by John Koraska

February 7, 2005, Revised: September 17, 2005

 

For Social Security updates please visit my new website US Public Policy

 

 

The President's call for Social Security tax reform and federal income tax reform has provided a belated spot light on unjust tax and welfare laws that have festered for decades. The President deserves credit for acknowledging the evils built into the tax code and welfare programs. While I support the overall objectives espoused by the President, I don't think he'll get the job done by continuing in the direction he is headed. A rare window of opportunity exists for reforming government in a more just and humane way.

 

Real reform must be comprehensive and must start with a public understanding of how Social Security and other welfare programs are interconnected with the federal tax code. What it boils down to are Wealth Redistribution schemes that are almost indecipherable and when understood are frequently contrary to their intended purposes.

 

The shear magnitude of injustice forced on workers, savers and investors by the government is beyond belief. That workers in a self-proclaimed free republic tolerate this oppression is even more mind-boggling. The only explanation for the absence of outrage is a lack of understanding on how the system really operates.

 

The lack of transparency due to perplexing legalese makes it difficult to expose the extent of injustice contained in the current tax and welfare programs. The heavy hand of big business and special interests that place today's workers at a disadvantage to their employers, other investors and to current beneficiaries is highlighted by multiple layers of taxes on wage earners relative to taxation of other types of income. (The application of skill, time and labor are also investments and taxes on these assets should be no more or less stringent than that exacted on other forms of investment.)

 

Current workers heavily subsidize many wealthy beneficiaries including survivors and dependants. And, corporations enjoy massive tax write-offs via business expense deductions. To add insult to injury, our borders remain unprotected against an illegal immigrant invasion that further undermine bargaining power of American labor. Neither the federal government nor the State of Texas are fulfilling their Constitutional mandated responsibilities. The question is how can politicians be compelled to uphold the US Constititution they are SWORN to defend.

 

If an objective court evaluated all the tax and welfare laws that enslave the American worker, they would undoubtedly be found unconstitutional. Workers are required to provide for a public welfare system that has little bearing on any rational contribution/benefit ratio. To call our tax and welfare mess a system is a deliberate corruption of the word. The unlimited disconnect between taxes paid and benefits received is so convoluted that any equitable return based on total contributions is purely accidental. How about a little history on this mess and how it operates so that people can understand it? And, with understanding, fix the problems.

 

Social Security began as an equity-based retirement program for low-wage employees. Benefits were to be based on a lifetime accumulation of taxes paid into the Old Age Insurance (OAI) Trust Fund. The Social Security Act of 1935 established a system of Federal old-age benefits for workers at age 65. Matching "contributions" by employees and employers were to be deposited into the Trust Fund so assets and interest income could accumulate to finance future retirement and death benefits. 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. http://www.ssa.gov/history/35acviii.html#Excise

 

In 1939 spousal and survivor benefits were added; but additional funding for the expanded charitable benefits was not provided. At this juncture, a self-funding, equity-based program designed for low-wage workers was discarded in favor of an ever-expanding socialist welfare Ponzi scheme that has systematically undermined the original law. It has been downhill ever since.

 

The legal basis for the Social Security Income Tax on employees is the 16th Amendment to the US Constitution. "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." While these thirty words authorized the government to confiscate a portion of your wages, it conspicuously omitted the authority of the federal government to confiscate money from one citizen and transfer it to another.

 

The Social Security Act of 1935 altered the US Constitution without amending it, which is the on legal way of changing it. The Emergency Banking Relief act of 1933 Forbade gold hoarding and gold export and imposed a maximum penalty of $10,000,000 fine and 10 years in prison for violators. On August 15, 1971 the formal convertibility of the U.S. Dollar into gold was suspended resulting in de facto devaluation and floating of the dollar on international exchanges. The 16th Amendment and the amalgamation of these succeeding actions are the primary enabling factors for the covert economic conversion of Capitalism into Debtism in the United States.

 

Minor changes in law (with profound effect) could reverse the transition back to real capital formation and concurrent reduction in overwhelming government, business and personal debt. Simply remove the tax deduction on all personal and business interest expense. Standardize income tax rates on wages, dividends and interest income to level the playing field. These actions would allow markets to decide the real cost of debt and/or real returns on invested capital, not the Federal Reserve nor the federal government. The current system rewards debt and penalizes savings, investment and capital. The government expresses alarm about the low savings rate in America while at the same time it is government policies that have created the problem. If every person who reads this, will sit down and figure out how much their standard of living would be elevated if they were debt free, I suggest they would endorse the concept.

