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A Tax Hike is Coming Soon for the 47% and the 53%

Raising taxes 47%Mitt Romney thinks 47% of Americans don't pay taxes. Well, most of those 47% of Americans would beg to differ.

Fact is, a whole lot of folks who don't earn enough to owe federal "income" tax do pay something called "payroll" tax. Those taxes, which currently consume 13.3% of most Americans' wages, are levied under the Federal Insurance Contributions Act, or FICA -- as in, "Who the heck is FICA, and why is she taking so much of my money?"

And on Jan. 1, 2013, these taxes are set to jump -- sort of.

Tax Math

The way FICA taxes work is pretty widely known, but a refresher course probably can't hurt.

Payroll taxes basically come in two flavors: a 2.9% Medicare tax, paid half out of an employee's paycheck, with the other half matched by the employer. Employees pay 6.2% of their paycheck to the government in the form of Social Security taxes (up to a limit of $110,100). And employers match these contributions, too, for a combined SSA tax bite of 12.4%.

In an effort to cushion the blow of the Great Recession, though, Congress passed laws reducing the employee's payment toward Social Security by 2 percentage points, leaving most of us paying just 4.2% in SSA taxes (plus Medicare), instead of 6.2%. Self-employed persons, who have to cover both the employee and employer portions of the SSA tax, are paying 10.4% instead of 12.4%.

Now, a 2 percentage point tax cut may not sound like much. But consider that on a $50,000 salary (that was about the median U.S. household income in 2011, according to the Census Bureau), a two percentage point tax break from 6.2% to 4.2% is worth a cool $1,000. That's real money in consumers' pockets. And just two more months, that extra $83 a month going to evaporate. Come Jan. 1, the temporary cuts expire, and we revert to the old tax level.

But Wait! You Can't Raise Taxes in a Recession!

This poses a quandary for the politicians. Most economists agree that it's a bad idea to raise taxes in a recession -- or even a slow recovery, which is our current condition -- because this puts a damper on GDP growth. Take money out of consumers' pockets and consumers have less to spend on cars, LCD TVs, and trips to Disneyland. But now we're faced with a situation in which 163 million American workers, many of whom "don't pay taxes" (according to Romney), are going to get hit with a $1,000-a-year tax hike.

What are we to make of that?

Politicians on both sides of the aisle are resorting to convenient dodges as they look for ways to justify what American families will have to perceive as a tax increase. On one hand, Republicans such as Mitt Romney don't seem to want to consider the payroll tax a "tax" at all -- because if it were a tax, then clearly, much more than 53% of the country is "paying federal taxes." Likewise, U.S. Rep. Kevin Brady (R-Texas) denounced the temporary cut in the payroll non-tax for "endangering Social Security" -- and argues in favor of raising it.

On the other hand, Sen. Mark Begich (D-Alaska), argues the tax cut was always supposed to be "a temporary thing." Rep. Richard Neal (D-Mass.) laments it never really "met expectations" in regard to boosting the economy. And President Barack Obama urges removing the cap on FICA collection, such that income in excess of the current $110,100 ceiling would also be subjected to the payroll tax.

What it all adds up to, in the words of Sen. Orrin Hatch (R-Utah) is "strong bipartisan support to let that tax provision expire."

A Distinction Without a Difference

Now, maybe the GOP politicians are right. Maybe cutting payroll taxes wasn't such a great idea. After all, it seems logical to say that if you don't collect taxes earmarked to pay for Social Security, that endangers the solvency of the retirement system.

But by the same token, doesn't the failure to collect enough taxes to pay for national defense endanger the solvency of the Pentagon? Doesn't a flat refusal to raise taxes so we have enough revenue to pay the rest of our bills endanger the nation's education system, its highways, NASA, and all of the other programs we spend $3.6 trillion on every year. Those mounting deficits count too.

The truth, of course, is that the payroll tax is a federal income tax. It's 15.3% (or 13.3%, for now) of your income that's being taken away and sent to Washington, spent on who-knows-what. So perhaps the best way to address our nation's ongoing deficit problem is to start by calling a tax a tax. End the artificial distinction between the income tax "on payroll" and the ... other income tax. Admit that, yes, Virginia, almost all Americans pay income tax. And no, we don't pay enough to cover all the spending. Then perhaps we can start figuring out how to fix the problems that causes.

Sad to say, Motley Fool contributor Rich Smith pays payroll tax, income tax, and a whole lot of other taxes, too. How about you?

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Unfortunately, they can't raise taxes enough to cover their spending! Something has to give.

November 07 2012 at 7:24 PM Report abuse rate up rate down Reply
Douglas Hom MD

Employees should pay more than their employers. After all, it is for THEIR retirement, not their employers! Isn't that how saving for a rainy day works? Reducing the cost to employers would allow them to pay their employees more money and let the employee decide how else he or she wishes to invest their money. Social Security is a mess right now and I doubt it will get fixed anytime soon as it is too hot a political football. I'm older, so I;m going to get mine, but I am fairly certain that future generations will have to pay more into the system to support me and my ilk as well as look forward to having to work more years to receive benefits full or otherwise. Solving the issue of future health care costs would go a lot further towards future financial stability than even Social Security.

November 07 2012 at 2:53 PM Report abuse rate up rate down Reply

Wouldn't my employer have more money to pay me if he didn't have to match my payroll taxes? And why can't I decide to opt out of social security and medicare and fend for myself in those areas of my life? Does the government think I'm too stupid to provide for my own retirement and healthcare or that they are better at managing my money than I am?

