On Compromise - Promoting Economic Growth.

I'll just be up front with my objective here. I'm about to pitch an argument for eliminating the social security, medicare and FICA taxes. Even if you're all for social welfare programs, please read on. I'm not proposing the elimination of those programs.


To start with some definitions. The Social Security, Medicare and FICA taxes are what the IRS calls the "Self Employment Tax." It comprises of a total of 15.3% of your taxable income. If you work as an employee, you pay 7.65%, while your employer pays the other 7.65%. If you're self employed, you cough up the whole 15.3%.

The tax on FICA and Medicare continues regardless of your income, but the Social Security Tax portion of it stops at about $108k. Simply, this is a tax on lower incomes.

What I'm suggesting here is that we eliminate those three taxes (Medicare, Social Security and FICA) and fund those programs through the income tax. Social Security Credits could be established through prior income tax receipts in the same manner we track social security tax paid. To offset the decrease in receipts (for the sake of compromise) increase tax rates on the upper income echelons, and possibly on net capital gains in excess of $250k (exclude dividends.) I haven't put much thought into the exact dollars and cents of where such income taxes would fade in, but you could start at the current social security phase out of $108k for (single filers, $216k for those filing jointly) and phase in a higher rate as you go up.

Why?
Well here's the theory. The objective is promoting economic growth, and even the most liberal economists know the best way to do that is to inspire business development. One of the biggest hurdles to the self employed and small business is dealing with additional payroll taxes, particularly Social Security, Medicare and FICA. Once a person reaches about $108k (it indexes every year) they stop paying those taxes anyway. So keep with the subtext here - I'm trying to promote and simplify business development for individuals and very small businesses, I.e. your "Mom & Pop" shops. Two things accomplished here would be freeing up the burden of those taxes on small businesses, and putting money into the portion of the population with the highest Marginal Propensity to Consume (MPC, it gauges how likely you are to spend money. Poor(er) people are more likely to spend than save.)

For business, the elimination of these taxes means they no longer have to distinguish between an employee and a contractor, and would have MUCH less incentive to try and falsely treat their employees as contractors to dodge a quarterly payroll tax requirement. This would increase voluntary compliance as well as simplify enforcement measures.
On top of that, it would save businesses the 7.65% of payroll per employee tax they're currently paying, freeing up additional income for development, added employment, etc. etc.

For individuals some perspective is required. A person making $25k a year pays nearly $1500 annually in social security tax. With what I mentioned earlier on Marginal Propensity to Consume, you're putting those dollars back in the pockets of people who are more likely to spend it and for someone who makes as little as $25k in a year, $1500 is a great deal of money. To add to all of this, the added increase in economic growth could actually serve to offset some of the increase in deficit that such a proposal could potentially create (depending on how the other tax increases went into effect.)

This shouldn't make anyone think that I'm any more pro-tax that I have been in the past. My perspective is still that the only proper tax is no tax at all. However in the world of compromise, there are give and take elements that can evince a more proper method of thought. My motive in such compromise here, is both putting money where it will see the most benefit (and the pockets of employees is less my objective than the pockets of very small businesses) and also promoting out-of-the-box thinking that can demonstrate why repealing legislation can in fact, be as beneficial as adding more.

There's my thought of the day.