Saturday, January 17, 2015

A Review of President Obama's 2015 State of the Union Tax Reform Proposals

In this post, I would like to look at the tax reform proposals that President Obama's office has announced he plans to make at his 2015 State of the Union Address.  As always with this blog, I will review them through the lens of shared earning/shared parenting families.  Also, as always with this blog, the analysis is of the broad policy implications; individual families will want to review their own situations and consult with tax and accounting advisers to determine the best course of action for them.

I also take a look at that series of Taylor Swift GIFs released by John Boehner (skip to the bottom for that). 

Here are the salient elements of the proposal and their pros and cons for shared earning/shared parenting families:

1.  "The president’s plan would raise $320 billion over the next decade, while adding new provisions cutting taxes by $175 billion over the same period. The revenue generated would also cover an initiative Mr. Obama announced this month, offering some students two years of tuition-free community college, which the White House has said would cost $60 billion over 10 years."

This provision is neutral for shared earning/ shared parenting families.

2.  "The centerpiece of the plan, described by administration officials on the condition of anonymity in advance of the president’s speech, would eliminate what Mr. Obama’s advisers call the “trust-fund loophole,” a provision governing inherited assets that shields hundreds of billions of dollars from taxation each year. . . . Under the proposal, inherited assets would be taxed according to their value when they were purchased. That means the capital gains on those assets during a person’s lifetime, now shielded from taxation, would be subject to tax at the time of the bequest."

This provision is neutral for shared earning/ shared parenting families.

3.  "The plan would also increase the top capital-gains tax rate, to 28 percent from 23.8 percent, for couples with incomes above $500,000 annually."

This Obama proposal will penalize shared earning / shared parenting families and subsidize patriarchal /maternalist families.

This tax is "progressive", meaning that higher levels of income are charged higher rates of tax than lower levels of income.  This tax and the 4.2% in similar taxes assessed as part of the ACA applies to the upper layer of income only and not to the lower layers of income for taxpayers who have income that meets the thresholds.

As noted in previous illustrations in this blog, the fact that marital income is fictionally merged into one unit makes progressive taxes inherently regressive, however.

This is because the lesser earner always gets merged into a higher rate (a "marriage penalty") and the greater earner gets merged into a lesser rate (a "marriage bonus").  The effect of the economic fiction of the merger is sometimes called "stacking effect".

What "stacking effect" does is end up creating an accelerating pressure on a couple to put all earnings into the name of one of the partners.  In actively earning families, this means there are substantial tax subsidies to make one partner the breadwinner and the other the unpaid worker.  In passively earning families, who have accumulated savings or inherited wealth, it creates pressure to put all property and assets in the name of one partner and for that partner to manage all of it.

The policy of fictionally merging marital income personal to each partner means that tax rates are reduced for parents who do not take personal responsibility for their children and increased for parents who do take such personal responsibility. 

Over time this has substantial costs.  It creates significant barriers for a nonearning partner in a marriage to reenter the marketplace, whether the marketplace of employment or of property ownership and management.   It leaves children with only one parent taking personal responsibility for meeting their needs, which has significant costs and distortions in child development. 

It also means that two comparably earning people can pay very different tax rates simply because of the earnings (or nonearnings) of their spouses, or whether they have a spouse at all, thus distorting the marketplace in which the two people compete.

An earlier post in this blog shows this using the tax burdens of Justices Ginsburg, Scalia and Kagan (all of whom earn the same salary but face very different tax burdens) as an illustrative example. 

This has a punitive effect in the simple extra tax dollars owed or not owed, as the case may be, but it also has a distorting effect on the marketplace, overvaluing the work performed by a sole breadwinner, compared to the exact same work performed by an earner who takes personal responsibility for his/her child.  The taxpayer subsidy effectively makes the sole breadwinner a cheaper hire in broad marketplace terms because extra money is paid to him by taxpayers, over and above his wages.  If he has a child, this becomes a payment simply to neglect his child, a type of "reverse paternity leave."

