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November 27, 2007

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Joe

I don't get the Dems excitement over 2008. They're running a female Nixon, a black Jimmuh Carter and a smarmier Bill Clinton and expect this to work out well?

I look at their 'front runners' and am amazed at the reach and ability of the VRWC.

Neo

With Charlie Rangel's tax plan (the biggest in history) on the table and Clinton & Obama arguing that $97,500 a year is "rich" (go figure), I don't think the economy has any hope of doing anything but dragging the Democrats into the depths. These clowns look like the three horsemen (or is that horse persons) of an economic apocalypse.

MarkJ

Imagine Obama as the Democratic nominee.

Then imagine Giuliani as the Republican nominee.

Then imagine them in a debate.

Then imagine Obama figuratively bleeding from multiple wounds and spitting teeth on the floor after Giuliani does his "Moe Green" impression on him:

"Yeah, it's nice you spent a year in Indonesia when you were a kid. But do you know who I am, Senator? I'm RUDY GIULIANI! And I was making my bones when you were going out with cheerleaders!"

Appalled Moderate

Neo:

The 97,500 limit is not the line on who is rich or not -- it is the artificial line between income that is subject to the payroll tax and income that is not subject. The Social Security tax is something that has evolved into something very bizarre -- a tax that redistributes wealth from the upeer middle class to the lower middle class. Folks who make over $100K get a nice 7.5% bonus with their final paychecks -- which helps with Christmas shopping. Just don't change jobs in mid-year because the withholding tax starts all over again.

Obama is making the mistake of being reasonable and addressing a real problem with Social Security, rather than talking in soundbites. (And, to avoid a raise being a burden for small business, you could limit the SS tax increase to the employee side of the withholding tax)

Oh, and by the way, getting rid of the AMT (which is more the Rangel idea) is not the sound tax-cutting policy it seems. It is a gift to those limosine liberals in silicon valley and New York City with high home interest payments and high state taxes. The Fed government should not be in the businessof subsidizing real estate bubbles and high local taxes. AMT elimination is not a bad idea -- but only if accompanies with limitations on mortgage interest and local tax deductions.

MayBee

Appalled Moderate:
http://www.washingtonpost.com/wp-dyn/content/article/2007/11/25/AR2007112501450.html?nav=rss_nation>Who's rich

Class, always an awkward topic in the United States, made a rare cameo appearance at a recent candidates debate in Las Vegas. The two front-running Democratic presidential contenders, Sen. Barack Obama (Ill.) and Sen. Hillary Rodham Clinton (N.Y.), sparred over tax policy and quickly got entangled in the question of whether someone making more than $97,000 a year is middle class or upper class. That's upper class, Obama said. Not necessarily, suggested Clinton....

Obama replied: "Understand that only 6 percent of Americans make more than $97,000 a year. So 6 percent is not the middle class. It is the upper class."

MayBee

Just don't change jobs in mid-year because the withholding tax starts all over again.

You get a credit for the amount you overpaid. It comes out of your paycheck, but comes back to you at tax time.

Appalled Moderate

MayBee:

I saw the WaPo article earlier. So what? That's horeserace stuff.

The policy reality is the taxable wage base cutoff makes less sense as the years go by, as Social Security is not really a separate trust fund.

MayBee

The Social Security tax is something that has evolved into something very bizarre -- a tax that redistributes wealth from the upeer middle class to the lower middle class

How in the world does raising the cap solve this problem? It doesn't-- it exacerbates it, especially if benefits are not also changed.

MayBee

It isn't horse races stuff to me, AM. I dearly want to know who a candidate is directing his policy toward, and part of that is who he's going to consider "rich" as they make plans to redistribute wealth. I care if Obama thinks $97,000 is rich or upper middle class. That means those are the people he thinks will fund the programs he wants, and who can afford to pay "their fair share".

Appalled Moderate

MayBee:

It's best to think of Social Security as a safety net, and nothing more than that, and not a system based on the income that is taxed. The amount of benefit attributable to income between the wage base and the second "bend point" just is not that high.

If you think of the program as social insurance, then spreading the tax burden to all wages makes sense.

The rich/poor thing is not that much of a window into Obama's thought, I think. The reasoning behind his proposal is the taxable wage base. His response to a question does not give us all that much insight in to what he thinks rich or poor is-- it feels like a campaign gotcha to make that much of it.

Of course, there is the option of taxing all income and reducing the rate -- an idea that makes some sense.

MayBee

It's best to think of Social Security as a safety net, and nothing more than that, and not a system based on the income that is taxed. The amount of benefit attributable to income between the wage base and the second "bend point" just is not that high.

Wow, thanks for that big information, AM. A safety net, huh? That sheds new light.

Actually, I was responding to your point that SS has become a means of redistribution, and I while I agree with that, raising the cap while keeping the benefits the way they are makes it *more* of a redistribution scheme.

The rich/poor thing is not that much of a window into Obama's thought, I think.

