STUMP » Articles » Taxing Tuesday: A Conundrum -- How to Tax Retired Folks When That's What You've Got a Lot of » 17 September 2019, 13:50

Where Stu & MP spout off about everything.

Taxing Tuesday: A Conundrum -- How to Tax Retired Folks When That's What You've Got a Lot of  

by

17 September 2019, 13:50

Because they’re getting to be a bigger part of the population.

WSJ: How Do You Tax a Baby Boomer?

The problem with old people is that they eventually stop working. This intractable reality normally bubbles into our political consciousness as we contemplate government spending on retirement benefits. Now at long last the implications for tax policy are also coming into focus, thanks to the unlikely duo of Elizabeth Warren and Japan.

Developed economies have evolved tax systems that rely disproportionately on labor income as their tax base — even as their working populations grow more slowly or shrink. This is true in the U.S., where the personal income tax furnishes some 34% of overall government revenues each year and payroll taxes on wages provide a further 23%. It’s true in Japan, where social-insurance payroll taxes account for 40% of annual revenue and the personal income tax another 19%.

Doing the math, that comes to 57% of revenue.

It’s the case in countries that also impose hefty value-added taxes on consumption. Germany, France, Italy — all still raise more than half of their revenue from labor-based taxes. The imbalance persists despite two decades of a modest retreat from labor taxation in developed economies that has seen personal-income and payroll taxes decline to 50.1% of revenue from 53.2%, according to the Tax Foundation.

Even when old people do have taxable income, the thrust of retirement policy for decades has been to skew the tax base away from their income. Incentives that defer income tax on contributions to retirement accounts are effective precisely because for most people the marginal rate they pay on that income in retirement is lower than the marginal rate they pay when they’re working.

What this means for the future can best be described by a simple equation: No workers equals no tax revenue.

It also means a lot of other things as well.

There are three possible solutions to this dilemma. One is to tax the fewer remaining working people more heavily. That way lies an economic and moral quagmire. Governments have spent the past generation cutting personal income-tax rates because they realized that too-high taxes suffocate economic growth. Can they afford to pay a low-growth price for raising rates again?

One also has to ask why future generations of workers should be forced to pay a higher proportion of the fruits of their labors to fund benefits for old-timers who refused to raise their own taxes or to reform benefits.

Expect more of this.

The second option is to tax the things old people actually do. That list includes spending, saving and dying. Let the games begin.

Start in Japan, which is on the cusp of increasing its consumption tax yet again, to 10% from 8% starting Oct. 1. Veteran Japan watchers recognize how foolish this is. Every previous increase to the tax, going back to its introduction in 1989, has been politically unpopular and economically destructive. The last one, to 8% from 5% in 2014, smashed consumer spending and plunged the world’s third-largest economy into a recession.

I am watching what is happening in Japan — or, rather, Stu is watching and letting me know if there’s anything I can use. [He generally watches news on NHK every day]

Outsiders are mystified that Prime Minister Shinzo Abe persists with the tax hike anyway, but Tokyo is running out of alternatives. Japan is a rapidly aging country. As Japanese workers retire at an accelerating rate, not only do they consume more public spending in the form of a pension and health-care bill expected to hit 190 trillion yen ($1.8 trillion) annually by 2040. They also pay less income tax. A consumption tax is what’s left.

By the way, Japan is not only aging rapidly, it is shrinking in population.

I’ve kept a thread on aging and shrinking populations at the Actuarial Outpost, and, unsurprisingly, Japan was my first entry five years ago.

The other thing old people tend to do is save, which is where Ms. Warren comes in. Her wealth tax — a 2% annual charge on fortunes larger than $50 million — starts with the superrich but won’t end there. It can’t, as labor taxation over time provides less and less funding for the left’s spending priorities.

This column has previously scoffed at Ms. Warren’s college-subsidy ploy to woo younger voters, but it isn’t entirely sarcastic to suggest millennials have more reason to support Ms. Warren’s wealth-tax gimmick. For all its destructive flaws, she’s a Baby Boomer who at least might one day be willing to tax her own generation to pay for their Social Security and Medicare tabs. President Trump conspicuously lacks a better idea.

This is dumb. While older folks – at the moment they retire – tend to have more money than younger folks… the oldest folks do not necessarily have more assets because, get this, they’re spending down their assets as retirement income.

I have an idea: cut benefits.

Oh, the third option for solving this dilemma? It’s cutting entitlement payouts so the old-age programs make smaller demands on the shrinking labor tax base. You know how this idea fares politically.

These generational fiscal realities present today’s baby boomers, and especially Republican boomers, with a stark choice. They’ll have to pay for their entitlements one way or another. They can do it by reforming the programs to reduce their benefit checks to an affordable level, or they can roll over and accept the sort of left-wing, European-style taxation they claim to hate.

