Stealthy Taxes and a Family First Idea

 The fiscal cliff deal is a classic case of crisis-driven legislation, passing an unread bill in haste, to solve an urgent problem created 2 years ago by passing crisis-driven legislation to solve, well basically, the same problem. Lack of political honesty about the real state of the nation's finances leads to unintended consequences and band-aids rather than solutions.

The Wall Street Journal discusses the fiscal cliff's Stealth Tax Hike, which raises the new marginal top income tax rate from the advertised 39'6% up to an effective45%  for many taxpayers. The Hike is caused by reviving two expired 1990 tax provisions, PEP and Pease, which limit deductions and exemptions for higher-income taxpayers. As a result, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000.  The article reports:

"The Senate Finance Committee informs us that in effect the loss of the personal exemptions, currently $3,800 per family member, can mean a 4.4 percentage point rise in the marginal tax rate for a married couple with two kids and incomes above $250,000. A family with four kids in that income range faces about a six percentage point marginal rate hike. The restored limitations on itemized deductions can raise the tax rate by another one percentage point.

Add it together and families in the 33% tax bracket could see their effective marginal rate paid on each additional dollar earned rise to above 38%. ...Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%."

The above does not count the added 2% payroll tax on income up to $110,000 which all workers pay. It does include the ObamaCare 3.8%  investment income tax which most of us won't have to pay.  Or maybe we will  -   if we get a big one-time income boost from tapping a 401K retirement plan to pay for a family emergency; or from selling a large house to begin retirement.

I'm not surprised that the tax rates are higher than advertised; you can't expect to really know what's in a hastily-passed largely-unread bill for a while. What does surprise me is the bias against marriage and family.

These new tax rates make it financially attractive for a couple with 2 high incomes to divorce and file separately. One couple has done so and stated a web site (MisMatch.com) to help other couples do the same.  More amazingly, the marginal tax rate for 4 child family is 2% points higher than for a 2 child family.

It's "Amazing" because our entitlement programs (Social Security and Medicare)  face  financial catastrophe because there are not enough future workers paying to support the growing number of older beneficiaries.

So, the new tax provisions encourage people to break up families and to have fewer children! Is that just an unintended consequence of haste? Or is it a symptom of policy by crisis tinkering instead of goal setting?

Perhaps we should put the horse back in front of the cart and rethink our priorities and goals to achieve the  society we desire.. Do we want the Government to take care of us (with a lot of attendant control) ? Or do we want to care for ourselves and our families while providing support for the less fortunate?

To help thinking about society goals as a basis for setting policy, consider a family-oriented idea:  Make Social Security a Family First Plan.

Today's workers pay 12.5% of their wages, including the employer share, to support today's retirees and hope someone else will return the favor later.  The Family First Plan will use each workers taxes first to pay benefits to the worker's parents and grandparents; second to fund a personal 401k plan; and third to fund a general safety net that supports retirees who have no children or have very low income.

It may take a lot of design work, number crunching and some income/benefits realignment to turn this idea into a  sustainable plan; and there's probably a generation long transition period.  But it would wipe-out the current multi-generation debt burden; and the family context should help young and old to accept essential realignments.

The key point is that the Family First Plan does more than just fund retirements, it encourages individual and  family self-reliance and stabilization across generations. I submit that is far more sustainable over the long term than any variation of the current impersonal Social Security system.