Barack Obama on the Social Security Tax
Wrecking America’s Entrepreneurial Strength
By blackhedd Posted in Economy | entrepreneurs | FICA | Obama | Social Security | taxes — Comments (20) / Email this page » / Leave a comment »
Senator Obama recently made an important proposal in regard to taxes. We’ve known for a long time that he intends to raise all kinds of taxes, including capgains taxes and income taxes on high earners. His specific recent proposal is to extend the FICA (Social Security) levy so that it will apply to all income above $250,000.
That may sound weird to you. It is, and here’s why: today the roughly 12.5% FICA levy is only applied to a bit more than the first $100,000 of income. Of course that makes sense because Social Security benefits are only based on that amount of income: if you make more than $100,000 in any given year, it doesn’t increase the retirement benefits you get.
Obama is proposing to charge the FICA tax on the first $100,000 of income (just as today), and then stop applying it to income between $100,000 and $250,000 (again, just as today), and then re-apply the tax to all income above $250,000.
Income above $250,000 will pay the Social Security tax, but will not contribute to the benefit calculation.
What is Superman trying to accomplish with this? What does he want us to think he’s trying to accomplish? And what will be the real effects?
Keep reading…
Let’s be a little clearer about what the Senator from Illinois is proposing. Whenever you earn a dollar of income below $102,000 (a number that changes periodically to reflect inflation), you and your employer together pay about 12.5% of that dollar to fund Social Security. You may think you’re only paying half of that, but that’s part of the cleverness of the system. Your employer pays the other half of the tax before he pays your salary, with money that otherwise would have been part of your compensation.
Now again, you only get “credit” for that first $102,000 when the Social Security Administration figures out how much your retirement benefit will be.
So when Obama proposes to also apply the 12.5% levy to all income above $250,000, he’s doing nothing more or less than to raise the effective marginal rate on that income from its current 33 to 35 percent, to a maximum of 47.5%. Add in his already-proposed income-tax rate increase of 4.5% for high earners, and that takes you well above a 50% marginal federal tax rate for high incomes. This is an income-tax increase, not a Social Security tax increase.
There’s been quite a bit of commentary which holds that Obama is pandering to middle class voters, by telling them that only the top 3 or so percent of earners will pay his new income tax. You can easily imagine that most people would have a rather strong reaction if he were to tell them that he was going to tack on another 17% to the 28% that incomes above $100,000 already pay.
Clearly that wouldn’t be something you want to run for President on. But if elected, I think it’s only a matter of time before the higher levies come to incomes between $100,000 and $250,000.
Why? Because of the reason Obama gives for proposing this enormous tax increase in the first place.
This isn’t about “fixing” Social Security. I’m well known for heterodoxy on the issue of fiscal discipline. Social Security will never run out of money, by definition. That’s because the government can and will print enough money to pay for the program, come what may.
I won’t go further with that, because it’s not my main point today. Flame away in the comments, and I’ll respond there or with another post on that subject.
What Obama really wants to achieve is justice. In explaining this plan, he gives the example of a $100,000 earner, whose bill for Social Security is 12.5% (grossing in the employer contribution). But a $1 million earner’s Social Security levy is only 1.25%!
Apply Obama’s tax increase, and the millionaire’s FICA levy will still be a bit smaller than 12.5% (because of the exclusion from $100,000 to $250,000), but hey, at least we’re moving in the right direction, right?
Never mind that the retirement benefits paid on the $1 million salary are precisely the same as the benefits paid on the $100,000 salary. It’s still a great soundbite.
Since there’s no conceivable economic benefit to this tax increase, and certainly no impact on the solvency of Social Security, the only argument left in its favor is fairness. Obama believes quite straightforwardly that it’s not fair for people who make more money than others to be able to keep it for themselves.
The only way this position can possibly make sense is if you assume that the kind of hard work which results in high middle-class incomes, actually is of little economic utility. Obama is saying that people who earn a lot of money aren’t really earning it in the first place, and therefore it’s not fair to let them keep it.
He adds in the politically-expedient point that he’s shoring up Social Security, but that’s a red herring that shouldn’t fool you.
