As demonstrated in my prior post, the Reagan Administration cut personal income taxes and subsequently raised payroll taxes, theoretically to save Social Security but in reality to pay for the income tax cut and other things. More on the other things later. Despite significant tax changes under subsequent administrations, this tax shift remains in place. In addition, the income tax code has been made vastly more complicated by higher rates combined with more deductions, exemptions, preferences, and favors, starting with the Clinton Administration and continuing in the administration of President George W. Bush. The same process has occurred at the state and local level in New York, with former Governor Pataki handing out this deal and that and sending checks, Mayor Bloomberg adding his own check, and former Mayor Giuliani pushing a special sales tax deal for clothing and cutting taxes for any individual company that got into his office and threatened to move to New Jersey. This is something that certainly didn’t change on Day One of the Spitzer Administration. In recessions, tax rates are raised to make of the lost revenue and service the debts. So, with payroll taxes up and income taxes down, and with tax rates rising and tax deals proliferating, who wins and who loses?
The obvious answer for the shift from the progressive income tax, which has higher tax rates at higher levels of income, to the regressive payroll tax, under the Social Security portion of which higher income levels are exempt, is that the affluent win and the middle class and poor lose. And indeed that has been the case. The growth of the alternative minimum tax portion of the income tax makes this worse, because otherwise the progressive income tax offsets the regressive payroll tax. As inflation causes the one-rate AMT to cover more and more Americans, the personal income tax is transformed into a flat tax – but the combination of the AMT and the payroll tax turn the federal tax system into a means for transferring income upward as those with lower incomes pay a vastly higher share of them.
Based on what has been done (raising the payroll tax, which the Bush Administration floated doing a second time in 2005) and not done (not fixing the AMT in 2001 as part of the huge Bush tax cut), not what has been said, I believe it is fair to say that a tax system that collects a higher share of income in taxes from the less well off than from the affluent is the official policy of the Republican party. I’ll say it again – through stealth the Republicans seek a tax system that redistributes income from the poor and working class to the upper middle class and wealthy. The only Republican candidate who has even acknowledged this is John McCain, which is one of several reasons that he is the only Republican candidate I will even consider voting for even for a second.
But there is another difference between the payroll tax and the income tax that is inequitable, given that today’s senior citizens are much better off than many of today’s workers, and vastly better off than today’s workers will be with they become senior citizens without pensions and with little 401K money themselves. The federal personal income tax, which has been cut, includes investment and retirement income – Social Security, pensions, 401K withdrawls, and interest and dividends on non-retirement accounts. The payroll tax only hits those working. Indeed, the Democrats derided the Bush tax cuts as a windfall for the rich, you might recall, the Bush Administration defended them as a windfall for senior citizens. The fact that retired senior citizens do not pay the payroll tax is one reason their federal tax burden is so much lower than a working couple with the very same income and less wealth, as I showed here. Of course the senior tax advantage is much greater for New York’s state and local income taxes, from which retirement income is exempted.
When Senator Barack Obama proposes to increase the payroll to “Save Social Security” a second time, he proposes exempt today’s affluent seniors from any share of the sacrifice they themselves have created. Moreover, if even more money is collected today to “Save Social Security,” what is to stop it from being spent today, or used to offset promises of additional tax cuts for those today, with even more IOUs deposited in the “lock box” to be theoretically paid back with interest tomorrow? Mr. Obama, therefore, would merely expand the inter-generational transfer of wealth to those “at or over 55” when President Bush said the words, generations who now say they believe their children and grandchildren will be less well off than they are, and are probably right. It must also be said that Mr. Obama also proposes exempting senior citizens with incomes of less than $50,000, but not non-senior citizens with the very same incomes, from the personal income tax. Yes, I said the very same incomes. So much for the candidate of the next generation.
Haven’t those “at or over 55” taken enough? Lift the income limit on payroll taxes to turn them into a flat tax? Fine, but only to reduce the 12.4% (6.2% for employer and employee) tax rate, not to pay back money that has been diverted. Raise the income tax take instead, and make today’s senior citizens share in the cost.
The general rule with tax complication is that insiders and players win, and everyone else loses, a fact that suits the insiders and players just fine. In fact, rising tax rates and increasing tax breaks seem to be a natural process, as elected officials curry favor with small, narrowly defined groups with special deals, while passing the cost on to the future and the majority, who don’t matter.
The personal income tax began with low rates and a broad base, but by 1976, in his campaign brochure, former President Carter said “basic tax reform is necessary. Jimmy Carter believes that our federal tax system is a disgrace. Loopholes must be plugged!” Former Senator and Democrat Bill Bradley took up the charge, and the 1986 tax reform act, pushed by the Reagan Administration and sponsored Democrat Dick Gephardt in the House of Representatives, took away most tax breaks and drastically cut rates. But former President Bill Clinton and the Republican congress reversed this by raising rates and, as the economy expanded, giving back some of the revenue in the form of an ever increasing range of tax breaks, a process that continues to this day.
Whom does an increasingly complicated personal income tax with lots of tax breaks and higher rates benefit? Two-income upper middle class professionals. If tax breaks take the form of deductions, they are worth more the more you earn, because the higher one’s tax bracket, the more one saves. For the majority of Americans and all those in the bottom third of the income distribution, deductions are worthless because the standard deduction is worth more than the sum of the itemized deductions they are qualified for. The wealthy do not benefit because of the AMT (even now) and the phase out of various deductions at higher income levels, a practice (I believe) the administration of George HW Bush began and President Clinton expanded on as a stealth tax rate increase. But assuming a two income couple the political class, elected officials and high-level bureaucrats, along with most of the top-paid people in unions and non-profit organizations, are in the sweet spot. Those earning, say, $60,000 to $120,000 per year each and $120,000 to $240,000 per year collectively. The shift in the tax code under President Clinton, therefore, shoveled the most advantages to people like the Clintons and their entourage, and those living in places like Chappaqua.
And like me, for it must be said that while some of the tax changes of recent years have stuck it to those in my situation those in my situation are among limited number of non-senior citizens who have been pandered to. Our total tax burden has fallen significantly as a share of personal income since the days of George HW Bush, despite our income being higher when adjusted for inflation. So why am I not grateful? Because every additional dollar I have received has been sucked out of my own future, my children’s future, my community’s future, and my country’s future. Why do people not see that? We’ve been sold an option-ARM with an exploding payment.