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House Passage of Tax Bill

January 04, 1986

It is worthy of comment that when one adds Social Security taxes to the marginal tax rates in the House bill, the federal tax is seen to have lost essentially all of its progressivity.

Focusing on the rates for couples, as an example, we find a moderately progressive rate structure of 15% up to $22,500 income, of 25% up to $42,000, and of 35% up to $100,000, where the rate becomes 38% and where accountants earn their keep.

If one adds Social Security taxes of about 7%, the rate structure becomes 22%, 32%, 35%, and 38%, a much narrower spread. The difference in marginal tax rates is now as little as 6% between the household incomes of $23,000 and those of $150,000.

However, if one looks at the Social Security tax the way an economist looks at it, the comparison becomes even worse. The economist does not recognize the distinction between the 7% tax that the employee pays and the 7% that the employer pays. This distinction was devised originally to make Social Security more palatable. The employer really pays both components. Thus, for incomes up to $42,000, the employer sees a cost of salary that is really 107% of what the employee sees, and to that amount, a marginal tax rate of 36.8% applies, versus a marginal tax rate of 35% for incomes above $43,000. Therefore, the marginal tax rate, as seen from the standpoint of "cost of employment" is actually higher for incomes between $22,500 and $42,000 than for incomes above $43,000!

Perhaps this comes as a surprise, but it shouldn't. The rich do not like paying taxes, and once again their lobbyists seem to have won over the poor people's lobbyists.

With all the changes that have taken place in Social Security, it has become the nation's principal welfare system, supporting widows, orphans, and college students. Today's contributors are not laying aside for their own retirement, but rather paying for the current retirees. The insurance principle on which Social Security was originally based is no longer applicable. Hence, the distinction between Social Security tax and the income tax is only a convenient formality. Since the distinction obscures economic realities, it should be eliminated. Once that is done, it will be clear that in the current tax reform package we have created an instrument of soaking the lower middle class and the poor.

SIEGFRIED OTHMER

Sherman Oaks

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