Ok. Well I do think it is. So we disagree. Perhaps he will give us more thoughts that will firm things up a bit. Generally, we only hear about "the rich" and "hard working Americans" from candidates, so it was nice to hear a few specifics for once.

clarice

I think the Democratic field is exceedingly thin. I think it is so in large part because the Clinton's bluffed stronger candidates out and raised tons of money fast (without much caring how crooked the sources were because we know the penalty for violating the law makes it a worthwhile risk). I don't see how any of them can win a nationwide race.

maryrose

I totally agree with your statement clarice. The dems have only themselves to blame and I think they are now experiencing "buyer's remorse".

MayBee

I hate to say it, but I really think Hillary can win. I have friends and family members that have just been waiting these past 8 years to vote for her.
In 2004, I think she would have been a shoo-in. Now, I don't think it would be an easy victory. But I think she could do it, and if she does we'll be subject to another 4/8 years with 40% of the public hating our President from election eve on.

Appalled Moderate

Social Secrity is highly redistributive (just over a limit wage group), as is the income tax. We are a welfare state, like it or not, and we make our policians pay a price when they try to change the government goodies that come to us. While that may be a big fat "duh" to you, isn't it best that we have a debate over how to fund the stuff we want, as opposed to chatting up an Obama off the cuff answer into an Important Clue on How Obama Views The Rich Poor Divide?

In essence, you are playing the Clinton game doing that. And the Clinton game (as modified by Rove and assisted by various medias) have brought the political discourse to where it is today.

clarice

Here's what I think. BJClinton won with less than a majority thanks to Perot. And then he needed Black votes to do so. Hillary wants Evan Bayh for her vp--she needs him to pivk up the middle and some White males voters. How easy will it be to get Black voters out for her with Obama not on the ticket?

boris

Social Secrity is highly redistributive ...

Since it could in principle be replaced by disability insurance plus annuity investment, that statement is not accurate. While it alwo may be valid to claim that is illusion, any attempt to remove that illusion would motivate people to move to the real thing and away from your "like it or not" (not) welfare state.

MayBee

In essence, you are playing the Clinton game doing that.

I thought the Clinton game was telling someone they are playing the ______ game when they disagree with what she's said.

isn't it best that we have a debate over how to fund the stuff we want,

First, I would like to see the debate over what we "want". I, for example, am saddened that the private accounts debate was wiped off the table before it ever got going.
But then, I don't see how discussing who will be asked to fund the things people say they want *isn't* part of the debate on how to fund the stuff *we* want.
I am suspicious that funding things "we" want will fall on those who can pay their "fair share". That is part of the debate, not a distraction from it.

Appalled Moderate

boris:

The problem with "principle" are the transition costs that did in Bush's plan. If Social Security had been funded like a private industry plan, the need to fund promised Social Security benefits for current retirees and near-retirees would not be a problem. Nonetheless, we are where we are, not where we'd rather be. The thing is, Bush was in a good fiscal position in 2001 to have attacked Social Security. He frittered that position away with tax cuts and expensive wars and acceptance of Republican pork.

MayBe:

The Clinton game is to make a bitter fight about something symbolic mask a real substantive discussion that is more vital, but might just be unpopular or have consequences. (cf, recent fuss about Limabaugh vs. actually doing something about Iraq.)

MayBee

MayBe:

The Clinton game is to make a bitter fight about something symbolic mask a real substantive discussion that is more vital, but might just be unpopular or have consequences. (cf, recent fuss about Limabaugh vs. actually doing something about Iraq.)

What is it called when you disagree with how someone views the problem, or you vocalize your dislike over the likely consequences of how they telegraph they will fix the problem, and someone says you are playing a game?

MayBee

In other words, I'm not upset that Obama said $97,000 is upper middle class. I'm concerned that he may actually think that and then make policy around it.

Appalled Moderate

I understand your concern. I think Obama's comment is too offhand to draw that conclusion. 97.5 K is magic number only with respect to the withholding tax.

Paul Zrimsek

In fairness to Herbert, he doesn't appear to be arguing that a loss by Clinton or Obama would be evidence of deep wells of prejudice in this society. Rather, he is already convinced for other reasons that there are deep wells of prejudice (or at any rate, he is already convinced that there are deep wells of prejudice), and this is something Clinton and Obama will have to overcome in addition to their own shortcomings.

There are "transition costs" to private SS accounts (from the government's perspective) only to the extent that prefunding them forecloses the option of cutting benefits later; barring that, any expense incurred is an expense that would have fallen to the government anyway, and is therefore not a transition cost.

Appalled Moderate

Paul Z:

As we know, payroll taxes fund payments to current retirees and other government functions. If those payroll taxes are diverted into vested private accounts, the government has to draw from other sources the money for current payments. Hence, "transition costs". Unless, of course, you are willing to cut benefits for current retirees, and make the streets of Phoenix look like Paris.

MayBee

What of the personal costs for the people that will be asked to fund an increase in the payroll tax, as Obama supports? A family transition cost, if you will. It's very real, it's just that individual taxpayers will be funding it, rather than the government.

