Examining federal revenue sources

With all the current talk about taxes, let's take a look at our total tax structure.

There are three primary sources of federal revenue — user fees, payroll taxes and income taxes.

User fees are just what the name implies. Those who use cars and trucks on public roads pay for highway construction and repair through the gas tax. Those who fly on airlines fund the Federal Aviation Administration through the ticket tax. Those who visit national parks support park maintenance with admission fees, and so on.

Payroll taxes are imposed on everyone who gets a paycheck, rich or poor. For every $100 you earn, your employer is required to send the government $12.50, half of which appears as a deduction on your pay stub and half of which doesn't. The second half is called the "employer's share," implying that it comes out of the employer's pocket. However, that's really your money because employers could give it to you at no additional cost to them if the tax didn't exist.

Income taxes apply to all sources of revenue, not just salaries, but only about half of Americans pay them. Rates are geared to go up as income rises; the top 1 percent of earners receive 15.6 percent of the national income and pay 35.5 percent of the income taxes; The top 20 percent of earners get 52.5 percent of the income and pay 89.3 percent of the income taxes. The bottom 40 percent of earners not only pay no income tax, but instead get money paid to them, as an "earned income tax credit."

User fees pay for the services the user receives, payroll taxes cover Social Security and Medicare benefits and income taxes go into the general fund. So, as the debate rages about whether or not taxes should be raised, the proper first response should be, "Which ones?"

Some cite deficit pressures as they argue that we must allow income tax rates to return to their pre-Bush levels, while others say an increase in the income tax will hurt the economy. At the same time, at President Obama's urging, Congress has temporarily lowered the payroll tax from 12.5 percent to 10 percent, in the name of economic stimulus and is entertaining the idea of taking it down further, to 8.5 percent. That increases the deficit in a big way.

So, the question should not be a simple, "Should taxes go up or down?" The issues are deeper than that. For years, payroll taxes brought in more money than was paid out in benefits, and the resulting surpluses were invested in government bonds. Now, payroll tax revenues are insufficient, and the bonds are being redeemed to make up the shortfall. Is that the right way to fund entitlements?