Obama's new tax plan? explain??

Question

This is a quote from one of the internet news places

"The 6.2 percent payroll tax is now applied to all income up to $102,000 a year, which covers the entire amount for most Americans. Under Obama's plan, the tax would not apply to incomes between that amount and $250,000. But all annual income above the quarter-million-dollar amount would be taxed under his plan."

So what about the people between the $102k and $250k....do they pay different tax rate?? why don't they pay 6.2% as well? Someone explain please, doesn't seem fair to those under $102k

Answer 1

They pay a higher tax rate.    Since I think of my tax bill as one (state and fed) I can't remember the exact tax rate.   They pay something around 15%.

I am in CA and pay 40% of my income in income tax, state and fed combined.   I am in the medium tax bracket.

Answer 2

This discussion on payroll taxes is talking about social security taxes, not income tax.

Obama's proposal isn't "unfair" to those who make less than $102K, because even the person making $150K would still pay social security tax on the first $102K earned.  Those that make over $250K would pay social security on the first $102K, then pay more social security on income above $250K.  So it basically adds a sort-of progressive tax element to social security.

The social security tax is 6.2% withheld from paycheck, and 6.2% matched by the employer.

< edited because I just read that Obama has changed his plan...previously he had suggested removing the cap completely>

Answer 3

Payroll taxes are regressive.  They were originally pitched as a modest tax on a modest amount of income and were to guarantee a safety net when you retired.  (They were also based on a ponzi scheme that each generation working would be larger than the previous generation so we're really paying for the people who've already retired rather than saving for ourselves.)

Over the years, social security benefits have become so generous and the such that to even begin to pay for the benefits the government has revisited both the rate and the amount of wages covered.  Instead of 1% of the first $3000 of income (up to 1949), it's now 7.65% of the first $102,000.

Obviously this created a problem for poor people.  While they wouldn't necessarily owe income tax, they'd owe 7.65% for payroll tax (15.3% if self-employed).  The government's solution was to create EIC and give back even more money.

Fixing the tax is going to take more than playing games with the social security rates.  Besides you can't look at your tax burden in a vacuum.  You have to compare the COMBINED tax rate AFTER credits to see if it's "fair" or "reasonable."

For a single person making $60K, the marginal tax under this plan would be 25% for income tax and 7.65% for fica/mc.

(total of 33% or 40% if self-employed...but with possible credits and deductions, maybe it's closer to 30%.)

For a single person making $150K, the marginal tax under this plan would be 28% for income tax and 1.45% for mc.

(total of 30% or 31% if self-employed.)

For a single person making $300K, the marginal tax under this plan would be 33% for income tax and 7.65% for fica/mc (total of 41% or 48% if self-employed.  By this point, even if the taxpayer had credits and deductions, AMT would prevent their tax from dropping below 35%.)