Appalled Moderate

MayBee:

Either increase what you pay in, decrease what you pay out, get everyone to have more kids, open the immigration gates wide, or increase the debt load and force the choice on your kids.

Those are the choices with Social Security. They aren't pretty, but they will get made. My guess is that the one of the defaults will be elected, and everyone will be real sorry about it 20 years from now, or brushing up on their spanish.

MayBee

Either increase what you pay in, decrease what you pay out, get everyone to have more kids, open the immigration gates wide, or increase the debt load and force the choice on your kids.

Those are the choices with Social Security.

As much as you say you'd like to see a real debate about Social Security, you know the choices are actually a little different than that.
Increase what who pays in?
Decrease what gets paid out to whom?
etc.

Again, increasing what gets paid in doesn't come cost free, just because it won't be the government funding the increase. Increasing people's taxes isn't a pain-free way to increase the government coffers, even though it is pretty easy on the government.
That has to be part of the debate.

Paul Zrimsek

AM, the word "prefunding" in my last should have served as a hint.

Appalled Moderate

Paul Z:

Prefund suggests a payment into a trust. You can look at state retirement systems around the country to see the likely consequences of that. (You'll either end up with trust funds tryiong to bully the private sector, a la CALPERS, or a great new funding tool for "investments" in "infrastructure".) Also, prefund requires a "payment", or series of payments. Where's the cash? (Likely, in Iraq somewhere.)

MayBee:

Absolutely we should have a debate.

We do means test social security to an extent by subjecting the benefits to tax once income receives a certain amount. We could means test the benefit to restrict payment, or subject more of the social security to a tax. I don't know the details

As for "who" pays tax, I'd vote for the over 97.5 set paying the withholding tax on all payroll, and to avoid a double whammy on small business and the self-employed, not adding subjecting the employer to that part of the tax.

MayBee

As for "who" pays tax, I'd vote for the over 97.5 set paying the withholding tax on all payroll
That is fine, but again, that's why what the candidates think is "rich" or upper middle class matters. It won't be painless to people making 97.5+ to begin paying more, and I don't want them to imagine it will be.

BarbaraS

The social security reserve is a laugh. There is no reserve. The government spends this money just like any other funds they receive. And the reason the democrats killed private accounts is because that would take away from the money they can spend for their vote getting bribes which includes pork. I hate pork because it gives funds to a narrow segment of the country unequally and causes that particular congressperson to be re-elected which is the reason for the poork in the first place.

There is no problem funding the elderly now. The problem comes in when the boomes start collecting. This should have been taken into considertion years ago. They knew it would happen but the last thing I heard was the dems saying there is no problem with social security and that it is just a republican scare tactic.

You know, the more I hear "take from the rich and give to the poor" I wonder how we got so far from the Constitution. The Constitution says that all men (and women too I suppose) are equal under the law. If that is so then how come we have affirmative action and different tax rates and some are more equal than others?

kepa poalima

you have to understand that AM not putting too much stock in Barama really meaning his statement about $97,500 could be on to something. liberals don't say what they mean and don't mean what they say. i believe AM lives in that world of those who don't mean what they say and don't say what they mean and because of that familiarity, he instinctively recognizes the code. others here, who live in the world of 'words have meanings', don't recognize that code as readily.

TM

That is fine, but again, that's why what the candidates think is "rich" or upper middle class matters.

The point has been made many times, but here we go again - Paul krugman specifically and Dems generally will wail about "the rich" and hedge fund heroes with private planes making a billion a year, but when it comes time to pass a bill "the rich" becomes the folks making over 97k.

Or look at Warren Buffet, with a net worth over what, $40 billion, calling for a continuation of the estate tax. Bully for hime, but the estate tax kicks in at about 2-5 *milllion*; whether it ought to apply to estates over $1 billion is not the debate here, Warren.

For those who don't get the proportions, that would be like a guy with an income of $4 million saying that taxes ought to be higher both for him and for folks with incomes over $500. My guess is that put that way, even Dems would blush. Maybe.

(Hmm, this may be inspiring a "better late than never" post.

Appalled Moderate

kepa:

All liberals and moderates and people who don't agree with you are liars? Boy, I bet you get your lights punched out frequently when discussing politics with friends and family members.

TM:

The devil is always in the details, not somebody's offhand definition of "rich". When it comes to payroll taxes, there is a 97.5k cutoff that makes less and less sense from a policy standpoint. (I know the number escalates annually). When we are taking income tax rates, or the application of AMT, different considerations apply.

Yes, the Krugmans of the world rail against the rich, just as the Maguires of the world rail against tax increases. Its part of the DNA of being liberal or conservative. I think your point on the Buffets of the world is valid. Nevertheless, you are talking in specifics, not generalities, and inferring how Obama would tax increase from his payroll tax stance is exactly the sort of thing (in reverse) you are complaining about with Buffet.

kim

If it weren't for the railings, Laffer would fall off the cliff going around the bend.
===================================

GMax

OK lets be clear the payroll taxes is 15%. And a self employed guy doing well and making $115,000 a year just got the privilege of paying an additional $2700 a year and sees not once bit of change in his social security benefit. Now he may be making enough not to default on his subprime mortgage when it reprices, but he sees that come out of his chips too. So inferring that liberals want to reduce his standard of living is not an inference, its backed up by years of hard earned experience ( mostly earned on his back ).

