Holt 7525-9 S15_IT

Example 5: In 2015, Taxpayer A had $40,000 of earned income, Taxpayer B had $400,000 of
earned income, and Taxpayer C had $4,000,000 of earned income. Taxpayer A paid $6,120 in
social security tax ($40,000 x .153). Taxpayer B paid $26,294 in social security tax ([$118,500 x
.153] + [$281,500 x .029]). Taxpayer C paid $130,694 in social security tax ([$118,500 x .153] +
[$3,881,500 x .029]). The table below summarizes the percentage of income each taxpayer paid
in social security tax.
Taxpayer A Taxpayer B Taxpayer C
Earned Income $40,000 $400,000 $4,000,000
Social security tax paid $6,120 $26,294 $130,694
Social security tax as a
percentage of Income 15.3% 6.6% 3.3%
Other characteristics of the social security tax and the social security system include:
a. The social security tax is collected in such a way that it is partially hidden from the
taxpayers. The employee’s share (7.65% of earned income) of the tax is withheld from the
employee’s paycheck. The employer’s share (also 7.65%) is collected directly from the
employer. This creates the illusion that the employer’s share is paid by the employer, not by
the employee. But in order to remain employed, a worker must be worth as much to their
employer as what they cost. Part of the cost of an employee is the amount of social security
tax that the employer must pay. So the employer’s share of the social security tax is a
payment by the employer for the employee’s labor. The payment is received not by the
employee, but by the Social Security Administration. Most employees are unaware of the
total amount of social security tax that they pay. Self-employed persons (who pay the full
15.3%) are much more aware of the social security tax burden than are employees.
b. The social security system encourages retirement by taxing earned income and by
providing a subsidy to retirement. Since labor is a limited resource, encouraging retirement
is counterproductive to achieving the basic goal in dealing with scarcity: Produce as much
consumer satisfaction as possible with the limited resources available.
c. The social security system rewards long life. The longer a person lives after beginning to
receive social security benefits, the more benefits the person will receive. This causes a
redistribution of income from groups with a shorter average life expectancy (males,
smokers, certain minority groups) to groups with a longer average life expectancy.
3. Corporate income tax. In 2014, the corporate income tax generated about 11% of all federal
tax revenues. There is not a consensus among economists as to who ultimately bears the
burden of the corporate income tax. In the short run, it is likely to fall mainly on stockholders.
In the long run, it likely will shift at least partially to the employees and customers.
4. Federal excise taxes. In 2014, federal excise taxes generated about 3% of all federal tax
revenues. Excise taxes, like sales taxes, tend to be regressive. Compared to higher income
households, lower income households spend a higher percentage of their incomes on
purchases subject to excise tax. Among the largest sources of federal excise tax revenues are
excise taxes on gasoline, alcohol, and tobacco.
Example 6: According to the Bureau of Labor Statistics Consumer Expenditures Survey for 2013,
households in the bottom 20% of income spent on average about 3 times as large a percentage
of their incomes on alcohol and about 5 times as large a percentage of their incomes on gasoline
as households in the top 20% of income.
Characteristics of a Good Tax
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
The essential purpose of taxation is to fund government operations. Taxation transfers resources
(by transferring purchasing power) from the private sector (households and business firms) to the
public sector (government). Taxation imposes a burden on the taxpayers, while providing funding
for the government.
13 - 3 Taxes, Deficits, and the National Debt