November 06 2012 at 1:48 PM Report abuse rate up rate down Reply
2 replies to macman962's comment

Actually, that is exactly what the government goons imagine. Or more precisely, that even if they aren't better at managing your money than are you, putting them in charge of managing your money gives them more control over your life (and you less control over your life).

This, of course, is the goal of government goons.

The more amazing part is the intellectually derfenseless herd of useful idiots who are exploitable by these goons into imagining that ceding control over their lives to the goons benefits the herd.

November 06 2012 at 2:52 PM Report abuse rate up rate down Reply
Douglas Hom MD

You are correct in your employer could pay you more but he/she might use it to hire more workers, too. Social Security needs to survive but exactly how and in what form is a real problem as it is a form of Ponzi scheme that never runs out because it always has "new blood" to fund it ... that is, YOURS and the taxpayers. The weight of this cherished entitlement is eventually crushing especially with Medicare being added onto the burden of the taxpayer. Both are really really important parts of financial planning BUT both programs drastically need financial overhaul to survive .. in a reduced form and any reduction in benefits would be fought tooth and nail by both parties and most ages. The problem is too many people rely TOTALLY on SS for ALL of their financial support. The issue of poverty of the elderly is going to be a real albatross for this country as we are now taking heretofore deadly terminal diseases and turning them into CHRONIC ones that suck up huge amounts of the healthcare bill. No one is advocating age warfare but issues of end of life costs and what states of disease should be supported by taxpayers is an issue that requires a national discussion without politics. The Democrats suggestion to have discussions of End of Life with patients and families was roundly attacked by the Republicans as Death Panels. The Democrats took off big girl panties and ran from it. If anything, the Rs should have embraced the issue as it goes to costs that are essentially superfluous towards health, life, and well being of patients, families, and this nation. Gutless and self serving for both parties. Pitiful lack of political courage. I think the public is more than ready for this type of talk and yet, it's a big political point getter as both sides portray it as "Let's get rid of Grandma."

November 07 2012 at 3:01 PM Report abuse rate up rate down Reply

everybody should pay the same amount of tax across the board no matter who they are.

November 06 2012 at 4:21 AM Report abuse +2 rate up rate down Reply

So what,...if the crooked Govt. dont tax you on one thing,...they will get your azz on another.
Like property taxes,... which are LOCAL,...but arent bankruptcies / etc. supposed to LOWER your value for your house ????? Well ,...I have had 3 on my street ,...but MINE has INCREASED EVERY YEAR SINCE 2008 !!! GO figure !!! It`s all a bunch of crap,...and they use every loop hole to raise what you pay to the Govt. one way or another,...doesnt matter,...we are being ripped off !!!
The Govt`s both LOCAL and NATIONAL have done nothing to improve my standard of living ,...but TAKE more away from me !!! Because these clowns cant manage OUR TAX MONEY !!! Why do we have to suffer for their stupid incompetence ??? !!!!!!
The idiots in Congress cant even balance their OWN checkbooks,.....be WE are FORCED to have ours balanced, or we face a DOWN GRADE of our CREDIT !!!
Its so screwed up ,...nothing will fix it ,..until we change the CRAP in D.C. !!
Have a nice day.

November 06 2012 at 3:55 AM Report abuse +2 rate up rate down Reply

vote Chinese products out of the US

November 06 2012 at 12:49 AM Report abuse +1 rate up rate down Reply
1 reply to SPQR's comment

guess your one who voted for slammy obammy? You better start looking at your electronics and see how many you have that says " MADE IN CHINA". Vote your ass OUT OF THE US!!!

November 08 2012 at 7:48 AM Report abuse rate up rate down Reply

it's not a tax increase...it's an elimination of a temporary tax break. like a glass half full or empty kinda thang!

November 06 2012 at 12:17 AM Report abuse rate up rate down Reply

Paying payroll taxes is like paying for retirement. You'll be paid at retirement based on the money you pay in. There is absolutely no return of the federal income taxes you pay. It's these federal income taxes that pay for defense, welfare, food stamps, etc.

Also, it's interesting how some people consider the taxes the employer pays as the taxes they pay. The employee currently pays 5.65%. It's the employer that pays 7.65%. Only if you're self employed are you truly paying all your payroll taxes.

November 05 2012 at 11:37 PM Report abuse +1 rate up rate down Reply
1 reply to Keith's comment

gamling casinos in the Bahamas, bronze statues of unknown crooks, etc

November 06 2012 at 12:46 AM Report abuse rate up rate down Reply

Pot calling the Kettle black I say! This coming from A male ( Not a Man that's for sure!) that released only what 2 yrs. of his taxes?...& what about the M$NEY he has gaining interest as we speak in Swiss bank accounts or where ever he has his $$$$$ in some off shore bank account. & Let's not forget 2 mention how Romney mentioned in 1 of the Presidential Debates about how he's bring back 12,000,000 jobs back to the U.S. All while at the very same time "Bing Capitol" is buying & tanking The Honeywell Co. in Southern Illinois & shipping their jobs to China! He has no empathy for the working class/poor because he's never been there himself but Romney & his Minions will try their hardest to make sure we stay there. Read up on the "Pullman Industry" people. It wasn't that long ago that this evil company treated their workers like indentured servants. You think Romney & his amazing Lemmings won't try it again? Ha! Wait! Just Wait!

November 05 2012 at 11:18 PM Report abuse -1 rate up rate down Reply


November 05 2012 at 11:12 PM Report abuse +2 rate up rate down Reply
4 replies to pdbliz's comment