And as to the pacifist liberals who want to talk to everyone in the world punching out any lights, it is to laugh at the irony of the comment.

boris

97.5k cutoff that makes less and less sense from a policy standpoint

Since increasing benefits cut off at 97.5k it makes perfect sense. The whole problem with your POV (IMO) is that if it's all just taxes then it doesn't matter if the "trust fund" runs out does it. There is no trust fund (in your POV) just make believe.

At some point the illusion starts to collapse as supporting relationships are removed. When the solution is to turn it into a pure flat income tax (on top of the progressive income tax) the risk is more and more people will figure out what they're really paying in taxes. Why do you think the system is set up to hide from people how much they really pay? If everybody had to write a quarterly check for all their contributions (like self employed) there would be some changes made.

Right now it's taxes + retirement + employer contribution. Lump in all into one tax number and look out!

Jane

GMax, do we have an outcome on the Lowe's thing? When will the announcement come? Or did I miss it?

Appalled Moderate

Gmax:

OK, but why should the hard-working guy who ups his income from $75,000 to $95,000 be treated differently than the $115,000 guy? The difference he sees in his Social Security is marginal.

(Also, to avoid the 15% hit on the self-employed, I'd suggest limiting the increase to the employee side of Social Securtiy, and, maybe, the increase in revenue could fund a decrease in the 7.5% rate).

Boris:

The social security formula is designed to provide more replacement wages to those whose social security wages are low. Which means, basicaly, the middle class, paying in at the same rate as the lower middle class, subsidizes the lower middle class retirement benefit, while the upper middle class and rich get a tax break. From a policy standpoint, this just makes no sense.

kim

So you characterize the SS formula as some sort of bulwark against the action of the market? What if the market lays siege?
==================================

boris

subsidizes the lower middle class retirement benefit, while the upper middle class and rich get a tax break

The upper middle class and rich aren't paying less than the middle class you nitwit! Individually they pay a lot more so they're subsidizing the lower and poor also.

Seems like you are trying to play the "lower rate" means "less money" game. That's like saying bread and milk is a smaller percentage of their income so they're getting that cheaper than the rest of us.

BS

Appalled Moderate

boris:

I'm not saying those over 97.5 are paying less payroll taxes. They are simply paying 0 over $97.5 meaning that the percentage of payroll tax goes down as wages goes up. That's known as a regressive tax, and that is bad policy for an income based tax. (Sales taxes are inherently regressive, and property taxes can be.)

MayBee

That's known as a regressive tax, and that is bad policy for an income based tax.

Is it really an income based tax?
Regardless, the benefits are extremely progressive, and the program in its entirety is progressive.

Appalled Moderate

MayBee.

If a payroll tax isn't based on income, than what is it based on?

Benefits are "progressive", in that lower income folks get a larger portion of their wages replaced. But the progressivity is funded by taxing the middle class at a higher rate than the upper middel class (and the wealthy). That makes sense?

boris

That's known as a regressive tax, and that is bad policy for an income based tax

It's not income tax, it's contribution for benefits. The guy contributing from 150k will get the same benefits as the guy contributing from 97.5k and that's the reason for the cut off. Changing that turns the "contribution" into a "flat tax".

Since 150k guy pays the same DOLLARS as 97.5k guy for the same benefits in DOLLARS down the road, he is also SUBSIDIZING the lower middle class the same in DOLLARS.

If it all just turns into "income tax rates" that opens up a can of worms. Why should 97.5k guy get a bigger "elderly welfare check" than 33k guy gets? Because he contributed more? FALSE FALSE CONTRIBUTIONS SHAM SHAM THERE IS NO TRUST FUND IT'S ALL JUST INCOME TAX !!!

boris

taxing the middle class at a higher rate than the upper

They're contributing the same in dollars. They will draw benefits the same in dollars. They subsidize progressivity the same in dollars. That argument is busted.

glasater

"Folks who make over $100K get a nice 7.5% bonus with their final paychecks -- which helps with Christmas shopping"AM--this kind of comment is exactly why the "d's" should never be in power. They really don't understand "money".
Take a look at this SS article.

Appalled Moderate

boris:

Good Lord, you act like your social security dollars go into a little social security lock box with your name on it. I know you know better than that. And the can of worms with Social Security is coming, whether you like it or not. Demographics, y'know...

glaster:

Oh piffle. What does your slam have to do with the article you linked. You think I am under some delusion that the money I am being taxed i not my money, and the government is giving me some kind of gift in those last paychecks? Harumph.

GMax

OK, but why should the hard-working guy who ups his income from $75,000 to $95,000 be treated differently than the $115,000 guy? The difference he sees in his Social Security is marginal.

