December 20, 2006

WSJ: Nancy Pelosi Already Has What She Wants (Plus a BIG Extra Point on Social Security)

As noted in a Wednesday subscription-only editorial, that would be a progressive tax system:

The Top 1% Pay 35%

Maybe our liberal friends are onto something. They keep saying the rich should pay more taxes, and it turns out the rich already are! That’s one of the valuable lessons from the IRS’s annual study of income tax data, just released for 2004.

Americans who earned more than $1 million in adjusted gross income paid $178 billion, or an average of $740,000 per filer, in income taxes in 2004. That’s up about one-third from 2002, the year before the Bush tax cuts in marginal income-tax and dividend and capital gains rates. The wealthiest 1% of tax filers paid a remarkable 35% of all individual income-tax payments that year.

I love the following analogy, but WSJ could have gone further with it:

….. Here’s a way to think of the distribution of current income-tax payments: Imagine a banquet attended by 100 random Americans. If the bill for the meal is distributed like the income tax, the richest person in the room is required to pay one-third of the tab — or more than all 50 attendees with a below-average income. The three richest people are charged as much as the other 97. And the 30 or so lowest-income people in the room — those with a family income of $30,000 or less — pay nothing and eat for free.

Actually, thanks to the Earned Income Credit, many of those 30 lowest-income people get paid to eat, thanks to the rest of the people in the room.

This is by any definition a “progressive” tax system. Make that highly progressive. It’s true that lower-income workers are also dunned with payroll taxes, but that still doesn’t do much to alter the fact that the current tax code really does soak the rich.

I know there’s only so much space, but in terms of payroll taxes, the Journal missed a BIG chance to tell people something that the formerly Mainstream Media never gets around to telling people — Social Security, contrary to popular belief, is a “progressive” setup too. In its case, the more you make, the less you get in retirement benefits compared to what you earned while you were working.

You doubt? Though the below from my classroom presentations changes every year, and still needs to be updated for the benefit increase announced in November, it makes the point (Warning: Mood-swing alert for upper-middle and greater income earners — Ed.):

SocSecBeneLevels06

Translation (looking at the two rectangles on the graph):

  • If your earnings in your final year of work were $30,000 and you retire this year at Age 65 years and 8 months (SocSec’s Full Retirement Age this year, which is gradually increasing to 67 over the next 18 years), and if that earnings level reflects in real terms what you have consistently made throughout your working career, your first-year Social Security benefit will be roughly $13,500 (45% x $30K), or about $1,125 per month (benefits increase with inflation in successive years).
  • If your final year’s earnings were $60,000 and everything else stays the same, your first-year benefit will be roughly $20,000 (about one-third of $60K), or about $1,700 per month.
  • The higher earner is getting a benefit that is less than 50% greater than the lower earner ($6,500 more divided by $13,500), even though he or she has paid twice as much into the Social Security system.

These are approximations (but pretty good ones). Social Security actually looks at your highest inflation-adjusted 35 years of earnings for the purpose of calculating your benefits. There are many other nuances not worth getting into here that most affect people who aren’t in the workforce during an entire working career.

Call this setup fair if you are are a wealth redistributionist (as you might imagine, the vast majority of people in my classes don’t see it that way!), but in terms of what people get out of the system compared to what they put in, it is NOT regressive. For better or worse, as with the income-tax system, Social Security is, and has been since its inception, “progressive.” It would be nice if the people whose job it is to inform us would let us know that, at least once in a while.

Memo to Nancy Pelosi, Charlie Rangel, et al: Don’t worry, be happy. The rich are getting soaked quite nicely.

Cross-posted at NewsBusters.org (FIT here; SocSec here).

Share

2 Comments

  1. You don’t need to tell me this. I had to run projections on this stuff for work – we had made a retirement calculator, which projected Social Security, DB pensions, DC accumulations annuitized, etc. I’m not a pension actuary (I do annuities, but I don’t analyze DB pension plans), but I’ve seen various pension funding methods, all of them legit…and the method used for Social Security is pretty much a sham. But you know that. I had to explain it to a co-worker that those IOUs in the Social Security “Trust Fund” are totally bogus, and that tax is tax is tax. The money all goes into the same pile.

    Here’s what bugs me about these progressive taxation schemes: they’re very volatile. If you have 35% of your revenue dependent on what 1% of the people get, and generally that 1% of people get income that’s highly dependent on the business cycle…not good. Is it any wonder that most localities prefer to tax sales and property values? Those are much more stable.

    Comment by meep — December 21, 2006 @ 4:55 am

  2. #1, your last para makes an excellent point. Along those same lines, the Fair Tax people (national sales tax replacing income tax–fairtax.org) like to point out that a Fair Tax would be less volatile revenue-wise than the income tax system is.

    Comment by TBlumer — December 21, 2006 @ 8:02 am

RSS feed for comments on this post.

Sorry, the comment form is closed at this time.