Boring but Important

     Some things in life are no fun, but you just gotta do them. Going to the dentist. Getting a colonoscopy. Making the phone call that you dread. Paying taxes. (The deadline is Monday, April 15.)

     So today I'm talking about taxes, which in my opinion are the second most boring subject on earth, behind life insurance. But like life insurance, taxes may be boring, but they are important.

     Most of us have taxes withdrawn directly from our paycheck or Social Security benefit, so we never see the money. Somehow it seems less painful that way. And then if we get a refund ... why that's a bonus! (Even though, of course, it's not ... we've just been giving Uncle Sam an interest-free loan for the past year).

     It's all in how you frame things. I like the way our town does our real-estate taxes. You receive a bill in March. Instead of saying it's due on April 30, and if you're late you get a penalty, it says it's due on June 30 -- but if you pay early, by April 30, you get a discount!

     It's the same thing. But it makes you feel better. Of course, in the fine print it says "liens will be filed after 12/31" which is telling us that we don't really own the property at all. We're renting it from the local government, and if we don't pay up they will take it away from us.

     For the most part I don't mind paying taxes. It's the price of living in a civilized society. We pay real-estate taxes to educate our children. We pay Social Security taxes to finance our old age. We pay income taxes to buy tanks and guns and ... help the poor and build up our infrastructure. According to some people, we need more federal taxes to pay off the political hacks in Wash ... pay off the debt, or to pay for more infrastructure, or pay for medical care or higher education.

     So there are a few types of taxes that have been in the news recently -- mostly proposals to raise taxes -- and I just want to point out a few consequences.

     The flat tax. This would make everyone pay the same percentage of their income -- say 20% -- in taxes. Yes, the rich would pay more. But this tax is not progressive, so the rich would not pay proportionally more. Most people agree this is not fair since as you go up the income scale you can afford to pay more ... and remember, people are only paying the increased amount on the higher income. So if Ms. Moneybags makes, say, $1 million a year, she still only pays 10% on her first $9,525 of taxable income. She only pays the higher 37% on the amount above $500,000.

     Actually, the flat seems to be a way to lower taxes, and collect less money for the government, because let's face it, if you want to raise money, you have to go after the people who actually have money. You can only squeeze so much out of the middle class.

     The value added tax, or VAT. In this scheme, which you may have heard about, taxes are not collected on income. They're collected when people buy something. It's like a national sales tax. This is essentially a flat tax -- as are all sales taxes -- and so in a sense it is regressive, in that the richer you are, the less tax you pay as a proportion of your income.

     Plus, anyone who has any savings would suffer an immediate cut in their purchasing power, since that money was already taxed as income, and now it will be taxed again when it's spent. In other words, it would penalize retirees who have saved up any money outside a traditional IRA.

     Capital gains tax. Currently, capital gains on investments are taxed at a lower rate than the income people earn from working. The lower rate also applies to the qualified dividends people receive from stocks and mutual funds. Some people want to even out these rates. And honestly, I think they have a good argument. Why should working for money be penalized compared to investing for money?

     But make no mistake. While this tax would penalize the wealthy, for sure, it would also penalize retirees. Anyone who has savings in an investment outside of a traditional IRA would pay a higher tax when they cash in their stock or mutual fund, or when they receive a quarterly dividend. Unfortunately, retired people are often lumped in with wealthy people -- because we're the ones who have saved and invested some money.

     The wealth tax. Presidential contender Sen. Elizabeth Warren has proposed a tax of 2% a year on all wealth above $50 million, rising to 3% for fortunes over $1 billion. This is a new idea. One might wonder how to collect this tax -- how does the IRS value the real estate, the art, the farming or the business interests that people own? But, really, most of us probably don't mind this tax, since no matter how anyone counts it, we don't have anywhere near $50 million.

     A higher personal income tax rate.  Rep. Alexandria Ocasio-Cortez is proposing a 70% income tax rate on income over $10 million a year. There's nothing novel about this. Taxes have been higher in the past. Again, most of us probably don't care, because we can't even imagine making $10 million in a year (or at all!) But you may want to look more carefully at her idea, since as long as a tax is graduated it implies a higher income tax on people with lower incomes as well.

     Which brings up a caveat. In 1983 when Social Security was reformed, an income tax was initiated on anyone receiving Social Security benefits if their income reached $25,000 as a single and $32,000 as a couple. Back in 1983 this was a reasonably decent income -- and so one could argue it was fair to start taxing away Social Security income over those amounts.

     But fast forward to today. Social Security still taxes any income over $25,000 as a single and $32,000 as a couple. But let's face it, that's not a lot of money anymore. If those limits were adjusted for inflation, they would today be more like $64,000 for singles and $82,000 for married couples. The 1983 reform was designed to tax beneficiaries who were pretty well off. Today the consequence of the "reform" is to hit retirees of very modest means. (By the way, 13 states, from Connecticut to Colorado, also impose their own income tax on Social Security benefits.)

     So beware those income levels. If they're not adjusted for inflation, what seems "wealthy" today may not seem so flush a few years from now.