Wednesday, April 15, 2009

Form 1040’s Neglected Kid Sister

Today is the day that federal and state individual income tax returns are due, and the federal individual income tax receives much attention. The Social Security tax brings in almost as much revenue, but, alas, enjoys no such red-letter day.

The individual income tax is the federal government’s single biggest tax. It is a (complicated) function of each family’s income from wages, investments and other sources. Approximate individual income tax payments are often (but not always) withheld from wages, but the annual filing of the infamous Form 1040 is the time when Americans pay the individual income taxes on their other income, and sharpen their pencils on the individual income taxes they owe on their wages.

The individual income tax is the subject of much analysis of its fairness. For example, the Tax Foundation reported last summer that “in 2006, the top 1 percent of tax returns paid 39.9 percent of all federal individual income taxes and earned 22.1 percent of adjusted gross income.”

However, the individual income tax is misleading both in terms of total amount paid and its distribution across families. For example, on Friday the Treasury Department reported that federal tax receipts for the 12 months from April 2008 to March 2009 were $2.37 trillion, only $1.07 trillion (45 percent) of which were individual income tax collections.

Although officially known as a “contribution,” the Social Security tax brings in almost as much revenue as the individual income tax, and is catching up. The chart below shows Treasury collections of the two taxes (in order to adjust for seasonality, the chart shows the average over the prior 12 months).

Since the recession began, individual income tax collections have fallen from $1,186 billion to $1,072 billion, whereas Social Security tax collections (inclusive of the Medicare tax) have increased from $837 billion to $859 billion. Thus, for every dollar paid on Form 1040, there is 80 cents paid in Social Security tax.

The distribution of the two taxes’ payments across families is quite different: a sizable majority of Americans pay more in Social Security taxes than they pay in individual income taxes.

Partly because the Social Security tax takes so much from taxpayer wallets and because it is less visible than the individual income taxes, some Americans get themselves into trouble by neglecting to pay all of their Social Security tax. Before his confirmation as Treasury secretary, Timothy F. Geithner himself was embarrassed in January when it was revealed that he had neglected to pay Social Security and Medicare taxes for several years. Over the years, other senior civil servants have also been embarrassed by revelations that they’d failed to pay Social Security taxes on household help (including acommissioner and an acting commissioner of the Social Security Administration).

For the Social Security tax, it is tough growing up in the shadow of Form 1040.

1 comment:

dWj said...

For what it's worth: in Iowa (and I believe also Louisiana, Delaware, and Virginia), state tax forms aren't due for another couple weeks. Growing up in Iowa, I took for granted that the state gives you 15 days after you finish your federal taxes to figure out your state taxes, even if you put the federal taxes off to the last minute. It was only as an undergraduate at the U of C that I learned that Illinois, at least, didn't do that.