Notes on tax reform (part 2 of 2)

The other point I wanted to make is the amendment that did not pass the Senate’s standards, introduced by Sens. Marco Rubio and Mike Lee. They proposed a reform to the Child Credit procedure, aimed at low-income working parents. As a shift from the usual “entitlements” model, where this is given as a “subsidy” to those whose income levels do not rise to “taxable” proportions, their measure would have allowed the Child Credit to offset payroll taxes.

Inasmuch as low-income workers rarely hit the taxation stage on their income while, from the first dollar earned, a portion is stolen before they see it for “FICA” (with an equal amount taken from the employer’s till, which could have been paid to the worker!), this payroll deduction is often the only part of their paycheck they never get to see again. (Note that few people who remain poor all their lives end up living long enough to collect Social Security or Medicare.)

So this was an effort to both remove the stigma of “entitlements” and give credit to the taxpaying “working poor” person, for being willing to pull whatever weight (s)he has in contributing to society. Instead of lumping these hard-working folks into the ”parasite” category (also a misused term, but that’s another column), this measure would have taken a step toward empowerment for those folks.

Of course, the real reform would have begun with putting a floor on FICA and withholding, so the first X dollars earned each year would be exempt from all taxation. If they want to raise the ceiling on FICA, which now stops deductions at about $250,000, they should precede that by giving everyone an automatic tax-cut, starting from the bottom.

Think of the ramblings about minimum wage, and how it is impossible to live on it. Start by removing the deductions: at $7.25 an hour, FICA knocks it down to $6.70; if you instead pay it in full, and then include the “employer contribution,” it’s costing your employer about $7.80 an hour. You should begin by getting that for your services.

My own idea, of a “FICA floor,” postulates a transition to a voluntary system for retirement. First step would be putting a floor on all incomes, before which no deductions for payroll (or income?) taxes would ensue. For those in lower income levels, it might mean not paying any taxes at all, but since most of that (at least at the federal level) is swallowed up by interest on the national debt, unwarranted wars overseas (and at home with Prohibition II, the war on some drugs), crony corporate subsidies and bailouts, etc.—you have to realize it’s not going to anything of value, certainly not to the working-poor folks.

Second step might be offering investment vehicles, so even those low-income folks could tuck some of it away, for future emergencies or impending retirement. And since the “progressives” among us would immediately complain that it’s setting people up to fail to plan for their own retirements, let’s make these “investment vehicles” mandatory at least at first: the amount that would have been deducted from your check is still not right in your hands, but goes into an account that is your own, even though you can’t touch it until retirement. (I’d make exceptions for medical emergencies, specific-skills education that leads to higher income, or even starting a business of your own, but that’s how I ride.)

Do the math: If you have $15,000 of income shielded from FICA deductions, that is 7.5% of that ($1,125) plus the equal “employer share” for a total of $2250 a year. Multiply that by 40, you get $90,000 you never got to spend as you chose.

Now put that money into a simple savings account, building it into a CD or other long-term investment as the amount rises. That $2250 a year, left in there for 40 years, accruing interest at even a modest 5% on average, and being augmented each year with another $2250, comes out to . . . $ 301,229.44. If you cannot add to that (with higher income, other investment or just plain saving a little more, there is something very wrong with you. Even if that was “all there is” when you retired, it’s enough for most folks to live on gradually over their dotage years, and even leave some for the grandkids at the end.

You could also use this growing fund as collateral for other expenses (house, car, new business, etc.), and still have it when you decide to hang up the spurs—or just pursue some other venture, with no need for it to succeed immediately. Imagine how it would feel to be able to finance your own future, with money that is already yours!

I could go on, but I am going to wait for feedback . . . . (Meanwhile, don’t even start me on the SALT deduction, which subsidizes states that cannot manage their own finances …)