Warren Buffett has an op-ed in The NY Times bemoaning the fact that he and other super-wealthy investors pay a lower percentage of their income in taxes than their secretaries and other lower-paid staff members.  This is an argument frequently heard from Democrats.

But in making that argument Buffett misleadingly lumps federal income taxes in with that he calls “payroll taxes.”  Payroll taxes are known as FICA (the Federal Income Contributions Act), and it is the percentage employees and employers pay on wages with a limit to fund social security and Medicare.

As I have posted before, FICA is not a tax in the way other income taxes are taxes; FICA is supposed to be a pay-in to the mythical social security “lock box” which will provide funding for social security payments.  The reason there is a cap on the amount of wages subject to FICA is that there also is a cap on social security benefits (by contrast, there is no cap on the smaller portion of FICA used to fund Medicare).  FICA payments used to fund social security were not intended to be a general revenue raiser for all sorts of unrelated government spending, and were tied to wages because social security was a type of retirement plan for wage earners.

In reality, the line has blurred and FICA payments now are loaned to the Treasury for general government spending.

When Buffett and others (including those people who heckled Mitt Romney recently) demand no limit on FICA, and apparently not even restricting it to wages, what they really are saying is let’s create a scam whereby we compel people to pay unlimited amounts into the social security system with no correlation, even indirectly, to social security benefits, with money which will not be used for social security.  What this does put another nail in the coffin of social security by treating FICA as just another tax with the revenues to be used for things other than funding social security.

Buffett goes even further, echoing Obama’s call for a continuation of the “payroll tax holiday,” i.e., allowing middle income taxpayers to pay nothing into social security.  This simply further divorces contributions from benefits and turns social security into just another welfare program.  In fact, it creates a “double dipping” effect which further damages social security funding, because wage earners get the equivalent of a refund of their FICA obligation yet still get social security benefits, literally something for nothing.

Some of the investing rules which Buffett cites in his article may be worth revisiting because they are divorced from economic reality;  but let’s not forget that it is people like Democrat Chuck Schumer who have been the most vigorous defenders of “tax loopholes” for hedge fund managers and others.  Regardless of whether these investing rules are changed, Buffett should know better than to lump ordinary marginal tax rates in with FICA payments, and to use esoteric investment taxation as an excuse to raise taxes on small business owners and other job creators.

While the left may cheer this soak the rich strategy and Buffett may get a feel-good out of it, in fact all they are doing is playing into the destruction of social security as they claim to want it, turning social security into just another taxing and spending mechanism to be played with as political and fiscal circumstances dictate.

 
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