2009 would have been over $218 billion or an increase of a bit less than $41 billion. If we were able to do this over ten years, the U.S. would have extra income of $410 billion. All from raising taxes by seven full percentage points on those making income over $1,000,000.

Unfortunately, $410 billion is “only” about 7% of the deficit we expect to incur over the next ten years. That is not an inconsequential portion but considering the debate surrounding hiking tax rates by any amount, let alone generating an increase sufficient see a seven percentage point increase in taxes paid, as well as the negative consequences such a sharp adjustment would engender, this hardly seems to be the “only” place to go to achieve debt reduction.

The magnitude of the deficit is too great to pay with new taxes.  As it is now, the 2011 deficit will come in at $1.65 trillion.  A 7% tax rate hike would net an additional $41 billion.  Or $410 billion over ten years.  This would reduce the 2011 deficit from $1.65 trillion to $1.61 trillion.  Not impressive.  Remember, Standard and Poor’s wanted to see $4 trillion in debt reduction over the next decade.  And $410 billion is a long way from $4 trillion.

Take a close look at these numbers.  A $1.65 trillion dollar deficit.  And taxable income as reported to the IRS of $623.6 billion.  The deficit is 2.6 times the total taxable income from those making $1 million or more.  In other words, you could tax away all of their money and the government would still run a deficit.

The spending is so great that the only way you’re going to get serious deficit reduction is with spending cuts.  Because spending is big enough to cut to make a difference.  Unlike taxing the Warren Buffets.  Whose incomes aren’t big enough to make a difference.

So when Keynesian tax and spend liberal Democrats talk about serious deficit reduction it’s just misdirection.  They know they can’t reduce the deficit.  But that’s okay with them.  For that isn’t their goal.  They want to raise taxes for a different reason.  They like to spend.  It’s how they get power.  And votes.  But when you run such massive deficits it’s hard to spend more.  Unless you raise taxes.  And that’s why they want to raise taxes.  Not to reduce the deficit.  Which is impossible to do with tax hikes.  They’ve just run out of money.  And they want more to spend.

Left of Center Welfare States are Always Good for Vote-Getting

And if you think it’s bad on this side of the Atlantic, you should see what they’re doing on the other side.  The Europeans have a lot of social democracies.  Left-of-center governments.  With huge welfare states.  Which is always good for vote-getting.  But it comes at a price.  High taxes.  And lots of debt.

To keep spending at their levels of spending they have raised tax rates on the ‘rich’.  And lowered the threshold for being ‘rich’.  The Business Insider crunched the numbers and put together a little slideshow showing the tax rates.  And what it means to be rich in these countries.  We pulled the data from the slide show and put them into tabular form below (see These Are The Toughest Taxes For Europe’s High Earners by Nick Jardine posted 9/24/2011 on Business Insider Europe).

We calculated the numbers above based on the threshold salary that puts these taxpayers into the top tax rate.  And the tax rate.  All numbers are in U.S. dollars.  The numbers very a little from the Business Insider slideshow possibly due to rounding error.  Or other tax considerations.  But the numbers were close enough to fill in the blanks where needed.  Though it may not be completely accurate, the numbers should be close enough in magnitude for the purpose of discussion.

When they couldn’t Tax the Rich Anymore, they Taxed the Middle Class.  By Redefining them as Rich.

Depending on your political persuasion, you no doubt will draw different conclusions from these numbers.  A Keynesian liberal Democrat will say Germany isn’t taxing their rich enough.  That they are the richest of the rich.  And that they should probably tax everyone earning over, say, $100,000 at the highest rate.  Like in Greece.  A non-Keynesian will see it differently.  They will note that only the German economy is rich enough to bailout the poorer nations of the Eurozone.  Particularly Greece.  Meaning that the more rich people you let be rich the more tax revenue you will have.

A non-Keynesian will think it’s not fair that a rich German only gets to keep $3,581 from the $6,511 he or she earns every week.  The Keynesian will have no problem with that.  Of course, they may not think it’s fair that a Belgian only gets to keep $446 of the $892 he or she earns every week.  They’ll think it’s fair to take about half of what the rich make.  But they don’t think it’s fair calling someone rich who makes only $46,349.  Or calling someone rich who only makes $20,613.  Especially if they earn more than they do.  And currently pay no income taxes.

None of these countries started out at these income thresholds or tax rates.  They’ve lowered income thresholds through the years.  And they’ve raised tax rates.  Whenever their governments spent more money than they had.  Employing class warfare they vilified the rich.  Raised their tax rates.  And when they couldn’t raise tax rates on the rich anymore, they raised taxes on the middle class.  By redefining them as rich.  And they then paid the higher tax rates.  It’s gotten so bad in some countries that people who pay no income tax in America would be paying the highest tax rate in some European countries.  But it all starts with taxing the rich.

With Keynesians in Power you’ll never see Spending Cuts because that’s how Democrats Buy Votes

We have to be careful of what we ask for.  Such as taxing the rich.  Because we may be rich ourselves one day.  As the threshold for being rich shrinks over time.  First it was the billionaires.  Then the millionaires.  Then those earning $200,000 or more.  Then those earning $100,000 or more.  Down to as low as $20,000.

Fair is fair they’ll say.  So you’ll agree to make the rich pay their fair share.  And then those earning less than you will also agree to make the rich pay their fair share.  And by rich they’ll mean you.  Until all earners will be taxed at the highest rate.  To support those non-earners who vote Democrat.

