By C. Carl Pegels
The FICA (Federal Insurance Contributions Act) tax, also known as the Social Security tax, is the most regressive tax currently imposed on the lowest-income earners.
Currently FICA taxes are only charged on earned incomes below $118,500 per year. This limit is discriminatory to those earning less than the limit. The current policy also imposes a regressive FICA tax on low-income workers. The tax is charged only on earned income and not on investment income. In fairness to all, it should be applied to all income.
FICA taxes are used to provide Social Security income and cover Medicare costs for retirees and for disabled people of all ages. Both wage earners and investment earners are entitled to benefit from Social Security and Medicare. Since all are entitled, why should all not provide their fair share of the costs through a fairer taxation system than the one now in effect?
Based on the above reasoning it is proposed to lower the FICA tax on low-income earners without penalizing them with lower Social Security benefits when they retire. Presently all income earners pay 7.65 percent of their income in FICA taxes. A fairer new rate schedule could be zero or possibly 1 percent for those earning less than $30,000 per year, with a gradual increase to the current rate for those earning over the above amount. At annual incomes over $50,000 per year the current rate could be maintained.
The above proposed rates are only an example. Tax experts can arrive at a plan that is much fairer than the present regressive taxation plan.
It is imposed on people who typically do not have the knowledge or expertise to argue against the unfair regressive taxation they are exposed to.
Implementation is fairly simple by making the adjustments at the end of each year when all income earners must prepare an income tax return. It will be relatively easy to determine the appropriate FICA tax for each individual. Any excess contributed through payroll withholding can be reimbursed by the IRS.
American income tax policy has been allowed to reach its present form because of the theory held by many politicians that the more wealth is accrued by the rich, the more economic development there will be for the overall economy.
What is ignored is the fact that not all wealthy people are engaged in economic development, but instead many just accumulate their net incomes, while spending relatively little in the economy.
One rational justification for higher taxation of high-income earners is the robust economic and social environment our nation provides for them to earn their higher incomes.
C. Carl Pegels is professor emeritus in the School of Management at the University at Buffalo.