I very much agree that, at the extreme high end of the income scale, the amount of compensation can exceed the economic utility of the person generating the income. Tiger Woods is a great golfer, but is he really worth the $100 million or so that he’s received over the years? How about Oprah Winfrey? Has she earned the more than $1 billion she’s been paid?
And let’s step back from the extreme high end, to the realm of senior executives in large companies. There are a handful of outliers here every year that come close to Tiger Woods and Oprah Winfrey. But the typical CEO salary in the largest businesses is in the range of 3 to 5 million dollars.
The point about CEO pay has been argued at great length (CEOs are supply-constrained just like baseball pitchers are; boards should set compensation rather than the taxman; etc, etc.) For now, I’ll just say that I’m willing to grant that many, perhaps most, big-company CEOs are paid well above their actual value-added.
Should we use tax policy to address this issue? I happen not to think so, but frankly, the numbers here don’t really add up to a big problem (there are only 500 CEOs in the Fortune 500) so I don’t care about it very much.
What I do care about very much is the entrepreneurial class. There are no fewer than 20 million tiny businesses in America. They’re all run by people who accept enormous risks and heavy workloads in order to try to do something better for themselves and their families.
The reason these people matter, and matter tremendously, is because they’re the ones who are creating nearly all of the private-sector jobs. We need people who are willing to work 80 hour weeks while living on credit cards or savings, because the people who don’t have what it takes to do that need jobs too.
And what’s the reward for an entrepreneur who takes no salary or a minimal salary as he builds up a small company over perhaps five years or so? He’s looking forward to an opportunity to go from near-zero to maybe half a million dollars in annual income, in the good years.
That’s the guy whose heart Barack Obama is aiming his gun at.
Plenty of left-leaning people over the years have told me that entrepreneurs will always do what they do, simply because they enjoy the risk. There’s something to that, but I can tell you something from direct experience: if you’ve never had to scramble to meet a payroll, you can’t know what running a small business is like.
There’s nothing like the feeling of coming up short on a payroll. It feels like you have branding irons all over your body. This is not the kind of risk you let yourself in for, if you know that the potential reward isn’t worth it. And now Barack Obama wants us to think that those rewards are unfair and should be penalized with higher taxes.
We already have a large step-up in the income-tax rate for people who earn more than $1 million a year. (That’s the reason why most income above $1 million takes the form of deferred compensation.)
Let’s step it up even farther. Let’s make it so making more than $1 million a year is not something that Americans ever do. I’m almost ok with that. But don’t start punitively taxing incomes below that level. It’s a job killer.
-Francis Cianfrocca (“blackhedd”)
« Rethinking the Goals of a National Mortgage Bailout — Comments (45) | The Audacity of Lies: Obama Takes on the Crude-oil Speculators — Comments (42) »
Barack Obama on the Social Security Tax 20 Comments (0 topical, 20 editorial, 0 hidden) Post a comment »
I don't have numbers - and I really am not in the mood to wrestle with e IRS website to try to find data. But anecdotally, I believe I'm generally right, so I'll go with it.
Many small businesses, and some not so small business, are run as sole proprietorships and partnerships. What this typically means, in tax terms is that the small businessman declares all of the profits from his business - whether he uses them as salary for himself or uses them as "retained earnings" - on his regular 1040. Partners will also wind up having to declare on their individual returns, their "share" of the profits even when those profits are not paid out to them for personal use (my father is in this situation). In my parents' case, this means that, while their actual salaries (the money they take home for private use) would put them in a middle bracket, they wind up with "income" well over limits, causing them to pay higher marginal rates, lose deductions, get caught by the AMT. For a sole proprietor, that extra tax comes directly out of the business - not much is different in a partnership, where the business will probably distribute money to cover a partner's added burden.
This is why one needs to challenge the notion that taxes fall on "the rich." Democrats have skillfully made it sound like cutting the top marginal rates only benefits people like the Fortune 500 CEO, who makes millions in wages. We need to remind people that the tax system is set up in a way that sometimes you could be "rich" even though all your money is tied up in a business. We need a story - find some middle-class folks who run a small business and who wind up getting slammed by the taxman because of it and remind people that, when Democrats speak about the "rich" they mean these regular folks who are working hard just to get by and have a little success. We need to reframe the discussion and win back the businessmen.
