Posts Tagged ‘payroll 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.