When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Friday, December 7, 2012

The Payroll Tax - the problem and part of the solution

Our Enemy, the Payroll Tax - NYTimes.com: "Payroll taxes are a relic of New Deal Machiavellianism: by taking a bite of every worker’s paycheck and promising postretirement returns, Franklin Roosevelt effectively disguised Social Security as a pay-as-you-go system, even though the program actually redistributes from rich to poor and young to old. That disguise has helped keep Social Security sacrosanct — hailed by Democrats because it protects the poor and backed by Republicans as a reward for steady work. But the costs of this disguise have grown too great to bear. Whatever its past political advantages, the payroll tax now imposes an unnecessary burden on a stagnating economy. In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class."

As usual, the New York Times only gets it half-right. Yes the payroll tax is a problem (for those employed), it is extremely regressive, but it also provides a remedy (if changed along the lines I suggest below) to find a way out of the morass we are in. Employers are increasingly limiting or deleting benefits for employees--pensions, health insurance, etc. What's the answer? Level the playing field, make ALL employers contribute to the social cost of retirement and health care based on the gross compensation (including payroll) of every employer--

1. Delete entirely all payroll tax paid by employees.
2. Increase the payroll tax paid by employers to 10%  of gross employee compensation with no income limit and "compensation" to include not only payroll but the value of ALL compensation paid to an employee such as the value of stock options, etc. This would increase revenues dramatically by eliminating the $110,000 cap and including all compensation (stock options etc.). (The present employer payroll tax is 7.65%--6.2 Social Security + 1.45 Medicare.) We all know that executive pay is out of control--there is no reason any employer or employee should not have his "total package" subject to the payroll tax. In addition ALL employers should be subject to this federal payroll tax--no "opting out."

3.  Means testing of social security and medicare benefits and other cost controls to efficiently and fairly administer the system. No double dipping, etc., to insure fairness and solvency.

4. Phase out (over time) of all pensions and other non-social security retirement plans, replaced by employee self-funded retirement accounts -- funded by direct withholding from an employee's wages at the default rate of 5% of gross wages (employee option to increase this up to a maximum of 20%) and paid to a federally regulated financial institution (yes this could be an "institution" operated by a union) of the employee's choice (completely portable), guaranteed 100% by the US government.

5. Self-employed individuals would have to pay a 5% self-employment tax on their own income (in lieu of the  payroll tax rate of 10%) generated by "self-employment" (50% of said self-employed income being considered like "dividend income" paid by corporations to stockholders on which there is no "payroll tax" paid).

If you want to solve our "crisis," you also need to reform the income tax--

Eliminate all personal deductions, "favoritism" and special tax breaks--ALL income (capital gains, dividends, wages, etc.,) subject to a flat 20% income tax rate on all income over $20,000 per year (first $20,000 being exempt from all federal income tax). Income over $1,000,000 per year would be subject to an additional 5%, making a total effective tax rate of 25% on all income over $1,000,000 per year--individuals, corporations, etc.--no exceptions or special tax breaks!

If Congress would pass this, the "fiscal crisis" would be solved--and watch the economy boom! Oh I know there would be whining and complaining--but this is "doable" and it eliminates or lessens tax burdens on the poor and middle class.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects