American taxpayers understand that the existing U.S. tax policies are mysterious and far from a moderate level of transparency. While the federal politicians are pondering ways to lower the federal deficit and win political points for their individual perceived wisdom, taxpayers wait for the hammer to come down on them.
Politicians have lost touch with the reality of how to run a business and how to create a balanced budget. Within our respective households, we routinely monitor our expenses (spending habits) and income. When our income exceeds our expenses, we are free to save the surplus or spend more to balance our budget. The politicians create a deficit for future generations to pay back.
An essential ingredient to a successful household balanced budget process is to start with spending reductions, with insight to the income opportunities (an additional job, reduction in savings, etc). In a household, we cannot print more money to create the mirage of a real budget.
Raising federal taxes before spending analysis and reduction is a no-no.
During 2011 and recently in 2012, I forwarded a recommendation regarding tax reform to Sen. Susan Collins, Sen. Olympia Snowe and Rep. Mike Michaud. Recently, I received a call from Washington, D.C., and spoke to a "handler." Unfortunately, there is no intention to address any real solutions during the deficit and budget negotiations.
The public needs to get angry and insist upon having elected politicians take unbridled actions to address the nation’s economic problems.
Since federal politicians have refused to address the entitlement spending management issues, let us go back to address a portion of reasonable tax reform. Individuals and small businesses need a lower tax burden to build the U.S. economy.
Large successful companies typically employ individuals with high incomes, are Washington insiders, or they are highly successful, self-employed earners.
During 2011, President Barack Obama focused attention on a one-time payroll tax reduction for individuals to 4.2 percent while retaining the employer payroll tax of 6.2 percent. Now he has proposed higher taxes for the top earners and effective tax reductions for individuals and small businesses earning less that $250,000. It is interesting to find that each of the federal executives (except the president) earn less than $250,000. They will see an effective tax reduction.
A little known fact about the current tax law related to payroll tax is that an employee earning $40,000 pays $2,480 in payroll tax and his/her employer pays another $2,480, for an effective payroll tax rate of 6.2 percent; an employee earning $110,100 pays $6,820 in payroll tax and the employer pays another $6,820, also an effective payroll tax rate of 6.2. President Obama earns $400,000 annually plus perks. He pays $6,820 in payroll tax, so his effective payroll tax rate is 1.71 percent; and an employee earning $3 million pays $6,820 in payroll tax while his/her employer pays another $6,820, making the effective payroll tax rate 0.22 percent.
The above is a fact because the tax code establishes a “wage base” of $110,100 and an employee payroll tax is not deducted for any additional income. This tax treatment creates a disproportionate effective payroll tax burden, shown in the following chart.
I recommend that if federal politicians want to lower the tax burden for all of the middle class without imposing an unreasonable tax burden on the higher income earners and the businesses, consider removing the wage base provision for payroll taxes.
Tax all employees and employers at the same payroll tax rate. Identify a lower rate (lower than 4.2 percent) of approximately 3 percent. If enacted, the federal payroll tax revenue would increase by more than $100 billion annually to bolster the recovery of the downtrodden Social Security system.
Advocates of real tax reform have advocated a flat tax for all individuals. Taxing all employees at one rate for payroll taxes would be a good start.
America has numerous earners (estimated at more than 200,000) who earn more than $10 million annually (athletes, entertainers, executives, etc.). If their companies can pay them at that rate, they can surely pay a payroll tax rate equal to those employers who have employees making less than $110,100. Today, those individuals and employers have an effective payroll tax of 0.07 percent.
If the government were to enact the recommended change to remove the wage base, President Obama would pay $24,800 rather than $6,820. His perks, amounting to more than $60,000, would more than compensate him for the new small tax burden.
When a person with an income lower than the wage base realizes the effective take home pay increase, he/she has an opportunity to invest the new surplus, which has the effect of additionally lowering their effective payroll tax.
Small business owners and their employees who earn less than the current wage base will realize a lower tax burden. A lower tax burden could provide business growth and more jobs.
Larger business owners and their employees who earn more than the current wage base of $110,100, would realize a higher (but fair and affordable tax burden).
The change does not introduce a distribution of wealth concept. It is a fair and equitable piece of the overall and necessary tax reform.
In Maine, the change to the federal payroll tax will support the concept of “open for business.”
Sen. Collins and incoming Sen. Angus King would pay an effective payroll tax of 3.9 percent, based on their annual income of $174,000. They will pay only $6,820 annually, rather than $10,788 if the wage base is removed.
I urge Maine small business owners and employees who earn less than $110,100 to insist that elected officials take the first step toward eliminating the wage base applied to the payroll tax.
Len Greaney of Rumford Center was recently a candidate for Maine Senate District 14.