Tag Archives: value added tax

Taxes & Generational Equity: Federal Taxes in 2020

For the past four decades, the retired, the rich and (in some states such as New York) selected public employees and unionized employees of government contractors have become richer and richer, while ordinary workers in the private sector have become poorer and poorer.   It is estimated, for example, that the average Millennial is paid 25 percent less than the average Baby Boomer had been at the same age. 

https://www.wsj.com/articles/playing-catch-up-in-the-game-of-life-millennials-approach-middle-age-in-crisis-11558290908

At the same ages, Gen X men working full time and who were heads of households earned 18% more than their millennial counterparts, and baby boomer men earned 27% more, when adjusting for inflation, age and other socioeconomic variables.  Among women, incomes were 12% higher for Gen Xers and 24% higher for baby boomers than for millennials, using the same measures.

If one ignores the rising level of education, labor force participation and pay of women since 1980, this is a trend that actually started with those at the back end of the Baby Boom, who have been disadvantaged compared with earlier-born generations, those now in retirement, for their entire lives. After I called for a study of Social Security records some years ago, one found this.

Adjusting for inflation, the median male worker born in 1958 earned just 1 percent more during his career compared with the median man born 27 years earlier, in 1932. In fact, the median male born in 1958 earned 10 percent less during his career compared with the median male born 16 years earlier, in 1942. The lack of progress of mid-level male earners is not a surprise, of course. We know the median real hourly wage received by men reached a peak sometime in the 1970s. It has not surpassed that peak in any year since the 1970s, and in many years it has been far lower.

And yet it is work income that has been taxed more heavily over the past four decades.  Retirement income has received the same exemptions, and in fact even more exemptions, compared with the time when each generation was richer than the one preceding, rather than poorer, and seniors were more likely than working-age adults to be poor, rather than less likely to be poor.   And investment income has come to be taxed far less than work income.  At the federal level, one by one, both political parties have supported most or all of these tax deals to benefit the retired, rich, and the other organized selfish.  What does it add up to?  Let’s fire up the Turbo Tax and find out.

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A Value Added Tax Would Be Far More Fair Than the Payroll Tax

As I showed in my prior post…

https://larrylittlefield.wordpress.com/2019/07/31/dont-increase-the-federal-payroll-tax-replace-it-with-a-value-added-tax/

The federal payroll tax on the first $132,900 in wage and salary or self- employment income, a tax that has been increased over the decades, is both unjust and economically damaging.  All the groups of people who have become richer over the past four decades, at the expense of making everyone else poorer, have either all or much of their income exempt from it.  Today’s seniors, the richest generations in U.S. history, because their retirement income is exempt from the payroll tax (they also get special exemptions from the federal and state income taxes).  The very wealthy, because investment income is exempt from the payroll tax (dividend income and capital gains are also taxed at a lower rate under the federal income tax).  And those who get very rich non-wage benefits, generally unionized public employees – all that income is exempt from both the payroll tax and income taxes.

These groups have used their political power to capture a greater and greater share of total U.S. income, while the work income of ordinary private sector workers has been going down, generation by generation. With Millennials paid 25 percent less than Baby Boomers had been at the same point in their careers.

https://larrylittlefield.wordpress.com/2019/05/25/retirement-benefits-are-to-white-collar-crime-and-generational-inequity-what-handguns-are-to-street-crime/

And yet it is these less well off workers who are forced to carry the burden of Social Security and Medicare for the richer and more entitled generations that preceded them, the soaring cost of public employee pensions and health care, and the huge national debt run up by the multiple rounds for tax cuts for the rich.

So what would I propose to make federal taxes more equitable on a generational basis, and more progressive (with the better off paying more) as well? Replace the regressive, worker-only federal payroll tax with less regressive, everyone pays as they spend their money Value Added Tax (VAT).

