I’ve been wanting to dig into the details on this for a while…so here goes.
The most noticeable tax hike for most of is was the 2% increase in the social security tax from 4.2% to 6.2%…which all 134M of us with day jobs noticed around January 15th. Now…2% sounds like a pittance, but the base is so broad, it’s actually not.
So…some background. FICA taxes are really just an income tax…supposedly earmarked to pay for Social Security and Medicare. Cash, however, is fungible, and at the end of the day, all the cash goes into the same pot, and shortfalls are settled with IOU’s rumored to be kept on post it notes. All income up to ~$110k is subject to a 15.3% tax….half paid by the employee, and half paid by the employer…but don’t kid yourself here…you pay all of it. 6.2% is earmarked for Social Security, and the other 1.45% is for Medicare (I think)
So…an employee earning $50k per year would have $3825 deducted each year from his paycheck…and his employer would kick in another $3825….and send it all to good ol Uncle Sam…$7650 per year (That’s not exactly chump change!!) A few years ago, as part of the stimulus…they decided to lower the employee portion by 2%….This ended in 2012…thus we all ended up with a 2% tax hike…$1000 per year for our employee making $50k per year. Looking at the math…the rate went from 13.3% to 15.3%…a 15% increase.
From there…I found this document from the SSA..the total 2012 tax receipts related to FICA was $796B…good for 37% of taxes withheld in 2012…so a pretty good chunk. So…one would expect with a 15% tax increase, FICA taxes would increase from $796B to $915B, all else equal, so about $120B for the year, $10B per month. Very important to note..this is a one time bump from 2012 to 2013. Assuming we end 2013 with around 12% revenue growth, a full 5% of that will have come from this tax hike, and thus we won’t see another spike in 2014…we’ll just continue along at a higher base.
So…let’s think about 2014. Current employment is about 135M people and we seem to be adding jobs at about 2M per year. So in 2014, there will be 2M more people working…if their average wage is $50k, that alone would add $15B per year to the coffers…a 1.6% increase. That’s 1/4 of our recent payday loan from Fannie Mae. In relation to the $3.8T federal budget…it’s a rounding error.
I guess the point of all of this is to point out that yes…2013 tax revenues are showing very healthy increases. These increases are large, and they are material to the deficit. In fact…if we could string another 3 or 4 years of this together like the CBO thinks we will…the deficit situation would be vastly improved by 2016. However….given the math behind the increases, the data does not support this optimistic view….instead, the admittedly impressive 2013 revenues seem very likely to be a one time event caused by tax hikes and tax avoidance transactions that pulled income into 2012(with taxes paid in early 2013). If this is all true…then 2014 revenue could see low single digit growth, or even shrink…having huge implications for the 10 year picture.
And that’s why I haven’t got that excited yet about the surge in 2013 revenues. If…at the end of 2015, revenues are close to posting their third consecutive year of double digit growth…this pessimist will absolutely be forced to start re-examining my fundamental assumptions. Our $17T of debt took decades to accumulate and it’s going to take more than one year of double digit growth to even stop digging this hole, much less actually start paying it down.