California Tax on the Rich
It was very eye-opening to see some of the stats that came to light as part of Rob Reiner's preschool proposal. The funding for his proposal would come from a tax increase on Californians making over $400,000/$800,000 per couple. Apparrently, a 1.7% tax on such individuals would generate $2.4 billion in revenues. That's pretty amazing. So I guess there are about 180,000 couples making this kind of money, eh? Good for them! Given that this group is also likely benefiting from very low dividend and capital-gains taxes much more so than the common man, it seems fair to hit them with some pretty high marginal taxes. The neat thing about state income taxes though is that they are federal tax deductible. So about a third of that $2.4 billion comes right out of the federal coffers and stays a little closer to home. I'm really not a fan of high taxes, so I'd tend to support tax increases on the wealthy mainly to save taxes for the less wealthy. A tax such as this might put about $150/year back into the pockets of more middle-class Californians. What do you think?
Social Security and Housing
What about offering Social Security assets as collateral for home purchase? That could be a big boost for lower-income families that need a good savings vehicle and would allow them to take advantage of the various tax benefits of homeownership, including the $250,000 renewable exclusion. Homeowners can also build sweat-equity through their home improvement projects.
At the same time, I'd like to see more progressivism related to the mortgage tax deduction: perhaps a tax credit at an even 25% of mortgage interest rather than deductibility at income rates which favors the rich, a reasonable cap on mortgage interest deductibility as an effective luxury tax on mega-mansions, and similar tax credits for rent payments. We live in an increasingly mobile society, which I believe is a good thing for our economy, but transaction costs on real estate, while gradually falling, do not make it practical for a mobile worker to be a homeowner.
Lousy Returns on American Retirement Assets
Having Social Security assets in treasury bills makes no sense at all. Assuming a working lifetime from 25 to 65, the assets in the fund do not need to be accessed for 20 years on average. And the retiree will be in withdrawal mode for perhaps another 15 years as the unused money sits in that same fund. That is some of the most patient money around. Basic finance theory suggests that investors can optimize their returns for any given level of risk, with higher risk tolerance comes higher expected returns. Risk is defined as volatility, illiquidity, and unpredictable final outcomes. Yet in finance terms, there is no "risk premium" paid to these investors who are forced to have their money sit in the "trust fund" for 20 years or more on average. While the interim volatility of other assets will be much higher than that of t-bills, over a 20-year period, the expected return of higher-yielding investments will fall in a very tight range.
Investors could expect up to 2 to 4 percentage points of increased returns annually. At 3 percent real returns, an account will roughly double over 25 years. At 5 percent real returns, it will be almost 70% greater again. At 7 percent, it will be well over 5 times the original amount. So for the least wealthy retirees that rely on Social Security for a great portion of retirement income, this could be a massive improvement in their standard of living.
Treasury rates would go up due to the reduced demand for these instruments, but not by so much, because everybody loves a risk-free asset (especially international investors). Investors that really need a safe haven for their money would get paid more. The return on corporate securities would go down, making risk-capital that much cheaper. There are a lot of winners in this scenario. Of course, the U.S. government would have a great incentive to balance the budget, also a good thing, and perhaps promoting greater efficiency in this body that consumes 20%+ of GDP.
The Payroll Tax and EITC
The EITC is a great idea, just too complex. Low-income workers are often consuming various federal assistance as it is, so it makes sense to let these families and individuals take home a maximum amount to try to address their own problems directly. Under the EITC, they have to wade through the complex tax filing system and often do not understand how to claim their benefits. Why not just let them keep the dough from the get-go? These are the same folks taking ridiculous payday loans. Cut income tax rates and the social security tax to zero on incomes at least up to a reasonable poverty line. Again, they're getting very little return on their money in the social security system and taking payday loans to survive day-to-day. This money could be easily restored to the system by raising the income cap on social security and it would be a huge boost to lower-income workers by allowing them a tax cut right on their paycheck.
I would strongly consider tougher usury laws to protect these folks from digging deeper and deeper holes for themselves through payday loans and other unaffordable lending schemes.
