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Midland Daily News, May 18, 2005
My columns in April on taxes generated
several spirited responses. Discussion of taxes has a tendency to do that, I
would guess, because taxes affect our pocketbooks.
To their credit none of the
respondents entered into personal attacks or name calling, except one who
called me a "populist". Now, that word comes from the Latin word for
people, so if he is suggesting I am interested in the "people" and
what's good for them, then I accept that label with honor.
Several of them objected to my
comment that "a small increase in the payroll rate would not be
burdensome." Self-employed people pay the full 12.4% on themselves and
half the tax on their employees. Todd said, "If my self employment taxes are increased, I’ll simply lay someone off to
offset my costs." Todd has ten employees. Businesses like his are the
backbone of our economy.
Gilbert Harter said in the
Midland Daily News, that I "wandered away from history with a diatribe on
cheating, suggesting that cheating dominates the tax returns of self-employed
persons, higher income persons, and corporations."
On the contrary, I only mentioned
that they "have opportunities to cheat on their taxes", when compared
with people who only have W2 income. Government studies, however, do indicate
that people cheat on their taxes to the tune of billions of dollars every year.
Lee Newton aptly pointed out that
"low-to-moderate income self-employed" may or may not report their
income, especially when it is in cash. I agree with him. In fact, the temptation
is probably just as great among low income people as among those who make much
more, since they are struggling just to have a decent living.
One person asked, "should I be penalized for spending over $100,000 to educate
myself?" Of course not, but not all have that opportunity. He was not only
dedicated to his goal, but was fortunate to have the wherewithal to do that.
What no one picked up on was my
recommendation that we replace some of the income tax with a value added tax. I
said this could provide enough revenue to exempt the first $90,000 of income
from income tax. It is in light of this change in the income tax that I made
the statement that "a small increase in the payroll rate would not be burdensome."
It was in this context, too, that I applauded the reform of both the income and
payroll taxes together.
The Heritage Foundation, on their
website, analyzes President Bush's proposals to reform social security, including
examples of how "typical" taxpayers would benefit from Personal
Retirement Accounts (PRA).
It concludes that the individuals
who opt for PRAs would have just as much income in
retirement plus an inheritable "nest egg", "assuming a 4.9
percent annual real rate of return and administrative costs of 0.3
percent." If the rate of return is 3% or less, then the government would
guarantee an income equivalent to Social Security without a PRA.
"The default portfolio would
likely consist of up of 50 percent stock index funds, 30 percent corporate bond
index funds, and 20 percent government bonds," according to the Heritage
Foundation. President Bush estimates that to set these up "the total cost
over 10 years would be $754 billion when interest is included."
It seems to me that if a person
opts to put 4% into a PRA, then his Social Security benefit should be reduced
by at least a third, since the total payroll tax is 12.4%. The Heritage
Foundation examples showed a smaller reduction.
If investing in the market is
such a good thing, what would be wrong with the Social Security Trust Fund
investing its money in the market according to the rules above? If these PRAs are such a good thing, why do they have to be
"guaranteed" by the government?
Finally, why not put that three
quarters of a trillion dollars cost of setting up PRAs
into the Social Security Trust Fund, change the benefits from wage gain formula
to one based on inflation in prices as proposed by Robert Pozen,
and increase the normal retirement age?
Let's keep the conversation
going. All of this is very complicated and all views need to be heard.