Politicians afraid to address Social Security with honesty

Social Security turned 75 this year, having paid its first beneficiaries in 1937. It was conceived under the Social Security Act of 1935 and was established to provide an income to those who had worked and were at least 65 years old.

Since then, Social Security has expanded to make payments to the worker’s family members (if divorced or disabled) and to the disabled. (This is a relatively small but still significant part of the program.) In dollar terms, it is the largest government program in the world and the single greatest expenditure in our federal budget.

Social Security is funded through payroll or FICA taxes on income: 12.4 percent of every dollar earned up to an inflation-adjusted cap ($110,100 in 2012).

The income tax is its much more famous cousin, given its IRS enforcement and annual April 15 filing deadline. Payroll taxes on income generally are withheld from one’s check, making them a lot less obvious.

The income tax has higher marginal tax rates, making it seem more painful. But it also exempts a lot of income from taxation — through various deductions, exemptions and tax credits. As a result, one will be in a relatively high “tax bracket” but will have a relatively low average tax rate.

This explains the common observation — most recently made by presidential candidate Mitt Romney — that half of all workers (“the 47 percent”) don’t pay any (federal) “income taxes.” For example, with only the basic exemptions and deductions, a family of four earning less than $45,400 won’t pay a dime in “income taxes.”

But the same family loses nearly $5,600 to payroll taxes on their income. Often, people imagine that companies are burdened by “its half” of FICA. But firms shift the burden to workers, as surely as gas stations shift the burden of gas taxes to customers. So, although payroll taxes are far less famous, it turns out that they are usually (much) more painful for workers. These workers are not a part of “the 47 percent,” but they’re still paying a lot of taxes on their income.

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