As we saw in yesterday’s article, income tax withholding allowed the federal government to expand the reach and yield of the federal income tax. Working men and women who, in prior times, would never have dreamed they would pay income taxes were brought into the “tax loop,” so to speak. Nor is this all bad. In the years after World War II, we have enjoyed the highest standard of living in history. Many who might never have imagined owning a home, or sending children to college, have succeeded beyond anyone’s wildest dreams. Our prosperity has been unprecedented — and reflected in growing layers of government and levels of services which, unfortunately, may have grown to exceed even the abundant prosperity from which they derived.
Yet, for whatever reason, the “salad days” are over and we have to consider whether the multiple, redundant and complex levels of government we have built, and the overlapping systems of taxation developed to support them, continue to be viable.
The success of income tax withholding has fueled tremendous increases in taxes, especially at lower-income levels.
Social Security taxes, a flat percentage assessed directly against both employee and employer, have grown seven-fold in the last 50 years. A 2-percent tax (1 percent employee, 1 percent employer) in 1945 has increased to 14.4 percent of employee wages in 1993. The tax starts with the first dollar of employee wages and continues up to earnings of $57,600. Medicare, spun off from Social Security in 1991, adds an additional 2.9 percent, also split evenly between employer and employee in income up to $135,000. Combined with federal unemployment taxes, currently 0.8 percent, these taxes have gone from producing just under 8 percent of federal revenues in 1945, to 38 percent of federal revenues in 1992.
Combined, the two primary income-based revenue sources — income and Social Security taxes — paid literally by every man, woman or child holding a job or operating a business — have grown to the point where they now provide the federal government with more than 80 percent of its revenues!
Some will argue that Social Security tax revenues are not really “federal revenues”; that, instead, they are payments into a special trust fund to be invested and repaid with interest at retirement. The reality is that these funds are being spent about as fast, if not faster, than they are being collected.
Assume, however, that there really is a “trust fund”: In simple terms, in 1992, the federal government spent $1.28 for every one dollar it collected in taxes, leaving a 28-cent “deficit.” If Social Security receipts represented, say, 25 cents of every dollar collected, and if those funds are not counted as “revenues” but are “invested” for the future, then actual revenues would be reduced by 35 cents (the amount of the “trust fund” deposit) to equal 65 cents. Spending remains unchanged; thus, $1.28 in spending compared with net revenues of 65 cents leaves a real “deficit” of 58 cents.
In other words, using the “trust fund” approach, the federal government really spends $1.28 for every 65 cents it collects in taxes as opposed to spending $1.28 for every dollar! Hardly a consolation to a tax-weary work force.
As a concept, “payroll taxes” have been pushed to the limit. There are a total of nine separately calculated taxes or mandates directly tied to employee payrolls, including the income tax. Unemployment taxes have always included separate federal and state assessments, generally, a 0.8 percent federal tax, and, for a new business, a state tax of 3.7 percent of wages up to $7,000. In 1991, Social Security added a separate Medicare tax, creating a total of four separate taxes because each tax is assessed separately against employees and employers. Maine also has an income tax, which, like its federal counterpart, is also collected through payroll withholding. Workers’ Compensation, generally paid by employers as an assessed percent of payroll, is also widely viewed as a tax by virtue of its mandatory nature and the extent to which it has been allowed to become a politically sanctioned social program.
The lack of serious scrutiny of the cumulative impact of these taxes, or the complex regulatory burdens imposed by this system of piecemeal taxation, in just the area of wages helps explain why many businesses have become politically cynical and job growth has begun to lag significantly.
Employers must manage these demands as well as try to pay a high enough level of wages that employees will have enough after-tax income to also pay their own property and sales taxes and still have enough money with which to pay their bills.
Our tax policies, adopted in the name of fighting a war, have effectively shifted the bulk of the cost of federal spending, and a good part of state spending, onto the backs of employers and employees — and, as the saying goes, what government isn’t able to accomplish through taxes and spending, it pursues through regulation, but that is a story for another time. Is it any wonder we are wilting under the burden?
Jim Longley, a former practicing attorney, operates a business and retirement planning company in Lewiston. A major in the Marine Corps Reserve, during the Gulf War he served as director of public affairs at Camp Lejeune and with the allied security forces in northern Iraq.