New "payroll tax"on investment income being considered--attack on the ants.

[samclem]

As part of the process of paying for the new health care entitlement, legislators are now considering a new tax on investment income.

The story.
In part:

WASHINGTON -- House and Senate negotiators are considering applying for the first time the Medicare payroll tax to investment income as part of a compromise to pay for a health overhaul.
The extra Medicare tax would apply only to the wealthy and could allow congressional Democrats to reduce the sting of a tax on high-cost insurance plans, said Democratic aides and others briefed on the negotiations.
Labor leaders complained directly to President Barack Obama on Monday about the tax on high-value plans, which would hit some union members who have negotiated generous health benefits.

As many will recall, the tax on "Cadillac" medical plans was intended to discourage profligate use of medical care. It appears the proposed tax on these plans is pinching a favored constituency, so the guns are now turning on those who save and invest. Of course the tax would only affect "the wealthy," (income levels--individual: $200K, joint $250K--the marriage penalty lives on!) so no one else need be concerned about it.

Some good news, for now:

. Income from pensions and retirement accounts, including 401(k) accounts, would be exempt.

If this catches on, I don't doubt that the Social Security portion of the payroll tax will also be applied to investment income.

At some point I guess we can stop calling it a payroll tax.

It's probably just me, but sometimes I think the govt is now just allowing us to fatten up 401Ks, tIRAs, and Roths for a later slaughter to feed the machine.

 

[MasterBlaster]

The taxman

Let me tell you how it will be;
There's one for you, nineteen for me.
'Cause I'm the taxman,
Yeah, I'm the taxman.

Should five per cent appear too small,
Be thankful I don't take it all.
'Cause I'm the taxman,
Yeah, I'm the taxman.

(if you drive a car, car - I'll tax the street;
(if you try to sit, sit - I'll tax your seat;
(if you get too cold, cold - I'll tax the heat;
(if you take a walk, walk - I'll tax your feet.

Taxman!

'Cause I'm the taxman,
Yeah, I'm the taxman.

Don't ask me what I want it for, (ah-ah, mister Wilson)
If you don't want to pay some more. (ah-ah, mister heath)
'Cause I'm the taxman,
Yeah, I'm the taxman.

Now my advice for those who die, (taxman)
Declare the pennies on your eyes. (taxman)
'Cause I'm the taxman,
Yeah, I'm the taxman.

And you're working for no one but me.

Taxman!

 

[ziggy29]

To repeat, this is another example of why I'm increasingly looking to arrange my affairs to allow me to be a grasshopper -- LBYM + no debt = decent lifestyle on a modest income that qualifies me for a lot of means-tested goodies and subsidies which the ants can keep paying for. I hate feeling like I'm going to be abusing the system, but the alternative would be the system abusing me.

 

[samclem]

To repeat, this is another example of why I'm increasingly looking to arrange my affairs to allow me to be a grasshopper -- LBYM + no debt = decent lifestyle on a modest income that qualifies me for a lot of means-tested goodies and subsidies which the ants can keep paying for. I hate feeling like I'm going to be abusing the system, but the alternative would be the system abusing me.

I think there's a lot to be said for this. However:
1) It's possible that the trend toward redistribution will moderate. The public backlash appears to be building, and maybe the time will come when small government and lower taxes (rather than "lower taxes for me, higher taxes for others") will be back in vogue. Still, the overall macro trend is not encouraging.
2) As we have discussed, there may come a time when assets, rather than just income, becomes the measure of who shall be shorn. Decreasing income can be done by increasing assets (e.g. decrease investment income by using investments to pay off the mortgage), but decreasing (detectable) assets while maintaining a satisfactory standard of living is more problematic. It probably involves lawyers (trusts, etc), or plunging into the grey areas of the economy (tangible, undocumented investments, etc). Most of these measures have relatively high costs of investing (actual or opportunity costs by way of reduced potential for growth). I guess we could think of this as another form of diversification to address another type of risk.

 

[Independent]

Sam - you didn't provide a link for your story. I think I found it at the WSJ, Democrats Weigh New Tax on Investment Income - WSJ.com. I noticed this line

Income from pensions and retirement accounts, including 401(k) accounts, would be exempt.

When I think of the "ants", I think of ordinary middle and above middle income wage earners who typically save their money in 401(k) and other retirement accounts. This tax wouldn't hit those accounts. I'm not sure what insect name I'm supposed to use for people who are able to consistently save more than the 401(k) and IRA maximums. Nor am I sure what to label people whose assets didn't arise from their own labor. Somehow "ants" doesn't seem corret for them.

