In response to Web’s post on the 53%, wherein Web points out that even the 43% who “pay no taxes” contribute in the form of payroll taxes, Brandon Berg asks:

Are we agreed, then, that Social Security and Medicare are welfare? Because if they’re insurance programs, then the contributions aren’t really taxes.

It’s an interesting question. Social Security and Medicare are both sold as (mandatory) “insurance programs” instead of tax and welfare*. For the sake of this post, I am going to focus on social security, though most of the arguments carry over.

There are two basic possible answers to this question:

  • No, it’s insurance. The payouts aren’t “unearned” because you have to put in in order to take out. And what you get in return will correspond roughly with what you put in. If you have a low-wage job or an uneven job history, your social security checks will be smaller than if you work regularly at higher wages. These payments are made without regard to need (there is no “means-testing”) and high-earners do not pay into the system above a certain amount (roughly $107k) because their payout checks will not correspondingly go up upon retirement.
  • Actually, it’s welfare. It’s a wealth transfer from the young, who are paying out, to the old, who are receiving. The original recipients did not put any money in. The correspondence between pay-in and take-out is rough at best. The revenues generated from the payroll taxes are not treated especially differently than other revenues.

People tend to make arguments on either side of this as it suits them. I am, in fact, no different. I tend to get aggravated when people talk about the hypocrisy of folks who decry “hand outs” but cash the social security checks. My reasoning is, basically, that they put money in their entire working lives and therefore what they are receiving is not a “hand out” as much as a social insurance payout. At the same time, I take a view similar to Web’s with regard to the 53%/47% question: If you pay FICA, you pay taxes.**

Is this contradictory? In a way, yes. If someone pays FICA and only FICA to the federal government, and social security is an insurance program, then they are paying insurance and not taxes. And if someone is collecting a social security check that they are not presently working for, they are in fact accepting hand outs not much different than the person on food stamps that they are criticizing because the money they put in actually already went out to someone else or into some other program and certainly wasn’t earmarked for them. So I guess I am having it both ways.

But that’s because it is a complicated question. And I guess, to some extent, I can’t entire view it as an either/or proposition. The income is a tax, but the outgo is an obligation of sorts. And the full name of FICA is the “Federal Insurance Contributions Act tax”, containing both the words “tax” and “insurance.” So it was intended to be both, at least to some extent.

This is an unsatisfactory answer because it lets people (like me!) make arguments on whichever side of the hybrid is more convenient. While I tend to believe my parsing is justified, I get annoyed with people on the other side of various issues, defending social security as an insurance program but then at the same time suggesting that means-test it or criticizing people for accepting the payouts. Or alternately, arguing that FICA taxes “don’t count” because they’re not real taxes but then arguing that the things they pay for are “entitlements” (and therefore, tax-based). I’m not sure that there is any way around this, though.

Some have suggested that we dispense with the “insurance” aspect of it, collect it the same way that we collect other taxes (ie less regressively). But, except when it’s not, the illusion that it is its own thing is too convenient to get rid of, ultimately. I suspect that, as we look for ways to tighten the budget, we will start doing more and more things that make it seem like tax-and-welfare (lift FICA caps, means-test). But I don’t think we will ever stop calling it insurance.

* – Web questioned how we define “welfare.” For the sake of this post, coinciding with what I believe to be Brandon’s intent, we will define welfare as “Money from the government, either to the recipient or directly to somebody else specifically on the recipient’s behalf, spent on something other than basic infrastructure, which the recipient did not earn nor do anything positive to entitle themselves to it.” It’s not a perfect definition and subject to interpretation on the meanings of “basic infrastructure” and “positive,” but it will have to do for now. Perhaps at a later point we will explore the subject more thoroughly.

** – And arguably, even if we didn’t actually call it a tax, it is psychologically indistinguishable from a tax. My wages from substitute teaching are so low that almost no money is taken out by the federal government in the form of direct income tax. But when I look at the difference between my gross pay and how much I take home, I think “tax.” The same was true when I was a teenager working at minimum wage.

-{This is a political issue and there’s certainly no way around that. So this is not one of those “no politics” posts. I do ask, however, that we refrain from presuming that those who disagree with us are lying, stupid, selfish, or less good and noble people than we are. I do suggest that people are using terminology out of convenience, but I do not suggest that any particular side is being fundamentally more dishonest than the other. It’s easier to discuss things when we operate from this perspective.}


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28 Responses to Should FICA Be Considered A Tax?

