It’s tax time again, and time to take stock of how the events of the past year have affected two fictional couples, the Young Hopefuls, now both age 30 with a four-year-old child, and the Senior Voters, now both age 70. You may recall that in 2007 each couple had an income of $100,000, with the Young Hopefuls paying $33,028 in federal, state and local taxes and the Senior Voters $14,169 on the very same cash income, even though the senior citizen couple in this example had far more wealth and non-cash benefits such as health insurance.
Things got worse for the Young Hopefuls in 2008, as the recession caused Ms. Hopeful to be laid off from her moderate income job and Mr. Hopeful’s self employment income to drop, while the Senior Voters, who are “living on fixed incomes” benefitted from automatic inflation adjustments for their Social Security and pension. The Senior Voters paid $13,453 in federal, state and local income and property taxes on their income of $102,593, or 13.1% of it. The Young Hopefuls paid more taxes — $16,070, on their far lower income of just $57,000, or 32.1% of it. So what happened to these couples in 2009?
Like many of their generation, Mr. Hopeful has been forced to work as a freelancer or independent contractor, so his non-employer could avoid providing him with health insurance and pensions while continuing to provide these to other employees hired earlier. With business down in the recession, his self-employment income was cut again from $50,000 in 2008 to $44,100. When Mr. Hopeful does not work, he is not paid – and does not get unemployment insurance. While this sort of income loss is more common among the self-employed, the current recession has seen wage cuts and furloughs become common for wage and salary employees as well, with both wage rates and hours falling. According to press reports and data, moreover, self employment is soaring as those laid off are not rehired to regular jobs, particularly if they are older and could have a substantial effect on a firm’s health insurance premiums. The Young Hopefuls are uninsured.
Mrs. Hopeful held a part-time retail job without benefits in 2007, at which she earned $25,000 while paying $5,000 in child care. She lost that job after Christmas 2007, and was unable to get another one. Unemployment insurance payments in New York are set by the following formula — “your original benefit rate is calculated on your actual high calendar quarter wages. Your weekly benefit rate is one twenty-sixth (1/26) of the high quarter wages paid to you in your base period.” Mrs. Hopeful’s high quarter was $7,000; her weekly benefit is $269, which she received for six months in 2008 before exhausting eligibility, for a total of $7,000 in taxable unemployment insurance income. Thanks to the extension of unemployment insurance due to the federal stimulus plan, she was able to collect for 48 weeks of unemployment payments in 2009, for a total of $12,912, but was unable to find another job, even at Christmas. It should be noted that as the recession drags on fewer workers are losing their jobs, but those without jobs are still unable to find them, with long term unemployment accounting for a rising share of the unemployed.
Since the inflation of the early 1970s, before the automatic inflation adjustment for Social Security was enacted in 1975, no elected official has been able to say the words “senior citizens” without also saying the words “on fixed incomes,” the fixity of those incomes being part of the presumed need and entitlement of the retired, regardless of how high those fixed incomes are. As a result of the New York State pension enhancement passed in 2000, however, the first $18,000 of the Senior Voters’ New York City pension income is automatically increased by an amount equal to one-half the inflation rate, which was 2.7% for 2009. That pushed their pension income up by $243, from $35,691 in 2008 to $35,934 in 2009.
In a quirk based on the timing of the measurement, the Social Security inflation adjustment was 5.8% for 2009, adding $1,840 to the Senior Voters’ 2008 total of $31,702, raising it to $33,542. When prices subsequently dropped, Social Security wasn’t cut back as a result. And since there was no additional upward inflation adjustment to Social Security with negative inflation, Congress voted to send the seniors a $250 check instead. With falling incomes pushing down the money coming in, and the big inflation adjustment increasing the money going out, Social Security is running a deficit after decades of surpluses. And since those surpluses were spent on other things, and the rest of the federal government is too broke to pay it back, politicians and pundits are sounding the alarm that drastic benefit cuts are required – for future beneficiaries – along with tax increases – for today’s and tomorrow’s workers.
The tendency for three decades, in fact, has been to cut income taxes, which burden a wide range of income, and raise payroll taxes, which only hit workers. This benefits retirees and the rich, who receive retirement and investment income rather than wage and self-employment income. The greatest example is the Reagan and Bush income tax cuts, and the 1983 payroll tax increase to “save Social Security.” Today’s retirees (particularly retired public employees) and the rich are just about the only people who have become better off in recent decades in terms of their income as well. This year, the state enacted yet another tax on work income (but not retirement and wealth income) to “save the MTA.” With the MTA not saved, the Governor has proposed to raise that tax for those living in New York City.
The Senior Voters also cashed in $35,000 from their 401K-equivalent 457 plan in 2009, bringing their total income for the year to $104,485, up 1.8% from 2008. The Young Hopefuls’ income, meanwhile, was unchanged at about $57,000, but only due to the federal stimulus program’s extension of unemployment insurance benefits.
