3 Things 3-6
Thing One Beware Of The Fair Share Argument In recognition of tax season, which is currently underway, and in service to the idea of letting the data tell the story rather than the politicians, here’s an informative excerpt from a story that recently ran in the Wall Street Journal about the tax rates paid by various income groups: “…Mr. Biden likes to cherry pick the example of the odd billionaire who might pay a small amount of tax in a given year. But in the aggregate the top 1% in 2020 earned at least about $550,000 and paid an average income-tax rate of 26%. Those making more than $220,000 but less than $550,000 paid an average rate of 17.5%. For those in the next grouping, above about $150,000, it’s 13.1%. Above $85,000, 9.5%. Above $42,000, 6.5%. And the bottom 50% of taxpayers, those below about $42,000, paid an average rate of 3.1%. This shouldn’t be news to anyone paying attention, but it’s worth noting the enormous gap between reality, as reflected in the data, and the posturing in Washington about the rich escaping taxation. Despite the President’s demagoguery, millionaires and billionaires don’t pay less than their secretaries. By the way, the trend over the past two decades is that the income tax burden has been shifting even more to the highest earners. The nearby line chart captures the trend. In 2001 the top 1% contributed 33.2% of income-tax revenue, nine points lower than in 2020. The Paul Ryan-Donald Trump tax reform in 2017 did little to change the trend despite Democratic claims that it favored the rich…” The data, which was compiled by the Tax Foundation based on IRS statistics, also revealed that the top 1% of earners mentioned above accounted for 42.3% of the country’s income taxes collected. Along with noting that figure was a two-decade high, they also shared that the top 1% accounted for only 22% of the AGI (adjusted gross income) reported in 2020. We don’t share this with you to try to get you to change your political affiliation. That’s your business and we don’t care how you align politically. Besides that, taxes are necessary for a functioning government, a functioning government is necessary for a prosperous economy, and a prosperous economy is necessary for broad prosperity at the individual level. So, we share this with you to remind you that no society in history ever taxed its way to sustained prosperity. Economic growth is the only way to achieve that, and, at some point, higher taxes discourage the investment needed to achieve that growth. If we get to the point where our growth has stalled (and individual prosperity has lessened) while taxes have continued to rise, we will have done it to ourselves.
Thing Two Revisiting The Social Security and Medicare Issue Last week we mentioned the ticking time bombs that are the Social Security and Medicare trust funds. The former is projected to be insolvent by 2035 and the later by 2026. We said that all options for addressing the impending crises should be on the table, including means testing, which would essentially reduce benefits for well-off “older people”. With that in mind, we share what WSJ writer, Marc Siegel said on the topic a few years ago: “One commonly held belief about the Social Security system is that baby boomers and the generation that preceded them are making out like bandits, draining both the Social Security and Medicare trust funds and leaving little for younger generations. It is also widely believed—fervently so in some quarters—that the rich don’t pay their “fair share” of Social Security, since the earnings subject to the program’s taxes are capped each year. Do these notions—particularly the latter—stand up? Last month I turned 70 and, thanks to my earnings, became entitled to Social Security’s maximum benefit, currently $3,500 a month, or $42,000 a year. And so, if I live to 90, I will receive $840,000 worth of (inflation-adjusted) benefits. Over the past 50 years, according to the Social Security Administration, the combined taxes paid into the system by me and my employers equaled $329,640. This sounds like a good deal—the benefits I would collect over the next 20 years are more than twice what I put in. But the benefits are only about one-third the $2.27 million I would have accumulated had the taxes instead been invested, over time, in a stock index fund. Moreover, the benefits I would collect are even less than the $1.28 million I would have accumulated if my “contributions,” as Social Security taxes are euphemistically called, had been placed in U.S. Treasury bonds. This number is particularly important, because the Social Security Administration bought government bonds with my (and others’) taxes to build up its trust funds. In effect, the government made almost one-half million dollars more on my Social Security taxes than they will pay me if I live another 20 years. What about Medicare? Over the past half century, my Medicare taxes exceeded $1 million, more than three times my Social Security taxes. That’s because since 1994 there has been no cap on the income subject to Medicare taxes. I have calculated that these taxes, invested in Treasury bonds, would now have accumulated to almost $1.75 million…” Along with the various solutions for recalculating the benefits to be paid out that are currently being contemplated, Congress (prompted by the rest of us) should also put the idea of privatization that Mr. Siegel alludes to back on the table. If citizens were allowed to control the accounts their contributions were put into, many would take advantage of the opportunity and, over time, they could accumulate the kind of money Mr. Siegel described. Those people wouldn’t “burden” the government at all for monthly retirement checks or healthcare benefits. Again, there is no single solution, so not everyone would opt in. But that doesn’t mean all options shouldn’t be on the table.
Thing Three Just A Thought "The people naturally adhere most to doctrines which demand the least self-exertion and the least use of their own reason, and which can best accommodate their duties to their inclinations." - Immanuel Kant