These economic phenomena began with the 16th Amendment (1913) to the US Constitution. Without defining "income" subject to the provisions of the Act, a Pandora's box for tax and welfare mischief was created that have allowed lawmakers and their corporate sponsors to by-pass Constitutional intent and restraint. It's time to put a lid on the box before the federal government bankrupts the country.

 President Bush, with majorities in the House and Senate and a Supreme Court packed with Republican appointees represented the last likely opportunity for conservatives to reverse course (or curse) of the liberal welfare state erected on fiat money and bogus tax and welfare laws.

Instead of embracing fundamental conservative ideas, the President stoked the fires of inflation and debtism with an unprovoked, preemptive attack on Iraq that posed no immediate *(see footnote) MILITARY THREAT to US interests.  This war and others have been financed with tax cuts instead of increases. Contrary to expectations of his conservative political base, government debt has skyrocketed under his regime during an era of what was promised to be fiscally responsible conservatism.

In 2004, Individual Income Tax Receipts were reported as $809 billion and total employment taxes and contributions were $689.4 billion. The combined FIT & FICA taxes individual taxpayers sent the government exceeded $1 trillion. Since most of the combined taxes sent in by individuals are deductible as business expense to their corporate employers, one should not be surprised to learn that U.S. Treasury received only $189.4 billion in corporate income taxes this same year nor to learn the country slumped deeper into debt.

First, one might ask why the U.S. Government receives approximately 1% of gross corporate revenues from the corporate income tax when the corporate income tax rate is about 35%. The answers might be found in corporate subsidies, deductions and credits hidden in more than 60,000 pages of tax code. Next, one might ask: "Is the corporate income tax real or is it a subsidy disguised as a tax?"

The answers may be found by investigation of the legal basis for Federal Income Taxes (FIT) and Federal Insurance Contributions (FICA) accounting practices.

TAX FACTS & FLAWS

16th Amendment to the US Constitution (1913)

"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."

Social Security Act of 1935 

INCOME TAX ON EMPLOYEES:

http://www.ssa.gov/history/35acviii.html#Excise

"SECTION 801. (Paraphrasing) “In addition to other taxes, employees shall pay an income tax on 1% of wages up to $3,000 and every employer shall pay an excise tax on individuals in his employ of 1% on wages up to $3,000 on each employee...... "(Note: The initial 1% was scheduled to increase in the early years of the program.)

DEDUCTIBILITY FROM INCOME TAX

"SEC. 803. For the purposes of the income tax imposed by Title I of the Revenue Act of 1934 or by any Act of Congress in substitution therefore, the tax imposed by section 801 shall not be allowed as a deduction to the taxpayer in computing his net income for the year in which such tax is deducted from his wages.”

This provision of the Social Security Act more clearly violates the US Constitution than double taxing wage income. It mandates that employees not only pay two taxes on the same income, it requires FIT taxes to be paid on FICA taxes. The 16th Amendment only authorized a tax on income. It DID NOT empower the government to collect an income tax on an income tax.

Note: The FICA tax should be a legitimate deduction from the FIT for no better reason than it is clearly based on unconstitutional law. It is absurd that a debtor can deduct interest on a loan made voluntarily, but is prohibited from deducting the FICA income tax confiscated involuntarily from the same income.

 The employee FICA tax rate is currently 7.65%. The 6.2% OASDI rate is capped at $94200 (2006) and the 1.45% HI rate has no ceiling.  Since "deduction" of the 7.65% FICA tax is disallowed from individual federal tax returns, a taxpayer is required to pay income tax on the FICA tax. A worker in the 20% nominal tax bracket is actually paying 9.18% (7.65% FICA on gross income + 1.53% FIT on FICA income taxes).

SEC. 804. In addition to other taxes, every employer shall pay an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages......(The excise tax matched the employee 1%)

No  (SEC 803) prohibition was made for adjusting employer (corporate) income taxes by the amounts of other taxes. This TAX LOOPHOLE has led to massive government subsidies to corporations by fiat. Corporations not only deduct their own taxes, but ALSO all the individual FIT and FICA taxes confiscated from the paycheck of their employees plus their wages. 

Note: A possible remedy to balance employee and employer taxes is to close the Loop Hole that favors the latter. Simply repeal the Sec 803 standard that compels employees to pay two income taxes on the same income and  FIT taxes on FICA taxes OR apply the same standard to employers that would eliminate the Business tax deduction of employee FIT & FICA taxes. Closing these Loop Holes would result in Business Employers to pay their fair share of taxes, reduce the tax load on employees and provide billions in new revenue to the IRS. Don't try holding your breath until this happens!

Deduction of employee FICA and FIT Taxes as Wages

IRS Publication 535 (2004), Business Expenses

http://www.irs.gov/publications/p535/ch06.html

IRS QUOTE:  6. Taxes ..... Employment Taxes:

If you have employees, you must withhold various taxes from your employees' pay. Most employers must withhold their employees' share of social security and Medicare taxes along with state and federal income taxes. You may also need to pay certain employment taxes from your own funds. These include your share of social security and Medicare taxes as an employer, along with unemployment taxes.

