Social Security is the real tax reform to watch - Albuquerque Journal

Social Security is the real tax reform to watch

Jim HamillThe 2020 presidential campaign is underway. And it’s now fashionable to talk about raising taxes. For the wealthy. At least that’s what a candidate and a new member of Congress says. These proposals have sucked all the oxygen out of the room.

The real shocker may end up sneaking under the radar. That’s interesting because the proposals that receive attention are the ones that affect few – a recent Social Security proposal will affect many more.

The attention grabbers are Alexandra Ocasio-Cortez’s proposal to tax income above $10 million at a 70 percent rate, and Elizabeth Warren’s proposal to tax wealth above $50 million. Let’s address these proposals first.

The “O-C” proposal seems to terrify high-income people. It would return the top tax rate to the rate that existed through much of the history of the country, most recently immediately before the 1981 tax legislation.

The highest rates have been used to fund war efforts – 77 percent in 1918 and 94 percent in 1944. The top 1940s-1950s rate dropped to 70 percent only with the Kennedy tax cuts in the early 1960s.

The O-C proposal would be limited to taxable income above $10 million. It’s just a proposal and not likely to happen, at least in the near term. But it’s not out of line with what we have seen in this country.

The Warren proposal is different. It is unusual and really impossible to administer as explained. Warren’s wealth tax begins at 2 percent on wealth above $50 million.

The problem is that it is unreasonable to expect people to provide an estimate of their wealth every year. The estate tax requires something like that, but only once – you die only once.

The Warren proposal could be enacted by use of some proxy for wealth. While it may seem odd, income may be an excellent proxy. But, you say, isn’t this just an income tax?

Well, maybe not, if income is a good proxy for wealth. It is known that income does not serve as a wealth proxy at lower levels of wealth or income. But there is evidence that it does if the target wealth is $50 million or more.

So it may be possible to tax high wealth by a surtax on income above a very high level. In fact, the O-C proposal may actually be a good proxy for a wealth tax.

Anti-tax advocates such as Grover Norquist, who actually knows better, misrepresent the tax to apply to everyone. But they understand that it is wise for political reasons to try to convince all of us that we’d be paying 70 percent.

In spite of what you may think, I am not advocating for or against high-income (or wealth) taxes. I just find it interesting that the proposals seem to be catching some wind in their sails.

It is also interesting that a House Democratic proposal to boost Social Security by raising the payroll tax has not received the attention of O-C or Warren. Rep. John Larson, D-Conn., is promoting legislation to raise the limit for the 6.2 percent Social Security tax.

In 2019, the 6.2 percent payroll tax is collected only on the first $132,900 of wages (or self-employment income, which is assessed at 12.4 percent). The House proposal would create a “doughnut hole,” in which the tax would start again at $400,000 of wages.

And in time, the proposal would apply the tax to all wages, closing the hole. This latter proposal would actually hit a lot of Albuquerque people who are not worried about the O-C or Warren proposals.

For example, if you are self-employed with $200,000 of income, eliminating the current wage limit would cost you $6,423 a year. At $300,000 of self-employment income the cost rises to $17,875.

I realize that $300,000 of income sounds like a lot. But $17,875 in added taxes each year is also quite a bit. It inflicts more pain than that to be suffered by those with $10 million or more of annual income or $50 million of wealth under the more publicized plans.

The House proposal, if enacted, will be met with resistance. This includes, if necessary, arguments to be made and alternative business structures to explore that would offer a colorable argument that the tax is not owed.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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