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  • Applying Payroll Tax to Investments Will Slow Recovery and Hurt Seniors

    The House and Senate are working to reconcile their differing health care reform bills into one final bill. Tax increases remain a stubborn sticking point. The House prefers a surtax on high-earners and the Senate an excise tax on so-called “Cadillac” health insurance plans that cost over $8,500 for individuals and $23,000 for families.

    Labor unions, and their backers in the House, have made clear they are staunchly against the excise tax. Congressional negotiators are now looking to reduce it so it has less of an impact on union members, but will need to raise other taxes to replace the lost revenue if they do.

    Their latest idea to bridge the divide is to apply the payroll tax to investment income for the first time. Currently, the payroll tax applies only to wages. Increasing taxes on investment income would be a bad idea at any time, but doing so now as the economy is just emerging from a deep recession is downright irresponsible. We are in the beginning of recovery and higher taxes on investment would threaten that recovery. The Obama Administration has reportedly even considered that it will likely have to put off the tax increases it wants - including increasing taxes on capital gains and dividends – because of the weakened state of the economy. If Congress goes through with its plan to hike taxes on investment income and capital gains it will hurt economic growth at the worst possible time and contradict the sensible concession of the administration that taxes should not be raised now.

    The tax code already taxes investment too much. High taxes on capital gains, dividends, interest and business income increases the cost of capital. This drives down wages and costs the economy jobs. Increasing these taxes will further depress investment at the very time when the economy needs new investment to grow and create jobs.

    Seniors lose

    Applying the payroll tax to capital gains and dividends would hurt those that rely on investment income for their livelihood – especially seniors. Seniors live off their dividend and interest income in addition to their pension and Social Security checks to pay for their living expenses, including basics such as housing, food and medical care. When the taxes on them go up, seniors have less after-tax income for expenses. Seniors also sell assets, recognizing capital gains, when their expenses exceed their income, so raising the tax on capital gains further reduces their resources. In addition, raising the taxes on capital income and capital gains will lower asset values, leaving seniors less to sell when they need it.

    Nearly 30 percent of all stocks are held in retirement savings plans. Most of the seniors that rely on the income from these plans for their livelihood are not “fat cat” investors that have been the target of so much criticism lately. They are people that spent their working years saving money for their own retirement in mutual funds, 401(k)s, IRAs, and other savings vehicles. Slamming them now with higher taxes would punish them for a lifetime of frugal living and careful planning.

    All stock holders, including seniors, already pay a substantially higher real capital gains tax rate than the current rate specified in law because capital gains are not indexed for inflation. Increasing the rate will worsen this effect and further increase the tendency of investors to hold on to assets to avoid paying the capital gains tax. This will result in capital not being efficiently allocated to the most deserving projects, which will further lessen economic growth.

    Breaking the link with payroll and benefits

    Expanding the payroll tax to investment income would also further dissolve the fundamental policy that taxpayers pay payroll taxes during their working years and receive benefits for paying them during their retirement years. The policy was first weakened when the traditional cap was eliminated so payroll tax was applied to all wages and salaries. The Senate bill took this a step further by increasing the Medicare portion of the payroll tax for taxpayers making more than $200,000 a year to pay for a new, separate health care entitlement program. Applying the payroll tax to investments is the next step down a slippery slope where Congress further obliterates the tie between the payroll tax and the retirement benefits it is supposed to fund.

    Congress’ willingness to violate this fundamental policy exemplifies how determined they are to pass a health care bill. At this point, they appear willing to tax anything and violate whatever principles previously defended to get the bill over the finish line. Since the economy is still shedding jobs and it’s clear that anything approaching full employment is a long way off, it is time for Congress to take notice of the economic harm they threaten. A good first step would be to drop this idea of increasing taxes on investment. Doing so is a common sense action that both the left and right can agree on. Will Congress wake up and see what everyone else does?

    Posted in Economics [slideshow_deploy]

    27 Responses to Applying Payroll Tax to Investments Will Slow Recovery and Hurt Seniors

    1. Concerned, Mequon WI says:

      They just want to keep taking our money and evenually we will have socialism because no one will be able to sustain the taxes the government imposes on everything. If this is what they want to tax now it can only go up in the future. What happened to America?

