FICA: The trillion dollar millstone around the neck of the American economy

The Ten Steps to Prosperity, listed at the end of this post, are introduced by Step 1., Eliminate FICA. It is, by far, the easiest to implement Step.

According to the Brookings Institution: Payroll taxes are levied to finance Social Security, the hospital insurance portion (Part A) of Medicare, and the federal unemployment insurance program.

Revenue totaled just over $1.1 trillion, or about 6.1 percent of gross domestic product, in fiscal year 2017.

Of course, the first paragraph is completely false. It comprises “The Big Lie” that federal finances are like personal finances.

Because our federal government is Monetarily Sovereign, and so creates new dollars ad hoc, each time it pays a bill, federal taxes fund nothing. They are destroyed upon receipt.

Therefore, FICA does not “finance Social Security,” and comparing tax revenue to GDP is senseless. While monetarily non-sovereign entities (state/local governments, businesses, you, and me) need income in order to fund outgo, the U.S. government neither needs nor uses income.

Here is a graph published by The Motley Fool:

The gold colored box at the top of the 2nd column was given the negative term, “Deficit.” It more properly should be given the positive title, “Net Dollars Added to the Private Sector By the Federal Government.

Why is this important?

Remember how President Obama sent each family up to $500 to help end the Great Recession? And remember how President Trump boasted about how cutting taxes would stimulate the economy?

Obama was correct to send dollars to families — because that adds dollars to the private sector. And Trump was correct that tax cuts are stimulative — simply because they leave more dollars in the private sector.

A growing economy requires a growing supply of money in the private sector.

Now think of the federal government ripping more than a trillion dollars per year from the private sector. Think of what that does to economic growth. That is tantamount to the Federal government making a giant, trillion dollar bonfire out of your FICA dollars.

That is the negative effect of FICA.

But it gets worse. The government’s FICA bonfire mostly consumes dollars belonging to the middle- and lower income groups — salary dollars.

Image result for millstone on the neck
FICA: A giant millstone around the neck of the middle- and lower-classes

The rich have made sure that interest and capital gains are not subject to FICA — only salaries of employees.

All those millions and billions the rich make in the stock market or on real estate deals or as partners in a partnership — those are not subject to FICA.

But it gets even worse.  The Social Security tax rate is 12.4%; 6.2% is withheld from each of the employer and employee. But, the employee really pays the full 12.4%, because employers figure that in as a cost of salary.

The maximum taxable earnings for Social Security withholding for 2018 were $132,900. (Medicare withholding — 2.9% from salaries — has no maximum.)

If you make, say, $75,000 a year, your entire paycheck is subject to the 15.3% FICA tax, for a total of $11,475.

But, if you earn $1,00,000 a year, of which $250,000 is salary and the rest is stock market and real estate gains, you will pay $16,479 (12.4% x  132,900 for Social Security)  plus $7,250 (2.9% x 250,000 for Medicare) for a total of $23,729.

In short, the middle-class sucker pays 15.3% of his paycheck, while the rich guy pays only 2.4% of his paycheck.

But it gets even worse, yet. If you’re making millions a year, you have accountants who set up partnerships and offshore deals to shelter you (not only from FICA but from income taxes).

But, it gets even worse and worse. Incredibly, the federal government levies income tax on your Social Security benefits.

So here you are, ostensibly paying for your Social Security benefits via FICA, and then the government taxes the benefits you ostensibly paid for. (I say “ostensibly,” because FICA doesn’t actually pay for anything. No federal tax pays for anything.)

In summary, FICA is a giant scam, designed to widen the Gap between the rich and the rest. It’s classic Gap Psychology, the human desire to distance oneself from those below on any income/wealth/power scale, and to come closer to those above. It is the popular belief that people below us on the income/wealth/power scale are inferior and to be disrespected, while people above us are superior and to be admired.

Will allowing the middle class to keep its trillion dollars cause inflation? Let’s look at a bit of history:

Index scale value=100 for 2008. Blue: Federal Debt. Red: Inflation.

In the ten years since the “Great Recession,” federal debt rose $10 trillion, nearly a trillion a year (191%) while inflation rose a total of only 17%.

And even that modest increase in inflation could have been lower. Because it was below the Fed’s target of about 2.5%, the Fed kept interest rates artificially low, trying to increase inflation.

Had inflation threatened higher, the Fed would have controlled it by raising rates, as it has begun to do recently.

In summary, FICA is the most unfair, regressive, useless tax in America.

  • It pays for nothing.
  • It reduces economic growth by taking a trillion dollars out of the economy, and destroying them, every year.
  • The benefits it supposedly funds are taxed — a tax on a tax.
  • It impacts the middle-classes and the poor far more than the rich, widening the Gap between the rich and the rest.
  • It is the most easily implemented Step of the Ten Steps to Prosperity, requiring no bureaucracy; it could be done instantly.
  • It would save time and effort for businesses, which no longer would have to make the calculation and the deduction from every employee’s pay.

FICA is a trillion dollar millstone around the neck of America’s economy. Eliminating FICA is the easiest, fastest, fairest way for the federal government to stimulate economic growth.

The heavy burden called “FICA” should be eliminated, now.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell

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The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY

5 thoughts on “FICA: The trillion dollar millstone around the neck of the American economy

  1. FICA doesn’t really rip 1 trillion out of the US economy on a macro level, as most of it gets “paid back” in the form of benefits to retirees, unemployed, poor, and disabled. It’s more of an income redistribution scheme of which the wealthy have largely exempted themselves.

    Of course, it is not enough for the wealthy to be exempt, they would prefer to privatize the whole affair so that trillion dollars in taxes gets directed to Wall Street and the investor class. Eliminating FICA, (with no cuts in benefits) would put that trillion into the pockets of the poor and middle class where it belongs.

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    1. I agree with you. One small caveat: The “paid back” part implies that the FICA dollars continue to exist until they are sent back. More accurately: FICA dollars and all tax dollars are destroyed. Then separately, the government creates new dollars to pay for stuff like guns, healthcare, roads, Social Security, etc.

      But you are correct in that the rich use SS and FICAto widen the Gap.

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  2. Why not have Social Security for All like (proposed) Medicare for All? As long as SS doesn’t rise past the point where most of the money is spent, thereby increasing consumption and stimulating the economy, this will not increase asset inflation. FICA could be eliminated and Direct Money Creation – DMC – and removing the counter-productive tax on SS would act as raises in SS payouts, which would make SS into a sort of Basic Income Guarantee, just enough to meet minimum living standards. With this cushion, people would be free to take a chance on starting a business instead of being locked into a job, especially if we have Medicare For All too. People could even volunteer their time for worthy things that nevertheless don’t pay enough to live on. And automation could take some of the most dehumanizing jobs away – from making hamburgers (already experimentally automated) to assembling smartphones, to commercial driving – while humans could pursue the more creative things only we can do.

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