So what about taxes? Let’s crank up the Turbo Tax and find out.
The $104,485 in income the Senior Voters received translates into $77,554 in federal taxable income once the partial exclusion of Social Security income, personal exemptions, and the standard deduction are factored in. Their federal income tax bill was $11,769 for the year. In 2008 the Senior Voters received a check for $1,200 in May as part of the first federal “stimulus” giveaway, but this time their check was just $250, reducing the net tax bill to $11,519, or 11.0% of income.
The $57,000 the Young Hopefuls received, including $12,900 in unemployment assistance and $44,100 in independent contractor income, falls to just $29,146 in federal taxable income after personal exemptions, the standard deduction, a child tax credit and the newly added $800 “making work pay” credit. They also lost the 2008 stimulus rebate, but did not gain an inflation adjustment check. Mr. Hopeful, however, has to pay both the employer and employee share of the payroll tax as part of the “self employment tax,” which comes to $6,231 according to Turbo Tax. The total federal tax bill for the Young Hopefuls, therefore, is $7,955 or 14.0% of income, compared with the Senior Voter’s 11.0%. Because the double payroll tax on the self-employed hardly makes work pay, however, the Young Hopefuls actually paid less in tax in 2009 with lower self employment income but more unemployment benefits. In that sense, they became better off relative to the retired Senior Voters by doing less work. The Young Hopefuls’ state and local income taxes amounted to $1,679 and $1,118, respectively, for 2009.
Had they been making a lot of money they might have regretted living in New York City, which unlike all but a few localities has a progressive local income tax that hits the better off harder. As it is, however, they are lucky to live in a place where property taxes are low, and local income taxes go down when incomes do. The landlord of their 500-square-foot one-bedroom apartment had to give in and cut rents 4.0% in 2009 or risk losing a tenant, but building’s tax assessment also fell, leaving the property taxes passed on to the Young Hopefuls as part of their rent up just slightly at $3,921. In 2007, when he had $75,000 in self-employment income, Mr. Hopeful owed $1,029 in additional Unincorporated Business Taxes; in 2008, with just $44,100, he owes nothing. The cutoff for the UBT was increased to $100,000, which may benefit Mr. Hopeful if his independent contractor income increases in the future. But the new MTA Mobility Tax socked him for $150. Adding it up, the Young Hopefuls owed $6,868 in state and local income and property taxes, or 12.0% of their income.
And the Senior Voters? Public sector retirement income at any age, and a share of private sector retirement income at age 65 and after, is exempt from state and local income taxes in New York, so New York taxable income is zero, just like last year. Turbo Tax claims they are entitled to a $125 refund as part of the STAR local income tax break, even though they paid no local income taxes. On the other hand, the Senior Voters were hit with higher home costs in 2009. With the removal of the $400 Bloomberg Check and the $132 Spitzer Check, a higher tax rate and the gradual phase in of their higher house value, they paid $3,957 in local property taxes on their 1,500-square-foot (plus semi-finished basement) rowhouse, or a few dollars more than the Young Hopefuls paid on their 500-square-foot apartment. Factoring in the income tax refund, the Senior Voters paid $3,832 in state and local taxes, or 3.7% of their income.
Adding it up, the Senior Voters paid $15,351 in income and property taxes on their income of $104,485, or 14.7% of it. The Young Hopefuls paid $14,823 on their far lower income of just $57,000, or 26.0% of it. That is a much higher percent than the Senior Voters, but is less than last year. After taxes and housing costs the Senior Voters had $85,665 to spend in 2009, while the Young Hopefuls had $23,508.
Let me repeat again: there is nothing inherently immoral about a set of public policies that makes it hard on young people, particularly those without the burden of caring for young children, while making it easy on old people. The young, after all, have many other advantages. But such a system is only moral if it is sustainable. Can the Young Hopefuls expect similar benefits when they are senior citizens in 40 years? May I call your attention to the national, state and local debts, and the sudden interest — while the federal government is borrowing $trillions — in “reform” for Social Security and Medicare, with presumably no impact on those who were “age 55 and over” when former President Bush said the words? The Young Hopefuls had better plan on working until their health fails, and then living on less. (I certainly do on general principles, and I’m much better off than they are).
Nothing that has happened in the past year has led me to change my thinking. A health care reform that might have allowed the Young Hopefuls to afford health insurance has apparently stalled, as a result in part of Republican objections to any restraint on the increase in Medicare costs for today’s seniors, and riled up angry Senior Voters. Meanwhile, those same Republicans – and some Democrats – now asset that in the long run “entitlements reform” will be needed to keep the country from going broke, reforms that will presumably exempt today’s Senior Voters from any sacrifices. And the federal deficit the Young Hopefuls will be paying to taxes to fund? It has soared to one-third of the budget, as Social Security has gone into the red.