Taxing Social Security Taxes

The Fiscal Responsibility Cliff

- By: Larry Walker -

When I went to work for the IRS back in 1988, the first few weeks were spent in tax law courses. I distinctly remember, at the time, that the base amounts used in determining the taxability of Social Security benefits were $25,000 for single taxpayers and $32,000 for married taxpayers filing a joint return. For some reason when the topic came up this year, during annual continuing education, with all the talk of looming fiscal responsibility (errantly referred to as a cliff), combined with having been read the riot act by several seniors over the past year, it suddenly dawned on me that the base amounts are exactly the same in tax year 2012 as they were in 1985 –– $25,000 and $32,000. What’s wrong with this picture? The same thing that’s wrong with Barack Obama’s $250,000 top tax bracket argument, a failure to adjust for inflation.

My first brush with tax law was actually through a Junior College course in 1981. I helped prepare tax returns commercially for several years thereafter while attending college. Needless to say, I left the IRS in 1994 and moved on to brighter horizons. I returned to my first love in the year 2000 and am still involved in the industry today. With that out of the way, what’s both interesting and disturbing to me is the fact that Social Security benefits were tax-free prior to 1985, but then Congress, in its wisdom, changed the law to ensure that wealthy seniors were paying their fair share, which by my logic merely amounted to forcing them to pay taxes on the taxes they had already paid.

It was in 1985 that a neat little formula was devised whereby if one-half of a taxpayers Social Security benefits plus their other income (both taxable and tax-exempt) was more than the base amount (mentioned above), then up to half of their Social Security benefits would become taxable. As a consolation, if a senior’s sole source of income was Social Security, in other words if they were living near or below the poverty line, then none of the benefits were taxable.

According to the formula, if you are single or married filing separate and did not live with your spouse for the entire year, the base amount is $25,000. If you are married and file a joint return, the base amount is $32,000. And if you are married filing separate but lived with your spouse at anytime during the year, the base amount is $0. To determine how much of your benefits are taxable, you add one-half of your Social Security benefits to other income received from pensions, interest, dividends, capital gains, rental income, business income, tax-exempt interest, etc…, and then subtract from this the applicable base amount. If the result is positive, then the taxable amount of your Social Security benefits is the lesser of one-half of the result, or one-half of your Social Security benefits. Got it?

The obvious dilemma is that the base amounts are exactly the same today as they were in 1985 –– $25,000 and $32,000. Something is deftly wrong with this, because when adjusted for inflation the base amounts become $52,263 and $66,896. That’s a material difference, more than double. In my opinion, if Congress would simply index all limitations, base amounts and tax brackets for inflation (the AMT comes to mind), then the U.S. income tax system would be fair, but as it stands today for many it is not.

Making matters worse, beginning in 1994 Congress decided to up the ante. Taxing 50% of Social Security just wasn't enough for really rich old folks, so Congress added a second set of base amounts, whereby up to 85% of benefits could become taxable. To distinguish wealthier seniors from the rest, the original base amounts were raised by $9,000 for single filers and by $12,000 for joint filers. Thus, if one-half of your Social Security benefits, plus other income (both taxable and tax-exempt) was greater than $34,000 or $44,000, respectively, then up to 85% of the difference, or 85% of your Social Security benefits were taxable, whichever was less. The same amounts are in force today. There has been no inflation adjustment to the 85% base amounts since 1994.

If the 50% and 85% base amounts were rightly adjusted for inflation, then the former would rise from $25,000 and $32,000, to $52,263 and $66,896; and the latter would increase from $34,000 and $44,000, to $65,923 and $85,110 (see table below).

Now that’s more like it. It’s not all that, but it’s better than what we have today. Inflation Indexing should be an integral part of tax reform. It’s not right to screw our seniors out of money, when an automatic adjustment is granted in other areas of the tax code. We should have more respect for our elders. But even though my proposal would be an improvement, still the premise behind taxing Social Security benefits is errant.