 

Social Security Benefits are based on a complex wage index formula, not on the principals prescribed in the Social Security Act of 1935. Today's over-taxed workers face an uncertain future weighed down with tens of $trillions in unsustainable debt and unfunded liabilities. Big business is not paying their fair share of taxes, current beneficiaries luxuriate at the expense of their own progeny and the government isn't leveling with the public.

 

Workers are repeatedly informed their Federal Insurance Compensation Act (FICA) contributions are matched by an equal amount from their employers. A radically different perspective (from an employees point of view) emerges from a joint study of the Social Security program and the Federal Income Tax Code.

 

Social Security benefits are primarily paid for by a tax on certain earnings (for 2005, Employers and Employees each pay 6.2 percent of wages up to the taxable maximum $90,000 for Old Age, Survivors, and Disability Insurance (OASDI) and on all earnings (Employers and Employees each pay 1.45 percent of wages, no upper limit) for Hospital Insurance (HI) with the Medicare Program. The taxable earnings base for OASDI is adjusted annually to reflect increases in average wages.

 

Employers remit amounts withheld from employee wages for Social Security and income taxes to the Internal Revenue Service; employer Social Security taxes are also payable at the same time. (Self-employed workers pay Social Security taxes when filing their regular income tax forms.) The Social Security taxes (along with revenues arising from partial taxation of the Social Security benefits of certain high-income people) are transferred to the respective Social Security Trust Funds OAS, DI and HI. The funds can be used only to pay benefits, the cost of rehabilitation services, and administrative services. Money not immediately needed for these purposes is by law invested in obligations of the federal government, which must pay interest on the money borrowed and must repay the principal when the obligations are redeemed or mature.

 

Social Security benefits are based on a worker's primary insurance amount (PIA), which is related by law to the average indexed monthly earnings (AIME) on which Social Security contributions have been paid. The full PIA is payable to a retired worker who becomes entitled to benefits at age 65 and to an entitled disabled worker at any age. Spouses and children of retired or disabled workers and survivors of deceased workers receive set proportions of the PIA subject to a family maximum amount. The PIA is calculated by applying varying percentages to succeeding parts of the AIME. The formula is adjusted annually to reflect changes in average wages.

 

Automatic increases in Social Security benefits are initiated for December of each year, assuming the Consumer Price Index (CPI) for the 3rd calendar quarter of the year increased relative to the base quarter, which is either the 3rd calendar quarter of the preceding year or the quarter in which an increase legislated by Congress became effective. The size of the benefit increase is determined by the percentage rise in the CPI between the quarters measure.

 

Note: It is important to remember, it's your earnings, not the amount of taxes you paid or the number of credits you've earned, that determine your benefit amount. When the benefit amount is figured, it is currently based on your average 35-year earnings record; not on the accumulation of lifetime employee/employer contributions (nor compound earnings on those contributions).

 

How Social Insecurity Really Works:

 

 

Joe Blow (single) earns $90,000.00 (2005), claims 1 exemption (himself) $3,200 and takes the standard deduction of $5000, resulting in taxable income of $81,800 and $17410 in FIT taxes. Joe also pays a 7.65% FICA tax of $6885 (OASDI $5580 + HI $1305). Joe's total tax is $24295 leaving him with a net income of $65,705. This occurs because Joe is required to pay income tax on his wages and also pay income tax on FICA taxes (an income tax on an income tax). If and when Joe receives benefits, he will pay a third income tax on up to 85% of money that has already been taxed twice. This is outrageous.

 

Note: [It can be argued that Joe pays the entire 15.3% OASDI-HI taxes (including the $6885. attributed to the corporate FICA share) since his work contribution must, by necessity, exceed the total expenses of his employment PLUS provide a margin of profit for his employer to stay in business.] Many analysts agree this division in the payroll tax is ?artificial? because employers regard their part of the tax as expense hiring, just like wages and other benefits. Workers see only a 7.65% deduction on their pay stubs, but they really pay the whole 15.3% tax in terms of foregone wages.