You should treat the taxes you withhold from your employees' pay as wages on your tax return. You can deduct the employment taxes you must pay from your own funds as taxes. Example provided by IRS (THINK ABOUT THIS): You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in employment taxes. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as taxes.  UNQUOTE

How The IRS Utilizes "Reverse Accounting"

To reconcile the Gross Amounts of FICA taxes reported to the Social Security Administration with the Net Amounts of IRS tax collections the IRS has resorted to REVERSE ACCOUNTING!

This is footnote (5) to Table 1, discovered on page 41 of the Internal Revenue Service – 2003 Data Book.  http://www.irs.gov/pub/irs-soi/03databk.pdf 

Quote: “(5). Collections of individual income tax are not reported separately from Old-Age, Survivors, Disability, and Hospital Insurance (OASDHI) taxes on salaries and wages (under the Federal Insurance Contributions Act or FICA, and on self-employment income under the Self-Employment Insurance Contributions Act or SECA). The OASDHI tax collections and refunds shown in Table 1 are based on estimates made by the Secretary of the Treasury pursuant to the provisions of Section 201(a) of the Social Security Act as amended and include all OASDHI taxes. Amounts shown for the two categories of individual income tax were derived by subtracting the OASDHI tax estimates from the combined total collections for the two taxes (refund estimates were not made for these two categories).” Unquote

The IRS 2005 Data Book http://www.irs.gov/pub/irs-soi/05db01co.xls provides the most current annual tax data, (fiscal year, ending September 30, 2005). This is a brief summary of Table 1 that focuses on key elements being discussed:

  Gross Amount        Net Amount

  $2,268,895,122     $1,998,850,893   United States Total

       307,094,837           272,762,788   Corporate Income Tax

    1,107,500,994           879,927,524   Individual Income Tax

       786,612,462           766,315,297   Individual Income Tax withheld

       759,955,617           754,951,225   Employment Tax OASDI-HI total (5)

         716,905,338                 n.a.                 Federal Insurance Contributions Act (FICA)

            43,050,279                  n.a.                Self-Employment Ins. Contributions (SECA)

              6,947,510                   6,819,217     Unemployment Insurance (FUTA)

              4,538,535                   4,534,855     Rail Road retirement

In footnote 5, (above) the IRS has confirmed that the FICA (OASDHI) tax is just another “income tax”, even though the IRS and the SSA continue to label the FICA income tax as a “Contribution”.  Even more interesting is the revelation of how the US Treasury reconciles the $100s of billions of reported FICA taxes not collected by the IRS (due to EMPLOYER Business Expensing of Wages & Employment taxes, withheld from workers paychecks) on government balance sheets.

To reconcile the shortage of net IRS FICA collections with the gross contributions reported by the Social Security Administration, the US Treasury simply totals up FIT & FICA collections, subtracts the FICA tax from the total and calls the remainder “Individual Income Tax”. This dubious technique of “reverse accounting” provides a convenient, but highly questionable means of complying with the law that states: “Social security (OASDHI) (FICA-contributions) income taxes can only be spent on Social Security and Medicare.

A possible solution to this apparent contradiction in tax rates and net taxes paid; is to simply eliminate the corporate income tax and replace it with a 2% Corporate Gross Revenue Tax (CGRT). Treasury receipts from the new tax would more than double alleged income now reported and eliminate business tax deductions and credits of questionable merit. Efficiencies of corporate tax simplification would likely offset nets costs of the new tax by significant manpower reductions in government and corporate bureaucracies.

A CGRT is obviously less onerous on the government and the corporations. Think of the billions of talented man-hours that could be redirected toward purposes that are more productive if the corporate income tax was eliminated. With CGRT the government would no longer be subsidizing corporate jets and corporate welfare. Devoting more time to business and less time to tax compliance would reward corporations. They would also enjoy less government intrusions into their businesses.

By far, the most significant result of eliminating the Corporate Income Tax is the expected huge increase in government revenues. This would occur because Business expensing of wages (that include a FIT and FICA - taxes) would no longer be allowed or necessary. Deductions of Interest Costs would also be discontinued thus removing the tax incentive toward debt (often at odds with traditional capital formation).

Leveling the tax burden on various, income sources (dividends, wages, and interest income) would also be a welcome change, but that is an unlikely to happen unless workers unite and demand it.   

Summary

Any fair tax system should treat similar net incomes (regardless of source) with similar rates. All tax laws should consider the impact of inflation on income and should be indexed to an appropriate standard measure before taxes are calculated. This would reduce the incentives for government to use inflation to pay down debt with cheaper dollars. A return to the Gold Standard would also reduce much of the political mischief and misdeeds that have occurred.

*Foot Note: Iraq did pose a threat to dollar hegemony when Saddam Hussein decided (in 2000) to trade oil  denominated in Euros instead of the dollar in the "Oil for Food Program". That under-reported action may have contributed to his fate. Had this precedent not been overturned by the US led invasion of Iraq, OPEC may have been pressured into like actions, thus paving the way to demise of US dollar denominated world trade.  Branded by Bush as an “Axis Of Evil” in 2001, it should have surprised few that Teheran converted more than half of Iran’s Forex Reserve Fund assets from dollars to euros the following year, with dramatic consequences for both currencies. Since  establishment of the Iran Oil Bourse (in 2006) poses an additional threat to domination of the US dollar in world trade, it should come as little surprise that drastic US actions may be anticipated to eliminate the increasing threats.

Eliminate OR Modify Corporate Income Tax - (Art#4)