by John Koraska

March 28, 2005 Revised: June 18, 2006

 

For Social Security updates please visit my new website US Public Policy and our new blog!

 

 

Social Security tax and benefit reform are essential to restore faith and financial viability to the broken system

 

Changing the law to mandate investing the Trust Funds into real assets in the private sector is essential to AVOID unsustainable perpetual debt and certain dire consequences. The misappropriation of Social Security Income Taxes by politicians in both parties must be stopped. All laws of questionable constitutional merit that are driving this country further into unsustainable perpetual debt must be changed. In previous articles, it has been explained how Social Security has evolved from an equity based retirement safety net for low to middle income workers to a welfare program that is neither equitable or fair; a program that rewards the wealthy at the expense of lower income employees. The tax and welfare laws now in place are driving this country into BANKRUPTCY. That is a FACT.

 

Is Social Security Constitutional? YOU DECIDE!

 

From the outset, the constitutional basis of the Social Security Act of 1935 was uncertain. The basic problem is that under the "reserve clause" of the Constitution (the 10th Amendment) powers not specifically granted to the federal government are reserved for the States or the people. When the federal government seeks to expand its influence in new areas it must find some basis in the Constitution to justify its action.

 

Title II of the Act captioned: "Federal Old-Age Benefits." provides two types of benefits, first, monthly pensions, and second, lump sum payments. There is no explicit language in the U.S. Constitution, as Amended, that empowers the federal government to provide direct welfare payments to citizens. The Roosevelt Administration with Democrat majorities in both houses of Congress made a determination that Constitutional authority did exist under the tax clause. Presented here are the facts. You decide what they mean! (I have hi-lighted certain words to facilitate easier understanding.)

 

THE U.S. Constitution "(extracts)

QUOTE: (PREAMBLE) "We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

 

(tax clause) Article. I. Section. 8. Clause 1: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; UNQUOTE

 

A majority in Congress and the Roosevelt Administration chose to believe the words in the tax-clause "provide for the common Defence and general Welfare of the United States;" were a sufficient basis for the federal government to provide direct benefits to retired workers qualified under the Act. Words in the (PREAMBLE) made a conscious distinction between the words provide, and promote which certainly raises questions with regard to Constitutional intent that were ignored by the democrats. http://www.house.gov/Constitution/Constitution.html

 

The omission or contradiction in the placement of the word "Promote" in the Preamble of the Constitution or its inadvertent omission in the "Tax Clause" in the constitution is a legal issue that should have been resolved before enactment of the Social Security Act of 1935. The Congress and Roosevelt's interpretation that the authority to provide federal welfare relied on the "tax clause" is questionable. The absence of legal arguments to the U.S. Supreme Court regarding the "direct benefits" issue leaves open to challenge the Constitutionality of Social Security Act of 1935 and today's welfare state.

 

A supporting argument that the interpretation was wrong is supported by the fact that other less important issues were singled out and placed in separate clauses by Framers of the Constitution. If they wanted the Federal Government to provide direct welfare to US citizens they would have stated it clearly and unambiguously. They would have inserted a direct "Welfare Clause" in the document that might read: "The federal government will provide welfare to its citizens." Absence of any such statement lends strong credence to the suggestion that "Direct Federal Welfare" was not included, because they did not want it there. Had they desired a "Direct Welfare" clause they most certainly would not have hidden that intent in the tax clause. Makes no sense. Authors of the Constitution were intelligent, educated, experienced men with time to think about getting it right. It is easier to believe framers of the Constitution knew what they were doing, rather than Roosevelt's finding new meaning of intentions that cannot be found in the Document.

 

Absence of the word "promote" in the tax clause may also be explained by one of two alternatives. Since the word was already in the Preamble drafters of the document did not repeat the word because it could be assumed its repetition to be redundant and it was omitted on purpose. The only other explanation is that it was administrative error.

 

Regardless of interpretation, a full reading of the U.S. Constitution will result in NO ONE finding of a Constitutional authority for the Tax & Welfare mess that exists today. Among thousands of visits to this website, not one comment has been received to dispute these findings.

 

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."

 

No less a legal scholar than Judge Robert Bork (Reagan nominee to the US Supreme Court) appearing before the National Press Club on September 6, 2005 and aired on C-Span on September 12, 2005 stated emphatically that "Social Security is Not Constitutional".

 

I suspect Judge Bork may have been referring to these provisions of Social 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.)

 

Question: What part of the US Constitution or the 16^th amendment authorizes  two income taxes on the same income?

