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Front- and backdoor tax increases - The Eagle: Business

Front- and backdoor tax increases

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Posted: Sunday, February 13, 2011 12:00 am

As e-mails go, it was unusual. It was from a Republican candidate for the U.S. Senate. The candidate urged me to visit his website. The candidate was proposing "solutions that would make a difference."

For me, it was the last straw.

His proposal to strengthen Social Security was to raise the minimum age for retirement from 62 to 63. He would do it in 2014. If you view Earth from another planet, this is a reasonable idea. Somehow, we earthlings have to deal with the ever-expanding burden of elderly entitlements.

On planet Earth, however, the idea suggests a certain obtuseness about real life. According to the Social Security Administration, about 70 percent of all people take benefits at age 62. People don't take their benefits so they can join a better golf club. Most take benefits because they have little, or no, other income. In a world of shrinking employment, those who can choose a convenient time to take their benefits are very fortunate people.

The real issue here is the honest identification of a tax. Members of both parties love to argue about the income tax because it is visible and obvious. Democrats want to increase it, at least for those in the top 2 percent of income. Republicans want to decrease it for everyone, including hedge fund managers like John Paulson, whose personal income of $5 billion last year exceeded the $3.6 billion total team salaries for all 32 NFL teams.

Yes, you read that right. His personal income for the year would have paid all the humongous salaries of all team members in the entire NFL, with $1.4 billion left over.

Taxation comes in two forms, front door and back door. Taxes that are called taxes are front door. Other taxes are back door. We pay a lot of taxes that have never been called a tax. Politicians on both sides know this. They get to slide a lot by us simply by avoiding the "tax" label.

So, take this quiz: Which would you prefer?

* Raise the age of being eligible for Social Security benefits from 62 to 63;

* Or a 100 percent tax on all Social Security benefits for people who are 62 years of age.

See what I mean? Either way, people who are 62 years old lose 100 percent of their expected income benefits -- benefits that they paid employment taxes for decades to receive.

The recent bipartisan report from the National Commission on Fiscal Responsibility and Reform did much the same. It proposed higher taxes without calling them taxes or tax increases.

Here's an example. Most people don't know that one of the highest tax rates in the country is built into the Social Security benefits formula. The National Commission proposed to increase that tax from 85 percent to 95 percent. (You can find it on page 49 of the report.)

How could this be? Simple. When you and I pay our employment taxes, the percentage that gets credited for future benefits goes down as our income goes up. Instead of calling the crediting levels tax rates, they are called "bend points."

In 2010, for instance, income up to $9,000 was credited at a 90 percent rate; income from $9,000 to $64,000 was credited at a 32 percent rate; and income between $64,000 and $107,000 was credited at a 15 percent rate. Quite a difference. In effect, the tax rate rises from 10 percent of income to 85 percent of income when it comes to determining future Social Security benefits.

The commission proposes to increase the number of bend points and decrease the crediting rates. The net effect will be to lower future Social Security benefits. Like the Republican Senate candidate, the commission also proposes to increase both the full retirement age and the early retirement age.

The point here is not to hurl howls of execration at an unnamed Senate candidate. Nor is it to criticize a serious and well-intentioned report from a bipartisan commission. The point is to draw a line in the sand. It is time for you and me to say, "Enough!"

No more semantic abuse.

There is none in the Constitution. There is none in the Bill of Rights. But we get it constantly from both parties.

Next week: A $2.6 trillion token of honesty, and what your check from the U.S. Treasury should be.

* E-mail questions about personal finance and investments to scott@scottburns.com or visit scottburns.com.

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