    2. stirling, Pennsylvan says:

      It's amazing the bone-head ideas that this administration keeps comming up with to try to pay for their "Entitlements." Here's an idea, how about going thru all the existing "pork entitlements" that are already on the books that could be done away with first. We don't need more entitlements, which can't be paid for, we need less of everything to balance our finances. You can't endlessly punish those who have taken "risk" and earned succeess, (to pay for those who have not earned their success), it sends the wrong message. The message that is being sent to investors and seniors is clear – your rights as an individual mean nothing to the collective. (your money will be assimilated.)

    3. Larry (Winston Salem says:

      I think you have a couple of things confused here. Firstly, "payroll tax" is not the same as "income tax." If you're retired, you're not on a payroll; your taxed on the income you produce through various transactions that are not defined as "wages." Payroll taxes consist of OASI (formally known as social security), Medicare, and tax withholdings. Does the healthcare bill increase these taxes? Yes, but not if your retired. Secondly, a link in your post talked about obama's "blue print" to raise the capital gains tax from 15% to 20%. This increase in tax is a return to the tax level pre-2001 when then President Bush signed the "economic growth and tax relief reconcilaition act of 2001." This reduction in tax was set to sunset (or expire) in 2010. The continuation of this tax cut was an arguement during the campaigns.

      BTW: The people are waking up their parties; the republicians are already asking their representatives "Is this bill constitutionally sound?" I forsee, this challenge gaining ground….

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    5. Peter Asher, Oregon says:

      First of all, buying stock other then IPO shares is not truly investing. It is reimbursing a share holder. No new working capital drives from the transaction.

      If a tax was levied only on sales of stocks held for a short term and capital gains were indexed, no detriment would occur to the economy. (Dividends should be exempt as they are double taxation.)

      Indeed if in and out, quickie trades were heavily taxed, markets would operate on a more true value level and funds would be raised from activity that only sucks wealth out of the system without out any production being created. As this is the major potion of trading volume substantial revenue would be raised from taxing an activity that empirically harms the economy.

      “An honest man is one who knows he cannot consume more then he produces.”

      Ayn Rand, in Atlas Shrugged.

    6. SB Owner Springfield says:

      Well stated Mr. Dubay. Breaking the tradition of payroll taxes on income while working isn't surprising, candidate Obama promised the remaking of America. The puzzling actions for me are the multiple direct attacks on our senior citizens with this proposal, the Fed keeping interest rates low, and Medicare cuts in the health reform bill. Seniors are getting the brunt of paying for this remaking of America, along with small business.

    7. Whicket Williams Kin says:

      What will happen is investment will be driven to other countries where the tax burden is less, and only us poor who are unable to invest will be left, and we will wind up like Haiti, which was once the richest country in that region, and now the poorest.

    8. Drew Page, IL says:

      Not a single penny held in private hands is safe from these tax and spend liberals. Obama, Reid, Pelosi and their confederates have never met a tax they didn't love.

      Americans, both those left with jobs and even those who are retired and living on fixed incomes, are not safe from the confiscatory taxes, current and planned, by the current majority in the White House and Congress.

      There is only one alternative to those who wish to keep any of what they have earned and that's to vote every last one of these thieves out of office at the earliest possible moment.

    9. Jeanne Stotler, Wood says:

      Seniors do pay , we have medicare B, and D our of our checks each month, plus we have to carry a supplement policy unless on welfare. Since the cost of both of these went up the first of this month we have less to live on, This is compounded by the fact that Congress denies our Cola for 2010 and 2011, while voting themselves and their staffs raises. this bunch has shown they do not care for their constituients only for themself. Time for an admendment that this bunch and any other congress cannot vote into law ANY LAW THAT IS NOT TO BE APPLIED EQUALLY TO ALL CITIZENS, INCLUDING THOSE WHO SIT IN CONGRESS, SUPREME COURT AND MOST OF ALL THE WHITE HOUSE.

