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Wednesday, May 04, 2005

It's getting really bad out there:

Perhaps you've heard about Bush's plan to change Social Security. Maybe you've been reading some of the sensible commentators rebut Bush's claims. These rebuttals are generally well thought out, but we regret to inform you that even the good folks on our side aren't thinking critically. Here, for example are some quotes from people who should know better:Comment:
It is not 12.4% !!
The misleading percentage    
Wages shown on paycheck $100.00  
SS withheld from paycheck $6.20 6.2%
SS paid by employer $6.20 6.2%
Add these two percentages   12.4%
Then claim that workers are diverting
12.4% of their wages to SS
   
     
The correct percentage    
If the employer contribution is considered
to be part of one's wages
, then, in the
example above, wages are
$106.20  
Funds collected by SS $12.40 11.68%
The truth is, workers are diverting
11.68% of their wages to SS
   
     
How much a distortion?    
12.4% is 1.06 higher than 11.68%    
What is 1.06/11.68?   0.0909
     
The 12.4% figure is about 1/10th larger than
the actual amount
"of wages" diverted to SS
   


It is either 6.2% of wages, or 11.68% of wages, depending on how you classify the money paid by the employer. It is not 12.4%. This may seem like a small detail, but in our view it is much more important than the much fretted-over "private" vs "personal" wording debate.

What is especially distressing (or perhaps amusing) is that in Matthew Yglesias' post, he spends much time arguing about how to calculate the correct percentage of a consumption tax - by starting with the proper baseline figure. Yet he totally ingores that issue in his passing reference to Social Security taxes.

When every inch in this debate must be fought, why are people on our side - including economists - allowing the conservatives to use the higher 12.4% number, when it's not true?

[UPDATE: Have we ever used the 12.4% figure? No - except for one quote by Lary Lindsey on a tangential issue back in the stone age (2002). Neither has Bilmon or Paul Krugman, as far as we can determine.]


15 comments

You're so right. Republicans like to pretend that if employer's didn't have to pay SS 6.4% they would pass that along to workers as a wage increase. That's preposterous on its face. They also like exaggerating the amount of the SS tax to make it seem more onorous.

The fact that dems are buying into the republican fiction is worrisome for sure. Dems should always be sure to separate the employee from the employer portion of SS.

By Blogger Oleary, at 5/04/2005 6:32 AM  

If you are self-employed, then SS really is 12.4%

By Blogger Steve J., at 5/04/2005 7:29 AM  

Isn't this just the inverse of the trick they like to play when pushing for a VAT? Then they suggest that the tax rate required to replace income tax is a percent of the inclusive price rather than the exclusive, or net, price.

By Blogger yank in london, at 5/04/2005 8:42 AM  

Steve J: I forgot to examine the self-employed. That gets to the issue of what the employer contribution is. Is it not part of an employees' wages (my preferred view), and therefore a free-standing tax on business? Or is it part of an employees' wages?

If the latter, then the rate should definitely be cut to 11.68% for the self-employed.

If the former, then no change to the rate is warranted, because the self-employed is acting as two players, the employer and the employee.

By Blogger Quiddity, at 5/04/2005 10:11 AM  

oleary wrote, Republicans like to pretend that if employer's didn't have to pay SS 6.4% they would pass that along to workers as a wage increase. That's preposterous on its face.

But the best economic evidence is that most of the tax incidence falls on the employee, regardless of who actually remits the tax to the government.

This means that, indeed, that money is mostly coming out of the worker's wallet.

By Anonymous Anonymous, at 5/04/2005 3:52 PM  

Good point, but while we're truth telling, let's not forget that the percentage is actually lower and lower the more that your income exceeds $90K. A flax tax would be an improvement.

By Blogger Ace Davis, at 5/05/2005 4:42 AM  

Anonymous says: "But the best economic evidence is that most of the tax incidence falls on the employee, regardless of who actually remits the tax to the government."

But funny, he/she provides no evidence for his/her assertion.

As a business person, I find the idea ridiculous that if I didn't have to pay taxes of any sort, I would be included to give my workers a raise.

If you want to post this dribble, at least provide some specific links for such a preposterous assertion.

By Blogger Oleary, at 5/05/2005 6:20 AM  

If you are self-employed, then SS really is 12.4%

I am self-employed, and no, it's not. The employer 6.2% comes out of my income above the line so it's really 6.2% + (6.2% less my marginal tax rate).

By Anonymous paperwight, at 5/05/2005 7:56 AM  

Taken from Schedule SE (Form 1040)

You pay on 92.35% of your income up to a maximum net amount of $87,900 (2004) for Social Security.

The 2.9% Medicare tax has no cap, but is on 92.35% of all income.

Self-employed people pay at a rate of 12.4%, but half of that amount (the employer's half), is a deduction when calculating your income tax.

The rate is 6.2% on the employer and 6.2% on the employee, but it is only only 92.35% of the income.

By Blogger Bryan, at 5/05/2005 11:08 AM  

Why is Bush&Co so "concerned" over SS becoming a problem in 2052 when, by the most liberal of estimates, "peak oil" will occur no later than 2020 and by most estimates, has already occurred?

I predict a collapse of the 'Merikin oil economy, descent into a modified fuedal society and SS will be the least of anyone's concerns.

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