Tax the Rich – The Error of the Progressives

Happy New Year!  Hard to believe we’re in a New Year!!  Where does time go?  48 years ago this month I started my 1^st job out of college with Northwestern Mutual in Oshkosh, Wi.  Don’t ask how that went, but it did serve as a stepping stone into the world of finance which is where I still find myself in 2023.  So where do we find ourselves today?

“It ain’t what you know, that gets you in trouble.  It’s what you know that ain’t so.”  Mark Twain

-or-

“Figures don’t lie, but liars figure”  Unknown

Income Inequality

Over the holidays I picked up and started reading a book called The Myth of American Inequality by Phil Gramm, Robert Ekelund and John Early.  It’s a very easy read and an enlightening book, all based upon Government Statistics as it relates to current public policy.  I’ll get into Social Security in a moment, but I thought first we might look at the macro picture.

When does 16.7 = 4

How often have we heard especially during election years that the Rich should pay their fair share?  Or that a secretary pays more in taxes that Warren Buffet?  Etc. Etc.  and now we’ll get the hear constantly for the coming months as Congress fights over the debt limit and a balancing of the Federal Budget and the Trump Tax Cuts:

• Myth #1 – The top quintile (20%) earns 16.7 times more than the lowest quintile
• Myth #2 – The poverty level today in the USA is the same as it was in 1967 (War on Poverty)
• Myth #3 – Income inequality is rising at historical levels within USA

Enlightenment:

• • Inflation adjusted transfer payments to lowest quintile has increased since 1967 from $9,677 to $45,389 in 2017 (last year available) which equates to 91% of their household income.
  • U.S. Census Bureau only considers CASH and Direct Deposits as benefits, they do not take into consideration Medicare, Medicaid, Food Stamps (SNAP), Housing Subsidies, Child Tax Credits or Refundable Tax Credits. Uncounted transfer credits constitute 59% of total household income for the bottom quintile. Thus 2/3 of transfer credits are not counted as income.
  • The poverty rate in 1967 was 12.3%, today when taking into consideration the value of all transfer payments it would be only 2.5%, thus one could say the War of Poverty was successful.
  • Interesting tidbit, when one takes the lowest quintile that considers all household even students or people out of work, who will graduate or hopefully go back to work, 75% of between ages 25 – 60 will find themselves in the top quintile sometime in their lives.
  • Top quintile earned on average $295,904 in 2017, but paid $106,997 in taxes which accounts for 61% of all taxes paid and (83% of all Federal Taxes), thus taking home $197,034 which is 67% of what they earned.
  • Bottomline:
    • The U.S. Census Bureau does not consider taxes paid in considering the wealth gap, they only look at gross income, which is ridiculous!
    • 2/3 of Federal transfer payments are not considered as income to recipients
    • Total income is $45,389 lowest quintile vs $197,034 highest = 4x greater not 16.7!

Food for thought! This book was published last year using the latest data provided by the U.S. Census Bureau (2017), since then we’ve experienced COVID and seen multiple Federal & State aid programs causing massive Federal debt, so it will be interesting to see how these numbers will look, when 2022 is published?  My guess is that the lower quintiles have fared quite nicely and have and are still taking advantage of programs that were and are still available.  That might be the reason why many younger able bodied individuals have not returned to the workplace?

SOCIAL SECURITY

In 2023 the maximum earnings (earned income) subject to Employment taxes is $160,200 up from $147,000 in 2022.  Social Security taxes alone are 12.4% split equally between the employer and the employee.  12.4% x $160,200 = $19,864.80 or $9,932.40 each if one maxes out.

The PROGRESSIVE Social Security benefit formula:

• Highest 35 years of earnings, indexed to inflation which determines AIME (Average Indexed Monthly Earnings).
• Individual born in 1960 who maxed out their earnings, would have an AIME of $11,430
• Formula:

Conclusion:

• As you can see the formula is extremely progressive in that the lower earning individuals get a much greater ROI that a higher earning one!
• Avg percentage crediting rate of an individual who maxed out is 29% which is 1/3 of what a low earning individual would have been credited at.
• Most of you or your clients will have to pay income taxes on your Social Security benefits.
• If anyone says that Social Security should be MEANS TESTED, you can now reply, they already are!
• Should they decide to uncap the maximum earnings subject to FICA taxes or to stop them at $160,200 and then start them again at $400,000 (Democrat Proposal), I don’t know if they would credit those dollars taxed at 15% or ZERO as it relates to the benefit formula above.

Not that we can change what takes place in Washington DC, but I think it’s important that we know the facts and have the ability to discuss such issues when the proper moment presents itself.

Let’s have a GREAT YEAR and never hesitate reaching out, if you think I can be of assistance regarding Social Security claiming.