Because the US tax code has been consistently used by both parties to further political/social priorities, it is good to remember that its basic purpose is to raise money. We agree that the “art of taxation” is akin to “plucking the goose” to obtain maximum revenue (“feathers”) from citizens with minimal complaint (“hissing”).[1] It helps that process if government expenditures are kept in a reasonable range. From the taxpayer’s point of view the key difference to keep in mind is between “avoidance” (arranging your affairs so as to pay as little tax as possible) and “evasion” (which is illegal).
So far the US tax code taxes income. The main tax is the Individual Income Tax, started in 1913. Mostly this income tax applies to earned income. Most taxpayers are on the cash basis, which means income must be received by the taxpayer in cash, services or property during the tax year, usually the calendar year. There is a political movement afoot to tax the unearned income of certain wealthy individuals. There is also a movement to tax government payments to certain less wealthy individuals—payments which are not currently counted as income. There is no doubt these government payments are in cash, services or property received during the tax year.
Historically these government payments were smaller and meant to alleviate poverty, which probably meant bringing an individual or family up to their calculated poverty level of income, leaving an incentive to work to gain higher income. The problem is “the government’s failure to count its largesse as recipient’s income allows welfare households to blow past the income level above which a working family no longer qualifies for government help.”[2] The numbers are dramatic. The poverty level for a single parent with two school-age children earning $11,000 per year, is $25,273. This family qualifies for $53,128 worth of benefits,[3] which brings their total income to $64,128 or 254% of the poverty level.[4] If these benefits were included as the recipient’s income, they would not quality for so many programs (because these programs are means tested), the government would save money and there would still be an incentive for the recipient to find work.
Social Security Fixes?
The stability of Social Security is a major concern of taxpayers. Some political actors believe that this concern benefits them and they are loath to let the problem be solved. There are complex solutions proposed, involving the full retirement age, the early eligibility age, new benefit calculations involving “bend points,” the annual Cost of Living Adjustment (COLA), benefits taxation, and the payroll tax itself.[5] Simpler solutions involve raising taxes at the high end, privatizing the program, and ending its status as just a “promise” to pay. The good ideas are there. They just need to be acted on.
If you or any other advisors have questions about the issues raised here, please contact your investment manager or one of us.
— William H. Darling, CPA – Chairman & CEO
— Jeanne M. FitzGerald, CPA – Tax Manager & Vice President