Posts tagged ‘FICA’

Counting Coup

The fiscal settlement passed last night did absolutely nothing to improve the deficit or the financial sanity of government.  Its only purpose, as far as I can tell, was to let Democrats count coup on rich people as a reward for winning the last election.  It's like telling your kids that on their birthday, you will take them to do absolutely anything they like, and Democrats chose to display their disdain for rich people as their one act of celebration.    A few other observations:

  • I had expected that they would gen up a bunch of fake savings and accounting tricks to pretend there were spending cuts in proportion to tax increases, but apparently they did not feel the need to bother.  Essentially only trivial spending cuts were included.
  • At what point can we officially declare that the reduction in doctor reimbursement rates that supposedly paid for much of Obamacare is a great lie and will never happen?  Congress once again extended the "doc fix" another year, eliminating the single largest source of savings that was to fund Obamacare.  Congress has been playing this same game  -- using elimination of the doc fix to supposedly fund programs and then quietly renewing the doc fix later -- for over a decade
  • The restoration of the FICA tax is probably a good thing.  Though I think the reality is something else, people still think of these as premiums that pay for future benefits, so in the spirit of good pricing, the premiums should reflect the true costs.  And FICA premiums have always been set about at the right level (it is only the fact that past Congresses spent all the money supposedly banked for future generations that Social Security has a financial problem).  In fact, we should raise Medicare premiums as well.
  • Apparently, though I have not seen the list, this last minute deal was chock full of corporate cronyism, with a raft of special interst tax preferences thrown into the mix.

And so ends, I suppose, the 12-year saga of the Bush tax cuts, with tax cuts for the rich revoked and the rest made permanent.   The establishment media decided early on that it was going to run with the story line that these cuts were "for the rich."  The irony, that will never get any play, is that now, at the end, it is all too clear that this was far from the case.  Reversing the tax cuts to the rich only reversed a small percentage of the original tax cuts.  In fact, if the Bush tax cuts had been mainly for the rich, then the Democrats would not have even bothered addressing the fiscal cliff.

Health Care Bill Timeline

I am sure there are more landmines hidden in the Senate Bill, but the Heritage Foundation has parsed an implementation schedule from the most recent bill:

2010: Physician Medicare payments decrease 21% effective March 1, 2010

2011: "Annual Fee" tax on health insurance, allocated according to share of total premiums. Begins at $2 billion in 2011, then increases to $4 billion in 2012, $7 billion in 2013, $9 billion in the years 2014, 2015, and 2016, and eventually $10 billion for 2017 and every year thereafter. Two insurers in Nebraska and one in Michigan are exempt from this tax.

2012: Medicare payment penalties for hospitals with the highest readmission rates for selected conditions.

2013: Medicare tax increased from 2.9% to 3.8% for incomes over $250,000 (joint filers) or $200,000 (all others). (This is stated as an increase of 0.9 percentage points, to only the employee's share of the FICA tax.)

2014: Individual mandate begins: Tax penalties for not having insurance begin at $95 or 0.5% of income, whichever is higher, rising to $495 or 1% of income in 2015 and $750 or 2% of income thereafter (indexed for inflation after 2016). These penalties are per adult, half that amount per child, to a maximum of three times the per-adult amount per family. The penalty is capped at the national average premium for the "bronze" plan.

2015: Establishment of Independent Medicare Advisory Board (IMAB) to recommend cuts in Medicare benefits; these cuts will go into effect automatically unless Congress passes, and the President signs, an override bill.

2016: Individual mandate penalty rises to $750 per adult ($375 per child), maximum $2,250 per family, or 2% of family income, whichever is higher (capped at the national average premium for the "bronze" plan). After 2016, the penalty will be increased each year to adjust for inflation.

There is a link in the original to a more detailed timeline.  There is a lot more that is left out of this brief timeline, see it here.

Wither the SBA?

I don't have to explain to readers that I oppose the idea of government stimulus.   So I am loathe to argue about stimulus methodology, because I think one is just arguing over gradations of suck.

But if I were to discuss stimulus for employment, my first thought would be reducing the employer portion of FICA -- reduce the cost of employment, the quantity employed would likely go up  (of course, rather than doing this, the administration has done just the opposite, by requiring union shops on government contracts, effectively increasing the cost of employment).

My second thought was the SBA.  Most stats show that job creation is mainly in small businesses, and it appears to be small business credit that is impacted most for the 2008 banking crisis.  So, instead of sending more money to state governments; or welfare recipients; or large companies who have, by failing, proven themselves to have bad management or a bad business model or both  (none of whom are likely to be huge engines of private job creation).  Why not find a way to increase funding to small businesses?  Temporarily reduce the federal guarantee fee on SBA loans, provide tax credits for banks making such loans, something.

