By Donella Meadows
–November 1, 1990–
“I never knew that, about rich people not paying Social Security tax on all their income,” an outraged friend told me last week.
Said another equally angry friend a few days later, “That income tax bubble, I didn’t know about that. How could they DO it?”
They could do it because intelligent, busy people like my friends didn’t know. The regressiveness of the Social Security tax, the income tax “bubble,” the deficit that has not been reduced in spite of Gramm-Rudman-Hollings, and the chaos of the budget process have not been secret. But until the last few weeks hardly anyone knew.
Part of the responsibility for that has to be taken by the media. We have been writing about the bubble and the payroll tax, assuming that folks knew what we meant. Apparently we need to explain every form of government chicanery more often. More simply. In capital letters.
OK, I’ll try. Here’s a list of important facts about the new budget. I’ve kept it as simple as I can, but the politicians do not make this stuff simple. Please read it anyway. Otherwise you might explode in anger someday because you never knew.
1. The SOCIAL SECURITY or “payroll” tax IS STILL REGRESSIVE, which means it hits low-income people harder than high-income people. No matter whether you earn $10,000 or $50,000 you pay about 13 percent of your earnings to Social Security and Medicare — unless you earn over $53,000. On whatever you earn over that amount you pay NO Social Security tax. You still pay about 3 percent for Medicare on income up to $125,000. On income higher than that you pay NO PAYROLL TAX AT ALL.
Half the payroll tax is paid by your employer, thereby making it invisible to all but the self-employed. The part your employer pays, of course, is effectively paid by you, because it lowers your salary proportionately. The only reason I can see for hiding a tax that way is to make it easier to RAISE WITHOUT OUR NOTICING. The payroll tax went up steadily during the Reagan years, while we were told our taxes were being cut.
2. The “BUBBLE” refers to the strange fact that income over $225,000 has been taxed at a LOWER rate than income between $100,000 and $225,000. (It’s easy to see why most of us never noticed that.) I won’t bother you with the convoluted reasoning that led to that tax break for the rich, because as of a week ago the bubble is gone.
Here’s how it goes now. The first $19,000 a single taxpayer earns will be taxed at 15 percent, the next $30,000 will be taxed at 28 percent, and earnings over $49,000 will be taxed at 31 percent. This is sometimes presented as a “soak the rich” scheme, but those with high incomes are still much better off than they were before 1980, when the highest tax bracket was 70 percent. THE REAGAN TAX BREAKS FOR THE RICH ARE STILL IN EFFECT.
3. And the rich just got a new break, in the CAPITAL GAINS TAX. “Capital gains” means income earned NOT FROM WORKING BUT FROM OWNING SOMETHING (stock, real estate) that increases in value while you own it. Before last week capital gains income was taxed at the same rate as any other income. Now the maximum capital gains tax is 28 percent. That’s a break for those in the 31 percent tax bracket.
Why tax income from not working less than income from working? Good question. Ask your elected representatives. Keep asking.
4. Though our previous mortal enemy is eager to negotiate disarmament with us, DEFENSE outlays are set at nearly $300 billion each year for the next three years, a BARELY PERCEPTIBLE CUT (and that figure does not include Operation Desert Shield). The cold war is over, but you can’t see it in our budget. The world still has 50,000 nuclear weapons, half of them ours, but we will spend $3 billion next year to build more. Much as the nation needs it, THERE IS NO PEACE DIVIDEND.
5. The politicians are describing the new budget as “the greatest deficit reduction in history.” In fact it leaves us with us the GREATEST DEFICIT IN HISTORY. If the economy stays stable, the 1991 deficit will be over $320 billion NOT COUNTING THE S & L BAILOUT, which is estimated at $96 billion next year, and NOT COUNTING A POSSIBLE WAR in the Persian Gulf.
The politicans are taking credit for a $500 billion deficit reduction. Only $40 billion of that is in next year’s budget. The rest is promised for the four years after that. In 1985 they promised us a zero deficit by 1991. In 1987 they promised a zero deficit by 1993. Now they know better than to promise zero, but they say there will be very big cuts by 1995.
Even if they keep that promise, the national debt will increase by another $1 trillion over the next five years. At an interest rate of, say, seven percent, the extra trillion will cost in interest payments $280 EVERY YEAR FOR EVERY AMERICAN AND YIELD NO SERVICES AT ALL. That’s on top of the $1000 per person per year we are already paying in interest and will go on paying unless, by some miracle, the debt goes down.
THE DEBT DOES NOT STOP RISING UNTIL THE DEFICIT IS ZERO. IT DOES NOT GO DOWN UNTIL THERE IS A SURPLUS.
If you didn’t know these facts, you can take comfort in the fact that it took me two days on the phone to Washington to figure them out myself. Most of the people I talked to there weren’t too sure of them either. While you’re telling your elected representatives what you think of this budget, you might ask them why they don’t explain it to you honestly and clearly — and why they make it so complicated. The complications are truly not necessary, except to keep us from knowing.
Copyright Sustainability Institute 1990