Draft Proposed Debt Reduction Plan Released Today

The slides from a proposal by the co-chairs of the President's National Commission on Fiscal Responsibility and Reform can be found at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/CoChair_Draft.pdf

I am actually fairly impressed with the proposal. Unfortunately, some Senators and Representatives have already spoken out against it, saying they will not support it, even though they offer no effective alternative suggestions other than increasing debt. Sigh :(

Basic summary is that they propose eliminating all special interest tax deductions for individuals, and nearly all for businesses (keeping research tax credit, etc.) This allows them to simplify and lower marginal tax rates while still increasing overall tax revenue. They enumerate several health care cost savings proposals and save social security by gradually raising the full retirement age to 69 in 2075, gradually increasing the wages subject to social security taxes, and reducing social security benefits for those less in need.

Overall, the reductions are made up about 2/3 from reduced spending and about 1/3 from increased taxes, which seems a reasonable tradeoff.

Take a look, and if you think it's a step in the right direction, as I do, contact your Senators and Representatives to tell them you support such reform.

For more information on the National Commission on Fiscal Responsibility and Reform, you can find their website at http://www.fiscalcommission.gov/.

more about new health care law

This morning I read an excellent article on the effects of the recently enacted Patient Protection and Affordable Care Act, also known as "Obamacare".

You can find it here: http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/11/08/the-effects-of-obamacare.aspx

After reading it and learning more about the new law, I find my previous strong support of this legislation was naive. Yes, it does some great things: eliminates pre-existing conditions as a valid reason to deny health insurance, eliminates lifetime maximum benefit limits, expands health insurance coverage to more people, and attempts to reduce overall health care costs. However, the positive effects appear to be offset by more negative ones than I expected.

Inevitably, every article has a bias to support the points intended by the author, and this one does, too, but the factual data and arguments are persuasive. Please read the article and make your own judgment.

Washington State Initiative 1098

One of the initiatives in Washington State this year is 1098, which would impose an income tax for the first time in Washington. Washington is one of 7 states that do not currently have an income tax.



If I-1098 were to pass, beginning in 2012, it would impose an excise tax based on federal adjusted gross income (AGI). For individuals and married couples filing separately, the tax rate would be 5% for AGI above $200,000 up to $500,000 plus 9% for any AGI above $500,000. For married couples filing jointly, the tax rate would be 5% for AGI above $400,000 up to $1,000,000 plus 9% for any AGI above $1,000,000.



The tax receipts would be used to provide a tax credit to offset business and occupation (B&O) taxes on business gross income for the smallest small businesses, to reduce state property taxes, and to fund education and health services.



FYI: Small businesses are defined by the state of Washington as those business employing 50 or fewer employees.



I thought I'd look at the claims on both sides of this initiative, try to evaluate them for accuracy, and put my perspective on the issue.






SUPPORTING I-1098



Here are the primary claims of those who wrote and support the initiative:



1. I-1098 eliminates the B&O tax for small businesses.



SOMEWHAT TRUE: It does eliminate the B&O tax for the smallest (in terms of gross income) estimated 118,000 small businesses and reduce the B&O tax for an additional estimated 39,000 small businesses.



BUT ALSO FALSE: At the same time, the largest small businesses will end up paying higher taxes, due to the excise tax. Sixty-eight percent of those earning more than $200,000 or more are small business owners. They would gain no B&O tax reduction and have to pay the new excise tax.



2. I-1098 reduces everyone's property tax by 20%.



DECEPTIVE: It reduces only the state portion of everyone's property taxes, but that is only a small portion of the overall property tax. In Seattle, the effect is expected to be only a 4% reduction in overall property tax. In addition, local property tax districts will then be able to increase their property taxes to take advantage of this drop while remaining within the constitutionally mandated limit of 1% increase per year in property taxes without voter approval. Property taxes might not drop at all in some areas.