It’s a tension that will be on display if President Trump — elected in 2016 on a promise never, ever, ever to touch Social Security or Medicare — finds himself on a debating stage with Ms. Warren in 2020.

Get used to less.

Or take up BASE jumping. And get used to a shorter, but more exciting, lifetime.

I understand that it is not politically popular to cut benefits, but there are multiple things that can (and have) been done. Such as: don’t call it cutting benefits… call it taxing benefits!

The idiocy of the above is assuming that it’s merely the boomers, who are all Republicans [that is implicit in the piece], are anti-European-level taxes. Not that younger folks would object. Or that non-Republicans would object.

Well, how would one explain the level of shit about to hit Chicago politicians over the need to raise taxes way high just to cover the underpayment of pensions they’re already at. Chicagoans are not known for being a hotbed of Republican activity, at least, not for at least a century.

Which goes to the next item: how do governments currently tax retired folks? Property tax and sales tax. They’re both types of consumption taxes, kind of.

TAXING FOOD IN CONNECTICUT

Well, this one hits close to home. I just found out about it on Friday, when a co-worker shared details with me. Unlike her, I have wider choices, because I live so far from work. I don’t have to buy food in CT.

Prepared food tax will hit consumers harder than lawmakers thought

A controversial tax hike on prepared foods will hit Connecticut shoppers much harder than legislators thought, raking in $158 million over this fiscal year and next — nearly 40% more than lawmakers anticipated.

That’s a feature, not a bug.

The tax hike was described — when legislators adopted a new state budget in early June — largely as a 1% surcharge on restaurant food or on “prepared meals.” In other words, someone who purchased a grinder and small soda combination, even at a supermarket, would pay 7.35% sales tax, rather than the base rate of 6.35%.

That’s not really unusual, and we have something like that in NY.

And again, by emphasizing the 1%, they see it as a smaller impact than it really is.

1% on top of 6.35% is a 16% increase in the tax rate.

Yet when DRS released a policy statement this month instructing retailers on how to apply the new tax, which takes effect Oct. 1, it covered a much wider range of prepared foods.

Surprise!

via GIPHY

Smaller quantities of prepared foods subject to the new tax include:

“Meal replacement” bars
Soup sold in containers holding eight ounces or less
Popsicles and ice cream cones sold individually
Popcorn, kettle corn and nuts served heated
Pizza, cake and pie, if sold by the slice
Loose cookies, if less than five are sold at one time
Lettuce or greens-based salads in containers of eight ounces or less
Hot dogs served heated or on a bun
Frozen deserts of less than one pint
Doughnuts, muffins, rolls bagels and pastries if five or fewer are sold at one time
Cooked chicken sold by the piece, and whole cooked chickens

The discussion in the office on Friday was about how single folks and old people would be hardest hit.

Connecticut retailers likely will be very diligent in applying the tax to any item that might be interpreted as prepared foods “when you have the grim reaper of DRS standing over your shoulder,” Candelora said.

…..
Democratic lawmakers and Lamont averted a multi-billion-dollar projected deficit in the two-year budget without increasing income tax rates, but Democrats said that meant making many tough decisions.

Such as raising taxes in a way that people didn’t realize until they’re just about to be applied. [the discussions I’ve heard over the plastic bag tax have been interesting]

As I write this, Stu is out in Peekskill with our oldest child, looking at the shopping opportunities out there to see if it makes sense switching to Peekskill instead of Danbury. Peekskill is a little farther away, but not really by much.

As for CT, their finances are not good, so I fully expect more tax increases. When it’s sales and property taxes, it’s fairly easy for me to dodge.

TAX STORIES

So, my question with respect to tax returns over hush payments: do they think Trump claimed the payments as a business expense?

Just curious.

Because the only pertinent tax filings relevant to getting paid off to keep quiet I can think of would be those of the people who got paid, who would have to declare it as income. I don’t think Trump would have been required to file a 1099, but I could be wrong about that.

TAX TWEETS

[It’s not your money]

[It’s still not your money]

[That’s nice. It’s not your money]

I think I’m done with this person. Yes, I’m a bit jocular with the “taxation is theft” memes. I’m not totally serious with that.

But other people’s money does not belong to me. It belongs to them. Getting piggy about taking other people’s money is theft, you can call it “redistribution” all you want.

Oooh, I bet the clapping makes it that much more likely to happen!

I don’t really care what Illinois tries to do. They’ve got to try a lot of things, I suppose.

He wouldn’t be against it the same way Warren Buffet wouldn’t be against it: they’re actually rich, and could hire the people who would make the problem go away for them. It’s not that difficult of a concept.


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