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Two Income Taxes on Wages
Are two direct income taxes on wages Constitutional?
The US government imposes two direct Income taxes. The Federal Income Tax (FIT) tax is imposed on almost everything that breathes. The Federal Insurance Contributions Act (FICA) income tax is imposed EXCLUSIVELY on wages up to capped amounts (2008 - $102,000), that are increased annually. Middle-class Workers pay both income taxes, the total of which may significantly exceed the single FIT rate on highly compensated individuals and wealthy pensioners whose capital gains and dividend incomes are taxed at flat rate of only 15%.
In 2005 the Internal Revenue Service (IRS) reported total revenue collections (Billions of Dollars) of:
Income and
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Total
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Federal
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Individual
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Employment
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profits taxes
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Internal
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Income
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Corporation
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income
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taxes
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Estate, Gift,
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Fiscal year
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Revenue
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Taxes
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income
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FIT
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FICA
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and
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2005
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collections [1, 2]
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Total
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tax [2]
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tax [3]
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[4]
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Excise Taxes
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$2,268.9
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$1,414.6
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$307.1
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$1,107.5
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$771.4
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$82.9
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[1] Excludes excise taxes on alcohol, tobacco, firearms and ammunition, and certain occupations collected by the
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Alcohol and Tobacco Tax and Trade Bureau and the Customs Service. The Internal Revenue Service collected taxes on
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alcohol and tobacco until Fiscal Year 1988, and taxes on firearms until FY 1991
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[2] Includes tax-exempt organization business income taxes.
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[3] Includes income tax on estates and trusts.
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[4] Includes taxes for old-age, survivors, disability, and hosp. insurance (OASDHI), unemployment insurance, & railroad retirement.
SOURCE: IRS Data Book, FY 2005, Publication 55b. Also, Chief Financial Officer, Revenue Financial Management OS:CFO:R
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The above data provides a starting point to approximate the amount of Business Wage Expense deduction of employee Federal Income Tax Withholdings (FITW) and Federal Insurance Compensation Act (FICA) income taxes. I have guessed that approximately 70% of Individual Income Taxes (FIT) is based on wage income. $1,107.5 billion multiplied by 70% is $775 billion. The estimated $775.2 billion FITW added to the $771.4 billion FICA provides an estimated $1546.6 billion allowable by the Business Wage Expense deductions of FIT & FICA individual taxes. The estimated $1546.6 multiplied by a typical Corporate Income Tax (CIT) rate of 35% is $541.3. The latter amount exceeds the 2005 CIT of $307.1 billion by $234.2 billion.
The guesstimate provides the rationale' for either discontinuing the deduction of Individual FIT & FICA taxes from Corporate tax returns. Or replace the Corporate Income Tax with a 1 or 2 percent Business Receipts Tax. In either case government revenues would increase by several hundred billions. Also, the Gross Amounts of FICA OASDI taxes reported to the Social Security Administration would be linked to identical US Treasury cash revenues. Successful implementation of these reforms would be positive instead of negative net cash flows to the OASI and DI trust funds. Further details of this appear in other articles on USPUBLICPOLICY.COM
Summary of Legal Basis for FIT and FICA Taxes
(Includes author’s comments)
Preamble to the US Constitution and the Taxing (welfare) Clause
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
US Constitution, Article 1, Section. 8 (tax and welfare clause)
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States...
16th Amendment to the US Constitution (1913)
"The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration."
Social Security Act of 1935
(Established “Two” Direct Income Taxes on Wage Income,
and an Income Tax on an Income Tax)
INCOME TAX ON EMPLOYEES
http://www.ssa.gov/history/35acviii.html#Excise
"SECTION 801. (Paraphrasing) “In addition to other taxes, employees shall pay an income tax on 1% of wages up to $3,000 and every employer shall pay an excise tax on individuals in his employ of 1% on wages up to $3,000 on each employee...... "(Note: The initial 1% was scheduled to increase in the early years of the program.) Workers Denied FICA Tax Expense Deduction
"SEC. 803. For the purposes of the income tax imposed by Title I of the Revenue Act of 1934 or by any Act of Congress in substitution therefore, the tax imposed by section 801 shall not be allowed as a deduction to the taxpayer in computing his net income for the year in which such tax is deducted from his wages.”