...Subchapter S corporations, LLCs, etc. Your earnings get whacked by the taxman every quarter, whether or not you distribute them out as salary to the owners of the company. Much of the time, this is your working capital that you need to make payroll, and giving half of it to the fed/state/local authorities makes it that much harder to stay in business.
Also note that this policy position of Obama is manifestly inconsistent with what he said in an earlier debate. During the primaries, he said he wanted to remove the cap on the FICA tax and replace it a $200,000. Therefore, you would pay FICA taxes on the first 200K of your salary.
We need to call him out, because he has no credibility on this issue at all.
because even if you use income-averaging when you start getting a big income, the increased FICA is not subject to averaging. So it gets paid in year earned regardless of income averaging.
-- A true evolutionist would let endangered species die off. Anyone care to change sides?
-- Can't Feed 'em? Don't Breed 'em! --
Even though many people would use the same "Hey they make more they pay more" BS you hear alot I think many Middleclass people would be shocked and disheartened if you tell them the tax on these people would be over 50%.
People feel everyone should pay their fair share, but not to the point where someone is paying that much, there is no fairness in someone paying 50% and someone else paying 0%.
We need to remind the people that if someone is running a small business and makes lets say $100,000 /yr they may hire 3 workers, tax them down to $75,000 and they may only hire 2. These people bring money in but they also shell out their fairshare by hirering others and running a business that helps the whole community.
Voting for the Sexy(Pres) - Sexy(VP) Dream Ticket
Jindal/Palin 2012
I am one of the many libertarian conservatives (supported McCain in 2000)who have gone over to the Democrats after eight years of Bush (really I went over after Bush/Rove trashed McCain in South Carolina - too bad McCain went over to the Dark Side). Anyway I am in a losing battle to get the Obama campaign to understand the unfairness to family businesses and entrepreneurs of raising the social security tax threshhold. I echo the comments that I have seen here that social security and income tax impact on family business owners and their employees can unite right and left.
However, unlike many commentators on this site I believe that we need to tax productive earned income AND unearned income at the same rate; no gains or dividend differential. The lower rate not only unfairly tilts the tax burden to family businesses and entrepreneurs, it raises stock prices lowering the cost of capital for big international corporations. Family businesses typically finance growth through reinvesting their profits or bank loans. By leaving the tax rate on interest high, Bush has made it more costly for banks to obtain savings to loan to family businesses. We now face the troubling situation that Mom and Pop who own a grocery store will have to pay a 35% tax on earnings from reinvesting in their business but a 15% tax on earnings from investing in their competitor, WalMart. This is also true about another Republican favorite: tax free savings and investment accounts. The money going into these accounts can be invested in public companies but not in private companies, even if it is the business owner's money.
I am detached from Republicans any more, but I cannot believe that all of them are so beholden to Wall Street vs. Main Street?@!
The Essene
should apply equally, and be universally low. The main reason that there are special rates for dividends and capital gains is because our tax rates are too high to begin with, and we have to compete globally for capital. So these special rates were created to pump up the economy. If all rates were lower they would not be needed.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
I believe in one rate as low as possible. However, I diagree that the capital gains rate pumps up the US economy. Investors do not create a single job, produce a single product or provide a single service. It is those being taxed on their earned income at a rate two and a quarter times as high who do these things. We have a low differential rate for two reasons: one raising the rate does not necessarily generate corresponding amount of tax and, most importantly, both parties suck on the Wall Street money teat.
If McCain cuts the corporate rate to 25%, he will hurt family busi nesses more as the big international corporations will have more after tax profits to reinvest to crush their family business competitors who will continue to pay a 35% rate. The corporate tax is like the unrelated business tax that charities pay when they compete in business; a tax paid to equalize the tax treatment of businesses, big and small. Cut the corporate rate without cutting the individual rate and you will again penalize family businesses which will hurt American growth not help iut.
The Essene
if the small businesses are not incorporated, then the income created is only taxed as payroll taxes.
You are forgetting that income is taxed again before the owners can spend any of it. It's taxed once at the corporate rate, then taxed again when it is paid out to the shareholders. That's why most of these small guys are not organized as corporations... or if they are, they organize as an S corp, which is taxed like a partnership rather than a regular corporation.
