I know I am going to lose most readers at the outset here. Two matters are involved, taxes and arithmetic. It’s not complicated, just harsh. So please bear with me.
Above is the top portion of IRS form 941. It is the vehicle by which most government revenue is raised. It is seldom seen by the public, who are more familiar with their W-2’s and 1040’s.
It is frightening to talk to people about their taxes, as the level of ignorance is stunning. Perhaps the schools could educate kids in the basics … man, listen to me! Where is my head at? H&R Block, a company that exists primarily because of the ignorance of low-income Americans, would be out of business tomorrow if kids learned a scintilla of the basics of one of the most important economic aspects of their lives, their tax.
Jumping to the actual calculations on the form (bear with me – it is not complicated!), pay special attention to lines 3, 5a, and 5c. These are the meat cutting lines that lop of the largest part of our income.
Line 3 is Federal income tax withheld from employee paychecks. This is the visible portion of the iceberg. For most people, it is the smallest part of their federal tax. It can be fiddled with on the 1040, and since over-withholding is built into the system, most people get a refund each year. (Tax preparers are judged by the size of refunds. Don’t be fooled. It matters.)
But the rubber meets the road on line 5a. This is the Social Security tax. Note that it is NOT the advertised 6.2% of your income withheld from your paycheck, but rather 12.4%. Where does the additional 6.2% come from? You. If you have ever heard the expression “hidden tax,” this is the mechanical means by which they pull it off. They call the additional 6.2% the “employer’s share,” but the employer has nowhere to go for the money but into the value produced by his employees. The additional 6.2% is detoured around your W-2. It’s hidden. Did I say that already?
Line 5c is the same magic, but a smaller tax , the Medicare tax. Employees see 1.45% taken from their check, but 941 demands 2.9%. Again, half is hidden.
Without showing my work, I’ll skip to the bottom line. Here is the percentage of income tax called “payroll tax” taken from all working Americans: 14.2%.* Note I said “payroll tax,” and not “income tax.”
You are not allowed to monkey with payroll tax on your 1040. It only appears on two lines there, one for self-employeds like me, and a rarely used line for people paying too much due to multiple jobs. 14.2% is hard-wired into our system. It is sacrosanct. It is added to your income tax. For most, this means that their top marginal tax rate is not the advertised 15%, but rather 29.2%.
Yes, most Americans pay almost 30% of their income in federal tax, and do not know it.
Oh yeah, two final things: That 14.2% is advertised as FICA, or Social Security and Medicare, but the money is thrown into the General Fund by a device called the “Unified Federal Budget,” invented while LBJ was in office to hide the true cost of the Vietnam War. Payroll tax is used for everything.
And finally, only wage earners and the self-employed pay the 14.2% tax. Investors are exempt.
The federal income tax is usually the smaller of the two taxes paid by most people. In fact, many don’t pay any income tax at all. But all of us pay the 14.2%. This allows the Mitt Romney’s and Big Swede’s of this world to complain that 47% of Americans pay no tax.
That’s bullshit, and why I wrote this. (And don’t even talk about sales, state income, property, gasoline taxes …)
*If you’re interested, 15.3/107.65 = 14.2%.