The Hidden Income Tax Surcharge

Think you are in the 15% tax bracket, or the 25% tax bracket?  Think again.

The tax rates for Social Security and Medicare total 15.3%, and have been at that level for the past twenty years.  Most workers only see half that figure deducted from their paychecks, but if your employer didn’t have to give 7.65% of your salary to the government he could give it to you.

The $2.5 trillion Social Security trust fund doesn’t really have $2.5 trillion in it, because all the money is invested in Treasury Bonds.  A Treasury bond is a loan to the government, and it goes without saying that our congressmen spent the borrowed money as soon as they got their hands on it.  Future payments to Social Security beneficiaries will have to be paid from future taxes.

This year we’re not even “putting money into the Social Security trust fund”.  Monthly Social Security obligations will exceed tax receipts in 2010 and 2011, and the shortfall will be made up from tax receipts.

The system will briefly regain solvency from 2012 to 2015, then go into permanent cash-flow negative operations starting in 2016 (see the paragraph, Demographic and Revenue Projections, under Wikipedia’s “Social Security (United States)” entry).

This not only means that America’s taxpayers will have to pay twice to generate the same benefit payments.

Because Social Security taxes were paid as a percentage of income, and because they were used to fund general government operations, that means they were de facto income taxes.

Think you were in the 25% tax bracket in the 1990s?  It was actually 40%, your “official” tax bracket plus 15.3%.

If that $2.5 trillion Social Security trust fund were squirreled away somewhere, this argument could not be made.

But it’s gone, and it will have to be paid back in the future, from taxes levied on future income and future wealth creation.

That was never the original intention.  But starting in the 1970s, the money in the trust fund was used to supplement the government’s operating budget, leaving a binder full of IOUs.

Every dollar removed from the Social Security and Medicare trust funds to supplement the government’s annual operating expenses is an undeclared increase in the federal income tax rate.  And they’ve been doing this to you for decades.

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