Can you understand why so many seniors complain? Here’s what one fellow said to me recently, “What do you mean 85% of my Social Security is taxable? It wasn’t taxable at all last year. Just because I was finally able to make a little extra money this year, you mean to tell me that now I have to pay half of what I made in taxes? You’re telling me that I’m going to owe about half of what I’ve been able to save this year in taxes. I paid into the system my whole life, that money should be tax free. I might as well just stop working if I’m going to owe half of what I make in taxes, but then how am I supposed to live?”

I basically agreed with him. What he said is true. If you are self-employed and on Social Security, and make around $50,000 on the side, by the time you add in 85% of your Social Security benefits, $50,000 suddenly becomes $60,000 or more. Then when you add together the applicable self-employment taxes, federal income taxes and state taxes, the marginal tax rate quickly approaches 50%. I opined that I think anyone over 65 should be exempt from paying into Social Security while they are receiving benefits, and that the benefits should be tax free. I qualified this by adding that I don’t write the laws, I just apply them.

Congress should recall that we pay Social Security taxes in order to receive a basic subsistence in the future. The Social Security taxes we pay are a tax. Then the federal government has the nerve to turn around and tax seniors on the taxes they have already paid throughout their lives. In effect, what seniors are asked to do is pay a tax on a tax. How much sense does that make in the era of fair this and fair that? You have to admit that this is messed up. So fix it! It’s real simple.

Congress should either increase the Social Security base amounts for inflation, or go back to the pre-1985 policy making Social Security benefits non-taxable, and let the cards fall where they may. Make a choice and live with it. Anyone in Congress, or the White House who doesn’t have a clue about what’s in the current tax law, should study up, shut up, or just resign. Anyone who takes the time to examine what’s actually in the Code will come to the realization that some of this stuff is completely ridiculous. Under current law, it is entirely possible to make over $250,000, write it all off through new equipment purchases, other credits and gimmicks, and end up paying nothing in taxes. Yep, that’s right!

In my opinion, what we need to do is get rid of all of the temporary 2010 provisions including –– repeal of the Personal Exemption Phase-Out (PEP), repeal of the Itemized Deduction Limitation (Pease), 0% Capital Gains Tax, expanded Child Tax Credit, expanded Dependent Care Credit, increased Adoption Credit, increased Earned Income Credit, refundable Education Credit, Alternative Minimum Tax (AMT) patch, Bonus Depreciation, extended Section 179 Deduction, Payroll Tax Cut, and the vast array of Energy Tax Credits, and then go back to the 1986 Code and adjust all limitations, base amounts and tax brackets for inflation. In most cases, just like with Social Security benefits, the results will favor those who are the most deserving. We got by without this chaos before 2010, and we can get by without it today.

Fiscal responsibility isn’t a cliff, it’s an opportunity to correct our errant ways. Respect your elders. By the way, the notion of lowering the top income tax bracket from the current inflation adjusted amount, to the 1993 unadjusted top bracket of $250,000 is equally offensive. That’s not forward thinking. In fact, it’s so backwards it’s laughable. Think inflation!

References:

U.S. Inflation Calculator

1985 IRS Publication 915

1993 IRS Publication 915

1994 IRS Publication 915

2011 IRS Publication 915

Related:

Obama's 1950s Tax Fallacy

Black Unemployment Jumps 10.9% on Obama

Are you better off today than four years ago?

- By: Larry Walker, Jr. -

According to the latest report from the Bureau of Labor Statistics, the official unemployment rate for all Americans rose by 1.3% since Barack Obama took office. But over the same period, the unemployment rate for Black Americans jumped by 10.9%, and the number of unemployed Black Americans climbed by 19.1%. So are we better off than we were four years ago? You might be, but the Black Community as a whole definitely is not. So will 90% of Blacks vote to re-elect Obama anyway? You betcha, because it’s not about tangible results, or even the content of one’s character; shamefully for many it’s about the candidate’s skin color.

Per the first chart above, the Official Unemployment Rate has increased slightly from 7.8% on January 31, 2009, to 7.9% by October 31, 2012, an increase of 1.3% (0.1 / 7.8). So the official unemployment rate isn’t any better than it was when Barack Obama took office, it’s about the same, or slightly worse. What about that?

