'Populist' addresses Social Security concerns

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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, Iíll 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.


Newton also made a telling observation about the duties of his accountant: "Have me pay the least amount of taxes that I am legally obligated to pay. There is nothing un-American about that." I agree with that, but I am also trying to address the fairness of taxes, not just their legality.


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.

Personal Retirement Accounts

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.