Friends have warned me about the new Medicare tax, 3.8% of one’s investment income. Since the tax only applies to people with higher incomes than mine, I am regrettably not liable for this tax. But what is the economic reason for putting an extra tax only on the investment income of the very well-off?
All Americans are eligible for Medicare at 65 (an age minimum that should be raised). Why should somebody with $100,000 in investment income but no earnings pay no Medicare tax, while someone who earns $100,000 from a job pays $1,450 herself, and $1,450 through her employer to finance Medicare? This seems inequitable. The tax on all investment income, regardless of one’s total income, should be the same as what one pays on self-employment income — 2.9%.
As Republicans and Democrats continue to bicker about spending and taxes, the Onion has stepped in with an excellent plan for averting a fiscal crisis:
STEP ONE: Eliminate school breakfast and lunch programs, Medicaid, the Consumer Product Safety Commission, the Environmental Protection Agency, Medicare, PBS, New Mexico, elk, the Coast Guard, and all dams.
And, our favorite, Step Three:
STEP THREE: Eliminate federal prison system by converting U.S. territory of Guam into an unsupervised penal colony known as “The Gauntlet.”
“Render unto Caesar what is Caesar’s”? In many European countries, religion comes at a price: If you want the services of a religious community — for marriages, burial, and other activities — you pay a tax. (In Germany, for example, there is an 8 percent surcharge on your income-tax bill.) A very nice Finnish study by Teemu Lyytikäinen and Torsten Santavirta, “The Effect of Church Tax on Church Membership” (Journal of Population Economics, forthcoming), uses this institution to examine the demand curve for religion. The price elasticity of demand is fairly small—not more than 0.05—but that is partly because until 2003, Finland made it difficult to opt out of a religious community (and opt out of paying the tax). Not surprisingly, once the transactions costs of tax avoidance were reduced, the elasticity of demand appears to have risen.
The other day, Levitt and I participated in a brainstorming session on how to fight childhood obesity, sponsored by the Robert Wood Johnson Foundation. (FWIW, we recorded the event and will try to turn it into a podcast.)
One topic that got a lot of traction was a targeted tax on sugary drinks and fatty foods. (This is often called a “fat tax” but should not be confused with a tax on overweight people.) Many people in the session were in favor of the idea but a few were skeptical, primarily because such a tax will be tricky to implement well. One objection that I was surprised no one raised: the simple fact that taxpayers might hate the tax and rebel against it to the point where it becomes politically and economically impossible.
If there is one thing that politicians love to do it’s to promise people things now and not worry about how we will pay for those promises until sometime far into the future, when some other politician is on the hook to balance the budget.
We see this all the time in the form of budget deficits in the federal government, and also with the accounting tricks used on the Social Security Trust Fund.
These sorts of shenanigans get less press at the state and local level because many state and local governments are required to have balanced budgets (this paper by my thesis adviser Jim Poterba lays out some of the details). There are, of course, ways for states to get around the balanced-budget provisions. The method that currently casts the greatest shadow over the future is underfunded pensions. State governments promise generous retirement packages to state employees, but use accounting tricks to avoid recognizing the full value of what taxpayers will owe in the future to cover those debts. Read More »
The episode was inspired by a recent poll I saw on Yahoo! Finance (at left).
Does anyone believe for a minute that this many people would actually leave the U.S. if taxes (whatever that means, exactly) were to rise to 40 percent or even 70 percent? Read More »
1. Poll tax. Everyone pays the same amount. What could be fairer than this?!
England tried it in the late 14th century, leading in 1381 to Wat Tyler‘s Rebellion. Six hundred years later, England tried it again, leading to the Poll Tax Riots.
2. Sales tax. Goods are taxed at a flat rate (often 17 to 20 percent in Europe, and 5 to 8 percent in various American jurisdictions). Because the wealthy spend a smaller fraction of their income on taxable goods than do the poor, this tax is less progressive than a flat income tax.
Our latest Freakonomics Radio podcast is called “How Deep Is the Shadow Economy?” It addresses what we know — and don’t know — about the gazillions of dollars that never show up on anyone’s books.
The conversation ranges from the macro to the micro — that is, from worldwide estimates of the size of the shadow economy to the actual off-the-books transactions (from drug dealing to freelance hair-cutting) that make those dollars flow. Read More »