  1. A 4 says:

    #
    It took me a while, but I was able to find a comment I made here long ago. The point was that you can get any answer you want, depending on how you look at the tax data. Is it possible that all viewpoints are correct? I’ll post my original comment below.

    A 4

    You know what’s neat? You can get pretty much any conclusion you want with tax numbers, depending on the metric you use (compare to inflation or share of income, or share of total revenues, etc., etc.)

    For revenue numbers that include state and local revenues, you can go here:
    http://www.usgovernmentrevenue.com/numbers#usgs302

    Comment by A 4 — February 15, 2011 @ 4:03 pm

  2. trumwill says:

    Thanks for taking the time to fish that up. It can be hard finding old posts and comments. Particularly old posts, some of which were eaten by Langoliers and so you can spend hours and hours trying to find a post that’s not there. So you never know when to give up.

  3. Brandon Berg says:

    I think the real question isn’t really, “Does this person pay taxes?” But rather, “is this person, on net, paying more in taxes than he’s getting back in government spending?” If you’re paying $1,000 in taxes and getting $5,000 in benefits every year, then yeah, you’re technically paying taxes, but you might as well be paying nothing and getting $4,000 in government spending for free.

    I suspect that well over half the population, averaged out over the course of their lives, are getting more in government spending than they’re paying in taxes.

    Now, there’s legitimate room for debate on how exactly spending on public goods should be accounted, but there are lots of people whose accounts are very clearly skewed to one side of the ledger or the other.

  4. Brandon Berg says:

    By the way, while Social Security is kind of a gray area because benefits are loosely related to payouts (though skewed such that there are sharply diminishing returns), Medicare is straight-up welfare. Everyone gets exactly the same level of benefits, regardless of how much or how little you pay in, and because there’s no cap on the tax, there can be literally orders of magnitude differences in how much people pay in.

  5. web says:

    A4 – that was the genesis of my original post concerning “the 53%”, which I consider a very dishonest tactic in the vein of the old “lies, damn lies, and statistics” quotation (indeed, I used that as the title of my post).

    Brandon – The ultimate idea which conservatives are trying to play on in their class-warfare mentality is “waah, a bunch of people aren’t paying, they vote to raise taxes but they aren’t affected by tax raises.” Thus they have to cast as wide a net as possible, to assure their base that “those people” aren’t paying in to the system.

    Nevermind that in the year 2000, the number of people who had no income tax liability was only 30%, and the number rose sharply as a result of the Bush Tax cuts. Nevermind that many of these people have no tax liability even making $90k/year because of the standard deductions for kids. The rhetorical device is that “those people”, meaning “the people republicans/teapartiers/so-called-conservatives don’t like”, are a bunch of “leechers” who aren’t contributing to society.

    This in part leads to the next problem I’ve had with it lately, which is the level of hate and abusive language from the right wing concerning the other side. Listening to the radio on the way home from work yesterday, I’d have thought I was in some crazy dictatorship or autocratic regime, with the right-wing talk host talking about the local protesters as “fleabaggers” and insisting that the local cops should “go in with hats and bats, beat them up and arrest them all.” Nevermind that their “crime” was standing on a local bridge – a public walkway – and holding up protest signs in a nonviolent way; he wanted them arrested and beaten up merely for expressing a difference of opinion.

  6. A 4 says:

    Why are there so many ways to interpret tax data? My guess is that we all want tax policy to be fair. As a society, we do not know what “fair” means. It makes sense that people would define fair differently, but I don’t even have a good idea what fair means to me.

    “…people have no tax liability even making $90k/year because of the standard deductions for kids”

    {Redacted by Trumwill at request of author} Do we want to subsidize child rearing that way? Is it fair to do so? And how do you italicize for quotes, anyway?

    A4

  7. trumwill says:

    Let’s please steer clear of “the other side is lying” or “the other side is acting reprehensibly” arguments.

  8. A 4 says:

    Trumwill, I didn’t intend to do that. Can you delete the first two sentences from my final paragraph? They are not necessary.

    A4

  9. web says:

    A4,

    I for one have no problem with society “subsidizing” child rearing in that way. Raising a child is expensive. Societally, we should have an interest in the next generation. A tax deduction for those whose income is devoted at least in part to the rearing of the next generation – whether they be genetic children, adoptees, fosters, or some other form of dependent – is not a bad thing. Now, if you believe that such a deduction should include means testing (e.g. try to ensure that those receiving it really NEED it in order to prevent perceived waste), or that such a deduction should be lower or higher than it currently is, then that’s another discussion which I’m entirely open to engaging in.

