By Geier, Deborah A.
Publication: Virginia Tax Review
Date: Saturday, June 22 2002
자료: Integrating the tax burdens of the federal income and payroll taxes on labor income
VII. INTEGRATION IF THE LINK BETWEEN FUTURE BENEFITS AND TAXES PAID IS REJECTED
of the Social Security tax and the. Medicare tax and any future individual benefits that the taxpayer may receive. (159) I view the payroll taxes as undifferentiated federal taxes used to support federal spending (for the currently retired generation). Under that view, the taxes paid and benefits received by any particular taxpayer ought to be analyzed independently of each other for income tax purposes. How might the integration analysis proceed under such a view?
One possibility to consider is whether the payment ought to be
deductible under an income tax for reasons that are quite different from the earlier discussion regarding the qualified plan analogy. Another possibility is whether it ought to be creditable against that tax. In both cases, the benefits received, severed from any connection with the tax, should also be analyzed separately under income tax theory. Parts A and B consider the possibility of a deduction or credit, respectively, for the old-age and survivor's portion of the Social Security tax, as well as the tax consequences of the receipt of cash benefits on retirement. Part C considers the potential tax consequences of the receipt of Medicare services.
A. An Income Tax Deduction for the Severed Social Security Tax
As noted earlier, a pure income tax base is conventionally assumed
to include both personal consumption expenditures and savings outlays. Thus, expenses (as opposed to capital expenditures) incurred for business or investment purposes are generally deductible. A mechanical approach to this analysis might conclude that, since the payment of a tax is not in pursuance of an income-producing activity, it must be nondeductible personal consumption. Going back to first principles, however, one could argue that such an approach is too simplistic.
is generally agreed to be the ability-to-pay principle. (160) It is because a tax base of income" is thought to best represent one's ability to contribute to the fisc that it is adopted as the tax base. If that is true, then even certain personal expenditures ought to be deductible if they sufficiently compromise ability to pay. Indeed, this view underlies the personal exemption and standard deduction, which protect a bare subsistence amount from taxation, though clearly personal consumption. It also explains the deduction for extraordinary medical expenses (i.e., those in excess of 7.5% of AGI) (161) and for extraordinary personal casualty losses (i.e., those in excess of 10% of AGI). (162)
ought to qualify for deduction since they represent amounts not available for contribution to the fisc--even if one chooses to call them "personal consumption" outlays because they are not directly connected to an income-producing activity. As noted earlier, it makes no sense to allow deduction of the income tax itself under the income tax, even though it is a mandatory extraction, since it would result in a greater administrative burden with no fundamental change in the distribution of the tax burden. That is not true, however, of other taxes (so long as they are sufficiently nondiscretionary in nature), such as certain state and local taxes and, notably, Social Security taxes. While not directly mentioning Social Security taxes, Joseph Dodge stated:
fact that a given taxpayer might reap personal benefits from government having a value equal to the taxes does not negate the fact that the taxes are nondiscretionary expenses, since the taxpayer had no control over how the taxes are spent. The benefits are fortuitous. (163)
Security tax ought to be analyzed separately from the receipt of benefits, the taxation of the benefits themselves should also be analyzed separately. As a cash payment that is not a "welfare" payment (164) and therefore which generally represents ability to pay, it should be fully includable when received under this analysis. The operation of the personal exemption, standard deduction, and lower marginal rates on low earnings under the income tax would combine to protect the ability-to-pay value on receipt.
years and inclusion of the payment in the benefit years--is precisely the same result obtained under a "forced savings" analysis which further accepts the characterization of this "forced savings" as comparable to tax-preferred contributions to certain pension plans. As argued earlier, I believe that both the "forced savings" analysis is itself weak and (even if the forced savings characterization is accepted) that the analogy of this forced savings to tax-preferred pension plan contributions is weak. (165) Nevertheless, we end up at the same place!
second-best alternative. The main reason why state and local taxes are deductible, rather than creditable, under the income tax is to prevent states from raiding the Treasury and completely shifting all tax receipts to state coffers. (166) That worry is not present with the federal payroll taxes, and I believe a credit for such taxes is conceptually the most defensible approach.