Can you please pick a lane to drive in? Aren't you arguing for private accounts where the hard working guy gets to self direct some of his contribution and see it directly return to him?

Look if Soc Sec is a problem that needs to be solved, ( and it is ) the Democrats are and were the ones that refused to even allow a bill to be put forth to do anything.

Soc Security has been sold to the public since its inception as a public managed pension fund. The fact is that it has never been treated that way in practice is sad but of course true. But the current opposition to fixing it comes from the Ds, and I could quote you lots of stupid Al Gore "lockbox" speeches that clearly were shilling for votes and not based on his understanding of how it works - since as a long time Senator and two time V/P he surely knew that no separate and distinct fund ever existed.

glasater

Most older folks who vote for democrats do not understand that SS is basically in the general funds.
If you want to keep things the way they are, why not take over Mexico where half the poputlation is under the age of 25.

MayBee

Soc Security has been sold to the public since its inception as a public managed pension fund. The fact is that it has never been treated that way in practice is sad but of course true.

True. But to say, as AM is, that it has never been treated that way, so we should just begin taxing it that way is avoiding two things:
1- The public debate on it and
2- The fact that it would create a large tax increase. That is real money to income earners.

We all agreed that one reason the private accounts was scrapped was because the transition costs were too high for the government (if it were to be pre-funded). BUT increasing $97.5+ wage earners taxes only serves to shift the costs to individuals. It isn't that there is no cost to "saving" SS as it is, it's just that 6% of the wage earners will be footing the bill.
Which I suspect means that 6% is too much of a minority to have any political clout.
And certainly the Warren Buffets, the kind of rich guy that does have clout, doesn't really relate to the $115,000 wage earner's finances.
The fact that a self-named moderate calls the money one keeps after the SS cap is met a bonus is just darned depressing.

boris

you act like your social security dollars go into a little social security lock box with your name on it

BS, no more than I think the same about my IRAs. If you are interested in the subject you might consider reasonable discourse.

glasater

As someone who pays the 15% plus income tax and all the state and local taxes--I have to work very hard for the approximately sixty cents of every dollar I'm "allowed" to keep.

Appalled Moderate

GMax:

I think the Social Security system needs to be addressed in some fashion sooner rather than later, and am open to private accounts. But if you do that, you do have to deal with the issue of people who have accrued under the current system and the funding of their benefits. Generally, the Dems just want to ignore the issue and say there is not a problem, because demagoging the issue periodically works for them. (Kevin Drum is the blogospheric thought leader on that stance.) That's pretty crummy.

But Bush, with the Iraq adventure and his free spending and nutso tax cutting, really threw away the financial ability to deal with the problem now. So he gets no points here.

Obama seems the only one out there on the Dem side who even thinks there's an issue to be looked at. I give him props for that. But what's the response here? Deciding he's going to define rich at 97.5K, and fear monger about all the horrible tax increases to come.

boris

the can of worms with Social Security is coming ...

Actually doubt it. If it really is just taxes then the illusion must be important enough to maintain. If it really is just taxes then the "trust fund running dry" is also just an illusion. The gov collected taxes with promise of benefits and they owe on the deal just like any casino or mutual fund. Since there never was a trust fund it matters not at all when it "runs out of money".

MayBee

But what's the response here? Deciding he's going to define rich at 97.5K, and fear monger about all the horrible tax increases to come.

Is that really the response here, AM? Here's neo's original comment:

With Charlie Rangel's tax plan (the biggest in history) on the table and Clinton & Obama arguing that $97,500 a year is "rich" (go figure), I don't think the economy has any hope of doing anything but dragging the Democrats into the depths

Which was ultimately followed by you proposing a large tax increase for people making $97.5 k and saying anyone that thought Obama was talking about tax increases for people making over $97.5 k was playing a game.

I think it's quite possible to have a good discussion, but I can do without your game-calling.

cathyf
Social Secrity is highly redistributive (just over a limit wage group), as is the income tax.
You are missing the point. The "social security and medicare tax" (aka "OASDI and HI tax" aka "self-employment tax") is a simple regressive tax with two rates (14.2127264282397% below the "break" and 2.85855101034993% above the "break"), while the "income tax" is a highly complicated progressive tax which has a different functional shape depending upon number of dependents, one income vs two income, married vs single, local & state tax rates, real estate values, level of indebtedness, rent vs own, retirement savings, medical expenses, etc., etc., etc. If you compare 1040EZ rates, the total tax is mildly progressive up to about $50k, more or less flat to about $100k, and then becomes slightly regressive after that. Of course very few people file EZ once their financial lives are no longer EZ -- so the real tax rate curve that real families face is weirdly jagged with marginal rates jumping up and down and people facing weird incentives and disincentives that are changing with every shift of a few thousand in income. But, anyway, the "social security tax" taken by itself is certainly regressive (or monotonically decreasing, as we mathematicians would say), and, because it is redistributive, it is redistributive from the poor to the rich.