---
Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman
Ok, I have to think this through.
You're looking for an identical rate of taxation on individual income, corporate earnings, capital gains, interest and dividends. Correct?
And your reasoning is that large companies (which are generally C corporations) would have a tax advantage over small companies and self-proprietorships if we reduce the corporate rate.
You're adding in a lot of stuff about the cost of capital to large businesses and the credit available to small ones, that is just hard to evaluate because these things are responsive to a whole range of factors other than tax policy.
So let's say an S corporation has earnings in a given year. Those earnings flow through to the 1040 form of the owners of the business, where they're taxed as ordinary income. (When such earnings get high enough, the IRS will usually audit you, and reclassify your earnings as dividends, and tax them twice: once at the dividend rate, and again at the income tax/FICA/FUTA rate.)
Ok, now take a C corporation. This company doesn't have the option to flow its earnings through to shareholders. It pays the corporate rate (currently 35% plus the relevant state/local whack). The corporation is then free to retain what's left as working capital.
If the C corporation chooses to make a distribution of its after-tax earnings to shareholders, it declares a dividend, and then the shareholders must pay taxes on the dividend again, at their individual rate, unless they're tax-free investors (like pension funds or university endowments).
The net effect of this is to so disadvantage corporate earnings, that most large businesses seek to show as little profitability as possible. In most years, the Federal budget deficit alone is higher than the total profits of all public American corporations.
This is reflected in how shareholders reward corporate managers: in most industries, stock prices rise not when the bottom line grows, but when the top line grows. I would argue that this isn't healthy.
As far as unfair competition is concerned: it's simply not a good idea for a small business to compete head-to-head with a large one. Anyone in business knows that's stupid. You compete where you have a sustainable differentiator. The whole image of Wal-mart pushing small retail operators out of business is a total red herring. If those operators are smart and nimble, they'll find ways to add value that Wal-mart (which is playing a total economy-of-scale game) can't touch. Believe me, this is possible to do.
I think the right rate of taxation for both corporate earnings and capital gains is a very low non-zero rate. I used to advocate zero for both, but now I believe they should be 5 or 10%, for reasons relating not to fiscal policy but rather to monetary policy.
You speak of wishing to privilege job-creating activity, at the expense of so-called unearned income, particularly returns to capital. But this is extremely misguided, because a high rate of capital formation is essential to job creation. It's what enables productivity growth, which has stagnated in recent years as the US suffers from a serious case of capital flight that is well-camouflaged by capital inflows from foreign central banks.
The only way to increase aggregate productivity in the economy is to increase the returns to capital. The cap gains rate at 15% or 20% is far too high. It needs to be no higher than 5%.
I want to make sure that it is ok with you. As I stated I am no longer a Republican/Conservative/Libertarian. I visit your sites and don't say much because I like to look at all sides of the issues. I keep my mouth shut usually because I am here to learn. Unfortunately tax policy as it impacts family businesses is one of my pet peeves, particularly as a tax lawyer for family businesses for 28 years, I get excited by the wool that has been pulled over the eyes of the small business groups in Washington.
Let me know. Thanks.
The Essene
Follow the site policies (no profanity, no ad hominem, no talking points, no plagiarism) and you can say whatever you want. This is a place where we try to learn from each other.
You won't get very far if your points aren't well supported, but that's just market dynamics in action.
I want to make sure that it is ok with you. As I stated I am no longer a Republican/Conservative/Libertarian. I visit your sites and don't say much because I like to look at all sides of the issues. I keep my mouth shut usually because I am here to learn. Unfortunately tax policy as it impacts family businesses is one of my pet peeves, particularly as a tax lawyer for family businesses for 28 years, I get excited by the wool that has been pulled over the eyes of the small business groups in Washington.
Let me know. Thanks.
The Essene
since you are not a conservative/libertarian, Just what part of the big government, big regulation, high taxes of the other party do you find compatible with small business?
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
party of the small businessman:
If they can do that, they will not only gain electorally, but they will help shape policy that will benefit our economy greatly.
Now also found at The Minority Report