A Tax on Income is an Income Tax: the 47% Myth

By Erin Lale

The idea that the one tax designated “income tax” by the federal government is the only tax on Americans’ incomes is a clever bit of propaganda by the federal government. It is clever because it’s being kept perennially new by anti-tax Republicans, who should be its natural enemies.

Two years ago, they used to say 50% of Americans don’t pay income tax; now they are saying it’s 47%. If that means that 3% more Americans have climbed out of poverty, they are silent on that point. The 50% or 47% myth is propaganda because it is not true.
First let’s consider social security taxes and other payroll taxes, which every American who has ever worked and received a paycheck has paid. Social security taxes are taxes on income. There are no exemptions from social security tax; having children or other dependents will not keep you from having to pay. There is no income level below which one is not required to pay, but there is a cutoff above which one is not required to keep paying.

Social security tax is owed on the first dollar earned; it is not owed on the millionth. Unlike the tax named the income tax, there is no standard personal deduction; if you made $300 from a job last year, you won’t owe the tax named the income tax but you will be paying tax on that income, social security tax. If you made $300 from a business last year, you will be paying twice as much as if you had made it from a job, the “employee” portion and the “employer” portion. Those who pay social security taxes but not the named income tax include many small business owners, especially owners of new startups– you know, the job creators.

There is a popular perception that social security is some kind of retirement plan. That is incorrect. It is nothing like an IRA; no one owns any individual deposits in it, nor is a worker’s contribution saved for him by the federal government.

The federal government received social security taxes from today’s workers and immediately spends those taxes. The is no lockbox, no savings account, no investment. Social security taxes from today’s workers go into the general fund and social security payments to retirees come from the general fund. It is simply a tax. It is a tax whose true extent is kept hidden from most workers by having the employer pay half and not show that half on the pay stub. That is a system designed to hide the real amount of tax being collected.

Then there are other payroll taxes such as medicare tax and unemployment tax. These are also taxes on income, and thus, forms of income tax which are simply not called income tax. Medicare tax functions very much like social security tax, except for how benefits are paid out to retired and disabled workers. Unemployment tax is supposed to be a safety net, a sort of insurance against becoming unemployed, but it benefits only a privileged class of workers: those who worked full time in the same jobs for a certain amount of time before become unemployed.

Part time workers, seasonal workers, workers who have 2 or 3 jobs that together add up to a full time amount of hours, workers in high-turnover industries who change jobs frequently, workers in industries where employees are termed independent contractors or who work for commission, royalty, partnership income, profit sharing, or other such arrangements only, don’t receive unemployment benefits. Those workers tend to be on the low end of the income scale, in other words, the working poor. But there is another side to the tax-on-incomes coin.

There are also people who pay capital gains taxes instead of income taxes. Capital gains taxes are taxed at a flat rate which is lower than the top income tax rate. Not everyone who pays capital gains taxes is rich. Many senior citizens live off modest investments. The long term unemployed who had contributed to IRAs at their last jobs and who run through their savings have to pay early withdrawal penalties to the IRS if they cash out their IRAs to live on before reaching retirement age.

However, a lot of rich people have capital gains and must pay taxes on them. Capital gains are technically not considered income, therefore, although social security tax is a tax on income, capital gains tax is a tax on something other than income. One could make the argument, therefore, that although the working poor do pay taxes on their income, the non-working rich do not.

That would not change the fact that taxes are being collected, however. Capital gains tax is still a tax, just not on income. Sales tax, gasoline tax, cigarette tax, room tax, inventory tax (yes, that’s a real tax, paid by some business owners) and licenses and fees paid to government at all levels are all also taxes that are being collected and are being paid by Americans. The official income tax is not the end of the story on taxation–only the beginning.

Almost everyone pays some taxes, even if only indirectly. Renters indirectly pay property taxes because the landlords recoup the property tax they pay from their rent. Taxes on businesses are indirectly paid by consumers through prices paid for goods and services. One is paying a kind of tax when one buys a marriage license or a dog license or a driver’s license, a tax paid on an activity (marrying, adopting a dog, and driving, respectively.) Working is also an activity, and income tax is also a tax on an activity. Capital gains tax is a tax on profiting from investment, so in a way it is also a tax on an activity.

Taxes are all around us, and it would be nearly impossible to avoid paying them all throughout one’s life.

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