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Overpaid Executive Tax

One of the most outrageous and economically stupid measures to pass on Election Day came out of San Francisco: a new tax called the “Overpaid Executive Tax.”  It’s really as bad as it sounds. This law levies a .1% surcharge on any company in San Francisco whose top executives earn 100 times more than the “typical worker.” It was enacted as a means to fight against pay inequality, but all it does is show how incompetent its proponents really are. 

It’s worth noting that this tax applies to both publicly traded companies and private companies within San Francisco and it ensnares both local companies and large companies that conduct business within the city. What’s more, it’s completely arbitrary. What are you comparing when you say 100x or 200x the typical local worker? Does that mean on an hourly basis? Does it mean a part time typical worker compared to a high level overtime executive? Do you include overtime? Do you include benefits? It’s a virtually impossible number to calculate. And even if you did have a number to calculate, why is it 100x and not just 50x? Let’s say you compare a high tech company with a retail company such as a supermarket. The supermarket will have a lot of lower wage workers, whereas a tech company will have a lot of higher paid workers. It’s comparing apples to oranges in an effort to get someone to “pay their fair share.” 

I hope this has the economically expected effect of them losing a lot of money and business, which is obviously the opposite of what San Francisco probably wants during a pandemic. Current companies will likely change their hiring plans to eliminate or reduce the amount of lower-lever/lower paid workers. Likewise, companies considering doing business in San Francisco will undoubtedly hesitate or entirely change their mind. Why do business in a locality that is particularly anti-business with such ridiculous rules. Furthermore, this surcharge is basically not a tax, it’s a forced donation (because those affected have the option of leaving if they want to). It puts a responsibility on the company to leave San Francisco because the tax affects all the shareholders of the company. This also means that any company that doesn’t leave San Francisco because the tax applies to them is someone who is ultimately abusing their shareholders to whom they have a fiduciary responsibility.

This tax is utterly meaningless and it just shows that people proposing this are so economically ignorant that they should be embarrassed. The problem is that the people on the Left who come up with such ridiculous ideas are never actually embarrassed by that ignorance. 

The Real Problem With the Payroll Tax

I was disappointed to read “How the Bidens Dodged the Payroll Tax” last week in the WSJ, not because Biden is a good guy, but because the author of the screed, Chris Jacobs, gets it all wrong. Those of you who read my columns regularly know that I’m no fan of Biden, but in this case, Biden is in the right. There is nothing legally wrong with how he structured and paid his taxes – to the contrary, it elucidates an ongoing tax inequity that was completely missed in the article.

In order to understand what Biden did and didn’t do, you need to understand a little bit about s-Corps, LLCs, partnerships, and Social Security taxes. Foremost is that Social Security taxes are imposed on individuals’ earned income – salaries for employees and earned business income for independent earners. It is a tax on earned income — and only earned income. It’s money contributed from your work that goes into your retirement social security pension, not your business profits, interest and dividends income, capital gains or anything else. Social security is calculated from your working history, because you are taxed only on your earned income. That’s why it’s dubbed the payroll tax.

So now let’s look at some different scenarios. Say you work for a business operated as a C corp or S corp, and you also are a stockholder in that business. The money you get as a stockholder — such as dividends–is not working income so you do not pay the Social Security tax. But the money you earn on your labor for your work in this company – salary –  up to $137,700 (for 2020)- is subject to the social security tax.( Amounts earned over the $137,700 is still subject to the much smaller Medicare Tax).

But it gets more complicated when you consider partnerships (or LLC’s which are taxed as partnerships). If you work for and are also an owner of a partnership, your share of the partnership income – both for your labor and share of profits are included in one number reported to you on a K-1 form. And the full amount is subjected to the social security tax.  For instance, say you are a 50% owner of an architecture partnership and the firm makes $2 million, you would  get a K-1 form showing $1 million. Though that would be for both labor and profit, you would have to pay Social Security tax on the full amount. 

But if you are structured as an s-Corp, you pay yourself a salary. If the architecture firm were an s-Corp and it earned $2 million and each shareholder received a $400K salary and netted $600K in profit, they only pay the Social Security tax on the earned income, the $400K. And this is exactly what Biden did. He paid tax on his earned income.

So with an S-corp, you have cleared defined salary and (hopefully) profits. It is conceivable that, in Biden’s case, his salary was too low. That is a bit unclear. But what is absolutely clear is that the business is not all labor and therefore he should not be paying Social Security on the full amount. The problem, therefore, isn’t that Biden did something wrong or that he used an S-Corp “loophole” to “get away with” only paying tax on some portion of the business. The problem is that just because someone is a business owner should not mean that he has to pay social security tax on his business profits. Remember Social Security is a tax only on earned income and thus Biden rightly paid the Social Security tax only on his salary. The real problem is that partnerships, unlike their C-corp and S-corp counterparts, have to unjustly pay the full Social Security tax on both their labor and profits. This is the real problem with the tax code that has needed reform for many years. Biden and Trump would do well to address this inequality in the future.

