Titanic and Taxes

April 15th is the 100th anniversary of the sinking of the Titanic. That date, of course, is more famous as the deadline for submitting our income tax forms. But it falls on a weekend this year, so procrastinators get a brief reprieve.

The Titanic was sunk by an iceberg, and every grade-school child learns that most of an iceberg (about 90 percent) is hidden below the water’s surface — part of what makes it so dangerous to ships.

Taxes and government spending have the same characteristic. They are often “hidden” to us.

Sometimes, it’s because the tax is subtle — for example, the various taxes on cell phones. (have you looked at your bill lately?)

Sometimes, it’s because we don’t pay much attention to politics, focusing on a few policies because we’re busy mowing our lawns and raising our children.

Maybe we get upset about a certain tax — for example, federal income taxes or local property taxes — but largely ignore other taxes.

Or maybe we get irritated with some aspect of government spending — for example, on the military or welfare programs — but miss the bigger picture.

What is important but overlooked with the icebergs of government spending and taxation?

First, consider federal income taxes. With complaints that the wealthy do not pay enough taxes, many people want higher marginal tax rates on the rich. (Interestingly, our federal income tax system—with marginal tax rates ranging from 1-7 percent — debuted the year after the Titanic sank.) But the larger issue is tax loopholes — income deductions and tax credits — that lower taxes paid, independent of tax rates.

Second, consider state and local income taxes. At the federal level, families with children don’t pay much in income taxes until their earnings are in the upper-middle class. In many cases, though, their state and even local income taxes are higher. In fact, those with income at or below the poverty line still pay state income taxes in 15 states.

Third, federal “payroll” taxes on income (the Federal Insurance Contributions Act or FICA)) are far larger for most taxpayers than federal income taxes of the Form 1040 or April 15th variety. More than 80 percent of wage-earners pay more in federal payroll taxes on their income than they pay in federal income taxes. We don’t notice it since the money is quietly sucked out of our paychecks and we don’t fill out any forms for it.

How can this happen? FICA has no deductions and no exemptions. So, unlike income taxes, the 15.3 percent tax is applied to every dollar earned. And most people believe the fiction that the employer pays half of FICA. But the employer shifts most of the burden to employees, as surely as the local gas station shifts the burden of gas taxes to customers.

Fourth, debt amounts to future taxes. We’ve had a decade of impressive debt at the federal level. With Medicare and Social Security, we have huge entitlement programs and the baby-boomers retiring. And many states have unsustainable pension programs. Although it’s politically attractive to spend money now and to push taxes into the future, there is a limit to what can be done to delay.

What will it take to sink the American economy? How much debt is too much? No one knows. But the icebergs are getting larger and our ship is getting closer. Who will steer us away from doom?