OKLAHOMA LAW REVIEW
On the other hand, Figure 9 shows that Social Security taxes are collected on every dollar of earned income, starting at 15.3% of the first $94,200 of wages in 2006. That’s 7.65% on each worker and a matching 7.65% on the employer. Once earnings reach $94,200, however, the tax rate drops to just 2.9% — 1.45% on the worker and a matching amount on the employer.
The income tax system then uses the earned-income tax credit to refund at least part of the Social Security taxes paid by some low-income workers. Unfortunately, the combination of income taxes, Social Security taxes, and the phase out of the earned-income tax credit results in relatively high cumulative tax rates on earned income.
I won’t bore you with the details, but Figure 10 shows the actual effective tax rates imposed on single parents with various amounts of earned income. These tax rates bounce all over the place, rather than steadily increasing as the dotted trendline shows. Worse still, the very highest rates are imposed on single parents earning around $30,000 a year.
If it were up to me, I would combine the individual income tax and the Social Security payroll tax into a single income tax system with a broad base and low tax rates on earned income. That combined tax system could have a logical tax rate structure, as opposed to the roller-coaster rate structure of the current system. In addition, that system could easily accommodate a few refundable tax credits to help low-income workers and their families.