I have some questions for the tax cognescenti on this blog:

1) How are the Medicare taxes and the portion of the Social Security tax any one person pays calculated?

2) From what revenue source does a person pay their Medicare and Social Security taxes?

3) How does Paul specifically pay his Medicare and Social Security taxes?

4) How are the billions of dollars collected by the federal government from sources other than income taxes spent? Other sources would be capital gains, dividends, corporate and small business income, excise taxes (gas, telco, etc.), tariffs, and others.

I'm not sure on the exact numbers but I think I'm pretty close.

1) Social Security is 12.5% of your gross income. Your employer pays half and you pay half. If you're self employed you pay both halves. Medicare is something like 2.2%.

2) see 1

3) FICA out of my paycheck

4) I'm assuming that capital gains, corporate, small business income, excise taxes and other tariffs go into the general fund just like income taxes. The Social Security portion of FICA goes into a separate fund. This fund has been running at a surplus for decades and the money has been borrowed by the general fund and spent. This borrowing is guaranteed with Treasury Bonds and the Social Security Administration is prohibited from selling or trading those bonds. Unlike foreign banks or other bond owners.

So income taxes and payroll taxes (Medicare and half of Social Security) are both calculated based on a person's income, and then paid to the government through our income directly through a deduction in our paycheck.

Given the above, what is the meaningful distinction between an income tax and a payroll tax? As taxpayers, what does it matter to me that one tax is called "income" and the other is called a "payroll" tax?

Doesn't it all come from my income, regardless of what it is labeled?

Margaret,

People can have income without having a payroll check. Thus people can pay income tax without necessarily paying "payroll" taxes.

For example, Joe SixPack works for the man and gets a paycheck every 2 weeks, with all applicable tax deductions. His employer, meanwhile, diverts all his profits (i.e. income) into offhsore bank accounts with tricky accounting and pays NO taxes and even qualifies for corporate welfare. Poor Joe has no choices while his employer milks the system for every penny he can. America and Americans suffer because of the gutless employer's actions but America and Americans benefits from good old patriotic Joe. Too bad Joe is such an idiot that he doesn't see how he and the country is getting shafted by his employer.

The terminology "payroll" is because it also taxes the company's payroll. Meaning your employer is required to match. Unemployment taxes would be another payroll tax.

Gonzone,

From what revenue source do you pay your share of Social Security and Medicare taxes?

From what revenue source do you pay your income taxes?

Are these sources different or the same?

Editorial from The Wall Street Journal

"Who Pays What"

26 April 2005
The Wall Street Journal

(Copyright (c) 2005, Dow Jones & Company, Inc.)

Even the most ardent class warriors have no choice but to concede that the U.S. income tax code is steeply progressive -- that is, that it soaks the rich. You know the numbers: The richest 1% of all Americans pay 33.7% of all federal income taxes, even after the Bush tax cuts, while the bottom 50% of earners pay a mere 3.6% share.

But wait, our friends on the left quickly add, what about the payroll tax? Low-income folks pay the full 12.4% FICA tax on all of their income, while that levy is not applied this year on income above $90,000 (a level that rises each year with inflation). Thus, we are told, the U.S. tax system really isn't very progressive and the government would be well advised to raise taxes further.

Well, not so fast, Robin Hoods. An IRS study by a trio of tax wonks shows that, even after including Social Security taxes, the overall tax burden grew more progressive from 1979 to 1999. And while that burden became a tad less progressive after the Bush tax cuts of 2001 and 2003, the rich and upper middle class continued to pay far and away the bulk of U.S. taxes.

The nearby bar chart tells the tale. It is based on an analysis of IRS data by Michael Strudler and Tom Petska of the IRS and Ryan Petska of Ernst and Young. The authors found that over the course of 20 years the richest 0.1% of all taxpayers saw their overall tax share double -- to 11.05%, from 5.06%. The top 20% of all earners also saw their tax share increase sharply to more than two-thirds of all taxes paid. Meanwhile, the bottom 20% of earners paid only a tiny share in 1979 but saw even that share cut in half 20 years later -- including payroll taxes.

As for the windfall for the wealthy alleged to have been provided by the Bush tax cuts, the authors show that the tax share paid by the superrich fell only marginally even after the 1999 data were adjusted for the lower 2003 tax rates. The richest 0.1% would have still paid nearly double the share they paid in 1979 -- that is, double what they paid before the Reagan tax cuts of 1981, which were also supposed to have favored the wealthy. As the authors note, "The progressive nature of the individual income tax system is clearly demonstrated."

All of this is worth keeping in mind as we enter the rough sledding of Social Security (and later tax) reform. AARP and many politicians would love to "solve" Social Security's long-term financing shortfall by raising payroll taxes, especially the $90,000 income limit. But that would be socking it to taxpayers who already bear an outsized share of the American tax burden. The U.S. tax system is already "progressive" enough.

---

Still Soaking the Rich

Tax shares by percentile income classes, 1979-1999, including Social Security taxes

1999
1979 1999 (@2003 rates)

Top .1% of earners 5.06% 11.05 9.52
1-5% of earners 14.69% 16.84 17.75
Top 20% of earners 58.28% 68.17 67.47
Lower 20% of earners 1.22% 0.63 0.65

Sources: Michael Strudler and Tom Petska, IRS; Ryan Petska, Ernst and Young

As Atrios put it, both of these articles will make you smarter:

http://mediamatters.org/items/200504260003

and

http://www.washingtonmonthly.com/archives/individual/2005_04/006194.php