The Really Unfair Tax

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If the double tax on Social Security were eliminated, Michael Kasprzak and Betty Williams would save $1600

When President Bush talks about his plan to stop taxing dividend income, he says he's doing it, in part, for philosophical reasons. "It's unfair to tax money twice," he said as he unveiled his economic-stimulus plan earlier this month. "There's a principle involved. The government ought to be content with taxing revenue streams or profits one time, not twice."

But Bush was silent about the biggest double tax of all, one that hits every working American, not just the one-fourth of tax-return filers who report stock dividends. It's the income tax layered upon the portion of a worker's paycheck that is withheld to pay Social Security and Medicare taxes.

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Say a family has $60,000 in wage income. Of that, $3,720 is deducted from its paychecks for Social Security taxes, and an additional $870 is taken out for the Medicare tax. That's $4,590 that the family never sees. Nevertheless that money is taxed as personal income, as if the family received it. What it amounts to is a tax upon a tax.

And that's only the beginning. Some 10 million Americans are triple taxed, and that group's ranks swell by 1 million a year. When retirees begin to collect Social Security benefits, the income tax is again imposed on up to 85% of their benefits for those whose overall income exceeds a fixed level. For a husband and wife, it's $32,000 a year. For a single person, it's $25,000.

Because these base amounts do not rise with inflation, the number of retirees subject to the triple tax will grow each year. As a result, the tax will eventually hit many who can ill afford to pay it. And this is happening at a time when an increasing number of Americans are forced to work past their planned retirement age because of depleted pensions and retirement accounts. For 2000, 7.7 million individuals and families with incomes below $75,000 were taxed on their Social Security checks.

Be that as it may, the President's plan focuses on stockholders rather than workers. With certain exceptions, citizens would no longer pay tax on corporate dividends. The President's rationale: corporations already pay an income tax on their profits from which the dividends are paid to stockholders, and then those stockholders pay individual income tax on the dividends, thereby creating a double tax.

For 2000, the latest year for which complete tax data are available, 34 million tax filers reported receiving dividends. But the benefits flow largely to upper-income people. Just 7.9 million individuals and families — those who filed returns with incomes of more than $100,000--reaped two-thirds of the total dividends of $147 billion. In short, 6% of 129.4 million tax filers would enjoy most of the benefits from ending the double tax on dividends.

By contrast, TIME estimates that 100 million wage earners would profit from elimination of the double tax on Social Security and Medicare. And some 90% of those people take home less than $100,000 a year. People like Michael Kasprzak and Betty Williams of Seattle.

Kasprzak, 50, who grew up in the Rocky Mountains, is the director of a child-care center and preschool. Williams, 45, a Tennessee native, teaches family and child studies at Seattle Central Community College and does consulting work. They have an 11-year-old daughter at home and a 22-year-old daughter who is on her own. With a 12-year-old Mercury Sable, a three-year-old Toyota pickup truck, a mortgage on a two-bedroom home, and a trip to the movies their idea of an exciting night out, the couple is solidly Middle America.

Kasprzak says the family income varies, depending upon his wife's consulting and teaching assignments, but is usually between $65,000 and $70,000. Their income in 2001 was a bit higher. So how would they do if the Social Security and Medicare double tax are eliminated? The couple would have an extra $1,600 to spend. (Among the 100 million individuals and families who would benefit if this double tax were canceled, the savings would range from several hundred dollars to more than $2,000.) On the other hand, if Bush's current stockholder proposal is enacted, the Seattle couple would save $3, because their dividend income is just $12.

Nothing unusual there. Indeed, Kasprzak and Williams are like the overwhelming majority of middle- and low-income families who would derive little or no benefit from the President's elimination of the dividend double tax. Of 109.9 million returns filed for 2000 by those with incomes of less than $75,000, only 20% reported dividend income.

So who would be the real beneficiaries of the President's tax-cutting initiative? They are people who include the charter members of the Bush "Pioneers," the corporate executives, lawyers, oilmen and others who each raised more than $100,000 for the President's election campaign. People like Maurice (Hank) Greenberg, chairman of American International Group (AIG), the global insurance carrier that has been the beneficiary of many special-interest laws over the years.

This one would go straight to his wallet. In 2002 Greenberg ranked 47th on the Forbes list of the 400 richest Americans, with an estimated worth of $3.3 billion. Much of his wealth was tied up in AIG stock. In 2001, the latest year for which complete data are available, Greenberg owned about 44 million shares of AIG. The company paid 16 a share in dividends, meaning Greenberg would have collected $7 million. The President's tax plan would give Greenberg an extra $2.7 million from his newly tax-free AIG dividends. That does not include the dividends he received from other stockholdings.

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