Other Federal Taxes GOVT 2305. Module 16

Many Americans pay more in payroll taxes than they do in income taxes. The payroll tax is 15.3 percent on wages, divided evenly between the employer and the employee. The part going for Social Security is 12.4 percent. Medicare gets 2.9 percent. The Social Security tax is assessed, in 2017, on the first $127,200 of wage income only. The Medicare tax is assessed on all of an individual’s wage income. Note: The payroll tax is not assessed on capital gains, interest incomes, or dividend income except for upper income earners who pay the tax to help pay for healthcare reform. Is the payroll tax progressive? No Many Americans pay more in payroll taxes than they do in income taxes.

Regressive Taxation A regressive tax falls more heavily on lower- income groups than on wealthy taxpayers.

Payroll taxes are regressive They are assessed only on the first $118,500 of income. They are assessed on the first dollar earned without deductions. They are only assessed on wages and salaries, not on dividends, interest income, or capital gains.

Corporate Income Tax The corporate income tax has four brackets--15 percent on the first $50,000 of taxable earnings, 25 percent on income between $50,000 and $75,000, 34 percent on earnings between $75,000 and $10 million, and 35 percent on income greater than $10 million. Because the 15 percent and 25 percent rates apply only to income below $75,000, most corporate profits are taxed at the higher rates. The corporate income tax rate in the United States is higher than corporate rates in most other countries. However, few American corporations pay the top rate because of deductions and exemptions.

Excise taxes An excise tax is levied on the manufacture, transportation, sale, or consumption of a particular item or set of related items. Federal excise taxes are levied on tobacco, gasoline, airline tickets, tires, alcohol, etc.

Tax incidence? Are excise taxes on smokes progressive or regressive? Why? They are regressive because poor people are more likely to smoke than people who are not poor.

Regressive taxes Most excise taxes are regressive because lower income people pay a greater share of their earnings in taxes than do higher income people.

Flat tax Some tax reformers propose replacing the progressive income tax with a flat tax, a proportional tax, which is a levy that taxes all persons at the same percentage rate, regardless of income. Flat tax advocates would eliminate all or nearly all deductions to simplify the tax code. Ted Cruz has proposed a 10 percent flat tax with a $10,000 personal exemption. He would also lower the tax on capital gains and dividends to 10 percent.

Critics of the flat tax Interests that benefit from deductions (real estate industry, charities, churches, universities, etc.) will oppose it. Critics charge that it would shift the tax burden away from the wealthy toward the lower and middle classes.

Fair Tax Mike Huckabee favors the fair tax. Other tax reformers advocate the Fair Tax, which is a national sales tax of 23 percent on all retail sales of goods and services, including food and medicine. It would replace all other federal taxes. All U.S. residents receive a pre- bate equal to the tax paid by someone with poverty level income on essential purchases Mike Huckabee favors the fair tax.

What You Have Learned What are payroll taxes? What programs do payroll taxes fund? What are excise taxes? What is a regressive tax? Why are most excises taxes considered regressive? What are flat taxes and fair taxes? What are the arguments for and against them?