 

[samclem]

Sam - you didn't provide a link for your story.

It's in my post, under the blue underlined text that says "The Story." Does that not show up well? (i.e. should I be using some words that look more like a URL so folks won't miss the embedded links?)

I noticed this line

Income from pensions and retirement accounts, including 401(k) accounts, would be exempt.

Right, I noted that in the OP, too.

When I think of the "ants", I think of ordinary middle and above middle income wage earners who typically save their money in 401(k) and other retirement accounts. This tax wouldn't hit those accounts. I'm not sure what insect name I'm supposed to use for people who are able to consistently save more than the 401(k) and IRA maximums. Nor am I sure what to label people whose assets didn't arise from their own labor. Somehow "ants" doesn't seem correct for them.

I don't know what you want to call us, but there are a lot of people on this board whose annual savings exceed the amount they can put into tax-sheltered retirement accounts. And the money came from earned income. And for folks who have been doing this saving thing for many years, it's likely that most of their net worth comes from growth of their investments (which, I guess, "didn't arise from their own labor"). So, if you don't want to call us "ants," maybe you would be more comfortable with the term "bourgeoisie"?

 

[haha]

I hate this. I have made over $200,00, and I have made large capital gains, and I likely will again. But I have never and I will never be a member of the UAW.

So screw this whole piece of pinko communist demagoguery.

Ha

 

[unclemick]

I hate this. I have made over $200,00, and I have made large capital gains, and I likely will again. But I have never and I will never be a member of the UAW.

So screw this whole piece of pinko communist demagoguery.

Ha

I still am pissed at that dang George Washington and his Whiskey Tax who drove all those poor folks from Pa. to Kentucky where they learned to drive and later formed NASCAR. And then he saw something in the deal - becoming the biggest rye whisky producer in the Colonies.

Agile, mobile and hostile.

heh heh heh - And I'm not thrilled paying property tax on my car here up north neither. Gotta watch em every minute.

 

[deserat]

Sam - you didn't provide a link for your story. I think I found it at the WSJ, Democrats Weigh New Tax on Investment Income - WSJ.com. I noticed this line

When I think of the "ants", I think of ordinary middle and above middle income wage earners who typically save their money in 401(k) and other retirement accounts. This tax wouldn't hit those accounts. I'm not sure what insect name I'm supposed to use for people who are able to consistently save more than the 401(k) and IRA maximums. Nor am I sure what to label people whose assets didn't arise from their own labor. Somehow "ants" doesn't seem corret for them.

To me an ant is someone who lives below their means and has savings because of that. It is a reference to the ant and grasshopper fable in which the ants are raided by the grasshoppers who have not lived below their means and saved for the future.

As for 'assets' not arising 'from their own labor,' I could apply the same to a 401K or other tax deferred investment vehicle. What is galling about this is my government favoring one type of citizen over the other -yes, yes, I know life isn't fair and all of that, but in light of what we seeing with regard to the economy and unemployment, wouldn't you want to incentivize having people *not* be on the government dole either as welfare, unemployment or extra social security. Why punish those who have investments? Why punish those who have saved, who have forgone present pleasure for the sake of calling their time their own later in life (however much earlier that may be as dictated by an employer or government pension or rules of thumb regarding retirement ages). These boards abound with people who live well on less than the defined US poverty level - and they do it all through living off their investments, some of which must be after-tax. Should they be punished for that?

It's the cynicism regarding the idea: 'we applaud your willingness to forgo material goods today for possibilities tomorrow, but we need your savings today for what we want and forgot to plan for.' For many people, the cynical attitude described above leads to a dis-incentivization regarding savings - why save if someone else is going to take it from you?

"a lot of people on this board whose annual savings exceed the amount they can put into tax-sheltered retirement accounts. And the money came from earned income. And for folks who have been doing this saving thing for many years, it's likely that most of their net worth comes from growth of their investments "

What samclem said---and for most, it took many years of savings to reach that point - for most it is not an overnight occurence. I say that it all comes from their labor, just as the car, the house, their education, etc, have come from their labor. It's just that the ants decided to invest the benefits from their labor into appreciating assets versus depreciating assets. They also take the risk (as in 2008) that they will 'lose it all.'

