Friday, January 23, 2009

Don't Cut Payroll Taxes.

Both the Obama stimulus plan and the absurd response from the Republicans include a large cut in payroll taxes as a means to stimulate the economy. Bad idea. What should happen is that the cap on payroll taxes should be increased to include the first $250,000 of income. Or maybe all income should be subject to payroll taxes. But in any event, cuts in payroll taxes are a terrible idea. Cuts only help the Republicans and neocon/neoliberal goal of "privatizing" (and therefore eliminating) social security and medicare. [Payroll taxes theoretically can include employer-withheld federal or state income taxes, but I'm using the term only to refer to taxes withheld to pay a contribution to social security and medicare].

One of the goals of the Republicans is to entirely eliminate any government services to the citizens. In their view, the people should be taxed, but all the money should be used for defense and for corporate give-aways.

For example, they would like to completely eliminate public education and force all people to pay to send their children to private (often religious) schools. They would also like to privatize the police and fire departments, so that people in a neighborhood or community could enter into private contracts, pay-as-you-go, with private mercenaries (like Blackwater) to patrol their neighborhoods and apprehend "suspicious" people. Same for fire departments. They would like to eliminate public funding, and force individuals to privately contract with a private service to be on call in the event of a fire. By eliminating all social services, we essentially end up with a failed state in which the rich and powerful, and well-armed do as they please, but everyone else just hopes to survive.

Bush wanted to privatize social security. That means that, to begin, all the social security money would be allocated to each worker, and each worker would have to go to wall street (or a local broker) and pay someone to invest their money. Of course if the money is stolen, as has been true for half the value of Dow in recent months, half the value of Nasdaq a few years ago, then people are just out of luck. And the brokers charge so much in fees that the principal gets eaten up in any event. If Bush had succeeded in having social security privatized, seniors today would get nothing, and future generations certainly would vote to eliminate a fund that would end paying them nothing.

When 9/11 happened, one of the first things Bush did was to announce that payroll taxes would be refunded to every business in the affected area for the past two years. Why? The only reason to do that was to suck more money out of the social security and medicare fund. There was simply no relationship between payroll (social security and medicare) taxes contributed on behalf of employees two years before, on the one hand, and the 9/11 attacks, on the other hand. Of course this is a man who, when the U.S. was attacked by Saudi Arabia, decided to invade Iraq. so his logic has always been a bizarre and unfathomable issue.

Many businesses pay no income taxes at all, since they have so many scams and loopholes. Everytime some CEO announces that he "only" takes $1.00 per year in income, you should understand that he takes millions in stock options and other consideration which will be taxed at much lower rates. By claiming he only takes a dollar, he's really thumbing his nose at the public, most of whom do not understand these insider deals. But no matter how many scams and cons, businesses always have to pay the payroll tax, their share of the social security and medicare tax paid on behalf of all employees. That's why businesses and Republicans are always pushing to cut or eliminate payroll taxes.

Social security and medicare taxes are disproportionately assessed against modest income workers. All income up to about $100,000 is subject to the tax, which is approximately 15%: 1/2 of that (7.5%) is taken out of the employee's check, and 1/2 of it (7.5%) is paid by the employer. It's a matching fund. If the employee's share of taxes was cut to 5%, for example, the employers' share would also be cut to 5%. But any cut in payroll taxes is a terrible idea, because the taxes fund our only national healthcare system (medicare) which we need to strengthen and expand, not bankrupt by cutting its funding. And the payroll taxes fund social security, which we also need to strengthen.

A person earning $50,000/year would have their entire income subject to the payroll tax for social security and medicare. But a person earning $200,000 would only have one-half of their income subject to those taxes, since there is currently a cap of about $100,000: anything over that is not subject to payroll taxes. So the bigger earner is only, in fact, paying 3.75% of their total income in payroll taxes.