I've bored everyone with Cathy's Tax Plan before. It goes like this:

1) Leave the Medicare aka HI tax exactly as it is -- a 2.85855101034993% flat tax. (If you are wondering where that not-round number comes from, it is 2.9% divided by 1.0145. If anyone needs a remedial lesson on nominal vs real wages, speak up.) Or round it to 2.85%.

2) Convert the thing called the "social security tax" into a 2-part program. It has the following features:

(a) The amount collected from the payroll becomes a flat 11.6760828625235% at every income level, first dollar or billionth dollar. (Or, ok, change it to be a nice round 11.675%)

(b) That "break" number (now the "maximum taxable earnings") is still calculated via the same method and is still indexed for inflation. (It's now approx $100k)

(c) Payroll withholdings below the "break" go into individually-owned accounts owned by the individual taxpayer.

(d) Payroll withholdings above the "break" go into the general revenue, just like social security taxes do now. Just like now, general revenues are used to fund general expenditures -- social security benefits, military pay, bridges to nowhere, paper towels in the Capitol restrooms, etc., etc., etc.

3) The "income tax" is converted to a simple, moderately progressive, tax, something like what Steve Forbes and the other "flat taxers" out there inaccurately call a "flat tax". (A flat tax can only have one rate. The thing that people like Forbes call a "flat tax" has two rates -- zero on the first $XXX of income, and greater than zero on the income above that level.) But all of the byzantine crap (mortgage interest! child-care credit! charitable contributions! blah, blah, blah!) enacted by the pandering politicians over the years is gone. (Basically, make the standard deduction bigger and force everybody to take it.)

I like mildly progressive taxes -- because the demand for money slopes downward like all demand curves, 1% in taxes from a poor person hurts more than 1% in taxes from a rich person -- but the emphasis is on mildly progressive. Our current tax scheme is only mildly progressive up to about $100k, and starts going regressive after that. I'm talking about keeping that same mildly-progressive shape at the low end of the income scale, and making it flatter and flatter the higher you go without it ever going actually regressive like it does now. Having a flat tax added into a 2-step progressive tax like Forbes' plan gets you a reasonable mildly progressive tax. (Speaking as a mathematician, I hate the inflection point caused by having two rates and a cutoff -- but compared to explaining how the integral of e-to-the a-squared divided by 2 is the right functional form, heck, I'll take the step function.)

I like tax rates which are smooth and even and well-behaved mathematically. It's the constantly shifting rates, and the rules that change every year, which cause people to waste money and other resources on tax compliance and avoidance that they would otherwise put to productive uses. I spend many hours doing my taxes every year; I would gladly pay a few hundred dollars more if I didn't have to do that! And I'm not being flippant -- the time and money I spend doing my taxes is money pissed down a rathole, and even spending it on a bridge to nowhere would be a better use of it.

The other thing, of course, is that the Cathy Plan causes the complete collapse of the tax preparation and tax avoidance industries. But don't worry about them -- there is an infinite amount of work for those folks in Sarbanes-Oxley compliance monitoring industry...

kim

There's an analogy between the near chaotic individual complications imposed by the tax code and the current health care funding mishmash, but the only clear signal I see is when the government looks upon our health in as skewed a manner as it does our income.
=====================================

glasater

"constantly shifting rates, and the rules" is certainly spot on--and thanks for your post.
Years ago I dealt with a CPA who was convinced that if the government taxed two per cent of the "gross" income--we would have plenty of money for all the programs now in place.
But how to define "gross" and "income".

Appalled Moderate

boris:

The problem is that all of government will eventually become devoted the payment of social security. Perhaps this is a good result, if you wish the government would just get out of everyone's lives.

MayBee:

My response about 97.5 is whether it is the definition of "rich", not whether an extension of the payroll tax to all income is a tax increase. (It is. Duh!) I think what you did is referred to around here as "changing the goalposts". I understand it is generally frowned upon.

cathyf:

You've obviously thought this out, which is more than I have done. My point about redistribution, though, is that Social Security provides a high level of wage replacement if you made little during your career, and a much less of a wage replacement if you made near the SS taxable wage base through your career. Hence, there is a definite redistribution effect -- you are probably getting more than you put in if you were a low wage earner, and less than you put in if you are upper part of the taxable wage base.

As for your plan -- it's a good idea, and does not fit in with how Congress chooses to work.

MayBee

"constantly shifting rates, and the rules" is certainly spot on--and thanks for your post.
...
But how to define "gross" and "income".

Ditto. The truth is, there is nobody making a $1 Billion salary. The CEOs we hear about with the gigantic compensation packages are being paid in stock options, which is considered a different form of income for taxation purposes. So indeed, how one defines income is one thing that keeps it all from being so simple.

boris

all of government will eventually become devoted the payment of social security

Then we're all doomed anyway and 7% more in taxes from the rich won't save us.

boris

stock options, which is considered a different form of income for taxation

Options are taxed at the income tax rate.

glasater

Going back to a comment Charles Murray made in that "if it were possible to equitably distribute the world's wealth to all of its inhabitants---we would all be poor".

cathyf
But how to define "gross" and "income".
No kidding. I have spent my whole professional life dealing with derivatives, pricing models, risk systems, trading systems, mid-office and back-office bookkeeping, and none of that is as bad as doing my own schedule c taxes. I swear that reading the depreciation rules in JK Lasser will make your eyeballs bleed!!! (And don't get me started on them calling it a "depreciation deduction" when they won't let you deduct real depreciation!)