Plus, I'm already taxed on any interest, dividends and capital gains I may have (which will be going up in 2011) - so what's the motivation for this new tax? Will we get into triple taxation with this?

Yes, ziggy29 possibly has the right idea. Where's that sweet spot of optimization (inflection point for all of you math geeks out there) in this brave new world of 'entitlement?' I've been trying to figure that out for many years. As for the tax on net worth, would they count the NPV of a pension? How about possible life insurance? I guess you could be very busy in retirement re-adjusting that sweet spot with all of the changing rules.

Done ranting

 

[FIRE'd@51]

The article doesn't mention specifically if capital gains would be included as investment income.

Also, taxing interest income will raise interest rates, all else equal, which may well offset any gains with respect to reducing the Federal deficit.

 

[HFWR]

I must be a pi$$ ant, 'cause my portfolio will never throw off $200k/yr...

What I really want to be is a FIRE ant!

 

[Independent]

It's in my post, under the blue underlined text that says "The Story." Does that not show up well? (i.e. should I be using some words that look more like a URL so folks won't miss the embedded links?)

Right, I noted that in the OP, too.

I don't know what you want to call us, but there are a lot of people on this board whose annual savings exceed the amount they can put into tax-sheltered retirement accounts. And the money came from earned income. And for folks who have been doing this saving thing for many years, it's likely that most of their net worth comes from growth of their investments (which, I guess, "didn't arise from their own labor"). So, if you don't want to call us "ants," maybe you would be more comfortable with the term "bourgeoisie"?

My reading skills apparantly disappeared yesterday. I have no other explanation.

To compound that, I also didn't copy as much as I should have. Here's what struck me:

Currently, the Medicare tax applies only to wages, without any limits. The 2.9% tax is divided in half, with workers and employers each paying 1.45%. The health bill passed by the Senate would raise the worker contribution to 2.35% for individuals making more than $200,000 a year and couples making more than $250,000 a year.

Under the proposal now being considered, people making more than those amounts would also pay the Medicare tax on dividends and other income from investments, the people familiar with the talks said. Income from pensions and retirement accounts, including 401(k) accounts, would be exempt.

Maybe I'm still having trouble reading, but that seems to say that the tax would only apply to singles making more than $200k or couples making more than $250k (I read that to mean "annual income", not "net worth"). I assume that's combined labor and capital income, but the article doesn't say that clearly.

My comment was meant to say that the tax seems to be aimed at unusually high income people, and I have trouble calling them "ants".

We've also saved more than the 401k maximums, but then again I earned substantially more than the median income. There were a few years when we saved 1/3 of our gross income. Even with that, I'm can't imagine circumstances where we would hit the $250k annual income level.

The odd "didn't arise from their own labor" line meant "inherited, and other dumb luck". I should have been more direct.

 

[unclemick]

Like the weather - tax wise you have to keep your eyes open and adjust to suit conditions as they occur.

Hence my -'agile, mobile and hostile.'

I can be pissed but like like the weather I still will have to adjust, move and probably pay - but hopefully not in this instance.

Anybody remember all the tax shelters tried back in the 60's and 70's?

heh heh heh - Got my duplex 1977.

 

[eridanus]

Only 3% of Americans have an AGI >$200000. To call them "ants" would be stretching the analogy to say the least.

That said, the beast has to be fed. If you don't like it, write your Congressling and suggest some budget cuts.

 

[ziggy29]

Only 3% of Americans have an AGI >$200000. To call them "ants" would be stretching the analogy to say the least.

Yes, but:

1. I don't expect this to remain the lower limit.

2. I don't believe it's adjusted for inflation, so eventually, like the AMT, it will keep hitting more and more of the "middle class."

 

[Gone4Good]

Just to put things in perspective. According to the tax calculator at Dinkytown, a married couple earning $250K would pay $54K in Federal income taxes and at least another $10K in Social Security and Medicare taxes.

Meanwhile, someone who earned $250K in investment income split evenly between normal interest and qualified dividends would pay $38K in federal taxes. So about 40% less than the working couple. Putting money in muni bonds would considerably reduce that amount.

 

[Gone4Good]

That said, the beast has to be fed. If you don't like it, write your Congressling and suggest some budget cuts.

But that's just it. Nobody wants taxes raised. And nobody wants services cut. People say "cut the waste" but when you ask about slashing specific programs popular support declines rapidly.

A recent interesting case study is the vitriol spewed by the party of self described fiscal conservatives over proposed cuts to Medicare Advantage spending.