    10. philip hilliker says:

      Another way for Obama to tax averag people all he dose is spend and tax .andthe elderly who have little suffer from his polical grasp for socialist power and do awy with elderly and steal from the middle class with his hidden tax plans. VOTE THESE SUPPORTERS OUT IN NOV.2010

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    12. Billy T., Kansas Cit says:

      I am so sick and tired of the tax and spend mentality of Congress, Republicans included. We need to vote all of the incumbents out of office and start all over. We need an amendment for term limits and a hard ceiling on campaign finances, donations and expenditures.

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    14. Ben C. Ann Arbor, MI says:

      Something about stuffing money into matresses comes to mind. Thankfully, there are still smart people out there who will figure out a way to 'shelter" income from the Feds. If not – if all available legal "shelters" are lost, then the underground economy will flourish as it does in Russia.

    15. SAMUEL says:

      LET THIS SENATE AND CONGRESS AND OBABBBA KNOW!!!!!!!!!! THE SENOIRS STILL HAS VOTING POWER. ALL SENIORS, TEA PARTY, AND MIDDLE CLASS TAX PAYERS . VOTE ALL OUT OF OFFICE. THIS THIRD WORLD GROUP OF LEADERS DOES NOT HAVE A CLUE.

      WE SENIORS HAVE LOST MORE THAN HALF OF OUR SAVINGS DUE TO GOVERNMENT PUSHING FOR WORKERS TO PUT THEIR MONEY IN 401'S

      THIS WAS THEIR WAY OF GETTING OUR MONEY. ( AND DID THEY EVER)

      WE ARE THE GROUP THAT HAS WORKED ALL OUR LIVES AND SAVED.

      THIS GROUP OF LEFT WING NUTS IN THE WHITE HOUSE , BELIEVE IN KEEPING UP THE LAZY GROUP THAT DOES NOT WORK, OR WORK IN GOVERNMENT.

      WE WILL VOTE YOU OUT.

    16. Mike in Missouri says:

      I'm a bit concerned about the knee-jerk reaction by some calling for us "to vote all of the incumbents out of office". There are quite a few in Congress who are fighting hard for our rights and freedoms. Voting them out just because they're an incumbent would be devastating.

      We need more people like Tom Price (GA), Michele Bachmann (MN), Paul Ryan (WI), Ron Paul (TX), Mike Pence (IN), etc., etc.!! They not only get it, but continue to be tireless advocates for common sense in government — and for protecting our Constitutional rights!

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    19. OPAS says:

      stirling, Pennsylvania – I took the liberty of few corrections

      It’s amazing the bone-head ideas that this administration keeps comming up with to try to pay for their “Entitlements.”

      WAKE UP! none of their "ideas" are Bonehead, each and every one has been weel thought pought before it was implemented.

      Here’s an idea, how about going thru all the existing “pork entitlements” that are already on the books that could be done away with first. We don’t need more entitlements

      - get off that cool-ade, they are not "ENTITLEMENTS"

      , which can’t be paid for, we need less of everything to balance our finances.

      - of course they will be paid for, with YOUR money

      You can’t endlessly punish those who have taken “risk” and earned succeess, (to pay for those who have not earned their success),

      it sends the wrong message.

      Wrong again, the message is "VOTE for the DEMOCRAT PARTY" and "VOTE AS MANY TIMES AS YOU CAN"

      The message that is being sent to investors and seniors is clear – your rights as an individual mean nothing to the collective. (your

      money will be assimilated.)

      HOORAY! By George YOU"VE GOT IT – that is the CHANGE YOU VOTED FOR, rememeber,? Obama told you "Vote for me and we will change this great country. What are you complaining about? You wanted the Democrats in Congress and you put them in there, you wanted Obama to change this country and you voted him in.

    20. OPAS says:

      You can’t endlessly punish those who have taken “risk” and earned succeess, (to pay for those who have not earned their success),

      PUNISH??? you mean like when a thief steals your car he is doing it to punish you? or do you mean when a pick-pocket takes your wallet he didn't want your mony and CC, he wanted to PUNISH you, and of course if you are working you don't want the money, you only take your pay check because you want to punish your employer.

      Now I understand, they don't really want your money, they take your money to punish you and to show you they didn't take your money because they wanted it, they give it all away. .

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