Tax system benefits only the rich

C.F. BAUMGARTNER
SPI GUEST COLUMNIST

The squeeze on the middle class is real. It began with the bailout of Social Security (FICA). In 1983, Social Security appeared to be in trouble. Congress acted to make certain it remained solvent.

Many Americans believe that FICA is a contribution, which goes into their retirement account. That is not so. FICA taxes finance monthly payments to retired Americans. It is not a savings account.

Financial planners advise us that paying taxes sooner than later is unwise. Paying a tax sooner rather than later makes our present and future less prosperous.

From 1984 to 2002, the government collected $1.7 trillion more in FICA taxes from wages of Americans making under $87,000 (income exceeding $87,000 is exempt from FICA) than it paid to beneficiaries. How much is $1.7 trillion? Enough to have paid off all the U.S. consumer debt at the end of 2001. Today three of four families pay more in FICA taxes than income taxes.

Corporations pay dividends from after-tax profits, and shareholders must report dividends as profits, which means dividends are twice taxed. President Bush has declared the double taxation of dividends fundamentally unfair.

He didn’t mention FICA, but it is also double taxation. FICA taxes apply to wages that have already been subject to income tax. If double taxation of dividends is fundamentally unfair, he can make a stronger case against FICA taxes because they affect more Americans.

Ronald Reagan was elected president in 1980 because he promised to reduce taxes. The highest tax rate in 1980 was 70 percent, and 40 percent was common for some in the middle class.

Congress passed the biggest tax cut in history using the rationale of supply-side economics. Fewer taxes would lead to more investment and, thus, to economic growth. It failed. By 1982, the deficit was $343 billion, three times what it was when Reagan took office, and unemployment had reached 10 percent. Reagan’s solution? Raise the price of a gallon of gasoline 5 cents.

By 1983, Social Security was in trouble. Congress increased Social Security taxes more than was needed in order to have a surplus ready for the retiring baby boomers 30 years in the future.

The late Sen. Daniel Patrick Moynihan saw the Social Security scare as bogus and called the proposed increase in taxes thievery, which masked the drop in revenues caused by the Reagan tax cuts for the rich. The “bailout,” however, took place. FICA taxes now take $5,400 from every worker earning up to $87,000, and his employer pitches in the same amount. In 1970, the figure was $327.

The cumulative effect of FICA taxes and income taxes makes the system regressive, not progressive. Workers earning up to $87,000 pay 15.3 percent, while the $500,000 executive pays 5.6 percent.

Here is the truly egregious rip-off. Congress created a trust fund for the increased taxes. It would earn interest and be ready for the boomers. Instead, surplus FICA taxes went to pay for the day-to-day operations of the government. There is no trust and no fund.

Since 1983, the government has spent $5.4 trillion more that it took in from income taxes, estate taxes and excise taxes. However, government debt grew by only $3.6 billion because Congress allowed surplus FICA taxes collected from the wages of Americans earning less than $87,000 to finance a rip-off of the middle classes by the wealthy, and it’s all perfectly legal.

(emphasis added by me)

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