 

[ziggy29]

But that's just it. Nobody wants taxes raised. And nobody wants services cut. People say "cut the waste" but when you ask about slashing specific programs popular support declines rapidly.

At least at the state and local levels, I think there is an attitude among legislators that the way around this is to cut spending on the most popular programs in the budget. Then, when there is outrage about cuts in the most popular programs, the legislators offer to put something on the ballot which would restore funding -- IF the voters (not the legislators) chose to raise their own taxes. To me this is a slimy dereliction of duties which allows them (technically) to say that *they* never voted to raise taxes.

They don't cut the bureaucracy and less popular spending, of course, because the people wouldn't vote to raise their own taxes to fully fund them.

The dynamics are different at the federal level because there is no federal initiative process. But even at that level legislators protect their pet programs and, in the end, they all agree that "you vote to fund my programs and I'll vote to fund yours," and the result is the budget mess we have now. And at some point, we have well over 10 trillion reasons why this practice ***must*** come to an end. Raising taxes can be only so much of the solution.

 

[dgoldenz]

I think by the time 2012 rolls around, the effective tax rate on my income will be approaching 100% at this rate.

 

[eridanus]

The dynamics are different at the federal level because there is no federal initiative process. But even at that level legislators protect their pet programs and, in the end, they all agree that "you vote to fund my programs and I'll vote to fund yours," and the result is the budget mess we have now.

Eh, they reflect the will of the people (their constituents). Everyone has their pet projects and everyone likes a "free" buck from the feds.

 

[Gone4Good]

Eh, they reflect the will of the people (their constituents). Everyone has their pet projects and everyone likes a "free" buck from the feds.

The clinical term is Cognitive Dissonance - the act of holding two contradictory ideas simultaneously.

As in "Federal deficits are a problem but I neither want to raise taxes nor cut spending."

It's pervasive throughout the electorate and evident sporadically on this forum.

 

[ziggy29]

The clinical term is Cognitive Dissonance - the act of holding two contradictory ideas simultaneously.

As in "Federal deficits are a problem but I neither want to raise taxes nor cut spending."

It's pervasive throughout the electorate and evident sporadically on this forum.

I think you're making a logical leap here. It's not that *individuals* don't want spending cut, it's that we can't collectively reach a consensus on WHAT to cut. As a result nothing gets cut.

But I'll bet almost all of us have ideas about where we would personally like to see spending cut, so I think saying people have "cognitive dissonance" in this respect is largely bogus.

 

[HFWR]

Precisely why we need (a) a balanced budget amendment, and (b) term limits...

This is directly related to retirement, in that I'm practicing for my curmudgeon certificate...

 

[Gone4Good]

I think you're making a logical leap here. It's not that *individuals* don't want spending cut, it's that we can't collectively reach a consensus on WHAT to cut.

Not entirely. I think the public is confused. They want spending cut generally, but they don't want spending cut specifically.

Here is the 2008 breakdown of where federal spending went . . .

Defense 21%
Social Security 21%
Medicare 20%
Safety-net programs 11% (foodstamps, earned income tax credits, etc)
Interest on debt 8%
Veterans & Federal retiree benefits 6%
Scientific Research 3%
Transportation & infrastructure 3%
Education 2%
Other 5%

So when asked specifically . . . do you want taxes raised "No"; Do you want to cut defense spending "No"; do you want to cut Social Security "No"; do you want to cut Medicare "No"; Do you want to cut foodstamps and the like "No".

Do you consider the federal deficit a significant problem "Yes"


Cognitive dissonance.

 

[ziggy29]

So when asked specifically . . . do you want taxes raised "No"; Do you want to cut defense spending "No"; do you want to cut Social Security "No"; do you want to cut Medicare "No"; Do you want to cut foodstamps and the like "No".

Do you consider the federal deficit a significant problem "Yes"

Cognitive dissonance.

You really believe that there aren't a lot of *individuals* who want some of these broad areas cut? Or that there are plenty of people who want some taxes raised?

No, despite your claims there are plenty of people who want spending cut and plenty of people who want taxes raised. As I said -- the problem is that people wants everyone else's programs cut and everyone else's taxes raised while resisting cuts and tax hikes that hit them personally. So there's a stalemate and the deficit grows. But that's nowhere near the same thing as your specious claims about "cognitive dissonance". I personally don't know *any* serious deficit hawk who doesn't think we should ultimately raise taxes and/or cut spending.