Not to mention, when all is said and done I'm the second taxpayer in a 2-income family, so I have seen the flat tax, and it is 50%!

glasater

And to add to your comments cathyf--on going through an audit (state) on personal property........Don't want to do that again....

MayBee

Options are taxed at the income tax rate.

Yes, you're right, some are. Sorry. Of course back dating and lower-than market share grants complicate things. Sorry about that.

GMax

none of that is as bad as doing my own schedule c taxes.

You do your own return? I hate to admit but as a CPA I do not, and have not done so for a number of years.

Its just too complex to do. And the number of hours I would spend to do it would require me to not spend my attention on other matters which might make a return for me.

The requirement to basically do your return twice, once for the regular tax and then again for the AMT was the last straw for me.

cathyf

My experience is that I had to do my taxes first in order to give them to the accountant. And the best way to organize the information was to use a tax program (mac-in-tax, and later turbo tax). Some years I would even get the same answer as the accountant, while other years I would go over to the office and pick up my printout and get a short explanation of what I had done wrong.

As far as the AMT, that's trivial -- the tax program does that automatically, and I never needed to add in any information that wasn't already required. What I saw when I looked at the AMT is that it looked way simpler than the income taxes, basically pretty much a flat tax. Maybe there is something that I wasn't appreciating, but it looked to me like if I could skip the regular income tax and just pay the AMT it would have been almost the same amount of money, and WAY less time to prepare. (And considering that I was paying the accountant $500-$700 per year for the taxes, I would have been willing to send that all to the government just to do something easy enough for me to do myself.)

Walter

Options are taxed at the income tax rate...

Well, not exactly. Let's ignore qualified options for now, as (a) they are a small proportion of all options granted and (b) not taxed as ordinary income when granted, vested, exercised, or (usually) the underlying stock is sold.

The best definition of income is the change in net worth plus non-capital expenditures. It's almost impossible to measure and even more unwieldy to tax.

Another definition is the difference between the tax basis of something of value of something you give and the fair market value of something you recieve. (You have a tax basis of zero in your own services).

We tend to use variations of the latter in the US. The variations have to do with things like "cash vs. accrual" and "recognition vs. realization".

The problem with options is that you have to decide when to tax them:


  • Date options granted

  • Date services rendered

  • Date options are irrevocably vested

  • Date options may be transferable to a third party

  • Date options may first be exercised

  • Date options are actually exercised

  • Date stock purchased with options is sold


At each of the first three points, the options can only be measured theoretically--that is there is no way the grantee can convert them to cash. For reporting purposes, accountants use the Black-Scholes method to report something. Since the options are worthless if a disqualifying event (sometimes, but not always under the grantee's control) occurs prior to vesting, the calculated number clearly overstates the actual value.

We tend to use the date that the options are exercised, and calculate income as the difference between purchase price and fair market value. Clearly, the grantee received something of value prior to that time. The point chosen is just the earliest simple valuation.

Note: Under the new deferral regs (Summary), some, but not all options, continue to be taxed at exercise. Presumably the remainder would be taxed at vesting. Of course, that could create a substantial capital loss if the options lapse underwater, but what's a few broken eggs when you're making an omelet?

Which leads to a couple of questions:


  • Suppose part of the services are rendered by a resident alien in the US, but the remainder are rendered in a different country? Are the proceeds (as measured above) taxable in the US at exercise? Partially?

  • How about the converse: An alien here for three months exercises options granted years ago. Is that US source income?

  • What if services are rendered in two different states, the employee works in a third state during the vesting period, and exercises (during or post-employment) in a fourth state?

    Some states want all the income at exercise, some agree to apportion across the vesting period, others over the period from grant to exercise, still others want the grant date to control. (From my experience, NY (to take a state at random) will accept the method that yields the greatest NY-source income.)

    I've had to do 7-figure W-2s under these circumstances, with personal liability to each state if I didn't guess right. Oddly enough, the fourth state was more often than not Florida, Texas, or Nevada. Go figure.


More than you wanted to know, certainly. And in no way should the above be read as legal advice.

boris

We tend to use the date that the options are exercised, and calculate income as the difference between purchase price and fair market value.

Well okay. My comment was based on that and the rate is the same as any other income.

Walter

No offense meant. Except for the part that it is subject to tax later than earned, the rate is the same as any other income.

But purists would call the garden-variety option 'non-qualified deferred income not subject to inclusion in taxable income under § 409A'.

I am completely certain that I would (and often do!) mistate technical details in other areas. Such as, say, statistical calculation of the probability of a certain IQ given a mean and the assumption of a normal distribution.

