I closed my last post by suggesting I would examine specific, individual tax preferences. Before I do that, I thought it best to expand the subject of this blog. I initially indicated that I would only write about income taxes. But if any members of Congress are included among my readers, they are likely to call a point of order. As they might see it, I am not speaking to the motion on the floor because I also intend to talk about payroll taxes. So let’s get into it. What are payroll taxes really?
I will use the duck test as a metaphor to clarify the true nature of payroll taxes. You have probably read about or heard the duck test. You may have even applied it. The duck test is a comedic expression for inductive reasoning. One typical expression is
“…if it quacks like a duck, walks like a duck and swims like a duck, it’s probably a duck.”
Although this phrase is often attributed to James Whitcomb Riley, the exact origin of the expression is the subject of some disagreement. Regardless, it is an apt description of the use of common sense to reasonably evaluate our surroundings.
We are told that payroll taxes are “Social Security Contributions” whatever the hell that is. They are commonly referred to as FICA taxes – an acronym for Federal Insurance Contributions Act. Often, these taxes are a young employee’s first introduction to federal taxes and the notion of withholding.
Suppose income taxes are simply defined as a tax assessed against income. Suppose further that I elect to call an income tax a duck. For the remainder of this post, when you see the word duck, think income tax. What I will try to establish is whether there is a difference between income taxes and payroll taxes. Using my analogy, are payroll taxes a duck? Let’s find out.
First, do payroll taxes hang around with other ducks?
Payroll taxes were first assessed in 1937 under the Social Security Act of 1935. Benefits were described in Title II of the Act and taxing provisions were listed under Title VIII. However, in 1939, the Title VIII taxing provisions were removed from the Social Security Act and included in the Internal Revenue Code. This new section of the Internal Revenue Code was named the Federal Insurance Contributions Act (FICA).
Thus FICA is nothing more than the payroll tax provisions of the Social Security Act as they appear in the Internal Revenue Code. Today, income taxes and payroll taxes are both included within the IRC. Even though income taxes paddle around in Subtitle A while payroll taxes bask in Subtitle C, they are both swimming in the same pond. They be buds!
Second, do payroll taxes look like a duck?
Just what are income taxes under our current law? Title 26 - INTERNAL REVENUE CODE, Subtitle A - Income Taxes, CHAPTER 1 – NORMAL TAXES AND SURTAXES, SUBCHAPTER A, Determination of Tax Liability, Part 1, Tax on Individuals §1. Tax Imposed, Paragraphs (a) through (d) state,
“…hereby imposed on the taxable income…a tax determined in accordance with the following…”
Unlike much of the IRC, that seems reasonably straightforward. Income taxes are imposed on income. We must now ask against what economic or financial standard payroll taxes are levied. Are they assessed against property? How about purchases? No. Well what then? Let’s get the answer straight from the horse’s mouth. As an aside, however, when talking about the tax code, I generally refer more often to the opposite end of the horse.
“In addition to other taxes, there is hereby imposed on the income of every individual a tax equal to the following…”
Wait. What was that again? Employment taxes are “…imposed on the income…” That language makes it hard to tell income taxes from payroll taxes, doesn't it? Payroll taxes and income taxes may not be identical twins but you know the saying, ‘birds of a feather…’
Third, do payroll taxes swim and quack like a duck? Said differently, do they operate the same way as ducks?
OK, maybe payroll taxes look like our duck, and hang out with our ducks, but do they act in a ducky manner? In order to answer that, we must first understand how our duck behaves in actual practice.
Suppose I told you that the Internal Revenue Code required employers to withhold individual income taxes from the wages paid to employees. Care to venture a guess on what the IRC says about payroll taxes?
“The tax imposed by section 3101 shall be collected by the employer of the taxpayer, by deducting the amount of the tax from the wages as and when paid.”
Damn. I knew it. We have perfumed the pig and have tried to make a silk purse out of his ear. No, wait, I am mixing my metaphors. Anyway, it appears to me that payroll taxes do a great duck impersonation.
I don’t know about you, but if I went duck hunting and found myself sitting in a duck blind, and a payroll tax flew over, I would be tempted to take aim. And I think common sense suggests to any reasonable person that payroll taxes and income taxes both belong to that family of small aquatic birds that zoologists call Anatidae. You guessed it: ducks!
If it looks like an income tax, acts like an income tax and hangs out with other income taxes, it is probably an income tax, even if it is called something else.
So why the difference? Income taxes are always called just that: income taxes. But we call payroll taxes a variety of names: payroll taxes, social security taxes (and sometimes we parse out Medicare taxes), FICA taxes, social security contributions and employment taxes. Just why do we always separate payroll taxes from income taxes?
When I was in the army, I learned that some of the best camouflage techniques are used in plain view. In the milieu of tax policy, the concept of “hidden” taxes creates quite a furor. But our legislators don’t hide payroll taxes from us. Instead, they attempt to conceal the true nature of the tax. They certainly are not income taxes we are told. Congress continues this subterfuge by telling us they aren't even really taxes; they are contributions. A wage earner is contributing to his retirement fund if you will.
Pardon me for adopting a Scrooge persona but to that notion I say Bah! Humbug! To this taxpayer, payroll taxes are actually camouflaged income taxes hiding in plain view.
Applying our duck analogy, it seems apparent, even to the most casual observer, that payroll taxes are, in fact, income taxes. While everyone other than our elected leaders likely view payroll taxes as a duck, Congress continues to refer to them as anything other than their rightful name.
Thus, when Congress debates duck reform (i.e. income tax reform), whether that includes duck preservation, or duck cloning, duck mutation or duck breeding, or even duck extinction, the conversation is missing an important element. You might say Congress is a few ducks shy of a brace. (Author’s note: What do you call a group of ducks? Answer—it depends. It can be called a flock when in flight, a paddling or team when on the water, or, in general, a brace.)
We cannot have a serious, comprehensive discussion on duck reform unless we include all of the ducks. As we said in the army, we have to get all our ducks in a row.
I warned in my very first posting that I would not spare payroll taxes. Despite the fact that I have clearly demonstrated that they are also ducks, I do not consider either payroll taxes or income taxes to be just ducky. We should shoot them both down.
Have to take a break. I have a sudden urge for some Peking Duck or perhaps duck a l'orange. See you in a few days.