When You Know a New Tax is Bad

It seems that every year, there is a new tax that I or someone that I know has to pay or a new tax credit or both. Oftentimes, it can be taken care of on Form 1040 or some form that I already file in one line item, even if it feels like a random number generator fills in the amount that I get to send to my good friends at the Treasury Department.

As all my readers know, the Affordable Care Act (ACA, PPACA, ObamaCare) wasn't just any old law. And, since even the most optimistic of all proponents of the law knew that it would cost a lot of money, new taxes were needed to pay for it. These aren't just any old taxes. I'm talking about two in particular -- the 3.8% Medicare surtax on investment income for those individuals earning over $200,000 and for couples filing jointly earning over $250,000, and the 0.9% additional Medicare tax on earned income in excess of those same thresholds. (By the way, just like perhaps the worst structured tax in history -- the Alternative Minimum Tax -- those thresholds are not indexed.)

I looked at many of the personal taxes in the Internal Revenue Code. Almost without exception, when taxes apply to individuals or to couples filing jointly, the dual threshold is either twice the individual threshold, or at least meaningfully (50% or more) higher.

But, these are not your ordinary taxes.

All you lucky people (maybe you are just hard-working and it's not just luck) who will be subject to these taxes get to fill out not just one new form, but two new forms. That's right, you have to fill out Form 8959 to determine if you (and your employer) paid enough Medicare tax for you [and your spouse]. And, you need to fill out Form 8960 to determine if you were both a lucky earner and a lucky investor for the year.

I'd link you to the forms, but they are only available as drafts right now. And, I'm sure you don't really want to see them anyway.

Suffice it to say that as of now, Form 8960 looks like an easy one, but Form 8959 must have been jointly produced by the makers of Tylenol, Advil, and Aleve. You will have to have your Form W-2(s) in front of you while you suffer through the calculations and the eventual answer. Then if you are really lucky, you get to attach these two forms to your Form 1040 and send more money.

My conclusion? A tax (I know, it's really two taxes, but it looks like one to me) that requires two new forms can't be a good tax. Let's just get rid of it. I want to go back to the original income tax provisions -- pay 1% of your income in excess of $3,000. I'll even accept that the $3,000 is not indexed.

Everything You Should Know About the American Jobs Act

Ever needy for material to blog about, I eagerly awaited President Obama's address to a Joint Session of Congress where he would introduce his American Jobs Act (AJA). I listened carefully.

I did hear about cuts in FICA taxes. I did hear about small business tax credits. I really didn't hear much, though, that is relevant to what we discuss here.

So, I searched the internet. Google couldn't find text of AJA. Bing couldn't find AJA. Yahoo couldn't find AJA. Only Steely Dan could find AJA (if you get that one, you must either be old like me or old at heart).

We are supposed to learn in a week and a half how it is that the President plans to pay for this stimulus (my word, not his). Here are some things to look for (and everything on this list is 100% speculation on my part):

• Reduction in the defined contribution 415 limit to $20,000. That is, workers who can afford to make large 401(k) deferrals will not be able to get much in the way of company contributions.
• Limits on corporate tax deductions for so-called Cadillac health plans for non-union workers. That is, if your employer gives you "too" rich a health benefit, they can't get a tax deduction for all of it.
• Further erosion of the $1 million limit on deductible compensation under Code Section 162(m). As the President seems to believe that "CEOs and CFOs" make too much money, and he can't stop companies from paying that much money, he will seek to limit the tax deductions that they get. My feeling is that if you limit the deduction much more, most companies will just ignore the deductibility issue and pay their executives however they like.
• Means testing of Social Security (and perhaps Medicare) benefits so that those who are better financially prepared for retirement will not receive the full benefits to which they thought they were entitled.
• Some sort of restriction on the tax deductibility of equity compensation.

Ultimately, if the first bullet [above] becomes reality, it may result in joblock. That is, employees currently in the workforce will have difficulty being able to retire and thus will not open up jobs to those not in the workforce. Of course, it's possible that all of my thoughts are incorrect and misguided.

Perhaps Donald Fagan and Walter Becker know.

Getting Ready for the Budget Debate

I can see it coming now. Its magnitude and its long-term effects could dwarf them all -- Lincoln-Douglas, Kennedy-Nixon, Reagan-Mondale, Bentsen-Quayle, Burr-Hamilton (well, that one was really more of a duel). I'm talking about the budget debate of 2011.

The war has started. I'm not sure just what the first shot was. Was it the failure of the 111th Congress to send a budget to the President? Was it the Tea Party forcing the more traditional Republicans to insist on cuts for the remainder of fiscal 2011? Was it Paul Ryan's (R-WI) proposal to cut roughly $6 trillion from the budget over 10 years, not leaving untouched the sacred cows known as Social Security and Medicare? Was it President Obama's proposal to similarly make some significant budget (and tax) changes, perhaps in response to the Ryan proposal?