And according the second chart above, the Unemployment Rate for Black Americans jumped from 12.7% on January 31, 2009, to 14.3% by October 31, 2012, for an increase of 10.9% (1.6 / 12.7). So the unemployment rate for Black Americans has continued to rise at a recessionary pace, in spite of Hope and Change. So what about that?

And according to last chart, the number of unemployed Black Americans has continued to surge at a recessionary pace, climbing from 2,254,000 on January 31, 2009, to 2,684,000 by October 31, 2012, for an increase of 19.1% (430,000 / 2,254,000). So the number of unemployed Black Americans, those who refuse to go on welfare or disability and remain in the labor force, has risen due to the countermanding policies of Barack Obama. What countermanding policies you say?

To name a few:

1. Threatening to hike tax rates on the people who might have given someone a job instead.

2. Forcing employers to provide health insurance to current employees, leaving no room for expansion or new hires.

3. Spending borrowed money to subsidize solar panels, wind turbines, and battery operated vehicles, while the U.S. electrical grid remains vulnerable.

4. Allowing strict EPA regulations to stifle jobs in the oil and gas, and mining industries.

5. Increasing deficit-financed expenditures on Welfare, Food Stamps, and Disability as if that’s what Americans are demanding.

6. Running up $5.3 trillion of debt in 4 years, the largest increase in our history, resulting in the first sovereign credit downgrade in American history.

Well, you can’t have it both ways. You don’t achieve job creation through raising taxes, forcing employer mandates, social engineering, killing current jobs, offering free rides, or destroying the nation’s credibility. So admit it, Obama’s policies didn’t work. They didn’t work for Franklin D. Roosevelt, they have never worked, and they aren’t working today. So what now? More of the same, or will you dare to be different? Common sense dictates that if you want a different result, you must try something different. See you on Tuesday. Be there!

If the unemployment rate don’t fit, vote for Mitt!

Data:

Worksheets on Google Drive

References:

Bureau of Labor Statistics: CPS Data Table A-2

Bureau of Labor Statistics: CPS Data Table A-1

Related:

Black Employment | Back to the 1970s

Has Obama Created More Jobs Than Bush Yet?

U.S. Jobs Deficit Sticks at 11.6 Million in October

32 Years from Full-Employment

- By: Larry Walker, Jr. -

In the fairest sense, the U.S. Jobs Deficit has improved by an average of 30,000 jobs per month since January 1, 2011. And although this may be good enough for indifferent Obama loyalists, what it really means is that based on Barack Obama’s very best job creation averages to date, full employment is still another 32 years away. Based on yesterday’s Employment Situation Report, 171,000 nonfarm jobs were added in the month of October. However, since the U.S. needs to add a minimum of 320,850 jobs each and every month for the next 60 months in order to return to full-employment, October’s result fell short of the mark by 149,850.

When the entire Obama record is analyzed, it turns out that U.S. employers have only added a total of 194,000 nonfarm jobs since February 1, 2009 (133,755,000 – 133,561,000). The jobs deficit has increased by 5,521,000 during Barack Obama’s 45-month term, from 6,110,000 on January 31, 2009 to 11,631,000 on October 31, 2012. The average number of nonfarm jobs created on a monthly basis in 2012 is 157,000, which is ironically the same as in 2011. In contrast, the average number of jobs created in 2010 was 86,000, compared to an average loss of (422,000) per month in 2009.

So an average of 157,000 jobs a month, over the past 22 months, is the best that Barack Obama’s policies have been able to accomplish. This may sound great to some folks, but since 127,000 new jobs are required each and every month just to keep pace with population growth, what it really means is that we are clearly locked on a trajectory that chips away at the present 11,631,000 jobs deficit by a mere 30,000 jobs per month. So what does this mean in plain English? In other words, how many jobs must the U.S. create each and every month going forward in order to reach full-employment, and how long will it take?

