Tag: taxes

The Taxman Is After You

~ purplesage41 ~ Leave a comment

Many of my rr readers are South Carolinians. Even if you are not, a similar tax “reform” proposal may be coming to your state, as it has elsewhere. . So here’s the South Carolina version of the latest Republican plan to tax the middle class, and cut fores for the rich proposal.. South Carolina’s new proposal for a flat income tax, H. 4216, seems to be on the fast track for what is billed as a tax cut. Maybe. But not for most of us.

The federal standard deduction, expanded in the first Trump administration, would be cut for state tax purposes from $15,000 ($30,000 for a married couple) to a miserly $,6000 and $12,000, respectively. Then it is phased out until it disappears at an adjusted gross income of $40,000.

But wait, there’s good news. The tax rates would be changed from a two-step schedule of 3% and 6.3% to a single flat rate of 3.99% (just so we can claim to be lower than our neighbors). That’s a tax cut, isn’t it?
Yes and no. The General Assembly giveth and the General Assembly taketh away. The federal standard deduction, which was also followed in South Carolina’s state income tax, gives people at the bottom a little relief and makes the income tax just a little bit progressive.
That’s “economist-ese” for taking a smaller percentage of income in taxes for poor people than rich people. Our other state and local taxes on sales and property, and our fees and charges for government services, are regressive. They take a larger share of income from the poor than from the rich. So, the income tax has provided a partial equalization of the total tax liability across households at different income levels.
According to estimates by the S.C. Department of Revenue and Fiscal Affairs, if your family is in the median income range of $50,000 to $75,000, more than 80% of you will discover that your income taxes will go up, not down. Less than 10% of households in the income range of $300,000 to $500,000 will have that same sticker shock, but most will see a steep reduction.
Revenue from the individual income tax is expected to decline by about $216 million in the first full year. Bottom line: This is a tax cut for the wealthy, plain and simple. And unlike the usual justification – attracting business – the personal tax rate will now be lower than the business tax rate.
That’s not the only problem with this bill. With no chance to itemize, citizens with heavy medical expenses and/or generous charitable contributions or lots of interest on their home mortgage and/or student loans will have to rethink their priorities. Medical expense deductions are important for many disabled or elderly citizens, especially if there is a family member in a nursing home. Medicare is not much help there—and the future of Medicare is uncertain.
South Carolina is riding a wave of revenue growth that is overdue for correction. The stock market is flailing, consumer confidence has dropped, tourism prospects (important to our state) are dismal as people from other nations are reluctant to come here, and tariffs are likely to revive inflation that has just returned to more normal levels (not counting eggs).
The state’s definition of income for tax purposes will still be tied to the federal definition of adjusted gross income but that may change if Congress, worried about ballooning deficits, fails to extend the tax cuts from the first Trump administration. The legislature has made a number of commitments, such as higher teacher pay and a larger state contribution each year to protect the soundness of the retirement fund. Legislators may not be able to fund these priorities if revenue from the income tax falters, as it does with either tax cuts or recessions.
This bill needs to go in the circular file and start again.

Saving Social Security

~ purplesage41 ~ Leave a comment

There are a lot of small steps that could be taken to save Social Security.  Raising the retirement age is not such a hot idea. It penalizes workers who work in more strenuous and low wage jobs, often accompanied by lower life expectancy. It assumes that all potential retirees ae equally able to continue working even if they are in declining health (but not bad enough to qualify for disability). 

Let’s explore a couple of options that would shift more of the cost to those who need Social Security least. First, remove or at least greatly increase the cap on how much of your wages and salary are subject to social security taxes.  Second, put a cap on the amount of your income that is counted toward determining your benefits.  And finally, rethink the COLA.

The first two are not complicated.  There has always been a cap on the amount of earnings that are taxed, although there is no good reason for it. Higher income workers often have additional non-wage, non-salary income that is only subject to ordinary income tax, not Social Security taxes.  Average workers seldom do. Those who don’t work at all but live off their income from capital don’t contribute anything. Whatever happened to the social part of Social Security, which suggests we are all in this together?

For 2024, that cap on social security taxes is set at a wage and salary income of $168,600, adjusted each year based on the percentage increase in average wages. I don’t see any particular need for a cap, other than lobbyists for wealthier citizens appearing to have the ear of Congress. But if there is a cap, it should be set at something like 80th percentile of wage and salary income. (That’s the amount that has 80% making less and 20% making more.)  That way, when people get outrageous salaries for heading a nonprofit, a corporation, a university, or a football program, they will be carrying a fairer share of the cost of keeping our old folks out of poverty.

We don’t want the very wealthy to get more benefits just because they increase their contributions, so the wage /salary base used to compute the monthly check should be capped at some at something like the 60th percentile of the individual’s average wage and salary income used to determine benefits.

