Obama Social Security Talk Spurs Tax Plans

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00 Obama Social Security Talk Spurs Tax Plans May 23, 2008

Wealthy folks worried that a new administration will raise their taxes sharply by tinkering with Social Security are making plans now to soften the blow. Campaign trail talk by Democratic Sen. Barack Obama, D.-Ill., about shoring up Social Security with a tax on higher incomes has advisors walking clients through ways to reduce the impact. Rich self- employed people would be hardest hit. Among the possible antidotes: Taking a bonus or exercising stock options this year instead of next. Another idea is for entrepreneurs to take smaller salaries to reduce their taxable income. Tax rhetoric by politicians is powerful stuff, as recent activity among planners proves. The election is months away; nonetheless, Social Security talk is one of several campaign tax issues driving a very real effort by advisors to buffer clients now from what they see as looming rate hikes. Many are convinced Democrats will raise rates on capital gains and ordinary income. "We're seeing clients worried about the possible repeal of wage caps on Social Security," said M. Holly Isdale, managing director and head of wealth advisory services at Lehman Brothers Holdings Inc. "My experience is that they are beginning discussions to accelerate income into this year and thus avoid an increased Social Security tax, with the idea to pull the trigger on these plans later in the year." Isdale has been "deferring the details to clients' accountants who have a more detailed view of the entire income tax picture," she added. Under current law, people only pay Social Security tax on the first $102,000 of their income in 2008. (The tax, a part of the payroll tax system, is used to fund Social Security and is separate from a Medicare tax.) Nothing more than that is taxed, so a big share of high- income folks' wages isn't subject to the levy. What has people worried, according to Joan Crain, senior director of wealth management strategies at BNY Mellon Management, is the idea that Obama might change the rules to tax all income. There are also concerns that Obama, if elected, might create a so- called "donut," that would tax the first $102,000 and everything over a higher amount, say $200,000, according to Crain. The idea of the donut is that the system would create a hole that would spare upper- middle-class people some of the tax. "Clients are concerned and annoyed," Crain said. "They're saying that it's another stealth tax increase." The tax rate for affected wages paid in 2008 is set by statute at

6.2% for both employees and employers. So an individual with wages equal to or more than $102,000 would pay $6,324 in tax, and his or her employer would contribute the same amount. An individual who earns $1 million would pay the same amount of tax. The self-employed get a double-whammy; they must contribute for themselves and the business. So, an entrepreneur with $102,000 of income subject to the Social Security would owe $12,648 in tax. Doctors, lawyers and hedge fund partners with substantial self- employment income are among the individuals who fall into this category. "It's real, but it's hidden," said Isdale. "People may say 'You're saber-rattling' but I think it's worth noting and laying out for people what taxes could look like." Obama's campaign didn't respond to a request for comment. His Web site,
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says the candidate believes the first place to look for ways to strengthen Social Security is the payroll tax system. "Currently, the Social Security payroll tax applies to only the first $102,000 a worker makes," the Web site says. "Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century."

On top of this, Obama wants to roll back the Bush income tax cuts. High earners will be facing federal marginal income tax rates above

50%.

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Reply to
beliavsky
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wrote

snip for brevity

The reason it is saber rattling is because only about half the facts are presented. E.g. (1) Only about 18% of households make over $100k a year. (2) If these are two-income households, then chances are no one in the household will be hit with the proposed extra SS tax. (3) Fewer than 5% of households make incomes over $200k, and again, with two-income households, each earner most likely lands in the proposed donut.

Nor do the authors propose a realistic solution to the SS budget crisis. We do need a solution, right?

Well sure. Unless someone wants to take the "planning" out of FP.

The current top effective marginal rate is about 38%. It's the extra 12% (for those self-employed) from the proposed SS tax changes that gets it up to 50%. See

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IOW, with the donut, less than 5% of taxpayers are likely to see this rate increase. Probably far less than 5%. And, oh my gosh, it may fix the Social Security budget crisis. Obama's a problem solver! Can anyone believe this? Disclaimer: I did not vote for Mr. Obama. The guy's proposals deserve to be judged fairly, though, if only to educate people on micro- and macro-financial planning.

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Reply to
Elle

Yes, I recalculated these proposals for my 2007 income tax return and found my total federal taxes including social security would have been 26% higher.

My total effective tax rate - adding state and property - has fallen from 34% in 1991 to 28% in 2007 thanks to tax cuts from both Clinton and Bush. But the decline may end.

