The Hidden Tax
By Tim Penny
Published: Albert Lea Tribune, 4/13/06

It is tax time again. This week, millions of Americans are grappling with the tax code and scrambling to get their forms in on time. What many Americans do not realize is that the income tax, painful though it is, is not their largest tax burden. The vast majority of Americans- nearly eighty percent - actually pay more in payroll taxes for Social Security, than they do income taxes.

We obsess about the income tax because every April we have to "settle up" with the government. However, throughout the year, we have some control over this tax by selecting our withholding rates. And, at tax time, we can benefit from legitimate deductions and credits, such as charitable contributions, to reduce our income tax burden.

The payroll tax, on the other hand, is a "hidden tax." It is quietly deducted from every dollar we earn. Worse yet, it is applied to our gross income, meaning that, in essence, we are paying payroll taxes on our income taxes!!!

What many Americans do not realize is that the income tax is not their largest tax burden.

Between individual and employer contributions, all workers contribute 12.4% of their income to Social Security - starting with the very first dollar of income. For higher income earners, this Social Security tax stops after $94,200 of income. Because roughly ninety percent of workers make less than that, it means they never escape this tax!!

Meanwhile, the percentage of income taken by payroll taxes has increased exponentially over the years. When the Social Security system was created in 1935, the maximum annual tax paid by any worker was $60. Today, that number has skyrocketed to $11,000!!

Some say these payroll taxes are completely reasonable given that they fund our Social Security system, guaranteeing every worker retirement income. But the taxes collected each year will soon be insufficient to finance the system. The numbers tell the story. In 1965, there were six workers supporting every retiree. Today, we have only three workers supporting each retiree. With the retirement of the baby boom generation, there will be only two workers for each retiree. In response to this demographic and fiscal challenge, will today’s younger workers be forced to pay even higher payroll taxes?

It just does not seem fair to continually ask each generation of workers to pay ever more into this system, while giving them no assurance that the money will be saved and invested for their own retirement needs.

A better way exists in the form of Personal Retirement Accounts or PRAs. Here’s how they would work. Some payroll taxes would still finance a basic Social Security safety net. However, a portion of those taxes would go into a diversified investment fund. This fund would be owned by the individual worker - and could not be spent by Congress. Over the years, this fund would grow to become a healthy retirement "nest egg."

Clearly, this is not a "risky scheme" as some politicians have claimed. We know this because Congress has already created a PRA system for themselves and the federal workforce. It is called the federal Thrift Savings Plan. If PRAs are good enough for Congress, why not for every American worker?

On April 15 our government expects a detailed accounting of our finances and how much we owe in taxes. It’s about time that the government gives us a better accounting regarding our payroll taxes and the future of Social Security. After all, it’s our money, and we need to know if it will be there for us when we retire.