Don’t exempt retirement income from Iowa Income Tax.

Iowa Governor Reynolds made some bold tax proposals in her State of the State address. In addition to a flat tax of 4% on all taxable income, she has proposed that retirement income such as pensions, IRAs, and 401ks be exempt from income tax. She also proposes to exempt cash rent payments received by farmers who are retired.

Social Security income is already exempt in Iowa even though many retired Iowans have higher than average wealth and income. Also, the average farmer is significantly more wealthy than the average Iowan. Farmers also have social security and can have IRAs and/or other retirement income just like everyone else. For some farmers, their cash rent received during retirement could exceed $100,000 per year, just like non-farmer wealthy retired people can have high incomes. There is no good reason why everyone’s retirement income should be tax-exempt.

If any group should have part of their income be exempt from tax, it is those Iowans who have the lowest incomes. It would be better to increase the standard exemption for everyone than to exempt retirement income. That way, the tax relief would go to those who need it most, regardless of age.

Some of the rich are getting poorer, and some of the poor are getting richer.

The Des Moines Sunday Register published a lead article (Page 1) titled, “The rich keep getting richer”.  (See link below.)  Included were a number of misleading statistics or misleading conclusions based on the statistics.  For example, according the think tank, Iowa Policy Project, the median hourly wage in 2016 was $16.04 per hour.  37 years ago, the average wage, adjusted for inflation, which is fair, was $15.91.  The Register concluded, “This means a typical wage earner  working 40 hours per week for a full year would have seen a real increase of $270.40 over a 37 year span.”  While the statistics are technically true, you cannot logically conclude and that any specific person or group of people did not move themselves from a lower wage to a significantly higher wage.  I’m sure it is true some people moved down while some people moved up.  An interesting study would be to see how wages correlate to the number of years in the employment market.  It would be interesting to know the median starting hourly rate for a young inexperienced worker versus and an experienced worker who has been in the labor market to 30 years.  The fact that the average stays about the same my be a problem, but almost no one stays at the average wage for 37 years.

Another statistic was that the number of people who earned $1 million or more during specific years increased from 5,031 in 2010 to 8,325 in 2015.  Their “slice” of the state’s total adjusted gross income grew 37%.  Meanwhile, the number of Iowans claiming gross incomes of $40,000 to $99,999 climbed by 23%  while their slice of the state’s total adjusted gross income fell 2%.  First, I would venture to guess that a significant majority of the $1 million+ earners are people who sold their businesses or had other one-time income.  So, again,there is no logical reason to presume that the $1 million+ club is made up of the same people year-after-year.  At the same time, from 2010 to 2015 the Iowa economy was generally continuing to improve, so values and prices of businesses likely climbed.  Also, in the case of an “expanding pie”, the fact that any group gets a smaller percentage of the total does not mean that their real income is not increasing.

Finally, the Register reported that their analysis of U.S. Census data showed that the bottom fifth of earners saw practically no growth in household income – going from $13,798 in 2006 to $13,848 in 2016, again adjusted for inflation.  Here again, there is no logical reason to believe that the specific group of people who were in the bottom 20% in 2006 are the same people who were in the bottom 20% 10 years later.  It would be interesting to know what percent of the people in the bottom 20% in 2006 were still in the bottom 20% 10 years later.   My guess is there would be some, but not a majority.

As a society we need to make sure we don’t put hurdles in front of people who are trying to improve their lot in life.  In many cases this means removing government created regulatory barriers to entry into certain jobs.  The Register has done very good work exposing job licensing regulations that are in place more to protect existing businesses from competition and to protect the profits of licensing education businesses, than to protect the public.  Yet, the Iowa Legislature has done precious little to address this real problem for low income workers who are trying to work their way up in our economy.

Link to Register article:  https://www.desmoinesregister.com/story/money/business/2017/11/25/most-iowa-wages-have-stagnated-but-rich-keep-getting-richer/818770001/

 

Increasing the minimum wage is the wrong answer.

