Fix the Tax Mess Part 3 – Corporate Taxes and Social Security (FICA)

Article #15 Purple Wayz: Navigating to the Center

My experience with taxes is similar to most Americans–I can’t stand ‘em. But friends, we have to deal with this.

Refresher

In prior PW articles, we wrote that if the US could find $400B of additional tax revenue and $600B of spending savings–in 2024 dollars–the fiscal situation would reach a neutral point. Debt held by the public / GDP would stay at approximately 100%, where it is right now. Just grow everything with inflation and voila, fiscal issues solved!

We’ve covered spending, which is a super heavy lift. And we found about $325B in tax revenue so far, just from individual income taxes. So, we need about $75B more. This comes from 2 sources: Corporate Taxes and Social Security.

Corporate Taxes

The fix here is another situation of keeping the rates the same to stay competitive and growth oriented. We raise additional tax revenue by aggressively getting rid of loopholes. Currently, the US has a 21% corporate rate. When comparing the US to other countries, we have to gross up for state taxes (most foreign countries don’t have them), which takes us to 25%. The European average is 21.5%, with the UK at 25%, France 25.8%, Germany 29.9%, Sweden 20.6%, Finland 20%, Hungary 9%, and Ireland 12.5%. We lose to the smaller guys and stay even with the bigger guys. That’s fine.

So, can we raise $25-30B per year in corporate taxes using ONLY loopholes? Absolutely. Check out this recent piece on tax expenditures which has some of the biggies. I would target the following:

• Employer contributions for healthcare. We could get a ton here—up to $150B per year if we simply abolished the deductibility. But that wouldn’t be smart because people are so used to getting healthcare through employers and not paying taxes on the benefit. Instead, I’d replace employer sponsored coverage with HSAs (Health Savings Accounts), which gives employees a ton more flexibility. And limit the deductibility to a maximum amount. Savings $10-20B depending on how aggressive you want to get with the max. I’d start small. The only ones that would have to pay taxes on their healthcare would be the ones who get REALLY AWESOME coverage.

• Research Tax Credit. Like most loopholes, well-meaning but inefficient in practice. Savings $10-20B. I’d start small here too.

• Many energy tax preferences from IRA. Same idea. I’m very very very interested in decarbonization, but so many of these programs are not doing what they purport to do. Savings $10-15B.

• Regional opportunity zones. Same idea of good intentions, poor outcomes. The primary beneficiaries aren’t the zones. It’s the taxpayers. Savings $4-5B.

• Many, many more including $2B per year from my industry, private equity. PE firms get performance fees called carried interest when their investments work, typically 20% of the gains. These are taxed at capital gains rates. Shouldn’t be. Because hey–they’re not capital gains. They’re performance fees. Which is ordinary income.

We only need about $25B out of this, so we could actually get ahead of things here!

Social Security / FICA

The easiest thing to do with Social Security is extend the income levels that are taxed in Social Security from $170k to $250k, then grow at the CPI. This would keep the same framework and add approximately $40B per year in tax revenues. So, I guess we’re done then, with some to spare?!

Unfortunately, No. We’d just keep kicking the ball down the road as payouts would grow much faster than payroll taxes. The fundamental problem remains: the ratio of beneficiaries to workers is declining. In 1960, there were 5.1 workers paying into the social security system for every beneficiary receiving funds. In 2023, this number had reached 2.7, and it continues to decline. This is not sustainable.

When something is unsustainable, it needs to be rethought.

I don’t have all the answers here, but here are some ideas:

• Transition to Universal Retirement Accounts. Take a lesson from the successes of Roth IRAs and let people invest the money for themselves as early as possible in their lives. Let it grow tax free and utilize the power of compounding. Instead of payouts when people are in their 70s and 80s, it’s payouts when they’re in their 10s and 20s. We can be paternalistic about withdrawal and investment rules to save investment amateurs from themselves. But we would be letting people invest in things with MUCH greater returns than freaking Treasuries!!! What if this had been done with S&P 500 from 1960 onwards? $10k invested for 50 years at 4% is $72k. The same amount invested in stocks which pay 1.5% dividends and grow 7% per year is $594,584. Hmmm……I continue to believe that the power of compounding is one of the least understood major powers in the world. The major problem here is transition–for people over ~35, it’s too late.

• Keep the same framework but allow investments into the equity market. Treasuries are a terrible long-term investment. To satisfy nationalists, this can be invested in passive indexes in the US like the S&P 500. But for proper diversification, it should be in an all-global passive vehicle.

• Get rid of FICA entirely and move everything to income taxes. There are lots of calls to abolish the cap on FICA, which currently stands at $170k annual income. If you do that, then you’d have 2 income tax systems running in parallel–one from payrolls and one from basically everything. Just get rid of payroll taxes! Friends! There isn’t an account in your name sitting in DC waiting for you to turn 65! It’s pay as you go, and it doesn’t work. This would have the positive outcome of shedding the ‘It’s my money’ charade. Would make it much easier for the government to concentrate retirement payouts to the very needy, rather than everyone. I mean, why are Oprah and Elon going to receive Social Security checks?

• Bring in a lot more legal immigrants. I will do an article soon on immigration, but not on what the centrist solutions are. I don’t understand the legal side well enough. Just on the numbers of immigrants needed. Centrists see that limiting immigration is creating more problems than it’s solving. Centrists also see that illegal immigration (jumping the line) isn’t the answer either. Immigration is a classic issue where compromise is needed and can’t be found under the current two-party Duopoly.

Phew! I think we may be done with spending, taxes and the whole deficit and debt thing! I’m certain we will revisit it often, however……

There are thousands of permutations that can get us to $1 Trillion of annual deficit reduction. Unfortunately, if and when our federal government gets around to this in 2029 or after, the number will be much higher. The Trump Administration isn’t helping. And sadly, with our current politics, it’s likely that future Republican and Democratic administrations won’t help either.

I see two possible outcomes: 1) A debt crisis within the next 15 years generates needed reforms because we have no choice. 2) We work hard NOW (!!!) to enact needed electoral reforms at the state level to increase the number of compromisers in Washington DC.

Avoiding the kind of painful crisis we described in earlier articles is obviously the favored path. But our two-party politics have built in incentives to continue kicking the can down the road. Still, I’m optimistic we can do this because I’ve seen it in states like Maine and Alaska. We just need 2 more states to step up. Then 2 more. Then 2 more, etc. When the nation sees what it’s like to have more Lisa Murkowskis and Susan Collins, and fewer AOCs and Lindsay Grahams, that’s when this train gathers momentum and can’t be stopped.

Questions? Comments? Fire away.