    That being said, I do have a problem with those who insist that people whose net income tax liability is zero are “leeching” if they are currently receiving a tax deduction for child rearing. That seems to me both insulting to the people raising children, and to the intelligence of the conversation as a whole.

  10. trumwill says:

    Though I agree with Web with regard to tax breaks for kids, if your household makes $90k, I think you need to be paying more than just payroll taxes. Depending on how you break it down, you’re looking at the top quarter or third of earners. I don’t think these are the people that are paying no federal income taxes. If they are, I don’t think they should be, even with kids.

  11. trumwill says:

    I think the real question isn’t really, “Does this person pay taxes?” But rather, “is this person, on net, paying more in taxes than he’s getting back in government spending?” If you’re paying $1,000 in taxes and getting $5,000 in benefits every year, then yeah, you’re technically paying taxes, but you might as well be paying nothing and getting $4,000 in government spending for free.

    I think this complicates things pretty considerably. Just about anybody under 18 would qualify as a recipient. Which, while technically true, I don’t consider to be illuminating. Add on top of this the fact that I believe that the entire nation benefits monetarily from the fact that we educate our kids (to some degree, anyway).

    Now, we can average it out over the course of our lives, as you mention, but in that case somebody that dies in their twenties was a recipient merely because they didn’t have time to put back in what they took out. And somebody that dies just after retirement might end up ahead simply because they never took out what they put in to social security.

    That’s not to say that there isn’t a difference between someone that lives most of their lives collecting disability and another who works until the day they die, but rather that it’s a pretty complicated analysis.

    On the whole, if we could somehow make the analysis, I would expect that you are mostly right that far fewer than half put in what they take out. It might even be a staggering amount, depending on how we were to calculate. But that’s going to have a lot more to do income inequality than anything else, in my view. And I’m not sure how you get around, absent a libertarian ideal where almost nobody gets to take out. Which, of course, is likely what you are driving at :). But as far as fairness-in-taxation, skin-in-the-game, and so on, I don’t consider it particularly helpful.

  12. A 4 says:

    I looked up the standard exemption for children. It’s $3,650 per child*.

    I wasn’t trying to debate the tax breaks for children, though.

    Rather, just pointing out that I am not fully comfortable with using the concept of “fair” for making tax policy. Is it fair that people with children are not taxed on a small portion of their income? Sure – as Web points out, they have expenses that I do not. Is it fair that someone with lots of kids is not taxed, when I pay quite a bit? Not really – it’s not my fault they have so many. Is it fair that I pay a lot in school taxes when I do not have children? No – that money is used for people with children, but Yes – I have a vested interest in an educated population. If I get something, but not as much as actual parents, should I pay less? It’s a maze only a few steps in, when your basis is “fair.”

    A4

    *I bring this up because I don’t know if the $90K no tax example is at all common, or is it kind of like the hypothetical “welfare queen” that people argue about, but may not exist.

    P.S.: Trumwill, thanks for the deletion. I never aim for snark.

  13. Kevin says:

    My one bone of contention is with people, like my parents (especially my mother) who criticize others for accepting government benefits but see no contradiction in accepting all the Medicare and Social Security benefits they can. If the argument is, “I paid into this and so I am entitled to recover what I put into it,” that’s fine, but that argument falls apart once you start receiving more than you put into it plus interest. If the argument is, “it’s insurance,” that’s fine too, but then why is it okay for you to receive health insurance benefits through benefits, but if I would happily accept government health care in exchange for an increase in taxes, I am a socialist and government is too invasive?

    As the father of three kids, I often wonder whether parents shouldn’t get more of a tax break than we do. The deduction is, in my opinion, ridiculously low, as it costs well over $3,650 to take care of a kid, particularly one under the age of 5, for a year. I don’t think people will have more or less kids depending on what the tax code says, but I do think there is something not quite right with a system that will support people like my two sisters-in-law and their husbands, who consciously chose a childfree lifestyle, with Social Security benefits paid by my children. There ought to be some recognition of the fact that parents are raising the next generation of taxpayers and the childfree are getting, in many ways, a free ride in their old age.