 

Joe works for XYZ Corporation. XYZ is permitted to deduct Joe?s gross wages $90,000.00 (which include the $24,295 Joe paid in FIT and FICA taxes) plus the $6885 (the Corporation contributed to the OASDI-HI Trust Funds), as business expense. This accounting practice allows XYZ (35% corporate tax bracket) ) to reduce its tax liability by $33,910 ($96,885*35%), (an amount that exceeds all the taxes Joe paid). If the corporation were restricted to deducting only Joe's net wage income of $65,705 the corporate deduction would be reduced to $22997, a reduction of $10913. The latter amount represents the revenue increase to government if the laws were changed.

 

Business expense deduction of employee paid taxes reduce corporate tax liabilities by $100s of billions every year and deprive the U.S. Treasury of an equivalent amount. These accounting practices unjustifiably reduce corporate taxes, cause federal deficits to surge out of control and distort Social Security assets and liabilities.

 

By excluding Joe's combined taxes of $24,295 and the corporation's own FICA contribution of $6885 as business expense deductions; government would see its revenues increase $10913. ($24,295+$6885*35%). Under this scenario XYZ could only deduct direct wages $65,705. Such a change may be phased in so XYZ could gradually raise prices to compensate for justifiable increases in REAL corporate taxes.

 

It is understandable that net wages would be a legitimate business expense deduction; but to allow corporations to deduct all income taxes (FIT & FICA) paid by the employee PLUS FICA contribution paid by the employer as business expense deceives the employee, promotes corporate welfare and is bankrupting the federal government. A possible solution to the accounting problems inherent in commingling FITA & FICA taxes is eliminating the Corporate Income Tax. An alternative might be a Corporate Gross Revenue Tax (CGRT). (please see - Eliminate Corporate Income Tax)

 

By calling individual taxes and contributions (FIT & FICA) WAGES instead of INCOME TAXES the public is deceived into thinking in terms of gross wages instead of real -net- wage income.

 

HOUSEHOLD BUDGET ANALOGY

 

If households used government accounting tricks to balance their budgets, prison cells and lines at bankruptcy courts would grow exponentially. Unlike government, a family must balance its household budget or suffer the consequences. When government spends more money than it takes in, it can print or borrow more money to make up the difference; or lie about it. The gross amounts of FICA taxes reported to the Social Security Administration might be likened to a wage earner having his income automatically deposited into his checking account. His spouse who does the household accounts enters the weekly gross pay of $1000 in the check register and spends it, unaware that her husbands employer has withheld $300 for payment of taxes and other miscellaneous expenses, thus reducing the net deposit to $700. The $300 in debt and/or hot checks may land the couple in bankruptcy court and/or jail. As stupid as this may seem, this is exactly how the Social Security Administration (SSA) and the Internal Revenue Service (IRS) accounts for revenues, expenditures and liabilities of your Social Security taxes. The gross amounts are recorded at SSA and the net (after business expense deductions) cash amounts are received at the IRS. Politicians spend the gross amount, send IOU's to the Trust Funds and leaves the impossible task of reconciling the books to the Government Accounting Office.

 

More importantly, since government admits Social Security has evolved into a program to provide for the public welfare, why is it that DOUBLE income taxes on wages and a THIRD income tax on Social Security benefits provide the ONLY revenues to fund it? Why not a National Consumption Tax, Excise Tax, Corporate General Revenue Tax and/or import duty?

 

The big surprise for "Baby Boomers" and their successors is delivered when they retire and begin withdrawing from 401ks, IRA's, etc. That is when they become aware of the shocking truth, THEY'VE BEEN CONNED! Withdrawals from the retirement schemes are taxed TWICE; the withdrawal is taxed and up to 85% of the same money is taxed again if taxable income is above the thresholds the  income tax on benefits. The tragedy of this event is by the time Boomers learn what the political scoundrels have done to them and can vote them out of office, irreparable damage has already occurred.

 

Note: When a Boomer in the upper middle class with a nominal tax rate of 25% combines that rate with the 21.25 percent tax on the benefit (85% * 25%)the result is a REAL rate of 46.25 percent, (a rate higher than Bill Gates) and significantly higher than the tax rate suffered during employment. Deferred tax retirement schemes are a JOKE and the JOKE is on BABY BOOMERS! WHY ARE THEY NOT LAUGHING? The short answer is "Its not a laughing matter! Legalized theft is not a JOKE! It's a CRIME! A crime where the perps get reelected and the victims are shafted again and again!

 

Social Security Tax Reform (Art#3)