TAX SMACKS

(Excerpts from an e-mail to WAMU's Diane Rehm, 12/10/12:)

You have had a number of shows recently that have taken up some aspect of resolving the fiscal "cliff," and I commend you for it.  I seem to recall one not too long ago where a guest brought up (all too briefly) the FACT of another mortgage-interest deduction for so-called "second" homes, including beach cottages, mountain cabins, RV's and yachts, all of which may be classified as "second homes" and thus interest thereon is deductible.  Now such resources are not usually available for those other than the "well-to-do."  I think it is safe to say that even if a "working stiff" (wage-earner) has a home mortgage-interest deduction, he or she won't likely have a SECOND.

Yet, out of the 15 or 20 people (at least) I have heard address the issue on your show or elsewhere, pontificating one way or the other about the elimination of the home mortgage-interest deduction, only that one recent guest of yours has mentioned the SECOND-home mortgage-interest deduction!  I think it is ludicrous to debate the issue of eliminating the FIRST-home mortgage-interest deduction and to say nothing about the costs of the SECOND-home deduction!

FINALLY, I must ask why don't workers get to deduct residential rents paid?  Wealthier folks get not one but TWO mortgage-interest deductions, while said "working stiffs" who don't own their homes get nothing except the piddly Standard Deduction.  It makes no ECONOMIC sense, as more multi-family housing will be needed as we Baby Boomers age.

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Another serious tax issue NOT being discussed is the negative impact of the FICA (Social Security) payroll tax on the economy.  There has been almost NO discussion of this separate tax, despite the fact that it (12.4%) is assessed on gross wages and salaries up to about $110,000 and on no salaries higher than that.  Nor is FICA assessed on dividends, interest or capital gains, all of which are federally taxed at a measly 15% DESPITE the marginal bracket of the recipient.  FICA is in addition to the state and federal income-tax burdens on workers, it is not deductible from taxable income, so it is levied on GROSS earned income (up to about $110K) without any deductions allowed against it.  It is nominally split between the worker and the employer, but the workers bear the entire economic burden of the FICA tax because ALL available employers must pay it, and those employers will eliminate wages and salaries if they can swap laid-off workers for machines.  After all, there is no payroll tax levied on machinery!

As a result of the utterly stupid BIPARTISAN tax cuts back in 2001, workers and lower-income salaried personnel now pay a disproportionate share of their gross incomes in taxes, when measured as a ratio of after-tax-and-living-expense net income to gross income.  In other words, the more gross income someone realizes, the higher PERCENTAGE (not just total dollars) retained after taxes and living expenses.  This is the TRUE measure of the impact of income taxation: not which share of the population as a group pays the most aggregate dollars.  That is a red herring intended to distract the credulous and ignorant from the serious issue of too much taxation on lower incomes.  I worked out spreadsheets back then that showed the validity of my assertions.  That tax cut was rammed through the Congress so fast I was unable to complete my spreadsheets and study them before the bill became law!  Democrats have been almost incoherent when discussing this matter!

Note also that over half of all households in the US are now grossing less than $60,000 a year.  With two earners therein, that is an average of less than $30,000 each GROSS (pre-tax) income, which is chicken-feed!  Coupled with the widespread reduction or elimination of benefits, it is clear that over half of all Americans and/or their small-scale employers are bearing stupendously heavy burdens.  How many more households supposedly earn more than $60K but less than $75K?  I don't know, but I would bet it's a lot.  Yet we are absurdly debating the horrifying impact of modest income-tax increases on incomes above $250K!  Where is the reality in any of this?  How dumb must people be to even TOLERATE this stupid debate?

I wish to question, as the FICA tax is levied on gross (not after-tax) incomes at the time it is assessed, and the future value of those withholdings (inclusive of earned return) are what is doled out later as Social Security, why is it justifiable for SS receipts to be taxed twice as income?  The withheld FICA previously earned was subjected to the income tax at the time it was withheld, and now people are proposing to tax it again!  That is ludicrous, ESPECIALLY when measured against the one-time 15% levy on dividends, interest and capital gains!  Further, there are current proposals being discussed by the "experts" to defer retirement payouts of Social Security and/or to increase the FICA bite so there will be less need to raise INCOME taxes on wealthier folks (or to cut the Pentagon budget)!  All of that is absurd beyond belief!  Why should the lower-income folks bear an onerously disproportionate FICA burden in order to relieve the wealthy of the additional pittance being asked of them?

There is a lot of Chicken-Little doom and gloom being parroted about the decline of Social Security and the looming bankruptcy of the system, yet the system is currently flush with value (albeit federal IOU's).  Most commentators have gotten their lemming-like "fear factor" from reading the Trustees' Report SUMMARY published in 2009 raising the spectre of eventual bankruptcy of the Social Security Fund.  However, I downloaded both the Summary and the actual Report, and the Report paints a far less gloomy picture than does the Summary.  It pays to go to the source, for the Trustees concluded in the actual Report that future FICA receipts were PREDICTED to be insufficient merely because of their projected declining future birthrate of potential workers!  Also, much agony has been expressed about us Baby Boomers draining the SS Fund, but as I was born in 1946, I will be 89 years old if I live to 2035, the projected year of disaster.  I don't think I will live that long, and I expect the youngest Baby Boomers (at age 74 then) will have also experienced a significant "thinning of the ranks."  I was unable to find anywhere in the 2009 Trustees' Report any discussion of the likely mortality rate of Baby Boomers which would REDUCE the likely claims on the SS Fund!  Their projections seem to assume that ALL OF US will be alive and perniciously draining the Fund of its dwindling resources.

Finally, one should not conflate the maliciously fabricated Social-Security panic with the very real problems with Medicare.  Too many people are jabbering away about "entitlement reform" without being specific and without making any distinction between Social Security and Medicare.  There are important distinctions.  It would also be nice if the "experts" would read the actual Trustees' Report and not rely on just the Summary when pontificating their dreadful conclusions.  I hope you might get a chance to explore all these issues with your future guests.  I hope to be listening.

As you can see, none of this would have fit very well in a phone call!