  14. trumwill says:

    Kevin, since I don’t know your parents, I can’t really say where they stand. But my main problem with “people who oppose big government are contradicting themselves when they accept social security checks” is as follows:

    Jethro is a small-government guy. He doesn’t think Social Security should exist. If he could go back in time and insert himself in congress, he would have opposed its founding. However, he can’t. So his only choices are (a) to pay into a system his entire working life that he never takes out of, and (b) to accept the SSDI checks.

    It does not seem to me that, for the sake of consistency, Jethro should be obligated to take course (a). He can’t opt out of paying in. He can’t get rid of the program. So he paid for it.

    It’s sort of like how I don’t think health insurance should be tied to employment. But you can bet that we’re on employer-provided insurance. Why? Because it’s the system we have. The system I might prefer, whatever it is, simply doesn’t exist.

    Jethro might prefer to be able to take that 6% of his income and to have worked the stock market and bankroll his own retirement. But he can’t do that any more than I can enroll in a health insurance program that doesn’t exist. We are all bound by the structure in which we live.

    Now, if we look at Jeb, and Jeb thinks Medicare is awesome and if he could go back in time he would vote for it, but then Jeb turns around and calls the Canadian health care system socialism and says that all socialism is bad, well… he’s on pretty shaky ground, to say the least.

    Now a lot of people haven’t thought things through to the point of being Jethro or Jeb. And it’s worthwhile to ask them whether they think that social security and Medicare should ever have been invented. And, if so, why they view that different than some other government program they oppose. But I don’t consider it particularly fair to suggest that if they oppose expanded government that they therefore have to refrain from taking out from the system that they’re putting into.

    It’s not unlike criticism millionaires who think taxes on the rich should be higher because they still accept deductions that lower their taxes. Such millionaires are working within the system we have.

  15. trumwill says:

    I think this touches on a larger point, which is that the concept of fairness itself is subjective. When we hear about fairness, we have to ask ourselves, “fair to whom?” Because something that is fair to one person is not necessarily fair to someone else.

    To take a non-tax example, if Kip Worthington is born into a wealthy family and Harry Pauper born into a poor one, that doesn’t seem very fair to Harry. But it is quite fair to Mr. Worthington, who worked very hard so that Kip could have all of the niceties, while Harry’s dad was a bum. So, in a question of fairness, should we be fair to Harry or Mr. Worthington? Fairness towards one comes at the expense of fairness to the other.

    Btw, to italicize/quote you simply surround the portion you want to italicize with <em> in front and </em> in back.

  16. web says:

    But it is quite fair to Mr. Worthington, who worked very hard so that Kip could have all of the niceties, while Harry’s dad was a bum.

    It gets decidedly unfair when you reveal that Mr. Worthington is an executive who was “hired on” to the company that Mr. Pauper worked at, raided the pension fund, slashed wages and eventually fired all the employees to sell the firm to a larger company that wanted the patents and IP to build other items in their Chinese manufacturing facility, and then rode out on a golden parachute while Mr. Pauper was left with no job and no retirement prospects and no savings (after covering expenses while being unemployed) to live on.

    Just saying…

  17. trumwill says:

    You can stack the deck of any hypothetical. If we assume one set of people are good and the other set of people are bad, it becomes very easy to make moral judgments.

  18. web says:

    Except, Will, that my “hypothetical” is what’s happened to my father (who is among other things: primary caregiver for my paternal grandmother, part-time caregiver for my maternal grandmother, supporting my sister through college still, supporting my brother who still lives at home, and primary decision-maker for my brain-damaged uncle who lives in an assisted living home) three times in the past decade.

    It’s not a hypothetical at all. Not even close.

  19. trumwill says:

    I’m sorry to hear about your uncle, but what I put forth was a hypothetical (I could have used anecdotes, too, I suppose) to demonstrate the tension of trying to be fair to different parties. Your response, to change the hypothetical situation to your uncle’s situation, serves only to suggest that their is no tension because Mr Pauper must be the victim and Mr Worthington an aggressor. As I said, it does make moral calculations easier.

  20. Kevin says:

    Good point. But no one is obligated to accept government benefits. Old people are free to pay out of pocket for medical care. What chaps my hide are people who rail against government spending while accepting all the Medicare benefits they are entitled to with no concept of irony.

