Posts Tagged ‘Income tax’

‘Entitlements’ and welfare: the difference

December 2, 2014

There’s a big difference, easy to not notice, between “entitlements”, such as Social Security and Medicare, and “welfare”, such as Temporary Assistance to Needy Families.

Social Security and Medicare are paid for through special earmarked funds, which the people who benefit from these programs pay into.  They are different from welfare programs, which are paid for through general tax revenues, mainly the income tax.

Gary Flamenhaft, a guest poster on the Club Orlov web log, has a good explanation of how this works.

Some people criticized my claim about the Tea Party’s reason for shutting down the government: “They thought that the welfare system is bankrupting the country.  This is a laughable claim, because welfare spending looks negligible when compared to military spending.”

They pointed to the $850 billion Social Security program, the $821 billion Medicaid and Medicare program, and the $521 billion in other mandatory programs, calling them “welfare.”

There is just one problem with this critique: none of these programs are funded using the income tax. They are called entitlements, and the way you entitle yourself to them is by paying into them using a special payroll tax. Same goes for unemployment insurance, by the way.

entitlements720All of these are funded using something that is called a tax, but in essence they are joint savings accounts that you hold in common with many other people, with some rules on how the money is then spent on those who have paid into them.

Clearly, the Tea Party doesn’t like these joint savings accounts either.  We still need to distinguish them from “welfare,” or we won’t even know what we are talking about.

If you are not aware of this, the employer and employee each pay half of the payroll tax to the government, although if you are self-employed—lucky you!—you get to pay both halves.  [snip]

If you look at the US budget, on Table S-4 p. 168, you will see the distinction between mandatory programs paid by payroll tax and “appropriated” programs paid by income tax. There may be some overlap, but this gives you a general idea:

  • Subtotal, mandatory programs: $2,234 billion.
  • Subtotal, appropriated programs: $1,174 billion.


High income, no taxes

June 11, 2012

We hear a lot about low-income American families who pay no federal income taxes, but in 2009, the last year for which figures are available, there were 20,752 Americans with incomes above $200,000 who also paid no federal income taxes.  There were six people among the 400 richest Americans, taking in more than $200 million a year, who paid no taxes.  The number of untaxed, high income taxpayers increased sharply during the past decade.  Here are the year-by-year figures for people incomes of $200,000-plus a year who paid no taxes.

1999 – 1,605

2000 – 2,328

2001 – 3,385

2002 – 2,959

2003 – 2,824

2004 – 2,833

2005 – 7,184

2006 – 8,252

2007 – 11,600

2008 – 22,256

2009 – 20,752

I don’t want to exaggerate the significance of this.  The 20,752 were around 1/2 of one percent of the 4 million (out of 140 million) Americans who filed tax returns showing incomes above $200,000 a year.  Some may have escaped taxes for one year only because of some extraordinary event.  I don’t know how many escaped taxes year after year.  And you have to take inflation into account.  Back in the 1970s, $200,000 was real money.

Even so, I am more bothered about rich people not paying taxes than I am about poor people not paying taxes.  I don’t think it would be a burden on somebody with a $200,000 income to pay taxes at the same rate as I do.  On the other hand I’m not eager to tax somebody trying to support a couple of children on an income of $15,000 a year, which is what you would get working minimum wage, or to take away the Earned Income Tax Credit, would would raise that income to a hardly-lavish $20,000 a year.

Recall that the Earned Income Tax Credit and the Child Care Tax Credit were originally conservative Republican proposals as substitutes for welfare.  Instead of taxing people or giving them public assistance, why not reward work?  That seems reasonable to me.  What doesn’t seem reasonable is exempting people from taxes because they get their income from sources other than actual work.

Click on The Fortunate 400 for an article by David Cay Johnson on taxes paid by the 400 top U.S. income earners.  Only a few pay no taxes at all, but on average they are taxed at very modest effective rates.

Click on A Broken Tax Code for a report by the Committee for a Responsible Federal Budget.

Click on Rich Nontaxpayers for an article by Bruce Bartlett in the New York Times.

Click on The Minimum Wage and Making Work Pay for the case for raising the minimum wage and the earned income tax credit.

Cutting off your nose to spite Obama

August 19, 2011

A friend of mine tells me that his son, the owner of a successful business, has vowed that if the Bush tax cuts are repealed, he will keep his income below $250,o00 in order to keep the government from getting any revenue from the increased rates.  I have heard of other people who say the same thing.

Consider the logic of this.  The current top tax rate is $350 on every $1,000 in income over and above $250,000 a year.   If the Bush tax cuts are allowed to lapse, the person will have to pay $396 for every additional $1,000 over and above $250,000.  So the son is saying that it is worthwhile to give up $604 in income in order to prevent the government from getting an additional $46.

It goes to show that not everybody in business makes economic decisions based on economic incentives.   What would this person have done during the Eisenhower years, when the top tax rate was (in theory) 91 percent or the Nixon years when it was (in theory) 70 percent?