Monday, October 29, 2012

All For One, Not One For All

Trey Smith

If you happen to be employed as a dishwasher and you earn the federal minimum wage, your gross income for the year will come out to slightly more than $15,000. From the first penny you earn per year to the last, ALL OF IT will be subject to the Federal Insurance Contributions Act (FICA) tax. The very same thing is true if you're a school teacher pulling down $40,000/year or a mid-level state worker who earns $90,000/year.

Thus, on the surface the FICA tax appears to treat everyone equally. It seems to follow the slogan of The Three Musketeers: One for all, all for one.

But initial appearances can be oh so deceiving!

You see, if you happen to be a worker who earns $155,000 or $328,000/year, only the first $110,100 is subject to the tax. If none of your annual income is derived from wages, then ZERO of your income is taxed through FICA. This is not to suggest that you pay no federal taxes at all -- though many can claim this -- but you aren't subject to FICA on some or all of your annual income.

To recap. While FICA appears to be a tax that treats income equally, it is not. Rather than being a fair tax, it is a regressive one. The more you make in wages or salary over $110,100, the less your tax rate is. Everyone who earns less than the threshold pays the same rate. Those who exceed the earnings ceiling end up paying a lesser rate on their overall yearly income.

This brings to mind a few questions: Why is there an earnings ceiling to begin with? What is so different between $1 and $110,101? And why are wages subject to this tax, while other forms of income are not?

If you've read this blog for any length of time, then you should have a strong inkling of what I think the answers are to these questions.

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