Posts Tagged ‘Income Taxes’

‘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.


A look at taxes in perspective

December 11, 2012
Double click to enlarge

Double click to enlarge

If we return to Clinton-era tax rates, taxes will still be low by historic standards.

Keep in mind that the tax rates shown are only the top marginal rates, paid on income above a certain threshold.  Most people, including the very rich, are taxed at a lower overall rate.

Hat tip to The 21 Blog.

Let the upper-bracket tax cuts expire

April 14, 2010

Chart added 9/9/10

During the George W. Bush administration, federal income taxes were reduced by a few percentage points for all income classes.  But it is the tax reductions for upper income brackets, and not the tax reductions that affected the vast majority of the American public, that threw the government into deficit.

During the Eisenhower years, the top income tax rate was 91 percent.  Millionaires and billionaires didn’t pay 91 percent of all their income in taxes, of course, only that above a certain threshold, and only when they couldn’t find a way to shelter it. During the Kennedy years, the top rate was 70 percent. I don’t advocate restoring those rates, but growth in jobs and wages was a lot better during the Eisenhower-Kennedy era than it is now.

An estimated 47 percent of American households will pay no federal income taxes at all for 2009, a record figure. (These households will, of course, pay sales taxes, payroll taxes and other taxes.)  Some people who worry about rich people paying too much also worry about poor and working-class Americans paying too little; they think the way to provide incentives to work harder is to make rich people richer and poor people poorer.

I don’t think any segment of the population should bear the entire burden of taxation, but you would hardly do that by allowing the Bush-era tax cuts to expire, and the tax rate to revert to 39.6 percent from 35 percent, on income in excess of $250,000 a year for couples and $200,000 for individuals. The 39.6 percent rates did not prevent the wealthiest 1 percent of Americans from increasing both the amount of their wealth and their share of the national income.

Chart added 9/9/10