3. I-1098 provides $2 billion per year for education and health care.



TRUE, BUT MAYBE NOT: It does require the net increase in tax revenue to be spent 70% on education and 30% on health care. However, there is nothing to stop the legislature from reducing budget allocations to those services from the general fund by similar amounts and using these "savings" in the general fund for other purposes. They shouldn't, but they can. The legislature could also use those funds for other purposes, as they have in the past: taking educations funds designated from I-620 (death tax), I-728 (class sizes), and I-732 (teacher pay), and health services funds designated from cigarette taxes.



4. I-1098 taxes apply only to the wealthiest 1.2% of Washingtonians.



MOSTLY TRUE: Wealth is generally considered to be net worth and not current year income. However, income does not correlate perfectly with wealth. People with much lower than $200,000 average annual income will be subject to the new taxes whenever their AGI rises above those levels. For example, those who have volatile incomes (e.g., farmers) and those who may have an unusual one-time bump in AGI (such as converting all of their Traditional IRAs into Roth IRAs, or selling long-term stock holdings for a big capital gain) will have to pay the new excise tax.






OPPOSING I-1098



Here are the primary claims of those who oppose the initiative:



1. I-1098 could result in income taxes for everyone in as little as 2 years.



LITERALLY TRUE, BUT GREATLY EXAGGERATED: I-1098 does not allow changes to the rates or income levels for the excise tax without a public vote. Of course, two years after I-1098 is passed, the legislature can change it by a simple majority vote, and then apply any income tax rates at any levels, but they wouldn't do that all at once. The legislature will inevitably desire in the future to spend more, and adjusting an existing income tax will be a tempting means of paying for it.



Even if a public vote is required, you can be pretty much assured that once in place, an incremental change is likely to pass. The funds will be intended for another good purpose, and mostly only the people who would be newly subject to the tax would vote against it -- the people already subject to the tax likely would vote for it (on principle of fairness) and the people who would still not be subject to the tax would likely vote for it because it costs them nothing.



2. I-1098 proceeds will be spent for other purposes.



UNLIKELY: While the legislature can change the use of funds in dedicated accounts, they don't do this often. However, see my comments about claim #3 of the supporters.



3. I-1098 B&O tax relief will not be permanent.



DECEPTIVE: Yes, the legislature can take it away the tax credit, but it seems improbable they would do so anytime soon, given the huge state revenue increase from I-1098.



4. I-1098 will result in lower job growth.



PROBABLY: The new B&O tax credit is good for start-ups and low income small businesses, but it is bad for highly profitable small business and high income small businesses (that may or may not be profitable), where you would expect much of the job growth. It's probably a net negative on jobs, with fewer private sector jobs partially offset by some additional government jobs.



5. I-1098 will make it harder to attract great talent.



UNLIKELY: State income tax rates are not a primary consideration for most potential employees, although it may increase the costs for businesses to attract and keep the best high wage employees in highly mobile fields such as technology and upper management executives.



6. I-1098 will reduce charitable contributions.



LIKELY TRUE: Since charitable contributions are not deducted before calculating adjusted gross income, it seems likely that there will be some reduction in charitable contributions. According to 2007 IRS returns, 85% of all charitable contributions were made by those with adjusted gross incomes of $200,000 or more.






MY OPINION



Although in its current form it may never apply to me, I am voting against I-1098.

• Based on history with other taxes in Washington (sales tax, property tax, gasoline tax, etc.) and income taxes in other states, a new Washington income tax will inevitably be expanded.
• Washington has a regressive tax system in which people with lower incomes pay a much higher percentage of their income in tax that those with higher incomes. Ideally, we'd have a fair tax system, in which everyone paid the same percentage of their income.  A progressive tax such as that proposed by I-1098 would improve the tax fairness situation in Washington, but I don't believe this is the way to achieve it.
• There are better alternatives to an income tax for raising revenue, such as increasing use taxes and luxury taxes.
• I-1098 seems more likely to hurt the Washington economy than to help it.
• We should stop creating restricted government funds and instead let our legislators do their best to prioritize across the entire budget.
• We should require budget surpluses that are saved during expansions and allow limited budget deficits during recessions that may use up those savings.

