Look for Some Bad News In January Paychecks : Taxes: The most unfair of them all, FICA, rises again, naturally hitting workers the hardest.
Happy New Year and read my lips: As of Jan. 1, your taxes go up. For the 15th time in 27 years, the new year will bring an increase in the FICA payroll tax, which supposedly finances Social Security and Medicare. This time the tax rate will rise from 7.51% to 7.65%. Including the employer’s matching share, the FICA tax rate of 15.3% will be higher than the basic income-tax rate of 15%.
The top wage on which FICA is collected also will go up, from $48,000 to $51,300. So the maximum annual FICA payment will rise from $3604.80 to $3924.45--$7848.90, including the employer’s share. That’s almost a 9% hike.
While President Bush keeps saying, “no new taxes,” the FICA adjustment amounts to a quiet tax increase of almost $15 billion. Since 1978, FICA tax rates have risen by 30%. Most of this increase is the result of a “reform” signed with a flourish by Mr. Tax-Cut himself, President Ronald Reagan, in 1983. In fiscal 1990, FICA is projected to bring in $389 billion--four-fifths as much as the individual income tax. For most taxpayers, FICA takes more money than the income tax.
It would be hard to design a tax more unfair than FICA. Unlike the income tax, it has only one rate and no exemptions. As a result, a minimum-wage worker pays the same share of income as someone making $50,000 a year. Someone making $60,000 actually pays a smaller share, because the tax stops at $51,300. And someone whose income is from dividends, interest and capital gains pays nothing, since the tax applies only to wages.
The FICA tax looks no better from the supply side. It is a more direct disincentive to enterprise and employment than the much-abused capital-gains tax. The entrepreneur who is starting a company may have to pay a capital-gains tax, some day, if the company prospers and she sells her shares. But she must pay FICA on her payroll from day one, whether she prospers or not. The income tax doesn’t prevent the creation of entry-level jobs, because low-wage workers pay no income tax. But everyone pays FICA. A job must be worth 15% more to an employer than it is to an employee before anyone gets hired.
In January, President Bush will try again for a capital-gains tax cut. What better way to counter it than to propose a “supply-side tax cut for working people”: a large slice in the FICA levy. A 40% cutin the worker’s share of FICA, for example, would be worth $765 to a person earning $25,000 a year--$1530 to a working couple making $25,000 each. This would go down well compared with Bush’s capital-gains cut, which would give an average saving of $25,000 a year to people making more than $200,000 a year and nothing to most Americans.
The cost? About $75 billion in lost revenues. As it happens, that is the size of the projected Social Security surplus for 1991: the amount by which revenues will exceed expenses. This surplus is supposed to be going into a kitty to finance the retirement of the baby boomers in the next century. But the kitty is a myth. The money is being used to finance today’s government expenses. Next year’s Gramm-Rudman deficit target, for example, is $64 billion. Even if we hit it, the real deficit--not counting that $75 billion FICA surplus--will be more than double.
There is no way society as a whole can save money for its future retirement. The resources retirees consume in the year 2025 will have to be produced in the year 2025 or thereabouts. All we can do is take steps now to increase our future productive capacity. That way, retirees’ claims on 2025’s resources needn’t reduce the claims of then-current workers. If the Social Security surplus was increasing productive investment--even indirectly, by reducing the government’s demand for credit--it would be achieving that purpose. But it clearly isn’t. It’s enabling the government to avoid fiscal reality.
When it is time to draw down the kitty, taxes will have to be raised to pay off the IOUs it contains. (Or the promise to retirees will have to be broken.) The situation will be exactly the same as if the kitty didn’t exist and taxes had to be raised to pay retirement benefits directly. With this difference: For a generation, the government will have been financed in large part by a regressive tax.
Of course, if you cut FICA taxes by $75 billion, you still need to replace the money, or you will only have made matters even worse. It’s tempting to say the magic words, “peace dividend.” But that’s already been spent several times over on the nation’s Op-Ed pages. An across-the-board 10% income-tax surcharge would almost pay the bill, and would leave 19 of 20 families better off (which shows you how unfair the FICA tax is). Or we can start hitting the fiscal wish list. Every revenue buff’s got one. Mine is available on request.
Responsible people may be thinking it wouldn’t be a bad idea to raise some new revenue without squandering the money on a tax cut. But Ronald Reagan and George Bush have relieved the Democrats of any obligation to be responsible in fiscal matters. The past decade has not been one of tax cuts. It has been one of replacing taxes on high incomes and capital with taxes on low-income workers. Rectifying the abuse without actually increasing the deficit is as responsible as anyone reasonably needs to be.