 

Answer: There is no constitutional authority for taxing the same wage or salary income twice. It is therefore unconstitutional because powers not granted to the federal government were reserved for the states and the people.

 

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, 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).

 

The above facts provide irrefutable evidence that "The Social Security Act of 1935" was Unconstitutional from the outset and errors in the enabling statue have compounded with later legislation.

 

Is there anyone reading this that cannot craft a fairer, more efficient and justifiable tax and welfare system than this convoluted mess?

 

EXCISE TAX ON EMPLOYERS

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......(Note: The employer excise tax matched the 1% of the income tax on employee wages.)

 

Curiously, no similar (SEC 803) prohibition was made for adjusting employer (corporate) income taxes by the amount of excise taxes on wages. This peculiarity 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. 

 

HOW Government Conceals FICA Revenue Shortages

 "Injustice Under Law Equals Social Insecurity", John Koraska

 

The revenue shortages created by business expensing of individual FIT & FICA taxes are circuitously concealed by “reverse accounting” at the US Treasury.

 

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

 

With this footnote, 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 taxes as “Contributions”, for public consumption.  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”

 

In 2005, the IRS reported gross collections of $1.1 trillion in individual income taxes and   a net amount of $273 billion in corporate income tax collections. Of the $1.1 trillion in individual income taxes, approximately $550 billion (50%) was collected on an estimated total of $5.5 trillion in US wage and salary income. The IRS collected $717 billion in FICA taxes. 2005 Corporate and Individual Income Taxes  

 

Corporations deduct as business expense all wages, employee taxes (withheld from their checks) and employer matching FICA taxes. The estimated total business expense deduction of employee FIT & FICA taxes is $1.267 trillion ($550 billion - FIT & $717 billion - FICA).  At the typical 35% corporate tax rate, the corporate tax liability is reduced by approximately $443.5 billion dollars. This is $171 billion more than the $273 billion collected from the IRS.

 

This is the legal basis for the above constitutionally questionable corporate accounting rip-off.

 

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): 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

For more information on employment taxes, see IRS Publication 15 (Circular E).

 

 The concealment of FICA income shortages (created by business expense deductions of FIT & FICA) with "reverse accounting" by the US Treasury is almost too astounding to be true. However, I cannot arrive on no other explanation.

 

This dubious accounting technique allows government IOUs to be deposited in the so-called Social Security and Medicare Trust Funds representing cash never received by the US Treasury. US budget liabilities (IOUs) and Trust fund (Assets) is a zero sum game. The only useful purpose of the trust funds is to provide a means of determining and accounting for a measure of benefits due future claimants.  

 

Politicians' propensity to treat your hard-earned Tax Dollars like Toilet Paper must be stopped. The politicians are jeopardizing the good credit of the United States. Enron, WorldCom, Global Crossing; what's next? "US DOLLAR CRASHES!", "U.S. DEFAULTS ON NATIONAL DEBT". This must be avoided, whatever it takes... Lacking a successful political response, the only solution is to join forces by exercising rights guaranteed by the First Amendment to the US Constitution. The First Amendment was written because citizens insisted on a guarantee of their basic freedoms.

 

The First Amendment to the U.S. Constitution states: "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances."

 

The U.S. Supreme Court is co-equal to the Executive and Legislative arms of government. Since politicians elected by the People to represent our interests are not listening, the only recourse to not being heard and obeyed is through the courts. The Constitution is the only protection standing between the People and oppression. The right of workers to retain just compensation for their toil must be defended, whatever the cost.

 

Class action lawsuits filed in State and Federal Courts across the country, I can almost guarantee will get the attention of the politicians. The two major political parties will be forced to focus on real solutions to this mess instead of applying band-aids when a tourniquet is clearly needed to stop the hemorrhage of Tax Dollars and an explosion of Unsustainable Debt.

 

The most amazing and frustrating finding of my research, analysis and publication is that truth does not resonate. It appears that no one wants to know how the federal government has exceeded the power granted to it by the states and the people, nor the tragic results that will occur because of it. The bottom line is, it is not just flawed tax and welfare laws that are destroying the nation; but also apathy and greed. And, the tragic irony is, when the bubble inevitably bursts, those who will suffer most had no part in creating the impending disaster and many of those who did participate will likely grow richer. 

 

"Social Security Reform OR Perpetual Debt? Which do you choose?"

 

TELL YOUR CONGRESSMAN --- THEN TELL THE JUDGE!