Please let me know if anything above is incorrect, if you think I've made an error in evaluating a claim, or if you just have an opinion to share. Thanks!



Here is the full text of Initiative 1098 and here is the Washington State 2010 General Election Voters' Guide.

FDIC and NCUA insurance permanently increased to $250,000

Yesterday, the temporary increase in FDIC insurance from $100,000 to $250,000 was made permanent. It was previously set to expire at the end of 2013.

The press release announcing the FDIC insurance from the Dodd-Frank Wall Street Reform and Consumer Protection Act is here: http://www.fdic.gov/news/news/press/2010/pr10161.html

The press release announcing the NCUA insurance is here: http://www.ncua.gov/news/press_releases/2010/MR10-0722$250KNCUAShareInsuranceProtectionNowPermanent.pdf

Another FDIC press release (http://www.fdic.gov/news/news/press/2010/pr10162.html) announced that the increase was made retroactively back to January 1, 2008. This provides additional insurance coverage for depositors whose banks failed between January 1, 2008, and October 2, 2008. The six banks that qualify for this retroactive insurance are: ANB Financial, Columbian Bank and Trust, First Priority Bank, Hume Bank, IndyMac Bank, and Silver State Bank.

According to Q&A page http://www.fdic.gov/bank/individual/failed/dodd_frank_q_and_a.html, checks were mailed today for qualified depositors of those six banks.

For those of you with more than $250,000, note that you can qualify for multiples of $250,000 FDIC or NCUA insurance coverage by using different ownership categories. An individual account qualifies for $250,000 coverage. A joint account (e.g., with a spouse) qualifies for separate $500,000 insurance ($250,000 each). A revocable trust account (e.g., a "payable on death", or POD, account) with three beneficiaries (e.g., a spouse, child, and parent) qualifies for separate $750,000 insurance (3 x $250,000). Thus, at a single bank, with the three account ownership category examples above, you could qualify for $1,500,000 of FDIC insured deposits. For more information, read all about ownership categories at http://www.fdic.gov/deposit/deposits/insured/ownership.html.

The NCUA has their insurance information here: http://www.ncua.gov/Resources/ShareInsurance/YourInsuredFunds.pdf

Washington State deficit 1

Today I received a legislative update from my Washington State Senator, Ed Murray, which proudly claimed that the 2009 biennial budget was smaller than the 2007 one.

In Washington State, a two-year budget is passed every two years. The most recent budget, mentioned in the legislative update, is for the period from July 1, 2009 through June 30, 2011.

Unfortunately, that claim in Senator Murray's legislative update is false. On Washington State's official fiscal information website ("promoting transparency in state government"), each budget since 1998 (the first year of data available) not only was larger than the prior year, but also increased at a rate well over double that of the consumer price index (CPI).

Here's the data:
Please see below. A large whitespace gap appears to be being automatically generated above the html table :(

fiscal year	total budget	yearly increase	CPI
1998	$19,000,980,000	N/A	1.6%
1999	$20,396,296,000	7.3%	2.2%
2000	$21,466,622,000	5.2%	3.4%
2001	$23,068,921,000	7.5%	2.8%
2002	$24,382,416,000	5.7%	1.6%
2003	$25,145,488,000	3.1%	2.3%
2004	$25,965,575,000	3.3%	2.7%
2005	$27,497,721,000	5.9%	3.4%
2006	$29,184,992,000	6.1%	3.2%
2007	$31,332,251,000	7.4%	2.8%
2008	$33,220,243,000	6.0%	3.8%
2009	$35,272,627,000	6.2%	-0.4%
2010	$35,721,020,000	1.3%	N/A
2011	$36,928,289,000	3.4%	N/A
1998-2009		85.6%	31.6%

For the years 1998 through 2009 (for which I could find both state budget expenditures and CPI information), Washington State expenditures increased 85.6% at the same time the CPI increased 31.6%.