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Don’t Increase the Federal Payroll Tax –Replace It With A Value Added Tax

If there is one tax that both Republicans and Democrats love to increase, it is the federal payroll tax, now at 15.3% of your paycheck, theoretically split between employers and employees with the “self-employed” paying both halves.  The biggest tax change in my lifetime took place in the early 1980s, at the start of my career.  With the biggest cut in the progressive income tax in history, followed by the biggest increase in the regressive payroll tax in history, during the Reagan Administration.  The income tax cut has been repeated twice since, to benefit the richest members of the richest generations in history at the expense of loading debt on the less well off generations to follow.  That has been a Republican policy.  But increasing the payroll tax – the base, the rate, or both — is a Democratic go-to as well, to increase or at least maintain Social Security benefits under various Democratic proposals, as noted here…

https://larrylittlefield.wordpress.com/2019/02/17/social-security-the-democrats-join-generation-greeds-theft-of-the-future-from-less-well-off-later-born-generations/

Or to pay for things like family leave, as in the state program in New York or the federal program proposed by New York Senator Gillibrand.

Why increase the payroll tax?  Because the types of people who have gotten richer and richer over the past 40 years, at the expense of those who have gotten poorer and poorer (to the point where their life expectancy is falling), don’t have to pay it, or as much of it.  Only regular workers do.  We are now in the special interest pandering, campaign contribution collecting portion of the 2020 Presidential campaign.  No wonder everyone wants higher payroll taxes – or, as alternative, even more in cuts in federal old age benefits for already-disadvantaged later-born generations only.

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Federal Revenues: Recent History

The past 35 years or so have seen a persistent history with regard to federal tax revenues. Republicans, who have dominated the federal government for most of that time, have cut the taxes that fall more heavily on businesses and the wealthy, the personal and corporate income tax. And then following a fiscal disaster and soaring deficits, Democrats increased those same taxes. In the end the personal income tax ended up, as a percent of GDP, about where it was – at 8.1% of GDP in FY 2014 compared with 7.9% of GDP in FY 1978. While the corporate income tax ended up lower, at 1.9% of GDP compared with 2.6%. This is true even though profits account for a higher share of GDP today than they did in 1978, and work earnings at the top account for a much higher share of total earnings, factors that should have increased personal and corporate income tax revenues as a percent of GDP even with the exact same rules.

Payroll taxes, meanwhile, were substantially increased by the Republicans and never reduced, save for a special exemption in the Great Recession. These taxes fall exclusively on work income in the United States, and more heavily on the working and middle classes. The wealthy pay less, as a percent of their income, the retired do not pay at all and, with regard to international trade, work done in the United States is subject to the tax whereas goods imported from abroad are tax-free. The payroll tax burden increased from 5.3% of GDP in FY 1978 to 6.5% in FY 2001. Before falling to 5.9% in FY 2014, after the share of Americans working and average work income plunged in the Great Recession. Other federal revenues, such as excise taxes, estate taxes, and customs duties totaled 1.7% of GDP in FY 1978 and 1.6% of GDP in FY 2014, although the composition of this category has changed. These trends are discussed in more detail below.

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Taxes & Generational Equity: Federal Taxes in 2014

It has been one of my recurring themes that just two kinds of people have been getting richer in this country: the top executives who sit on each others’ boards and vote each other a rising share of private sector income, and unionized public employees (or at least older generations thereof in certain places) who benefitted from political deals to retroactively increase their already relatively rich retirement benefits. Everyone else has been getting poorer, working its way up the income and educational ladder since the mid-1970s. There are, in other words, the bonus rich and the years in retirement rich, the executive/financial class, the political/union class, and the serfs.

https://larrylittlefield.wordpress.com/2014/07/01/the-executivefinancial-class-the-politicalunion-class-and-the-serfs/

In general the executive/financial class has ruled the federal government, and the political/union class has ruled state and local governments in some places (including New York), over the past 30 or so years. This power is reflected in the tax code. At the federal level, however, these two classes have one thing in common. Relatively little of their income is in wages and salaries, which the federal government taxes twice. More of it is in the form of untaxed employer-provided benefits, pensions and other retirement income, and investment income taxed at a lower rate. For the serfs work earnings — wage income or self-employment income — is often all they get. The common view is that while state and local taxes are generally “regressive,” falling harder on those who earn and have less, federal taxes are “progressive,” falling harder on those who have and earn more. Based on the progressive federal income tax. That view, however, becomes less true once generational equity and the payroll tax are taken into account.

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