Why the Individual Mandate (Tax!) Needs To Go

While we’re on the subject of tax reform, one particular item that could be included in the package is the elimination of the individual mandate.  Since SCOTUS classified the penalty as a tax, it is one that can be repealed as part of the reform, and would produce an estimated savings of $338 billion over 10 years, according to current CBO figures.

Eliminating the individual mandate would not affect Medicaid or pre-existing conditions; it would simply allow taxpayers to have the freedom to decide if he or she wants to forego insurance without being penalized (taxed) for their choice.  According to the Wall Street Journal and IRS data, more than 90% of households who paid the “individual shared responsibility payment” (tax) earned less than $75,000. The tax is essentially a tax on the poor.

Republicans would be wise to repeal the mandate, ease the tax burden on taxpayers, and use the savings gained within the rest of the tax package to strengthen other parts of the reform proposals and provide meaningful relief for all taxpayers.

 

Social Security: Not a Tax

Whenever tax reform, tax packages, or  tax changes get discussed and debated, the focus is always on “the middle class.” While this sounds noble, the reality is that the middle class already pays very little in taxes. The majority of the middle class “tax bill” is actually Social Security — which is not truly a tax.

For example, my son made about $35,000 last year. He paid $1,500 in income tax and $4,500 in Social Security. But contributions to the Social Security system should  not be viewed as a tax — it is effectively a forced retirement payment. Pundits and lawmakers need to stop calling Social Security payments a tax, and need to stop including Social Security payments in their tax equations because it does not operate as a tax.

I strongly believe that with some tweaks to the Social Security system that make the benefits more tied to contributions and allow for some ownership of the underlying assets, we can get people to view those payments in a positive light – investing for their future. When you remove the Social Security line item from the amount of tax liability, you see that the lower and middle classes have a very low income tax liability.

An Updated Obamacare Analysis


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Today, Forbes did an updated analysis of the current state of Obamacare, as the enrollment numbers are trickling in. The news is rather poor:

“To briefly recap this year’s enrollment figures, late sign ups and automatic renewals pushed the number of people signing up for Obamacare through Healthcare.gov to 8.6 million through the end of 2015, before any attrition. Extrapolating from the current numbers implies that total Obamacare sign-ups will reach about 14 million (once the figures from state-run exchanges are baked in). The White House had previously lowered its 2016 goals, hoping to have 10 million people still enrolled and fully paid at the end of 2016 across the federally run healthcare.gov as well as state-run exchanges. The Obama Administration should hit, or slightly top these estimates, once totals from the state exchanges are factored into the final figures.

For comparison, last year, enrollment topped out at 11.5 million. Around 10 million followed through to purchase plans and 9 million ended up with coverage at year-end, after attrition. Applying the same proportions for this year, Wall Street analysts estimate that about 11 million to 12 million consumers will confirm enrollment by paying for their coverage. About 10 million to 11 million will remain enrolled by year-end 2016. This compares to the government’s revised goal of 10 million, (and an older projection from the Congressional Budget Office for 21 million).

Yet the federal numbers show that the rate of growth in the exchanges has declined year over year, and is mostly comprised of people who were previously covered by some kind of Obamacare plan (71% in 2016). Remember that at the end of the 2015 open enrollment period, the total enrollment across both state-based and the federal healthcare.gov marketplace was up 46% from the 2014 open-enrollment period. That was before any attrition. This year, it looks like the year-over-year growth in the exchanges will come in at about half of that figure.

The age mix of those who are signing up also looks to be tracking, at best, on par with prior years and perhaps a little worse. Remember, Obamacare was always dependent upon more young and presumably healthier consumers signing up for the inefficient plans to help subsidize older and costlier beneficiaries. But many young consumers are choosing to forgo the exchange’s high premiums, even as the government’s penalties for remaining uncovered by a “qualified” plan start to rise. For many of the young, and healthy, Obamacare’s overpriced plans are a bad deal.

Data that HHS released yesterday on the federal and state-based exchanges shows that 35% of total federal and state-based selections were by people younger than 35 thus far for 2016. This compares to 33% during the similar time frame during the 2015 open enrollment period and 29% during the 2014 open enrollment period. For health insurers, the slight improvement in the age mix isn’t expected to be material.

Obamacare’s acolytes are casting the tepid growth as success. Under their calculus, any expansion is a measure of progress. This math largely draws from how one charts achievement–whether it’s drawn from considerations of economics, or derived mostly from politics. If the goal is merely expanding Obamacare’s footprint, then each enrollee adds to the political enterprise. But Obamacare was supposed to be affordable, and self-sustaining. It was supposed to replace the individual and small group markets and the health plans people liked, and couldn’t keep.”

The government is willing to do anything to cast Obamacare in a positive light. But nothing can save it from the fact that the enrollment at this point in 2016 will only be half of what was projected when the legislation was voted on in 2010. If anyone thought that Obamacare would only have covered 10 million persons at this point — instead of the 21 million — there is little doubt that it would not have been passed.

Even today, the Obama voted to veto the bill that would have repealed Obamacare (the Restoring Americans’ Healthcare Freedom Reconciliation Act of 2015). Unfortunately for millions of Americans, Obamacare has proven to be yet another bungled, failed, government pipe-dream.