One and a half of Obama's three tax proposals are easy to implement, because all they require is Congressional inaction. I'm not so certain about the ones require new laws. So my best guess is we wont have all of these happen.

Theres more things I want out of a president than low taxes. That makes the upcoming election a dilemma.

This doesnt substantially change the rules of financial planning:

- Try to earn as make as money AFTER taxes as you can.

- Try to save and invest as much as you can.

- Employ tax advantages like deferral, capital gains, roth, real estate, health, education, etc.

- Practice some "tax diversification" as well as asset diversification. Tax laws are different than 20 years ago and will likely be different 20 years from now.

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Reply to
rick++

We sometimes question what the average person, or even professional, knows, or should know about taxes, or general financial planning issues. Are most aware that the retirement benefit is scaled so the $90K earner gets just over half the percentage in benefits? Forget most, are the politicians aware of this?

See

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for the math, but when I spreadsheeted this, found that on $20K, the replacement rate is 57%, $40K - 44%, $70K - 35%, and $90K - 30%. Is that fair? I don't know. A high wage earner should certainly have some responsibility for himself to save the different needed to retire, but isn't that difference (the 27% the 90K guy doesn't get) enough of a 'rich to poor' transfer?

Is a self-employed person, already bearing the burden of the double FICA tax, so well off at $100K that we want to tax him another 12% on incremental income? Joe

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Reply to
joetaxpayer

"rick++" wrote

Would you please lay out your assumptions?

Or if it is simply that you by yourself (that is, excluding spouse's earnings) make more than $200k and are self-employed?

Not trying to put you on the spot; just trying to get a handle on the proposals.

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Reply to
Elle

"joetaxpayer" wrote

The first thing I would consider are statistics like the average CEO makes over 300 times that of the average worker. So a backatcha: Isn't this eough of a "poor to rich" transfer? ;-)

Just reminding: The answers to these questions are far from black and white.

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Reply to
Elle

Fair enough. Is there an income level that's fair game? And how do we determine that? Is it the income represented by the top X% of earners, so the majority feels good about it, or at a certain dollar level of income, say $500K/yr? Tell me again how the hedge fund guys transmogrified their income to cap gains? 15% instead of 35%+.

And in the spirit of the Laffer curve I'd ask - when you implement that tax, will anything else change so the revenue you expect based on the current reported incomes changes due to changes in behavior? If the 15% cap gain rate is repealed, and gains are taxed as ordinary income, won't non-tax preferred accounts' trading slow enough to actually decrease revenue taken in? Of course I don't have the answers, but I do know that taxes change behaviors, and that a change in payroll taxes (FICA) on those CEOs we'd both be happy to tax will result in sneaky ways for them to get paid in non-FICA income. Perhaps more stock options.

Joe

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Reply to
joetaxpayer

"joetaxpayer" wrote

and so on; snip for brevity

Because ISTM that all possible answers demand some trial-and-error; because there is no way all will be pleased; because "what's fair" is so subjective, just my two cents but my only focus is on taxes being raised to resolve the Social Security budget crisis without cutting SS benefits or raising the retirement age significantly. I do not care if it's McCain's, Obama's, Ron Paul's, or Clinton's plan that fixes it. But they each better have a plan.

I say this not because I like per se giving my money to others (when taxes are raised), but because my neighborhood and investments are not safe when poverty is widespread.

And the time has come to stop this thread because of you-know-what. :-)

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Reply to
Elle

My approximate assumptions are:

-Earned income above $97500 increase 6.2%

-All earned income increase 3% (lowest bracket cut more than that)

-Long term CG and dividend increase 5%

There's various versions of Obama's proposals. Some have "doughnut hole" for social security. Some have complete elimination of long term capital gains differential. Unlike Hillary, Barak never got very detailed in his proposals.

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Reply to
rick++

A minor elaboration - theres an exact answer to this specualtion. In any given year the SS cuttoff is set to 90% percential of national earned income, so 10% of individual taxpayers will be affected by Obama's change. Obama has huge support in this 10% so he's got to handle it "fairly".

I always thought this was the most accurate way of defining the boundary between middle class and upper middle class, beacuse the census and DOL data tend to lag a few years behind social security data.

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Reply to
rick++

One often overlooked threat of this, and similar, proposals is the relative ease with which "whiplash" can occur. According to data from the Internal Revenue Service, in 2000 the top 1 percent of income earners paid nearly 35 percent of the income tax burden*. The saying, "don't bite the hand that feeds you" jumps to mind.

It's easy to dismiss a tax change on the grounds that it only affects a small percentage of the population. If the 1% cited above becomes disgruntled enough, the repercussions could be severe. It is common misconception that the rich abuse the tax system, but in reality they provide the bulk of the revenue. I'm personally hesitant to ask them for more money. One day they may collectively decide to close their wallets.

*"Distribution of the Federal Individual Income Tax," Special Report No. 101, November 2000

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Reply to
kastnna

This was what I was getting at, but not as eloquently as you just did. Any radical change in the tax structure can easily result in unintended consequences, and lower revenue. Joe

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Reply to
joetaxpayer

joetaxpayer wrote: [...]

Please, please, let's remember that the reason self-employed people pay both halves of FICA is to *eliminate* an unfair break they would otherwise enjoy.

It's pure nonsense or worse to portray self-employed persons as somehow paying a bigger share of FICA than employees. The employer doesn't care if he gives his 6.2% share to the government on the employee's record or directly to the employee, it's all the same as far as his business is concerned.

-Mark Bole

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Reply to
Mark Bole

And they also controlled roughly the same percentage of personal wealth. Looks like taxation hasn't hurt them too much, after all.

That's just how it's supposed to be, it's a progressive tax system and is favored by the vast majority of economists. Please check out the article at

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for more information on all the reasons why progressive taxation is good (and for balance, reasons why some oppose it). But to put it at its most basic, "As long as after-tax income is a strictly increasing function of gross income, there is a monetary incentive to increase compensation received."

The IRS has a lot of ways to go after individuals who don't pay their legal tax obligations, thank goodness they don't just "ask".

-Mark Bole

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Reply to
Mark Bole

As far as this being a "fix" for the problem, what's missing is the other side of the equation:

Benefits *paid* later on are affected by the amount of income that was subject to SS taxes previously. If they lift the cap on income subject to taxes, unless they tinker with a whole lot more of the system, they'll get more tax money coming in now in exchange for a lot more payments going out later.

That said, SS is always subject to change in the future and planners need to always be ready to come up with proposals for their clients to best protect themselves. But I think it's very early to be speculating on what Obama may or may not do and how folks should plan to work with it.

Reply to
BreadWithSpam

I suppose the average worker makes $30K to $40K per year. 300 times that is $9million to $12million. Considering how many small businesses are incorporated, I don't think it is possible that the average CEO makes that much. Do you have any source to back up your statement, or is it just a WAG?

Dave

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Reply to
Dave Dodson

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They don't come right out and say so, but they are most likely referring to CEO's of Fortune 500 companies or something like that.

-Mark Bole

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Reply to
Mark Bole

The survey in question (which they update yearly) is, specifically, from the Fortune 500 CEOs (and even then, in '07, they only got numbers for 386 of the F500 companies).

And those numbers include not just salary, but lots of other things (many of which, even I think are absurd). Pension contributions, option grants (not sure how they value them for the sake of the survey), perks (personal use of company jets, etc.)

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In particular:

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So these numbers apply to 386 executives. I don't disagree that some of the executives are getting paid way too much (of *my* money - I'm a shareholder in lots of these companies!). But I don't think the sound-bite numbers used here make much of a useful argument against it.

Reply to
BreadWithSpam

Politics. Any talk of Obama, Clinton, McCain is clearly politics. Added to that is the fact that this isn't law and isn't likely to become law as it is proposed. Politics isn't usually allowed on MIFP.

Elizabeth Richardson

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Reply to
Elizabeth Richardson

Well, if "they can afford it" perhaps we should take all 40 members of Forbes 40 Riches individuals and "tax" them out of everything except a million or two. That should be more than enough for them to get by.

I would like to see the site for that. My primary undergrad degree was Economics. My professors must have been the "exception to the rule". Even the Chicago School of Economics (perhaps one of the finest econ schools in the country) is predominantly libertarians that don't at all support that statement.

That only works in a vacuum devoid of any non-fiscal motivation. I've met plenty of people that detest "freeloaders living off of the hard work of others" (their words, not mine). I've seen those same people act out of spite, find ways to circumvent the system, and generally act as they would not have otherwise.

Global enterprise is constantly making it easier to live elsewhere. There is a point where people will "vote with their feet". As an anecdote, I have one client in particular that now lives in Europe solely because he believes the USA has become "mismanaged". Taxes weren't the only concern, but they were a factor. Whether he's right or wrong in his opinion is irrelevant.

Well, to each his own... Enjoy Memorial Day Weekend everyone!

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Reply to
kastnna

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