Sunday, October 03, 2010

Your "Tax Receipt"

Update: Monday, 8:00am. I have revised the chart to show the amounts actually paid by the taxpayer, and to note that Social Security is separate from the government's tax revenue stream.

I have discussed several times the fallacious approach of lumping Social Security in with the federal tax revenue stream, and the Agonist and National Public Radio provide a case in point by promoting misinformation published by’s (pdf) “The Economic Program.” I have added a column to the chart to show the correct numbers, but will explain below the chart why even those numbers are misleading and inaccurate.
lego mania
The amount that is shown for Social Security is wrong on several levels. First, the government does not spend some arbitrary percentage of its tax revenues to pay Social Security benefits. In fact, it does not spend any part of its tax revenues for that purpose.

Second, a person earning $34,170 would not pay the $1,040.70 shown, he would pay $2,116.69, or twice that amount if self-employed, and he would pay it not to the Internal Revenue Service but to the Social Security Administration, who would pay out essentially all of it in the form of benefits to people who are enrolled in that program either through disability or as a result of retirement. The government would not spend any of that money, because the government would never get its hands on any of it. The Social Security Administration is managed by the government, but the cash flow streams are entirely separate.

The issue is not really as clouded as some people like to claim by the fact that the government is spending money collected from Social Security payments. It is borrowing that money from Social Security and will someday need to pay it back, which is a straightforward and thoroughly uncomplicated process.

That chart is sort of like saying that my neighbor has $1000 income and pays $600 rent and that I have $2000 income and pay $300 rent, and so in combination we pay 30% of our income in rent. That’s technically true, but it’s totally irrelevant since we do not combine either our incomes or our rent payments. If I lend my neighbor some money to help him pay his rent, that changes absolutely nothing other than that he now owes me some money.

I also corrected the amount for Medicare. A person earning that amount will pay $495.00 into the Medicare fund and that money will be received by the federal government. It will, however, not be spent in whatever manner the government chooses, but is committed in full to payment of medical expenses of people enrolled in that program.

I adjusted the remaining amount to compensate, but got bored and left the rest to your imagination. Some are a bit questionable, I think. Federal highways, for instance, are maintained by the excise tax on gasoline, but that number may represent some building programs funded from general tax revenue so I won’t challenge it.

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