"There You Go Again"

It has been 48 years since Neil Armstrong became the first human to walk on the moon.  What a great example.  We should be “reaching for the stars” in all we do.  

However, we still have so-called economic experts who want to repeat or expand on past mistakes and failures.    

In the July 20, 2017 issue of the Wall Street Journal, in an article by Harvard Professor Martin Feldstein titled:  “How to Make the Tax System Fairer and Save Social Security,” Mr. Feldstein recommends:  “…  If (health) benefits were subject to the payroll tax like all other forms of employee compensation, the government would collect an extra $135 billion this year. …  Taxing employer payments for health insurance would create better incentive efforts than increasing personal income-tax rates.  Because the tax would be applied to existing benefits, it would not raise marginal rates and therefore it would not reduce the incentive to work or to invest.”   As President Ronald Reagan’s Chairman of the Council of Economic Advisors, Professor Feldstein would have never been permitted to propose such a regressive tax change.  As President Reagan would say, “there you go again.”   

Simply, he is wrong, especially with regard to its impact on American workers.  He complains that the current structure “… is unfair to those who pay tax on all of their compensation.”   When he asserts this is some kind of a free lunch because it would not raise marginal rates, he forgets that it would have much the same effect – it would lower worker take home pay from employment by hundreds of dollars a month, and, it would raise employer costs to employ workers by hundreds of dollars a month.   

I mean this sort of tongue in cheek as Harvard clearly has many of the country’s leading economists, but what kind of economics are they teaching at Harvard these days?   Instead of extending the same tax preference to the 20+MM Americans covered by individual insurance, he prefers raising taxes on 160MM workers and their employers.  And, I wonder if he is sensitive to claims that such payroll taxes are regressive, that they will add to “income inequality,” that they negatively impact middle-class two income earners – since individuals earning in excess of $127,000 a year would pay taxes at only a 1.45% rate on the value of their health coverage while those who earn less than $127,000 in FICA wages would be paying taxes at a 7.65% rate on the value of their health coverage.  

Additionally, this is not the only form of employee compensation that is not subject to payroll taxes.  They have yet to apply those employment taxes to the employer contribution to your 401(k) or your defined benefit pension plan.  If health coverage contributions (pre-tax cafeteria plan and employer contributions) are now to be counted as wages for FICA and FICA-Med taxes, can employer contributions to your 401(k) and defined benefit pension be far behind?    

They pulled a similar trick with 401(k) plans subjecting pre-tax contributions to FICA and FICA-MED taxes as part of the Social Security Amendments Act of 1983 – where SEC. 324. (a)(1) amended Section 3121 of the Internal Revenue Code of 1954 (relating to definitions) by including as “wages” “…  any employer contribution under a qualified cash or deferred arrangement (as defined in section 401(k)).”  Making the same change for 401(k) plans didn’t “save” Social Security and Medicare back in 1983…  a similar change won’t be any more successful today.  

We need creative ways to reach for the stars and we need to make a giant leap for American Workers retirement.