Politics - Medicare Tax Raise

The more I read about Obama's tax hikes, the more nervous I become. Previous posts discuss the potential perils of raising taxes on the wealthy (producers) during a deep recession. Obama also wants to raise the dividend tax which could discourage investment in business (production). However, the most terrifying potential policy is to force those making over $250,000 to pay the full payroll tax. The other negative effects of increased taxes are indirect and take time to slowly eat away at the economy, but this is not only a tax on wages or profits earned by the individual, this is an expense added to many companies. It is direct and its approval would have immediate effects.

First, let me explain how the system currently works. Payroll tax consists of Medicare and Social Security. 1.45% of an individual's earnings go to Medicare with no cap. However, Social Security is capped at $106,800 though it is taxed at much higher rate of 6.2%. This means any earnings after $106,800 are not subject to the Social Security tax. That doesn't affect me because I don't exceed the threshold, but it does affect many high wage earners and it does greatly affect my employer. The payroll tax is split between the individual and the company, so your company, in essence, matches what you pay. Your company also pays 1.45% of your wages to Medicare and 6.2% of your wages up to $106,800 to Social Security. While it may seem unfair that high income earners do not pay Medicare tax on earnings above $106,800, that thought only proves the socialistic ideals that are becoming engrained in us and ruining our country. Social Security, if handled properly, actually has some merit to it. It is set up that the more you put into it, the more you will get out upon retirement. Thus, those high income earners do not pay taxes on the income above $106,800, so they're benefits are capped just as their taxes are capped. Obama is looking to change the rules to turn it into a truly socialistic program (much harm has already been done to Social Security because of its debt, one generation pays for the retirement of the previous one, when the money should have been saved from the generation that is currently retiring).

We will ignore the very odd fact that in Obama's proposal income between $106,801 and $249,999 is not subject Medicare tax, although that is so odd that it's hard to ignore. Let's go to the obvious effect. The wealthy (producers) will have their taxes raised by 6.2% on the income over $250,000 and they will receive ZERO benefit from these taxes. If the person owns his own business, he will also have to pay the employer portion, meaning his taxes have just been raised by 12.4%. Do you not think that might affect his decisions to expand his business or hire new workers? Most likely there will be layoffs coming as a result. Still, the effect on the middle class is indirect because it comes as a result of the wealthy (producers) being harmed, so Americans may be able to be sold on it. Here though is where Obama will run into trouble. The company portion must also be paid. So in large corporations and small private owned businesses employing highly skilled staff, this tax will be a heavy burden. Suppose a company had 10 employees who when combined made $2,000,000 above the $250,000. This would increase the company's taxes by $124,000. At a time when the economy is lagging, that burden may be too much to bear for some companies. For others, it will require cuts in payroll (layoffs, wage freezes, or reductions). The effect will be immediate and will harm working class people. Also, Medicare taxes never go down, they only go up. So, people will understand there is no turning back here. Income tax rates fluctuate, but if Obama were to push this tax through, it would never return to its previous position. This, I think, will in the end defeat Obama's plan or at least cause him to make some serious concessions. I hope I am right.

Let's take a minute to recap where those wealthy producers would stand if Obama's tax increases are approved. They would have federal income tax rate of 40%, payroll tax rate of 7.45%, and a state income tax rate probably around 8%. This means that for every additional dollar earned, the individual will only get to keep about forty-five cents. This is where individuals really start to look for tax shelters and begin to cheat on their taxes because they feel the burden is unfair, and so it is. This is not the way to help an economy recover. This is the way into a Depression.