Such apparently obvious excessive spending didn't make sense to me. I thought about it, and then realized that the state population was also increasing during this time. Thus, the relevant comparison should be per-capita spending and associated growth.

Here is per capita data:
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fiscal year	population	per-capita spending	yearly increase	CPI
1998	5,570,033	$3,304	N/A	1.6%
1999	5,830,835	$3,498	5.9%	2.2%
2000	5,894,143	$3,642	4.1%	3.4%
2001	5,974,910	$3,861	6.0%	2.8%
2002	6,041,710	$4,036	4.5%	1.6%
2003	6,098,300	$4,123	2.2%	2.3%
2004	6,167,800	$4,210	2.1%	2.7%
2005	6,256,400	$4,395	4.4%	3.4%
2006	6,375,600	$4.578	4.2%	3.2%
2007	6,488,000	$4,829	5.5%	2.8%
2008	6,587,600	$5,043	4.4%	3.8%
2009	6,668,200	$5,290	4.9%	-0.4%
1998-2009	16.0%		60.1%	31.6%

Unfortunately, including considerations of population growth didn't help as much as I had hoped. Washington state government spending on a per-capita basis still increased at nearly twice the CPI rate (60.1% vs. 31.6% from 1998 to 2009), and that excludes any lost potential benefits of economies of scale.

I'm extremely disappointed by the deceptive politics and seemingly endless excessive government spending, even here in Washington.


Washington State expenditure history is available at http://fiscal.wa.gov/FRViewer.aspx?Rpt=Recast%20History%20Expenditure%20Statewide%20Summary

Washington State population data is available at http://www.ofm.wa.gov/pop/april1/cociseries/default.asp

U.S. BLS CPI data is available at http://data.bls.gov:8080/PDQ/outside.jsp?survey=cu

FROZEN granola chocolate chip cookies

I know this sounds weird, but these cookies taste delicious when eaten frozen. However, they are only so-so when eaten freshly baked or defrosted, so don't judge them after eating one warm from the oven. Thanks to Emily for this recipe.

I particularly like these cookies because it's wonderful to have them nearly always available and be able to eat only one whenever you have the desire.

If you don't make your own granola, and I rarely do anymore, I find that Northern Gold Honey Almond Granola works well in this recipe.

1. grease cookie sheets (I use the wrapper from the stick of butter and a bit of the butter to do so)
   


2. melt the following in a large pot, and remove from heat
   
   
   
   • 1/2 cup (1 stick) butter
   
   
   
   


3. mix the following dry ingredients in a large bowl
   
   
   
   • 1.25 cups brown sugar
   
   
   • 1/4 teaspoon baking powder
   
   
   • 1/4 teaspoon cinnamon
   
   
   • 1/4 teaspoon cloves
   
   
   • 1/4 teaspoon nutmeg
   
   
   • 1/4 cup whole wheat flour
   
   
   • 4 cups granola
   
   
   
   


4. stir dry ingredients into the pot of melted butter until coated
   


5. mix the following wet ingredients in a small bowl
   
   
   
   • 2 large eggs
   
   
   • 1 teaspoon vanilla
   
   
   • 2 teaspoons water
   
   
   
   


6. stir wet ingredients into the pot
   


7. stir in the chocolate chips (I typically use Ghirardelli 60% Cacao) until coated
   
   
   
   • 1 cup (or half a bag) of chocolate chips
   
   
   
   


8. heat oven to 350 degrees
   


9. scoop onto greased cookie sheets (the mixture is sticky, and this can be messy; I find that using one spoon to scoop with another spoon to touch up works pretty well)
   


10. bake for 8-9 minutes, until any part of cookies starts to turn brown (it's better to undercook than overcook these cookies, since you're going to freeze them anyway :-)
    


11. after a minute or two cooling on cookie sheet, move them to cooling racks
    


12. after they reach room temperature (an hour or two), put them in containers (such as clean cottage cheese or yogurt containers) and freeze
    

U.S. Personal Income Taxes 4

In previous postings about U.S. personal income taxes, I've repeatedly referred to special-interest tax incentives. The current tax code, Internal Revenue Title 26 of the Code of Federal Regulations (CFR), as revised April 1, 2009, consists of 14,887 pages (according the the U.S. Government Printing Office (GPO)).