For purposes of this post, I'm going to focus a bit on the Ryan proposal. As I read it, his proposed budget would make fairly sweeping changes to both Social Security and Medicare. With regard to Social Security, I think I'm safe. That "Fund", and I use the term loosely as it operates as nothing more than a bookkeeping entry is not in as bad shape as its younger sister, so the biggest changes appear to be set up to come in 25 year chunks. As I will be eligible for my unreduced Social Security benefit before 2025, I only need to worry about the program's ability to pay. But, for me, this will almost be found money, as I have assumed for years that I would never see a dime from Social Security (and I still may not, but that is for another day).

Medicare, on the other hand, that "Fund" is about as bankrupt as bankrupt can be. When President (Lyndon, not Andrew) Johnson signed it into law, nobody with a voice that could be heard figured that we would have the changes in health care that have occurred. Double-digit health care inflation wasn't even a nightmare, it just wasn't a possibility. Longevity improvement just wasn't a consideration. And, now look what's happened.

All of those employer-provided retiree medical plans - companies had to start accruing costs for them, and they all but disappeared. It's ok, Medicare is there. Well, for those of us not yet age 55, as I understand the Ryan budget proposal, Medicare may not be there, at least not in its current form. Yes, it needs changes, but like the rest of the people in my age cohort, I've paid a lot of money into that system, and I actually have expected, probably naively, that it would take care of a pretty good portion of my health care costs when I make it to age 65. I am beginning to feel betrayed.

It's not just me, though. For as long as I have been in this business, employer-sponsored retirement programs (including health care) have been designed with the presumption that both Social Security and Medicare will remain largely as they are. In these times of a down economy (yes, on the record, I think the economy is still down), global competition, and mark-to-market accounting fanaticism, companies are not feeling the need to provide better and more costly (to employers) health care benefits.

I'm a fan of what Congressman Ryan is trying to do. He is trying to cut runaway spending. I think it's common sense that if your goesoutas (expenditures) exceed your comeintas (revenues, generally from taxes) that you have to either cut your goesoutas or increase your comeintas or both.

Well, in round figures, the federal debt is about $14 trillion and the GDP is about $15 trillion. My very rough analysis of some graphs that I found online say that the economy is healthiest when debt as a percentage of GDP is in the range of 40% to 55%. Let's take a number in the middle, say 50%, because that makes my math easier. That would imply that we need to cut the debt by $6.5 trillion if the GDP doesn't grow. Frankly, growing at about 3% per year, it's change is not that significant to the equation.

So, let's do some math. The population of the United States is about 310 million. Cutting $6.5 trillion from the debt could be accomplished immediately if each American would be kind enough to contribute about $20,000 to Uncle Sam.

Ain't happening.

Among the people who want tax cuts, they surely don't want to see an increase. And among those who are calling for tax increases, very few are saying that those increases should start with their wallets.

So, Social Security and Medicare may truly need some huge changes. And, these changes will have a significant impact (for all the real grammarians and wordsmiths out there, I know that impact implies a physical collision, and because of that, I rarely use the word impact where affect or effect will suffice, but I feel a physical collision here) on benefit plan design and retirement income planning. And, after all, those are among the topics of this blog.

So, we'll try to keep you updated here, and occasionally attempt to both humor and educate the readership with some analysis, but in the meantime, to paraphrase President Reagan, I'm not sure that I am happy that Congressman Ryan wants to make my youth an issue in his campaign.

Senators to Introduce Legislation to Cut Spending, Raise Revenue

Senator John Warner (D-VA) and Senator Saxby Chambliss (R-GA) have announced that they will introduce a spending reduction and revenue raising bill in the Senate. Yes, you read that correctly -- that's one Democrat and one Republican.

While, the bill has not yet been introduced, the Warner camp has leaked enough information that we have some pretty good hints about what to look for. Here is a summary.

• Change the tax treatment for mortgage interest from a tax deduction to a tax credit and place a cap on it that would make it apply to only the first $500,000 of a loan. Further, it would eliminate any deductions related to homes other than principal residences.
• Lower marginal federal income tax rates, presumably to the levels recommended by the Debt Commission (see my earlier post on the topic here: http://johnhlowell.blogspot.com/2010/11/debt-commission-retirement-plans-and.html )
• Gradually increase the Social Security Normal (full) Retirement Age to 68 by 2050 (people born in 1982) and to 69 by 2075 (people born in 2006). 
• Increase the OASDI (Old Age, Survivors and Disability Insurance) portion of Social Security tax on high earners. Presumably this means that the 6.2% OASDI rate will be extended from the Social Security Wage Base to infinity (and beyond for you Buzz Lightyear fans).
• Reduce Medicare benefits.
• Reduce defense spending.

There are a lot of sacred cows in there. This is going to be controversial. But, according to comments from Warner's office, everything needs to be in one bill for an up or down vote. He says that individuals shouldn't pick and choose, but should either say that this bill is right or wrong. As of now, there appear to be roughly 10 co-sponsors for this bill from both sides of the aisle. We'll keep you apprised as we learn more and are able to untangle what this means for compensation and benefits issues.

VERY Temporary Doc Fix Passed

The House has approved a bill that delays by one month, scheduled cuts in Medicare payments to doctors (Doc Fix). Note that this still needs to go through the Senate and is only a 1-month delay.