The current cap of $100,000 is arbitrary. There is no rational basis for it. It should be lifted and a new cap established of, at a minimum, $250,000. There is an excellent argument that there should be no cap. As additional support for this position, the extreme right-wing goes into tremors everytime anyone mentions increasing (or eliminating) the cap on income for social security and medicare taxes. (See The Heritage Foundation for a long series of hysterical screeds opposing the idea). That's because eliminating the cap would only hurt rich people, and would help to strengthen two of the most important social service institutions in our country: social security and medicare. Increasing the cap would not directly affect most Americans, since it would only apply to people who earn over $100,000/year.

As an additional matter, all capital gains should be taxed for social security and medicare. Capital gains are considered different than ordinary income. Someone goes to work, gets a paycheck (like 95% of the citizens), that's considered income. But rich people don't go to work. They sit in their penthouses and buy and sell things -- real estate, countries, businesses -- and when they make their money buying and selling things, it's considered a "gain," a "capital gain," and not income. And capital gains are taxed at lower rates than ordinary income.

There's a good argument to be made that capital gains should be taxed at a higher rate than is ordinary income, since it's a lot harder for most people to go to work at a job 50 weeks a year than it is for rich people to tell their brokers to buy and sell stuff, then off to the country club for the rest of the day. I'd rather spend my days playing golf than digging ditches. And I hate golf.

Capital gains currently have a maximum tax rate of 15%. Some working person earning $50,000/year will pay 25-30% in income taxes. But a millionaire who gets $1.0 million in "gain" in capital gains during the same year will only pay 15%. Why is that true? Because rich people bribe the politicians in Congress to set up these special low tax rates for them. They save so much on the deal that they are more than willing to kick back millions to the politicians to thank them for passing laws that help the rich get richer while everyone else gets poorer.

The rationale advanced for a special low rate for capital gains is this: if there isn't a special low rate, people would not invest their money. They would just put it in the bank. Well first, that's nonsense. And second, that would be good: let them put money in the banks, and leave it sitting there, and the banks can loan it to normal Americans to use to buy houses or start their own businesses. The Republicans and some of their Democratic supporters have actually proposed eliminating capital gains taxes altogether so rich people would simply never pay taxes. A few Democrats tried to get a bill through last year to make the hedge fund scum pay taxes as ordinary income, because they claimed everything as a capital gains. These are people who, in some instances, were making over $100 million per year, only paying 15% in taxes. Chuck Schumer opposed the bill, and worked with the Republicans to defeat it. Chuck Schumer, a Democrat, but also a large recipient of money from hedge funds.

"June [2007] was a busy month for Senator Charles E. Schumer. On the phone, at large parties and small gatherings around the nation, he raised more than $1 million from the booming private equity and hedge fund industries for the Democratic Senatorial Campaign Committee, of which he is chairman."

"But there is another way Mr. Schumer has been busy with hedge fund and private equity managers, an important part of his constituency in New York. He has been reassuring them that he will resist an effort led by members of his own party to single out the industry with a plan that would more than double the taxes on the enormous profits reaped by its executives."

Chuck Schumer also lobbied to get a special capital gains maximum 15% tax rate on art. Do you know how many Wall Street criminals have been buying, selling, transferring art as part of their empire-building, as a place to hide all the money they've stolen from everyone else? Lots of them.

This is not meant to suggest Chuck Schumer is alone in soliciting and receiving millions of dollars from the Wall Street criminals, and the hedge fund and private equity con men. He unfortunately is just one of many in Congress. I think a huge amount of Obama's campaign was funded by Wall Street. Bringing a little light to the fact that they're all on the take might make it harder for them to continue to sell out the public. Such as by supporting proposals to cut payroll taxes.

If capital gains continue to have this extremely favorable tax rate (which I oppose) then at a minimum they should be fully assessed with social security and medicare taxes, to let the rich people contribute a little bit to our society. God knows they cause enough suffering. Make them kick in a little money to help everyone else.

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