The idea of raising the minimum wage – in Polk County, Iowa, or anywhere, is an emotional issue.  Wouldn’t it be nice if everyone earned a “living wage”?  On the logical side, just remember that raising the minimum wage will result in more people not being able to find work – especially the least skilled workers.  Also know that it will put upward pressure on prices that will further raise the cost of living – which will put more political pressure to further raise the minimum wage.  Increasing the Earned Income Tax Credit (EITC) is a better idea.  It is paid for by all income tax payers and targets those who have real need, without putting further upward pressure on prices.

Income inequality is not the problem.

Madeline Cano conflated income inequality with poverty in her recent letter  letter to the editor in the Des Moines Register.  (Hunger is symptom of income inequality. 10/15/2015)  Poverty is the problem, not income inequality.  Rich people earning even more does not make poor people earn less.   Cano did not actually advocate taking money from the wealthy and redistributing it to the poor.  She simply repeated the erroneous meme that income inequality is the problem.

Cano correctly identified that, “…Iowans are not earning sufficient incomes to support themselves and their families.”  Increasing the incomes of Iowans in a sustainable way to reduce hunger in Iowa should be a priority.  The best way to do that is through education, work experience, and opportunity, not through an increase in the minimum wage.

Raising the minimum wage definitely hurts most those who have no job and those who have the fewest skills.  It makes it more difficult for them to get a job and, at the same time, has a tendency to make things more expensive.

To the extent that we want taxpayers to subsidize low income earners, it is better done through the current  Earned Income Tax Credit, which targets benefits to those with real need, and excludes those with higher incomes or who are claimed as a dependent by others.

Social Security – don’t end the cap on taxable wages.

Recently, more people have called for an end to the cap on wages that are subject to the social security tax.  (For 2015, only the first $118,500 of wages are taxable, no social security tax is paid on wages above that amount.)  I think that would be the wrong way to go.  Social Security was sold to the public as a retirement plan where the amount of benefit received had some relationship to the amount paid in. It was not sold as a welfare program where the rich subsidize the poor. The benefits paid under Social Security are limited.  That is why taxable wages are limited.  Social Security is was intended to cover only a portion of a person’s needs during later years.  People should expect to continue to work throughout their lifetimes unless they save enough for their own retirement.  Unless, of course, we want to change over to a welfare system, where benefits are determined by politics rather than the amount you pay in.

Inequality is unjust and immoral – if government force is used.

Today, 9/16/2014, The Des Moines Register once again reinforced the idea that there is something inherently wrong with increasing income inequality.  (See “Ag economy cited in study showing growth in rich-poor gap” – link below.)  In a free market, where government does not interfere except to stop fraud and force, people only become wealthy by producing things that others value and purchase voluntarily.  Under free market capitalism, voluntary trade only makes every participant richer.

Unfortunately, we don’t have a free market in much of our agricultural sector.  So, an important question is how did the wealthy gain their wealth. If they gained their wealth by receiving subsidies from our government, then they gained their wealth by making others poorer. Today, farmers receive various kinds of government subsidies, both directly and indirectly.  For example, crop insurance premiums are subsidized 60% by taxpayers, regardless of the income or wealth of the farmer. And, crop insurance not only covers losses from natural disasters, it also covers loss of profits due to lower crop prices. There should be no subsidy at all for crop insurance, but it is particularly distasteful when the subsidy goes to the rich.  So, we must blame our own government’s policies for at least some of the unjust and immoral aspects of income and wealth inequality.

5 more years of farm welfare?

It appears that those in charge of reconciling the differences between the House and Senate versions of the Farm Bill will not be doing anything to reduce the obscene amount of welfare going to farmers.  Money “saved” by eliminating direct payments is being shifted towards more subsidies for crop insurance.  Senator Grassley’s effort to place a cap on the total welfare payments received by any one farmer appears to have been watered down at best.  Farmers have higher incomes and greater wealth than most citizens. They should pay the full cost of their crop insurance.  Now, lets hope that either the full House or Senate will vote this bill down.  We don’t need five more years of welfare for rich farmers.