I called the SBA today.  They said they have no idea, just like the rest of us, what is in the bill.  Apparently there were a few incremental changes proposed, but nothing concrete.  The only specific proposal the SBA rep made was an early provision in the stimulus plan to raise the government gaurantee fee, which hardly seems like a way to promote small business credit.  It probably makes fiscal responsibility, but since when did the stimulus have anything to do with fiscal responsibility?

On Class Warfare and Taxes: Part 2

In part 1, which you should read first, we discussed how the US has crossed a milestone where fewer than 50% of the taxpayers in this country pay about 100% of the personal income taxes. We also discussed how the recent tax cuts actually shifted personal income tax burden more onto the rich, rather than less.

However, John Kerry has cited the same CBO Report I used to make the points in the previous post to say just the opposite - i.e. that the recent tax cuts actually shifted the tax burden away from the rich to the middle class. Assuming he is reading the study correctly (which he is) how can this be?

The answer is in the difference between Federal income taxes and total federal taxes. The tables I used in part 1 were for income taxes only. It strikes me as reasonable to use income tax numbers for analyzing income tax changes. The total tax numbers Kerry uses includes not only income taxes but social security and Medicare taxes (including the employer contribution), federal excise taxes (such as the gasoline tax) and the corporate income tax. Lets look at who bears the brunt of these taxes.

1. Social security taxes are regressive. Very regressive. While your paycheck may show 6.2% FICA, the bill is really 12.4% because your employer matches this payment with funds they probably would otherwise pay you in wages. What makes this tax regressive is that it is a straight 12.4% of every dollar up to a limit, currently $87,900, after which the tax is zero. This kind of profile would never be tolerated in the income tax system. The reason for this is the carryover of the original idea that social security is not a tax and social benefit program but an insurance and retirement plan, a characterization that is becoming increasingly out of whack from reality. (If it was a private retirement plan, the managers would all be in jail right now for the terrible long term returns it pays out).

2. Gas and excise taxes are generally considered regressive as well, since gasoline is probably a much higher percentage of lower and middle class spending than for the rich (those rich who own Hummer H2's notwithstanding).

3. Its harder to pinpoint who pays corporate income taxes. The CBO report allocates corporate income taxes in proportion to dividends reported on income tax statements, which seems reasonable. Fifty years ago, one would have said that this meant the rich pay it, since we pictured the rich as owning all the stock. Today, in our mutual fund world, a lot is probably born by the middle class, particularly middle class retirees.

As a result, the sum of these non-income taxes are probably net regressive - i.e. they disproportionately hit the lower and middle classes. This means that an income neutral income tax cut, i.e. one that does not shift the tax burden but lowers it proportionately for everyone, will still shift the total tax burden to the middle class, because it reduces the amount paid in the progressive system (e.g. income taxes) in proportion to the amount paid in the regressive system (e.g. social security).

This leads me to a couple of thoughts. First, I think while he is quoting correct stats, Kerry is using the data a bit disingenuously. First, it implies to people that the middle class is paying more so the rich can pay less, which is untrue - everyone is paying less. Second, he is trying to use the data to show that personal income tax burden is shifting to the middle class, which we showed in post 1 that it is not - it is actually going the other way. Third, he uses it to justify a tax increase (or a tax cut rollback) on the richest Americans. We showed that already the Bush tax cuts shifted more of an already ridiculously high burden to the rich. This will shift even more.

However, there is a point here if Kerry wanted to latch on to it. Forget the class rhetoric about the income tax system - focus instead on social security. There are two good reasons for this: 1) Social Security is broken, and the financial reckoning is coming 2) unlike the income tax system, social security is truly indefensibly regressive. Yes, you can dig through Kerry's web site and find something on this, but he is for some reason so drawn to the income tax issue he never really hits it hard.

If John Kerry really wants to take up a populist tax banner, leave income taxes as they are (for all the fiscal deficit crisis talk, an economic recovery plus fewer new military invasions will bring the deficit back in line without tax increases). He should instead propose a reduction in the 12.4% FICA tax rate and then an elimination of the $87,900 wage cap. To make this palatable to Congressional Republicans (and me, if I were voting) it should be tied to a package of other reforms such as allowing some investment choice by individuals.

Of course, this is not going to happen. Politicians have used Social Security scare tactics with retired and older people so often that these folks have come to react negatively to any hint of change to Social Security. Reasonable discussion about the future of Social Security is just not possible in the last five weeks of an election, particularly with Florida in play.