Sorry to be pedantic, and thanks for the reminder to read the new regs (out just this July!).

Oh, to answer one of my questions above, the Treasury has yet to tell us how to calculate the amount included in compensation for 'non-qualified deferred compensation subject to § 409A' given in the form of an option grant in the money as of the grant date.*

* Actually, it can be in the money as of the grant date and yet deferred from income until exercise if the grantor uses an algorithm to calculate the award price, so long as the algorithm depends solely on averages or weighted averages of the price during a range of time between 30 days before and 30 days after the grant date and the algorithm is specified before the beginning of the period used in the algorithm.

You know someone is going to game that exception.

Appalled Moderate

Walter:

It's just for such reasons I don't talk technical tax issues on message board threads. You can never make a clean statements. There is always a caveat, an exception, and a penalty tax. At least, in the case of 409A, there is still good faith compliance and a year left to figure out what you're supposed to do.

Walter

AM,

I thought you were doing pretty well, given that you were trying to integrate a summary of a few hundred pages of regs with budgetary policy and the difference between the political and statutory underpinnings of Social Security.

I know it's late in the discussion, but here's my 2¢:

Decoupling the benefit calculation from the taxes paid would make obvious what all of us already know--Social Security is a welfare program rather than an insurance scheme.

That illusion is necessary for people to believe in entitlement to their benefits. Discussing a 'lockbox' makes people think that it contains something other than treasury certificates that are no more valuable to the US than an IOU I write to myself.

Believing otherwise is scary. It would allow people to begin to consider making welfare payments to those who need them, rather than those who've worked or married someone who worked and just plain lived long enough.

I've always thought that I'll never personally receive Social Security benefits. But that thought is much less comfortable now than it was in my 20's.

cathyf

Hey, Walter, you missed my favorite, from the frothiest days of the tech bubble:

-- Schlub employee joins high-tech startup, works 80-90 hours per week, is paid mostly in stock options.

-- Company goes public, and options are worth $5 million. Schlub exercises.

-- Within 3 months, company goes bankrupt. Schlub has worthless stock certificates and owes income tax on the $5 million.

(I've always thought that in this circumstance you ought to be able to send the IRS 38% of your worthless stock certificates. They, however, would not be amused.)

glasater

Can one get a loan against options--that is if one were fortunate to have such things?

Walter

Good one! (The good news for the Service is that the poor bastard who signed the 940 and his boss are on the hook for the missing withholding. We always got the taxes (cash from employee or sale of necessary stock) before transferring the stock.)

I understand why the '86 reforms stopped people from offseting wages with capital losses, but I've always thought there should be a safety valve in extreme cases. I'd bet that you could get Schlub a good hardship settlement with a little effort.

I had someone who exercised qualified options, took the big AMT hit, and then watched the stock die the very next year. It wasn't pretty.

boris

I've always thought that I'll never personally receive Social Security

Supposedly my benefit rates are already locked in.

all of us already know--Social Security is a welfare program rather than an insurance scheme ...

Well it is what it is. Ross Perot turned over his billions to the government and in return they pay him "interest" with a low income tax rate. Of course the gov spent all of Ross' money, there is no Ross Perot lock box. Of course the gov would let him "withdraw" some if he wanted and the money would come out of taxpayer revenue.

Does that make Ross' income and investments welfare? As Mark Weisbrot says ...

When the government bonds held by Bill Gates or Ross Perot or any other wealthy individual-- or pension fund for that matter-- mature, nobody proposes that they should not be paid their principal. Yet the reformers insist that the 140 million Americans who loaned money to the U.S. Treasury from their Social Security Trust Fund somehow don't have the same claim to be paid back.

Walter

"... loan against options?"

Usually employee stock options are written to be non-transferable. Because an employee could only receive value by exercising, and could only exercise after vesting, the options were not considered taxable until the risk of loss ended. (In the olden days (a bit before my time), they didn't even have a theoretical method to value them.)

If you can trade, borrow against and surrender, or sell options, they are easier to value.

The new regs (see link above and read about halfway down the cited page) make it explicit that borrowing against (non-qualified) options subjects them to tax. (To the best of my recollection qualified options must be (with exceptions, of course) non-transferable.)

Borrowing on your personal guarantee is OK, though, even if the loan officer takes your options into account when making the loan.

Walter

Eh, when I loan money, I usually get documentation.

Those pieces of paper you get say 'expected' for later fiscal years. They have to, because the money has not yet been appropriated.

Now, I'm fairly certain that you and all those over 50 will be paid full benefits under the current scheme. I just anticipate (and frankly think it would be good policy) means-testing by the time I retire.

And I certainly hope I'll be able to fail that test by a big margin.

boris

get documentation

Mox nix, this is politics not accounting.

Pay in under rule X

Get benefits under rule X

Rule changes have to be politically viable. That means the SS trustfund is as solvent as Perot's bonds.

glasater

Really have appreciated all the great comments.
What a wealth of thinking here on jom.

sophy

Welcome to our game world, my friend asks me to buy runescape .

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