Updated Jobs Benchmark

Updating Paul Krugman’s original benchmark with the latest figures, we discover that to be meaningful, the number of jobs needed to return to more or less full employment by December of 2014 (the original target date), or within the next 26 months, is now 574,346 jobs a month, as follows:

In order to keep up with population growth, we would need to create 127,000 jobs times 26 months, or 3,302,000. Add in the need to make up for the jobs deficit and we’re at around 14,933,000 (3,302,000 + 11,631,000) over the next 26 months — or 574,346 jobs a month.

But since that’s never going to happen under the countermanding policies of Barack Obama, we are forced to extend the time frame. However, even when we extend the target date to 5 years from today, which will be more than 8 years from the time the recession ended, the number of jobs needed to return to more or less full employment by October of 2017, or within the next 60 months, is now 320,850 jobs a month, as follows:

In order to keep up with population growth, we would need to create 127,000 jobs times 60 months, or 7,620,000. Add in the need to make up for the jobs deficit and we’re at around 19,251,000 (7,620,000 + 11,631,000) over the next 60 months — or 320,850 jobs a month.

Did the U.S. add 574,346 jobs last month? No. Did we add 320,850? No. In fact, according to the Bureau of Labor Statistics, the U.S. has only added 194,000 nonfarm jobs since Obama took office (i.e. February 1, 2009) (see related table). So what does that tell you? It tells me that Barack Obama’s economic policies have failed miserably. He’s the one who said, “If I don’t have this done in three years, then there’s going to be a one-term proposition.” So don’t blame conservatives and independents when the earth slides from under his feet on Tuesday.

Fair Enough?

In the fairest sense, when we average the number of jobs created over the last 10 months, we arrive at 157,000 a month. And when we average the number created in 2011 we ironically get 157,000 as well. Do the math. So in other words, there has not been any improvement this year over last year. So we’re not moving forward after all, we’re stuck in neutral. And since we know that it takes a minimum of 127,000 jobs a month just to keep up with population growth, we are only chipping away at the 11,631,000 jobs deficit by 30,000 jobs a month (157,000 – 127,000). Thus, on the current trajectory, full-employment is roughly 388 months — or 32 years away.

[For the mathematically challenged, take the jobs deficit of 11,631,000 and divide it by the twenty-two month average improvement of 30,000, and you get 388 months. Now divide 388 months by 12 and you get 32 years.]

So four more years of Obama’s trickle-down-government approach places us on the track to reach full-employment by around the year 2044. And that’s giving him the benefit of the highest job creation averages achieved during his entire presidency. I’ll be 84 years old by then, and my one year old twin granddaughters will be 33. I’m sorry, but no matter how you spin the numbers, Barack Obama isn’t worthy of a second term.

Until the number of Nonfarm jobs is expanding by a minimum of 320,850 a month for a sustained period of at least five years, anything short is bad news. The Romney-Ryan Team is the only one on the ballot with a plan targeted to come anywhere close to what’s needed. Aside from that, with the national debt already beginning its ascent towards $20 trillion, with 25 million Americans unemployed or underemployed, with the Federal Reserve devaluing our currency by printing money to purchase mortgage-backed debt on an unlimited basis, with our tax and regulatory structure mired in uncertainty, with a foreign policy meltdown, and with the price of gasoline hovering above $3.25 for a record 86 consecutive weeks, there is absolutely, positively, no reason to consider a second Obama term. None!

[Note: Paul Krugman and other left-wing cronies are now trying to push the idea that, since July 2011 only 90,000 jobs have been required to keep up with population growth. “The number used to be higher, but baby boomers are getting old — the same thing that affects the household survey.” However, even if such a radical 30% shift had occurred within the last four years, it would only alter the current jobs deficit by a diminimus amount — 592,000 jobs, from 11,631,000 to 11,039,000, so phooey! There’s no turning back now, we're sticking with the original benchmark which Mr. Krugman laid out in December of 2009.]

Data:

Worksheet on Google Drive

Related:

U.S. Jobs Deficit Improves by 1,000 in September

U.S. Jobs Deficit Increases by 72,000 in August

U.S. Jobs Deficit Holds at 11,760,000 in July

U.S. Jobs Deficit Grows by 47,000 in June

The Real Jobs Deficit | Moving in the wrong direction.

Obama Jobs Scorecard, Part 3 | The American Dream