Comment: This provision of the Social Security Act possibly violates the 16th Amendment because it mandates that employees pay “two” income taxes on the “same” wages. The section also provides the very Constitutionally questionable authority for employees to pay FIT taxes on FICA taxes. The 16th Amendment only authorized a tax on income. It DID NOT empower the government to collect “two” direct income taxes on a single income source and then compound an error by taxing a tax. Further, there is nothing in the US Constitution that authorizes taking money from one individual and transferring it to someone else, unless the recipient is an employee of the government or has established rights by other means, such as providing goods and services.
The public was led to believe the FICA taxes collected for Old Age retirement Insurance would be invested in a “Trust Fund” to build an asset base to fund future retirement. Even though flawed, the original legislation at least provided some degree of “equity” to a low wage worker “contributions”, very much unlike the “indexation of wages” that is now in practice.
The employee FICA tax rate is currently 7.65%. The 6.2% OASDI taxable rate cap is $94200 (2006), $97500 (2007) $102000 (2008) and the 1.45% HI rate has no ceiling. Since "deduction" of the 7.65% FICA tax is disallowed from individual federal tax returns, a taxpayer is required to pay FIT income tax on the FICA tax. A worker in the 20% nominal tax bracket is actually paying 9.18% (7.65% FICA on gross income + 1.53% FIT on FICA income taxes).
EXCISE TAX ON EMPLOYERS
SEC. 804. In addition to other taxes, every employer shall pay an excise tax, with respect to having individuals in his employ, equal to the following percentages of the wages... (The excise tax matched the employee 1%)
Comment: No (SEC 803) prohibition was made for adjusting employer (corporate/business) income taxes by the amounts of other taxes. This dubious practice has led to massive government subsidies to corporations by fiat. Corporations not only deduct their own taxes, but ALSO all the individual FIT and FICA taxes confiscated from the paycheck of their employees plus their wages. This practice shortchanges the government by hundreds of billions of needed revenue and denies Social Security the funds, essential to pay future benefits.
IRS rule and example of "Business Wage Expense Deduction"
IRS Publication 535 (2004), Business Expenses
http://www.irs.gov/publications/p535/ch06.html
IRS QUOTE: 6. Taxes... Employment Taxes:
If you have employees, you must withhold various taxes from your employees' pay. Most employers must withhold their employees' share of social security and Medicare taxes along with state and federal income taxes. You may also need to pay certain employment taxes from your own funds. These include your share of social security and Medicare taxes as an employer, along with unemployment taxes.
You should treat the taxes you withhold from your employees' pay as wages on your tax return. You can deduct the employment taxes you must pay from your own funds as taxes. You pay your employee $18,000 a year. However, after you withhold various taxes, your employee receives $14,500. You also pay an additional $1,500 in employment taxes. You should deduct the full $18,000 as wages. You can deduct the $1,500 you pay from your own funds as taxes. UNQUOTE
US Treasury Secretary Utilizes "Reverse Accounting"
To reconcile the Gross Amounts of FICA taxes reported to the Social Security Administration (SSA) with the Net Amounts of FIT & FICA tax collections the US Treasury Secretary has resorted to “Reverse Accounting”! This is footnote (5) to Table 1, discovered on page 41 of the Internal Revenue Service (IRS) 2003 Data Book.
Quote: “(5). Collections of individual income tax are not reported separately from Old Age, Survivors, Disability, and Hospital Insurance (OASDHI) taxes on salaries and wages (under the Federal Insurance Contributions Act or FICA, and on self-employment income under the Self-Employment Insurance Contributions Act or SECA). The OASDHI tax collections and refunds shown in Table 1 are based on estimates made by the Secretary of the Treasury pursuant to the provisions of Section 201(a) of the Social Security Act as amended and include all OASDHI taxes. Amounts shown for the two categories of individual income tax were derived by subtracting the OASDHI tax estimates from the combined total collections for the two taxes (refund estimates were not made for these two categories).” Unquote
From the above, it appears government accounting is so convoluted they don’t understand it themselves. That happens when the same money is counted twice, and dedicated funds are diverted from their intended destination. Even with the two income tax system, the federal government NEVER receives enough revenue. FIFTY-THREE trillion in debt and unfunded social obligations. When will the madness end?
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