Payroll Taxes

We will look at the various types of taxes placed directly on the income of the wage earner and see how that affects our beliefs about the tax system.

Updated 5/18/09 draft
  There has been much talk about the fairness of our current tax system. Some people say it should be graduated. Some say flat. All say it should be fair. We start by looking at tax data reported by the IRS for 2006.  

Here we see typical income tax vs. income. The poor pay a rate slightly lower than 10%. The tax rate rises gradually through the middle class to nearly 15%, before jumping to a maximum of 27% for the rich. We notice quickly that income taxes are not consistently graduated. Above $1.5 Million per annum, the real tax actually tends to be regressive, dropping to lower rates as incomes increase. The result is that the superrich are paying a lower rate than those who make over $200,000.


But wait! We failed to consider payroll taxes, which include Medicare and social security. Medicare is a flat tax (1.45%). Social Security has a ceiling amount. Thus, it is regressive for all incomes above the ceiling. Now, we see the poor are paying about a 17% tax rate. The upper middle class are paying about 23%, and the rich are paying about 29%. Now when we look at the regressive slide for the superrich, we notice they are actually paying a lower rate than those who make over $150,000.

But wait, there's more! Each employer is required to pay taxes on the income of every worker they employ. These taxes are also regressive at higher incomes. This can be thought of as money they pay to the government for taxes, instead of paying it to the worker as income. What if we account for what the worker is not getting because the employer has to pay it in taxes on his behalf? Now the poor are paying nearly 25% in taxes, the rich 32%, and the super rich 26%. Due to the regressive nature of total payroll taxes the superrich are paying a total tax rate lower than all those who make more than $20,000. The superrich pay roughly the same tax rate as the poor. The rest of us pay more!


Data Sources:

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More Discussion

  Initially, we thought we were asking, "Is it fair for the poor to pay nothing, while the rich pay 27%?" but now that we account for all the payroll taxes, the question becomes, "Is it fair to demand over 25% from the middle class, while the superrich pay less than 25%?" We also now ask, "How many people are being pushed into poverty by the high tax rate placed on the lower wage earners?" Our fear of impoverishing people through taxation has led us to lower taxes on those who are not even at risk of falling to middle class through taxation, while keeping taxes on the lower income families high enough to push them towards, even into, poverty.  

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