A basic principle of modern tax theory is that rich people should pay more as a percent of their income than poor people. The more income you have, the less you need any each additional dollar. As a result, each additional dollar should be taxed at a higher rate than the last.
It’s inhumane for the government to take your first dollar: you need it to eat. Ditto your second dollar. Your fifty thousandth dollar? Well, OK, you can pay some tax on that, but not too much. Your millionth dollar? You can afford to pay quite a lot of tax on that.
Taxing people means making them give up personal consumption in order to fund the democratically-determined national priorities of government. We should be very upset when taxes force a family to deny their kids dental care because they can’t afford it. We should be less upset when taxes force a family to give up its golf club membership. No one wants to pay taxes, but some people are better able to pay taxes than others.
Whether or not taxes go up with income, they certainly should never go down. But with the Social Security tax that’s exactly what they do. Under current law, in 2012 workers will pay 6.2% Social Security tax on every dollar of income they earn up to $110,100. After that they’ll pay nothing.
In 2011, the tax rate for Social Security was reduced to 4.2% for one year only. That payroll tax cut should be made permanent. Better that low and middle paid workers should pay 4.2% than 6.2%. But why should high paid workers pay 0.0% on income over $110,100?
Congress is currently talking about extending the 4.2% “reduced” payroll tax rate through February, 2012. Nuts. Make it permanent. Pay for it by applying the 6.2% “normal” rate to incomes over $110,100. That’s the only way to make the Social Security tax fair.
The regressive nature of the Social Security tax — the fact that the poor pay more while the rich pay less — is the greatest injustice in the entire tax code. With the Congressional spotlight on Social Security taxes, it’s hiding in broad daylight. Congress should stop playing politics with the payroll tax cut and make it permanent by extending Social Security taxes to everyone.