But no matter how much they’ll take it will never be enough.  Because you can’t reduce the deficit/debt by raising taxes.  They’re just too big.  The only way you can reduce these is by reducing the thing that made them so big.  Spending.  But that’s not likely to happen.  As long as Keynesians are in power.  Because that’s how Keynesian tax and spend liberal Democrats buy votes.

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FUNDAMENTAL TRUTH #45: “The bluest of cities in the bluest of states have the most activist governments, the deepest recessions and the most abject poverty.” -Old Pithy

Posted by PITHOCRATES - December 21st, 2010

Blue States Bleeding Red

We call it the Great Recession.  It started with the subprime mortgage crisis.  Then the dominoes started falling.  And unemployment rates started to climb.  So many people lost their jobs that it wasn’t only banks and auto companies staring into the abyss of bankruptcy.  Our city and states were, too.

But not all our cities and states.  Some were hanging in there during the Great Recession.  There was a pattern.  Sure, it was a rule with some exceptions, but a general rule all the same.  And if you looked at one of those red/blue electoral maps, you could see the states (and the cities) having the biggest financial troubles.  You just looked for the blue.

The blue states are the ‘Democrat’ states.  The red states are ‘Republican’.  And the states that are in the news with financial troubles tend to be the blue states.  The New England States.  The Mid-West states.  And the West Coast states.  The rate of business failures and high unemployment rates have hammered these states.  Taxable income plummeted.  Without the income to tax, tax revenue plummeted.  And these blue states are bleeding red.

Blue States and Unionized Public Sector Employees

These are the Big Government states.  Home for most of the nation’s liberal democrats.  Although liberal democrats make up only about 20% of the national population, most of them live in these states.  And when you pack a lot of this 20% into these small areas, their influence can reach a majority.  And they can control these cities and states.  And do.

These liberals are the guilty rich (anti-capitalist inheritors of great wealth).  Crony-capitalists (anti-capitalists who eschew the free market and bribe politicians in exchange for governmental favoritism).  Big Union (anti-capitalists who eschew the free market and seek legislation that favors them).  The celebrity rich (anti-capitalist movie stars, musicians, painters, artists, etc., who don’t live in the real world).  University professors (anti-capitalists who still have posters of Che Guevara up in their classrooms).  The mainstream media (anti-capitalists who want to shape opinion instead of practicing journalism).  And, of course, the poor and government-dependent.

And then you have public sector employees.  Unionized public sector employees.  And their ranks are growing.  They don’t work very hard.  But boy are they paid well.  And talk about fat benefits.  Pension plans that most can’t even imagine.  They have made themselves a privileged class.  And with their boss having the power to tax, that privileged class will be remaining privileged for a long time to come.  Unless a Great Recession comes along.

Much of Flyover Country not having any Budget Crises

What is flyover country?  It’s that are area of the country liberals fly over when traveling between the West Coast, the Big Union Mid-West, New England and, of course, Washington D.C.  It’s that area in between.  The red states.  You see, liberals fly over the red states because they don’t like them.  Or Republicans.

Because America is a center-right nation, and the liberals have concentrated in the blue states, that has left most of ‘fly over’ country conservative.  And what do conservatives NOT like?  Big Government.  So liberals don’t go where they’ve not welcomed.  For Big Government is the heart and soul of liberalism.

So the red states don’t have Big Government.  They don’t have masses of government-dependent people.  And they don’t have large public sectors.  Or public sector union employees.  Which means they don’t have huge Big Government budgets.  Or budget crises.

The Public Sector Out Paces the Private Sector in the Blue States

But the blue states do.  Their Big Cities are packed with government-dependent people.  And they have a huge public sector to cater to these people.  And a public sector union that pays this public sector very well.  They have pay and benefit packages that are to die for.

Of course, a public sector doesn’t make anything.  They have no goods or services that they can sell in the free market.  They have but one source of income.  Taxes.  And when times are good, taxes are good.  But when times are poor, so are taxes.

Part of the liberal democrat’s strategy to remain in power is to get as many people as possible dependent on government.  This helps make Democrat voters (people who vote Democrat because they are afraid of losing their government benefits).  And justifies their huge government budgets.  So they keep adding people to the public dole.  And keep growing their budgets.  It’s a foolproof plan.  As long as the private sector grows along with the public sector.  So the private sector can keep paying the taxes to support the public sector.  And the privileged class.

Big Government – The Road to Bankruptcy

But it doesn’t always work.  When businesses fail they don’t have any income.  So they can’t pay any income taxes.  And when a business fails people lose their jobs.  And their incomes.  So they don’t pay any income taxes either.  But it doesn’t end there.  Without any income, they can’t buy anything in the free market.  So other businesses see their sales decline.  And have to lay off employees.  And these laid-off people can’t buy anything in the free market.  So more businesses see their sales decline.  And they lay off people.  And on and on it goes.  Where does it stop?  Usually in a bad recession.  Or even a great one.

You add all of this up and what do you get?  Big cities with growing budgets (and growing pension obligations).  And shrinking tax revenue to pay for it.  Costs exceed revenues.  Ergo, bankruptcy.

And some of the states with the most generous public sector pay and benefits are California, Illinois and New York.   Some of the bluest of blue states.  And coincidentally, these are the states facing some of the biggest budget crises.  Actually, it’s no coincidence.  It’s the ultimate consequence of Big Government.  Bankruptcy.

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