Lastly, the COLA or cost of living adjustment , which is based on the inflation rate for the 12 months ending the previous June 30th.  COLAs are a great engine of inequality.  In South Carolina, pension reform a decade ago included a cap on increases..  We state retirees get a one percent increase every year regardless of actual inflation, but there is a cap is of $500. That’s one percent of $50,000. Any pension greater than that gets the same $500 a year raise.

Think about it.  Jane’s Social security benefit check is $2,000, just a shade above the average of $1907.  average, about $1900.  Dick’s check is the maximum of $4873, which we will round down to $4800 for easy calculation. . Both must contend with higher prices for housing, groceries, and insurance. This year’s 2.5% COLA gives Jane $50 more a month while Dick gets an extra $120.  The percentage gap between their incomes is unchanged, but percentages don’t pay the electric bill. The dollar gap has risen from $2800 to $2870, and that gap grows year after year.A cap on the COLA like South Carolina’s (about $5 a month) would be more equalizing. Or setting the cap at the COLA percentage of the average benefit and give that to everyone, which would do ven more fot those at the bottom of the scale. Let’s think creatively here!

After we survive the election, let’s go back to thinking about how a civilized society that believes in fairness would shore up Social Security with more revenue and slower growth of overall benefit, with the scales tipped toward the lower half of the income spectrum.  And January is not too soon to get started. We can call it The Other Project 2025.

Many Happy Returns

~ purplesage41 ~ Leave a comment

Monday, April 15th is Income Tax Day.  I expect many of you are devoting part of your weekend to filling out tax returns now that March Madness (with a bit of April thrown in) has come to its final conclusion.  Some of us actually enjoy the challenge of preparing our taxes, but most people dread the looming deadline.

My field of specialization as an economist is state and local public finance, so I take a deep interest in tax policy. Earlier this month I participated in an educational program for the North Carolina League of Women Voters on tax policy, and I have a return engagement in May as they try to figure out what constitutes good tax policy.  

Some forty years ago economists formulated the basic guidelines. A good tax system should be adequate, generating enough revenue to pay for the services that citizens need and want.  It should be equitable, fairly distributing the cost of government among citizens according to their ability to pay.  The revenue should keep pace with inflation because when prices rise, it affects the goods and services purchased by government. It should be designed to encourage people to do “good things” like buying electric vehicles and insulating their homes and getting an education and contributing to charity, and discourage them from doing “bad things” like smoking and driving gas guzzlers. Or things that the government wants them to do, like spend their tourist dollars in your state and resist the urge to shop in other states with lower sales taxes.  All those incentives come under the heading efficiency.

Back in the 1800s, an economist named Henry George was a big proponent of the single tax on land. Most contemporary economists would disagree, affirming the need for a variety of taxes.  Why? You have probably heard of portfolio theory, the basic idea being that you can reduce your risk without reducing your return on investment by having a variety of assets in your portfolio instead of just one. Some assets are reliable and steady in the earnings, others have the possibility of great returns.  Some are stable and steady in value while others are volatile. Some are easily converted to cash (liquid) while others are not. !) Some taxes are better suited to the federal level, others to the state level (all but five states have sales taxes), and mostly the property tax and fees for services at the local level. !) Some taxes are better suited to the federal level, others to the state level (all but five states have sales taxes), and mostly the property tax and fees for services at the local level.

Like an investment portfolio, a tax system needs to resist using too many kinds of taxes, because that would increase the state’s cost of collection and the individual’s or firm’s cost of compliance. (Cost of compliance is what you are encountering this weekend.,)

The income tax keeps pace with growth and inflation but drops sharply in recessions. It can be made progressive so that more of the tax burden falls on those more able to pay.  The sales tax is more stable and ensures that everyone contributes, but it is more burdensome on low-income households.  The property tax is the best source for local government because you can’t escape paying it by moving away—the land doesn’t move with you!  It is also used to pay for local services that benefit local property owners, including education, road maintenance, streetlights and law enforcement. Excise taxes target particular products or people—gas taxes paid by drivers are used to maintain the roads they drive on, tobacco taxes discourage smoking, alcohol taxes discourage drinking (maybe). Business taxes (and tax breaks) figure into state to state competition to attract and retain business firms.

 Justice Oliver Wendell Holmes said that “Taxes are the price we pay for a civilized society.” I mentioned that to one of my conservative economist colleagues and he said, “The price is too high.”  “Or perhaps,“ I said, “The amount of civilization is too low.” 

How much civilization do you want, and how much are you willing to pay for it?  Think about that the next time someone seeks your vote with a promise of a tax cut.  What services are we going to give up, or what debt burden will we increase to pass on to our grandchildren?