  21. Brandon Berg says:

    Will:
    I meant in more of an actuarial sense. If a 64-year-old has been at the 20th income percentile his whole life, he’s getting a subsidy in the form of the government promising to cover his medical expenses when he turns 65. 2.9% of his income doesn’t come close to covering the expected cost of that. Now, if he gets hit by a bus on his last day before retirement, then obviously he doesn’t get any actual benefit from that. But actuarially speaking he was getting a subsidy. Until actuarial gave way to actual.

    It’s a different story for people who die as kids. Who knows how they’re going to turn out? But I don’t think I’ve ever accused a kid of not paying his fair share of taxes, either.

  22. Brandon Berg says:

    Web:
    My problem with the left-wing approach to the wealthy is that they seem to take a “shoot ’em all and let God sort ’em out” approach. Some rich people got rich through questionable or even blatantly unethical or fraudulent means. Therefore we should tax the hell out of all rich people. A more reasonable response, I think, is to make it more difficult for people to get by screwing over other people, not to take it out on rich people generally.

  23. Jenny says:

    Brandon Berg, why is it so hard to understand that participating in a crooked system makes you a crook?

    400 people in usa control more wealth than the bottom 50 percent of actual workers. Please think about what that really means. It does not matterif they were born to it or they got it by crooked business deals, that ridiculous wealth is just as dishonest as the wealth hoarded by dictators and frauds in other countries like kim jong il or arafat or the ridiculous british royal family who just made it more “fair to women” by making the succession line “equal” for boys and girls as long as they are born into that inbred, stuck up, worthless Windsor line.

  24. Brandon Berg says:

    Yeah, that’s the kind of thing I was talking about.

  25. trumwill says:

    Web, I apologize for the tone of my previous comment. It was, if not out of line, closer to being so than I like to be.

    What I was trying to get at, though, is that I think it’s largely problematic and not remarkably productive to assume that people from one economic station or another should be assumed to be crooked, lazy, or whatever. Now, it’s entirely possible that any given rich guy got there by screwing people over, but I don’t think it’s good policy to work on that particular assumption. Nor, for that matter, to work off the assumption that someone who struggles to get by is lazy, criminal, or whatever.

    My hypothetical was drawn up (with Mr. Worthington having worked for his money and Mr. Pauper not having done so) to make a rather specific point: Even if we assume the rich guy worked for his money and the poor guy didn’t, that reflects on Mr’s Worthington and Pauper and not on their kids. And so it creates a bit of a dilemma wherein you would want to reward those who do work hard by allowing them to help their kids, but at the same time you don’t want to penalize the kids whose crime was being born to bad parents.

    It’s a problem for which there is no easy answer. And the notion of “fairness” provides precious little insight. Because it become a question of who (in this case, which generation) we are trying to be fair to. There are arguments to make things fairer in terms of not allowing people to abuse the system and all that, but I consider that to be a bit of a distraction to the main point that I was trying to make.

  26. trumwill says:

    Brandon,

    To be fair, lots and lots of folks on the left are all about trying to prevent people from doing bad things for money. The right tends to have non-flattering interpretations of these proposals.

  27. trumwill says:

    Kevin,

    No, nobody is making them cash the checks or accept the health care, but we are making them pay for it. At least in an abstract way. No one gets to opt out of social security. The only upside to having that money taken out of your paycheck is that you do get paid on retirement. Adding an ideological test to that (“But you best not take it if you ever want to credibly argue against big government”) just strikes me as highly problematic. By criticizing them for taking money out of it, you’re essentially imparting an obligation that they graciously pay in but do not receive anything in return for what they do.

    It’s not remarkably different than telling someone who objected to the draft, was drafted anyway, and served… that they lose the right to complain if they cash the military paycheck. I’m not suggesting that losing 4-6% of your income is comparable to being shipped off to a foreign land, but the dynamic is the same.

  28. web says:

    Will,

    Thanks for the apology.

    The point I was trying to make was very similar to the point made ineptly by “Jenny” above – when you get to the very, very, very top, it is very difficult to find persons who are honest. Whether you’re referring to the incestuous, revolving-door relationship between the SEC and Wall Street bankers, or the incestuous, revolving-door relationship between major international corporation boards and government, or the walled garden resorts and living arrangements of the “upper crust” as opposed to everyone else, there is a very serious disconnect in how the vast majority live and the morality of life as compared to the top. In the top sector, “morality” is replaced by “is it legal, and if not can I hire a good enough lawyer to confuse the issue anyways?”

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