Although many of the special-interest income tax laws are for the benefit of a small number of people, some are used by a substantial percentage of taxpayers. The following data is from tax year 2007 about the use of special-interest tax deductions.

Please see below. A large whitespace gap appears to be being automatically generated above the html table :(

Special-Interest Incentive	Taxpayers Who Used
some 1040 Schedule A deduction	35.83%
some 1040 tax credit	34.09%
Charitable Contributions deduction	29.15%
Home Mortgage Interest deduction	28.91%
State & Local Income Taxes deduction	26.01%
some 1040 income adjustment	25.56%
Child Tax credit	18.35%
Earned Income credit	17.43%
Self-employment adjustment	12.65%
State & Local Sales Taxes deduction	8.46%
Medical & Dental Expenses deduction	7.46%
Student Loan Interest adjustment	6.45%
Foreign Tax credit	5.41%
Education credit	5.27%
Child Care credit	4.60%
Retirement Savings Contribution credit	4.16%
Tuition and Fees adjustment	3.22%
Residential Energy credit	3.07%
Self-employed health insurance adjustment	2.72%
Educator Expenses adjustment	2.59%
Individual Retirement Account pre-tax contribution	2.34%
Gambling Losses and miscellaneous deduction	1.20%
Self-employed retirement contributions adjustment	0.84%
Early savings withdrawal penalty adjustment	0.83%
Moving Expenses adjustment	0.79%

In addition to explicit tax reductions due to income adjustments, deductions and credits, there are also lower tax rates for special-interest income, such as qualified dividend income and long-term capital gains, and an alternative minimum tax (AMT) that penalizes those who earn high incomes but not those who earn very high incomes.

While these special-interest tax incentives may have been set up for the best of intentions (e.g., to encourage charitable giving, to make it easier to afford to buy a home, and to increase investments to help grow economy), they often do so unfairly and at a higher cost for everyone else. The result is that taxpayers who do not qualify for a particular special-interest tax incentive are effectively paying additional taxes to subsidize the taxpayers who do take advantage of it.

Shouldn't everyone just pay the same income tax rate(s), and not pay more or less based on what they decide to do with their money?


U.S. GPO Bookstore for purchasing CFR: http://bookstore.gpo.gov/baskets/cfr-listing.jsp

IRS 2007 Individual Income Tax Returns: http://www.irs.gov/pub/irs-soi/09fallbulindincomeret.pdf

chocolate chip cookies

This is my favorite chocolate chip cookie recipe (thank you, Karen). The rolled oats improve both the texture and taste of the cookies.

1. heat oven to 375 degrees


2. cream together
   
   
   
   • 1 cup butter
   
   
   • 1 cup sugar
   
   
   • 1 cup brown sugar
   
   
   
   


3. add and mix in
   
   
   
   • 2 eggs
   
   
   • 1 teaspoon vanilla
   
   
   
   


4. add and mix in
   
   
   
   • 0.5 teaspoon salt
   
   
   • 1 teaspoon baking powder
   
   
   • 1 teaspoon baking soda
   
   
   
   


5. add and mix in
   
   
   
   • 2 cups flour
   
   
   
   


6. add and mix in
   
   
   
   • 2.5 cups rolled oats
   
   
   
   


7. add and mix in
   
   
   
   • one 11.5 ounce bag of chocolate chips cups
     
     (I typically use Ghirardelli 60% Cacao)
   
   
   
   


8. scoop onto ungreased cookie sheets


9. bake for 10-15 minutes, until edges just begin to turn brown


10. leave on cookie sheet for 2-3 minutes before removing them to cooling racks

U.S. Personal Income Taxes 3

Unlike a flat tax that distributes the tax burden proportionally based on income, graduated income taxes subsidize lower tax rates on those with lower incomes by placing higher tax rates on those with higher incomes.

