Understanding the U.S. Tax System and Social Security

There are several misconceptions surrounding the U.S. tax system and social security, particularly regarding the contributions and tax responsibilities of high earners. This article aims to clarify these misunderstandings, focusing on how social security and Medicare are funded, and the distribution of tax burdens among different income groups.

The Top 1% and Their Tax Contributions

The claim that the top 1% of earners pay 38% of all taxes is a common misconception. According to a Bloomberg study for 2016, the top 1% did indeed pay a greater share of individual income taxes than the bottom 90% combined. However, this refers to federal income taxes, not social security or Medicare taxes.

It is also important to note that the tax rate for the top 1% of earners has been reduced. The Trump Tax Plan brought the top income tax rate down from 39.6% to 37%, and further reductions are possible for business owners through the 20% pass-through break. Additionally, corporate tax rates have been slashed to 21% from 35%, benefiting corporate stockholders.

The Structure of Federal Spending and Revenue

Understanding federal spending and revenue requires a clear distinction between mandatory and discretionary spending. Mandatory spending is dictated by laws passed in previous years and includes programs like Social Security, Medicare, and Medicaid. The rest of the budget is discretionary, allowing for more flexibility in allocation.

The revenue side of the budget primarily comes from taxes, with most income taxes going towards the cost of social security and Medicare. However, other sources of revenue include interest from treasury trust funds and other revenue streams such as the general federal budget.

How Social Security and Medicare Are Funded

Let's examine how social security and Medicare are funded. Social Security is primarily funded through payroll taxes, with about 80% of the budget covered by these taxes. The remaining portion is funded by taxes on Social Security benefits and interest earned on the Social Security trust fund.

Medicare, on the other hand, is funded by a combination of payroll taxes, premiums charged to recipients, taxes on Social Security, and general revenue from the federal budget. Payroll taxes cover about 37% of the costs in any given year.

Dissecting the Federal Budget

As of 2014, the federal budget was structured as follows:

Mandatory spending: 2.546 trillion Social Security: 393 billion Medicare: 143 billion Medicaid: 131 billion Discretionary spending: 624.8 billion, including military and other programs

It is critical to note that while social security and Medicare account for significant mandatory spending, they are only a small fraction of discretionary spending. The majority of the budget still comes from income taxes and other revenue sources.

Understanding the funding sources and structures helps clarify the distribution of tax burdens and the role of top earners in the U.S. tax system. While the top 1% of earners do pay a substantial amount in federal income taxes, their contributions to social security and Medicare are relatively small compared to the overall budget.

Conclusion

The U.S. tax system and social security funding are complex, and there are many misconceptions surrounding them. By understanding the different funding sources and the distinction between mandatory and discretionary spending, we can gain a clearer picture of how taxes are collected and how they are used to fund various government programs.

If you have any questions or need further clarification, feel free to explore the resources provided or reach out to a financial advisor or tax expert.

Keywords: social security, Medicare, U.S. tax system