Income inequality is not the problem.

Income inequality is not a problem in and of itself.  As long a people earn their income through honest, peaceful and voluntary exchange, then there is no moral reason for our government to redistribute that wealth.  What is a problem is when government places its thumb on the scale and unfairly helps the rich to get richer, or hurts the poor and makes them poorer.  To the extent that a person gains wealth by unequal preferential treatment by government, it is morally correct for government to use its force to take away that wealth.

One good example of the many unfair government policies that wrongly favor the rich is the special low income tax rate on “carried interest” income earned by hedge fund managers.  They call it carried interest, but it is nothing more than a bonus based on performance.   In any other situation, this type of income is taxed at regular income tax rates. Somehow, hedge fund managers have sold politicians on the idea that carried interest is a special kind of income that should be taxed at lower rates.  Another example is the Oil Depletion Allowance for oil companies.  Another is farm subsidies for rich farmers.  We do not need to raise tax rates on ordinary income, we do need to do away with the unfair preferences, tax breaks, and subsidies that go mostly to the wealthy.

A good example of government policy that hurts poor people is that of keeping interest rates low in order to prop up housing prices.  If housing prices had been allowed to fall to their free market levels, housing would be much more affordable for poor people.  Instead, our government tries to fix the problem that it helped to create (unaffordable housing) by giving rent subsidies to the poor – creating more dependency on government, but not fixing the underlying causes of the problem.

To misquote Walter Scott, “Oh what a tangled web we weave when first we practice to use our government to achieve social goals.”  The solution to many of our economic problems today is to reduce the size and scope of our government.  Many unfair crony capitalist subsidies and tax breaks exist because our government has expanded far beyond its Constitutionally limited powers.  The primary just powers of government are to protect our lives, liberty and property; and to resolve disputes.  The scope and powers of our current federal government are clearly way beyond the limited government that our founding fathers created.  Lets start by closing unfair tax breaks and lowering spending to match.

Don’t raise top tax rates.

I just don’t believe most people think we should raise the top income rate above the current 35%.  All of the examples given are of the super rich, like Warren Buffet and Mitt Romney, who earn millions each year and pay a total tax of between 15% and 20%.  This is the unfair situation that most people think of and most politicians describe when they ask the rich to pay their fair share.  Maybe the easiest way to fix this problem is to revamp the Alternative Minimum Tax.  Why can’t we simply tax all earnings over $250,000, no matter the source, at the maximum 35% rate?  This would include interest earned on tax exempt bonds, dividends, capital gains, carried interest, and any other type of income that is otherwise tax exempt or taxed at lower rates.  It that doesn’t generate enough revenue, then start taking away itemized deductions based on income.  If need be, take away all itemized deductions.

The idea above presumes that we need to increase revenues (taxes) to help solve our deficit problem.  Of course, the biggest cause of our problem is that spending has increased too rapidly.  So, the biggest part of the solution should be to reduce spending.

The chart at the link below shows clearly that our deficit problem is due to uncontrolled spending, not that revenues (taxes) are too low.

Chart showing the history of federal revenues and federal spending:  http://www.heritage.org/federalbudget/growth-federal-spending-revenue

Tax increase on the rich – already done.

Beginning on 1/1/2013, individuals with income over $200,000 and married couples with incomes over $250,000 will pay a new 3.8% Medicare tax on interest, dividends and capital gains.  This increase will happen whether or not the Bush Tax Cuts are allowed to expire.  Currently, the Medicare tax is 2.9% of all earned income, without limit.  So, the wealthy pay the Medicare payroll tax on everything they earn.  Beginning in 2013, they will contribute even more based on unearned income.  This tax was included he Patient Protection and Affordable Care Act (PPACA), commonly called Obamacare.  The tax had nothing to do with protecting patients or making care more affordable.  It was simply a tax increase on the rich to help reduce the tremendous Medicare funding deficit.  So, Obama has already increased taxes on the rich.