Advocates cite a variety of reasons for charging those with higher incomes a more than proportional share of the income tax burden. Interestingly, the mathematics involved also make it politically advantageous to do so, as raising tax rates for a number of higher income taxpayers permits lowering the rates for a larger number of lower income taxpayers.

Using a set of simple graduated income tax rates with no special-interest tax adjustments, I tried to generate roughly the same tax revenue distribution as the 2007 tax year for each of the 12 IRS-reported income categories. If I'm modeling the graduated tax rates based on the IRS statistical data correctly, the following income tax rates would approximate the existing tax revenue distribution based on income:

• 2% for the first $5,000 of income,


• 4% for the next $10,000 ($5,000 to $15,000),


• 10% for the next $35,000 ($15,000 to $50,000),


• 12% for the next $50,000 ($50,000 to $100,000),


• 20% for the next $100,000 ($100,000 to $200,000), and


• 24% for all income above $200,000.

Note that because highest IRS-reported income category is $200,000 and above, the tax rate for that category is higher than it should be for those whose income is near $200,000 and lower than it should be for those whose income is far above $200,000. To more closely match the current income tax distributions, there should probably be 28% and 32% brackets as well, but I don't have the information to estimate them with any accuracy.

Advantages over existing tax code:

• simple and easily understood


• simpler individual tax forms


• reduced tax calculation errors (both unintentional and fraud)


• reduced costs for Internal Revenue Service (IRS): tax form publication, tax education, tax collection, and tax enforcement

Disadvantages:

• reduced work for individual tax preparation businesses (accounting, filing, publishing, etc.)

Differences:

• does not subsidize desired societal behaviors with special-interest tax incentives, resulting in lower taxes for those people who don't take advantage of special-interest tax laws, and higher taxes for those who do


• everyone with income files separately, so multiple income households would pay lower taxes than single income households with the same overall income (e.g., no "marriage penalty")

chocolate icing

This recipe comes from Fran Bigelow's excellent book, Pure Chocolate.

Although it is labeled as dark chocolate truffle filling, I use this simple recipe as a chocolate icing for cakes. I never liked cake icing before, but now I prefer this to most of the cakes! The only downside is that, at serving time, this icing often pulls away from the cake (doesn't stick well), so perhaps that's why she uses it as a filling.

1. finely chop 9 ounces of dark chocolate (I typically use half of Trader Joe's "Pound Plus" Belgian Dark Chocolate bar at 56%)


2. heat 1 cup heavy cream until begins to boil (I take it off at first bubbles, so it isn't yet "boiling")


3. remove from heat, add chocolate from (1) and stir until melted together and smooth (perhaps 2 minutes)


4. let sit at room temperature and every 20-30 minutes gently fold with a spatula until thickens to consistency of soft butter (recipe says 4 hours, but it usually takes 3 for me)

U.S. Personal Income Taxes 2

Over the next few postings, I'd like to consider the advantages and disadvantages of a few different potential income tax strategies.

The first one I'll write about is a flat tax. As you read in my first posting about U.S. personal income taxes, a flat tax of less than 12.7% would result in at least as much income tax revenue for the U.S. government as the current tax code.