Celebrating Boxing Day

~ purplesage41 ~ Leave a comment

December 26th is the feast day of Saint Stephen, the first Christian martyr.  Having grown up Protestant, I didn’t learn much about saints, but I do recall the lines from my mother’s favorite Christmas carol, Good King Wenceslas:

Good King Wenceslas looked out,
on the Feast of Stephen,
When the snow lay round about,
deep and crisp and even;
Brightly shone the moon that night,
tho’ the frost was cruel,
When a poor man came in sight,
gath’ring winter fuel.

The song goes through many verses to tell how the king and his page tracked down the poor man tohis humble abode and supplied him with food and fuel. If you haven’t exhausted your Christmas singing yet, this is the official carol for December 26th. It’s a holiday about giving to people in need, not supplying overindulged children with more toys than they need and keeping the economy rolling with consumerism.

The Boxing Day holiday has long been celebrated in some dozen countries, most of them from the former British Empire.  Shop owners kept a tip jar and shred the contents among their workers, while others gathered up food and clothing and money and delivered it to those in need. It may well be a remnant of a feudal tradition when the lords of the manor gave and annual (required) distribution of clothing, food, and fuel to their serfs.

For those of you who itemize your tax deductions for Uncle Sam, Boxing Day is close to your last chance to increase your income tax deductions.  Generosity should not be motivated solely by tax incentives, and it isn’t, because you have to give away a dollar for every 10-37% in federal income tax savings (plus any state income taxes). But certainly the idea of the government offering a partial match for your gift is a positive incentive.

The basic lesson of Good King Wenceslas is to be generous to the extent you can, because there are many unmet needs out there—refugees, natural disasters, wars, homelessness. But the story also raises the question,  why should the government encourage charitable donations with a matching grant? Having graduate degrees in both theology and economics, this question pushes my buttons.

Right now, there is a lot of pressure on governments around the world to provide humanitarian aid to refugees in general and victims of natural disasters and two wars in particular. It’s hard to get people enthused about paying their taxes for any purpose, and humanitarian aid is not high on the list of things voters call heir legislators about.

Refugees and victims of war and natural disaster are not unique to 2023.  There’s almost always a war and refugees somewhere, while climate change has accelerated natural disasters. In addition, the problems of poverty, homelessness and hunger don’t go away, and governments are called on to respond t these problems.  The more we can encourage private charity to shoulder some of the cost, the less of it will fall on the taxpayer.

There a re three problems with this argument.  The first is that providing relief for these hardships benefits all of us, even Ebenezer Scrooge (at least after he saw the light from his ghostly visitors).  If we all benefit, should we not all share in the expense?  But as with most expenditures that benefit everyone, people are inclined to hope that someone else will step up to the plate and contribute. Voluntary charity is far from adequate to address the size and scope of the humanitarian crisis.

The second problem arose from the tax reforms enacted during the Trump administration. A very large increase in the standard deduction meant that far fewer households would qualify for a lower tax liability because of charitable donations. The standard deduction for a single person for 2023 is $13,850 and for a married couple, $27,700. Your total deductions, which typically include mostly mortgage interest, state income and property taxes, and charitable donations, would have to exceed that amount in order to reduce this couple’s taxes

The tax reduction only applies to the amount by which your deductions exceed the standard deduction.  For example, a married couple household with other deductions of $15,000 would have to give more than $12,700 to charity in order to get a tax break.  The tax break doesn’t apply to the whole $12,700, just the excess over the excess over $12,700.  Charitable donations of $$20,000, in our example, would save this household only about $300.  Not much of an incentive, except for the wealthiest households. The limited tax savings discourage smaller contributors from increasing their giving. . (If that confused you, just accept my assurance that the amount of tax savings is very low for the average taxpayer, much larger for the very wealthy.)

Finally, a lot of charitable donations are not humanitarian in nature. There’s nothing wrong with supporting the arts or contributing to animal welfare or preserving green space, but these may be lower collective priorities than the humanitarian issues facing us.  When the government provides tax relief for charitable contributions, it doesn’t get to set priorities for which causes should be supported.  Would our legislators have chosen to spend money on my local little theatre? Probably not, but it encourages me to spend my money on my pet charity, money that would otherwise have been paid to the government in taxes.  To use the favorite insult among economists, that would be (Heavens to Murgatroyd) INEFFICIENT.

If kindness, compassion, and generosity can’t quite get you to pony up for humanitarian aid, like Good King Wenceslas, then at the very least you can support the noble economic goal of efficiency by giving generously to those causes that you genuinely believe are appropriate expenditures of government funds.  Now that’s a challenge worth mulling over for the rest of 2023. Just remember to make those donations before midnight on December 31st!