It also means that in later life the family collectively typically has less income and assets than it would have if it were a shared earning / shared parenting family, as some recent studies have illustrated.  In the patriarchal / maternalist families, by contrast, while the breadwinner (usually the man) sometimes has more income and assets later in life than he would hold individually including more access to these things in the marketplace, his family is poorer later in life.

As a political economy, as noted elsewhere in this blog, this has been a key driver in the $19 trillion federal debt, along with a similar phenomenon in Social Security and Medicare taxation and benefits.

The simple fix: get rid of fictional merging of marital income by taxing the income of each party to the marriage separately on the progressive rate schedule.  The IMF has asked the Obama Administration to do this (most OECD countries do not impose this fiction) and which it has ignored.  Joint returns can still be used, but the economic fiction will be removed.

4.   ". . . [a] new fee on banks with assets over $50 billion would be used to finance a set of tax breaks for middle-income earners, including a $500 credit for families in which both spouses work; increased child care and education credits; and incentives to save for retirement."

a.  "White House officials estimated that the new $500 “second-earner” tax credit would benefit 24 million households. The maximum credit would go to those earning up to $120,000, and some credit would be available to those earning up to $210,000."

This Obama proposal will largely penalize shared earning / shared parenting families and subsidize patriarchal /maternalist families.

This "secondary earner credit" is designed to offset the "marriage penalty" that a lesser earner in a marriage pays, while not reducing the "marriage bonus" that the greater earner in a marriage receives.  It continues the economic fiction of merging personal economic behavior of the spouses into one unit and thus reinforces the costs noted above to families, to children and to the political economy generally.

It therefore will be primarily used by stay-at-home mothers reentering the workforce or by women working in low-earning part-time positions who are married to men who are the primary breadwinners and do not take equal personal responsibility for meeting a child's needs. 

This is likely a proposal that Senator Patty Murray (D-WA) initiated.

The simple fix: To help stay-at-home mothers and part-time mothers married to breadwinners, but not penalize shared earning / shared parenting families, eliminate this proposal altogether and instead get rid of fictional merging of marital income by taxing the income of each party to the marriage separately on the progressive rate schedule.  The IMF has asked the Obama Administration to do and which it has ignored.    Joint returns can still be used, but the economic fiction will be removed.

b.  "Mr. Obama also wants to triple the child care tax credit, currently an average of $550, and make it easier for middle-income earners to qualify, offering up to $3,000 for each child under the age of 5. White House officials said the plan would eliminate existing tax-advantaged flexible spending accounts for child care and reinvest those resources in the tax credit."

This Obama proposal will penalize shared earning / shared parenting families and subsidize patriarchal /maternalist families.

The child care tax credit is generally something that helps two earner families, because they often outsource child care.   Shared parenting families outsource less, but often still use it.

One important feature, however, is that child care expense be seen as the responsibility of the parent outsourcing his/her share of care.

What happens with the current credit is that the greater earner gets most the benefit of the credit because s/he has the greater earnings.  There is again a fictional merging of the personal responsibility each parent is taking for the child.

The simple fix: Make the baseline model for the credit that each parent has equal responsibility for child care (if the time in the womb is counted toward the mother, then the father would have slightly more responsibility over the 18 years  outside the womb or sole responsibility for one nine-month period).  This means that the child care tax credit may be taken by the parent who is outsourcing his/her share of the care, perhaps up to the amount of $1500 for each parent.   The personal responsibility of each parent will thus be recognized and not fictionalized.  Joint returns can still be used, but the fiction will be removed.

 5.  "The remaining $110 billion to pay for Mr. Obama’s new tax proposals would be generated by a fee imposed on the largest and most highly leveraged financial firms. That proposal, administration officials said, was designed to make “risky activity” more costly for the roughly 100 such companies in the nation with assets more than $50 billion. Those companies would be assessed a fee based on the amount of debt they hold."

This proposal does not penalize shared earning / shared parenting families, however, it is curious that there is no effort to mitigate the concern about excessively "risky activity" by making the changes noted above.  Both the tax subsidies to couples putting all capital and property into the hands of men as well as the tax subsidies to sole breadwinners' earnings with tax cuts not only encourage "risky activity", but they have been financed primarily through federal debt that is being passed to younger generations.