Advantages of a flat tax over existing tax laws include the following:

• simple and easily understood


• everyone pays same percentage of their income


• tax can be accurately withheld from both earned and unearned income


• income tax can be collected when income is distributed (no free loans to individuals who underpay their taxes and pay rest when file, no free loans to government by people who overpay their taxes and get refund when file)


• potentially no individual tax forms to file and thus most individual tax documentation, preparation time and expenses may be eliminated


• reduced tax calculation errors (both unintentional and fraud)


• reduced costs for Internal Revenue Service (IRS): tax form publication, tax education, tax collection, and tax enforcement

Some disadvantages of a flat tax:

• reduced work for individual tax preparation businesses (accounting, filing, publishing, etc.)

Some differences:

• does not subsidize desired societal behaviors with special-interest tax incentives


• higher taxes than currently for people with low incomes


• higher taxes than currently for people who take advantage of special-interest tax laws


• lower taxes than currently for people with middle and high incomes who don't take advantage of special-interest tax laws

I'm particularly concerned about higher taxes for people with low incomes, so the next posting will look at multiple tax rates.

U.S. Personal Income Taxes 1

What if U.S. personal income taxes were perfectly fair, and everyone paid the same percentage, with no special-interest credits, adjustments, or deductions, and the same tax rate for every type of income? How much would each of us pay?

That calculation should be easy, right? Just take the total of all personal income taxes and divide by the total of all personal income. Unfortunately, this was more difficult to discover than I thought it would be. I couldn't find IRS reporting of total income. The closest reported statistic was adjusted gross income (AGI), which already includes more than a dozen special-interest income reductions.

Naively using IRS tax statistics based on AGI and individual income tax revenue, I calculated 13.8% for both 2007 and 2006 tax years.

Using other IRS tax statistics based only on positive AGI, the rates were 12.7% for 2007 and 12.6% for 2006. A lower overall rate is likely due to eliminating the effect of reducing the AGI denominator with negative AGI tax returns that do not contribute to income tax revenue.

If we were to use total income rather than AGI, the rate would thus be lower than 12.7%. Note that this also excludes all of the people who do not file an income tax return. Including them would lower the rate even further.

So, if everyone paid the same percentage of their income in federal income taxes, the rate would be below 12.7%!

Of course, this considers neither the societal preferences that those with lower/higher incomes not only pay lower/higher taxes, but also pay lower/higher tax rates, nor the myriad of special-interest tax laws that subsidize various encouraged societal behaviors.

IRS tax statistics: http://www.irs.gov/taxstats/index.html

Social Security insolvency 2

Thanks for the thoughtful comments on my first posting.

Dan commented on the lack of political will to either raise taxes or reduce benefits. Making such changes might not be easy for elected representatives, but being able to campaign on having saved Social Security could provide them some political benefits as well. They could also introduce the benefits changes gradually (as was done with raising full retirement age to 67 and introducing the sliding scale of benefit amounts based on retirement age between 62 and 70) so the reductions only affect future beneficiaries.

Mike commented that the government should start properly accounting for all current and future financial obligations. I absolutely agree.

Social Security insolvency 1

According to the 2009 Annual Report on the status of Social Security and Medicare, Social Security will begin generating a deficit in 2016 and will run out of reserves in 2037.

There are two obvious solutions to this financial problem:

1. TAX MORE: Eliminate the current income limit on the social security tax. Currently, people earning over $106,800 (in 2010) pay a lower overall percentage of their earnings towards social security (because they pay 0% on all earnings above $106,800). Instead, everyone should pay the same 6.2% on all of their earned income (plus the additional 6.2% paid by the employer).

2. SPEND LESS: Raise the full retirement age. In 1935 when the Social Security Act was passed, the retirement age for social security benefits was 65. At that time, the average life expectancy was less than 60. In 1983, the retirement age for full benefits was gradually increased to 67. In 2009, the average life expectancy was 78. Life expectancy has been rising much faster than the retirement age for full Social Security benefits. Raising that retirement age to life expectancy age would not be unreasonable.

2009 Annual Report Summary: http://www.ssa.gov/OACT/TRSUM/index.html

2010 Social Security and Medicare Update: http://www.ssa.gov/pubs/10003.html