The W-2 step; the Democrats are right that the Social Security tax is unfair, but they're wrong about how to fix it

Washington Monthly, June, 1991 by James Bennet

Consider Clayton Karioka, who serves up "Hazelnut," Amaretto," and "Decaf Genuine Guatemala Antigua" coffee from behind the counter at Bucks County Nut & Coffee Company in Washington's Union Station, where Hill staff and even the occasional political celebrity go to eat. ("You can always tell when someone's here," he says, 'cause the Secret Service come for coffee.") Karioka enjoys his job, guessing what the customers are going to order, joking with the cops who walk by, trying to pick up Spanish from Union Station's janitorial staff. He works from 6:30 in the morning until 2:00 in the afternoon, five days a week, and makes $5.50 per hour-$1.25 more than the minimum wage-with a raise scheduled after he's been with Bucks County a year.

All in all, the pay's not bad for a young, single man-until the government takes its cut. Karioka doesn't know it, but he's one of the chief victims of a sly shift in the tax burden that, despite the Reagan tax cuts of the early eighties and the Democratic reforms that came later, has left low-income workers paying as much as 28 percent more in taxes than they did in 1980. It's a shift that Senator Daniel Patrick Moynihan brought to national attention with his proposed Social Security tax cut-a dumb plan, but one driven by a commendable analysis that should send all Democrats who preach "tax fairness" scurrying to their calculators and tax tables to come up with a smarter solution.

Karioka seems to have a line on most any subject, from welfare reform to gender difference in coffee selection, but ask him about his taxes and he goes blank. "Hold on," he says, and pulls a crumpled check stub out of a cupboard. Over the course of two weeks, he made $402, counting overtime but not tips. Of that, the federal government withheld $40.71, the Social Security Administration $30.77 (on the line marked (FICA"), and the D.C. government $22.18. That left Karioka with $308.34 to live on. But witness the first miracle of the federal tax system: Half the Social Security tax vanished from his wages before he even received his check (50 percent of the 12.4 percent tax is paid by your boss; in planning what he has to pay his employees, he adds in his share of the tax as part of the total cost, which means if the government didn't get that money, you would).

Now, while the progressive income tax was cut at the beginning of the decade, Social Security taxes were being hiked so that today's workers would salt away savings against their retirement. But, as Moynihan pointed out, the government is essentially treating the payroll tax like any other tax, not saving its revenue to fund pensions but blowing it on federal projects like John Sununu's skiing holidays. In other words, the Social Security tax has become an income tax by another name, with two important differences: We all pay the same rate, and we pay it on the first to the 53,400th dollar of our incomes, after which the affluent pay nothing.

Factoring in the employer's share of Social Security shows that Karioka pays 24 percent of his income to the federal government, and 29 percent for taxes overall, before he gets back his refund of excess withholding. (This is the second miracle of federal taxes: Uncle Sam often withholds more than he should, which means that workers generously provide their government with interest-free loans-in Karioka's case, a loan of $323.75-for as long as 16 months, to be paid back after the workers file. This scam is more familiar to upscale taxpayers: "As investments go," The Wall Street Journal recently warned its readers, "tax refunds rank among the biggest losers.") Once you allow for the refund, Karioka winds up paying 21 percent of his income, excluding sales taxes, to the feds, most of it in Social Security taxes. Overall, even though their income tax rates went down, childless workers in Karioka's income group saw their federal tax burdens rise 10.7 percent in the eighties. Poorer Americans fared even worse. The tax burdens of the 20 percent of families (those without children-more on this later) who make less than Karioka rose about 28.5 percent, according to the Congressional Budget Office (CBO). Meanwhile, Americans in the richest fifth of the population, where Social Security taxes take less of a bite, watched their tax burdens drop 4.6 percent.

Karioka's federal taxes leave him $8,435.25 annually, before D.C. takes its chunk, and $7,880.75 afterward (another trick of the Reagan tax changes was to transfer more of the burden to state tax codes). That's what Karioka has left to feed, house, clothe, and improve himself. Unlike the businessmen who jam the halls of the Capitol to rail against capital gains taxes or the guys in suits who stood outside the White House last fall holding signs that read, "HONK IF YOU HATE TAX HIKES," Karioka never really notices what he's paying. "I don't pay attention to it," he says with a shy grin. "All I do is just deposit it to my account and keep on going. . . . No matter what's pulling you down, there are things you can enjoy." For our purposes, set aside the miracle of human nature and simply witness the third miracle of withholding: The payments don't seem real when you don't write a check. Multiply Karioka by about a hundred million people and imagine the potential for the Democrats if someone would make those payments seem real and show those workers how they've been swindled.