6.    ". . . .limit the size of IRA accounts to $3.4 million, which is enough to bring in annual income of $210,000 in retirement, according to the White House. If you hit that amount, you're done—no more contributions or accruing more benefits."

This proposal is generally neutral to shared earning /shared parenting families, however, there are some problems with its assumptions that may affect such families.

The Washington Post identifies this proposal as intended to go after the very large amounts that a few individuals have amassed in IRAs, which are subject to deferred taxation, and in some cases, such as earnings on Roth IRAs, no taxation at all if the sum is used up prior to the taxpayers' death .  Mitt Romney is estimated to hold between $20 million to a $100 million in an IRA and the Washington Post uses his situation as an illustration.

There is a flawed foundational assumption in such an IRA, however, that the reform proposal does not reach, and Mitt Romney provides an illustrative example of how this economic fiction in the assumption hurts shared earning/shared parenting families

Ann Romney has never held paid employment and has never personally paid any taxes on earned income.  She brought some assets into the marriage, such as stocks, but she presumably has transferred management of such assets to Mitt Romney, so he effectively pays the taxes on any passive income from such assets.

Because Obama nor the GoP are doing anything about the fictional merger of personal income in married couples, Mitt Romney is automatically getting to assign, for the purposes of taxation only, half of all his earned income and passive income to Ann Romney as part of the "merged marital borg".  This means that he pays a much reduced rate on his income compared to a man or woman of comparable income who has an earning spouse or a spouse with assets s/he owns and manages.  And, if Ann Romney were suddenly to take an interest in earned employment, owning the assets in her name, or managing them, she would pay taxes at his rate, not at the appropriate lower rate for her lower level of assets and income.  This is the "stacking effect" discussed above.

Because these IRAs and assets are all in Mitt Romney's name, and all being managed by him he should be paying the full rate for the assets. 

The simple fix: In marital couples, assets held only in one partners name, or managed solely by that partner, should not be fictionally transferred to the other partner to reduce taxes.

7.   Expand the EITC to make its welfare payments available to nonparents and to noncustodial parents.

This Obama proposal will penalize shared earning / shared parenting families and subsidize patriarchal /maternalist families with regard to the payments to noncustodial parents.

The payments to nonparents are neutral for shared earning / shared parenting families.

The payments to noncustodial parents are not.  This will mean that families that receive the EITC will have a financial incentive to have one parent be the primary parent and one take no personal responsibility.  It means that families that receive the EITC who share personal parental responsibility equally, whether they live together or not, will not receive as much in payments.

The simple fix: Create a "shared parenting" model for the EITC, with child-centric payments in the child's name, and, if desired, welfare payments to the parents in each of their own names.

8.  John Boehner's office has released some Taylor Swift GIFs about the Obama proposals; is there any truth in them? 

Because the Obama proposals penalize shared earning / shared parenting families, yes, however, they are very distorting and Boehner and the GoP are also reinforcing the problems for shared earning / shared parenting problems.

The GIF works because (a) Taylor Swift is a very high earning female (and, as discussed above the Obama proposals effectively raising taxes on her much more than on a comparably high earning male; she already has to pay higher tax rates than a comparably earning male) and (b) Taylor Swift is from a part of the country, Appalachia, that has long recognized actual paternity (while the fathers do not do the daily work over years of meeting a child's needs that it takes to raise a child successfully, they do take responsibility for their children), and the ACA has medical fictions that women are the only biological parents of children.

The GoP is very clearly focused on retaining, and even increasing subsidies to patriarchal marriage, however, and thus they are raising taxes on Taylor Swift as well.  And they are focused on outlawing abortion and are not acknowledging men having any personal responsibility for the unpaid work of meeting their children's needs after the child is born; in fact they see this as all the mother's responsibility.

The simple fix: The GoP could assert federal tax and benefit reforms that acknowledge men having equal personal responsibility for meeting their children's needs as the baseline (rather than that children are the personal responsibility only of women). 

No comments:

Post a Comment