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Don’t Forget Payroll Taxes

I was happily reading Arthur C. Brooks’s article in the May 28 edition, agreeing all the way, until I hit the point at which he picks up what I will call the Rush Limbaugh line of argument on federal taxes: “In America today, the top 5 percent of earners pay 59 percent of federal income taxes while earning 35 percent of the income.”

The math is, while technically correct, misleading. “Federal income taxes” do not include payroll taxes, which, despite the recent cut in them, still accounted for 40 percent of all federal revenue in 2010 — just shy of the 42 percent that federal income taxes produced. Further, an employee earning up to $110,100 per year is paying payroll taxes on every dollar he earns, whereas deductions can be taken against federal income taxes. And after $110,100, payroll taxes disappear completely: A $220,200-per-year earner is paying payroll taxes on only half his income.

In addition, a $50,000-per-year worker is told that only half his payment for Social Security and Medicare counts. The other portion is called the employer’s share. I would submit that the $50,000 earner would be earning more if his employer didn’t have to pay these taxes, so the whole total should be counted toward his tax burden, but that wouldn’t serve the “half the nation is on welfare” argument that conservatives seem to like so much.

I have never in my life voted for a Democrat. I cannot vote for a party that supports abortion, and I am disinclined to back a party that wants wholesale redistribution of wealth. But, sadly, I am becoming equally disinclined to side with folks who make arguments like this one.

Joe Hainthaler
Lancaster, Pa.

Arthur C. Brooks replies: It is quite correct that low-income earners pay payroll taxes, and it is true that they pay a higher percentage than the rich do, given that the system is capped and the tax is flat. The system was designed this way precisely because it was intended not as a pay-as-you-go arrangement, but rather as a forced-savings plan. The fact is, however, that Social Security and Medicare have become middle-class welfare programs, entailing large transfers to the median, middle-class retiree, as my American Enterprise Institute colleague Andrew Biggs has argued. This is one of the forces driving America in the direction of a European-style debt crisis.

We should not compare payroll taxes with federal income taxes, which are designed to pay not for private retirement, but for public goods. Today, according to the Heritage Foundation’s William Beach and Patrick Tyrrell, 49.5 percent of non-dependent Americans pay no federal income tax. It is dangerous when half our citizens have effectively no “skin in the game” in paying for national defense, for our nation’s infrastructure, or for programs for the truly needy. Two-thirds believe everybody should pay something in federal income taxes, according to the Tax Foundation. There is a tipping point between being a society of makers and being one of takers, beyond which, we rightly sense, our nation will no longer be the same.

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