The idea of a credit under the income tax for Social Security taxes
is not new. One of the original purposes of the earned income tax credit (167) was "to provide a wage bonus to low-wage workers in order to offset the burden of the social security payroll tax," (168) though it has long ago exceeded those modest beginnings. Moreover, in 2001, Representative Thomas M. Barrett of
and explicitly integrated simply because they are both taxes on wage income to support federal expenditures. Collecting federal taxes on labor income under two separate systems masks the high effective combined tax rate imposed on the middle and lower classes. The Social Security tax is not viewed, in this analysis, as simply a forced expenditure of any old sort that ought to be deductible under income tax theory because it is nondiscretionary and thus reduces ability to pay, but rather as the payment of an actual tax on wages, equivalent to the income tax on wages, both of which raise revenue for federal spending.
the additional issue of the extent to which payroll taxes paid in excess of income tax owed ought to be refundable under this conceptual approach. The resolution of this issue depends not only on the obvious revenue constraints of unlimited refundability but also, perhaps, on whether the lack of any exemption in the payroll tax system is troublesome. Assume, for example, that the employee portion of the old-age and survivors tax is made creditable against the income tax up to $1,500, that a waitress earns $25,000 and pays $200 in income taxes and $1,500 in the employee portion of the old-age and survivors tax, and that a lawyer earns $200,000 and pays $40,000 in income taxes and $5,000 in the employee portion of the old-age and survivors tax. Allowing a dollar-for-dollar credit of these payroll taxes against income taxes with no refundability feature would eliminate the waitress's meager income-tax bill but would not truly recognize her decre ased ability to pay taxes, since the payroll tax attaches to the first dollar of earned income with no exemption. Indeed, all the credit would do is significantly reduce the lawyer's income tax bill.
exceed the equivalent of a reasonable personal exemption. For example, in my above hypothetical, suppose that payroll taxes were creditable against the income tax up to $1,500 and that such credit was fully refundable since it is determined that $1,500 is a reasonable "personal exemption" equivalent. The waitress would now owe no income tax and would obtain a $1,300 tax refund. The lawyer's income tax would be reduced by $1,500. The effect of such a ceiling would mean that the lawyer receives no payroll tax "personal exemption," since his payroll tax is far less than his income tax, and thus refundability--where the personal exemption "equivalent" would kick in-would never come into play.
the tax and benefit and thus would also require independent analysis of the receipt of cash benefits in retirement. As a cash payment that is not a "welfare" payment and therefore which generally represents ability to pay, it should be fully includable under this analysis. (172) The operation of the personal exemption, standard deduction, and lower marginal rates on low earnings under the income tax would combine to protect the ability-to-pay value on receipt.
support federal spending, and thus separate from the receipt of any medical care under the program later in life, then the payment and receipt should each be analyzed separately. For the same reasons that it would be defensible to make the Social Security tax either deductible or creditable in the income tax under such an approach, the Medicare tax might also be made deductible or creditable. That analysis need not be restated here. The interesting question here in either case would be how to treat the receipt of medical care under the program later in life, analyzed separately as an independent receipt.
program represents resources over which the taxpayer has control and which can be spent in any fashion--and thus represents taxable ability to pay--the receipt of personal consumption in kind in this instance arguably does not and thus should not be taxable.
concept of income, some might argue that personal consumption received in kind (i.e., for free) ought, as a theoretical matter, to be valued and included in the tax base in all events, unless a specific exclusion provision can be found in the Code.173 The fact that everyone enjoys free personal consumption literally every day that goes untaxed, such as the free concert while waiting for the subway in the morning, is more a matter of administrative convenience than grand theory.
the Shanz-Haig-Simons concept of income should be interpreted with the underlying ability-to-pay norm that informs it clearly in mind. The reason why resources freely spent on personal consumption (above a bare subsistence amount) are taxed is because they represent resources under the control of the taxpayer that could fairly be called upon for contribution to the fisc. Consumption received in kind may or may not be, depending on the circumstances.
is susceptible to two readings because consumption can either be purchased or simply received in kind without charge. (An example of in-kind consumption without charge would be baby-care products sent to the parents of septuplets by publicity-seeking manufacturers.) Under one reading, "net increases in wealth plus consumption" means gross increases in wealth (inflows or receipts other than consumption received in kind without charge) less gross decreases in wealth (outflows or outlays including consumption expenditures) plus consumption (whether purchased through expenditures or received in kind without charge). This reading, which probably has the greater number of adherents, normatively mandates taxing the value of consumption received in kind without charge. Under the other reading, "net increases in wealth plus consumption" means gross increases in wealth (other than consumption received in kind without charge) less decreases in wealth-other than c onsumption spending. This second reading treats "consumption" as only a principle of nonsubtraction (i.e., nondeductibility) for purposes of calculating decreases in wealth. Consumption expenditures are taxed because they are not deductible (and thus remain in the tax base) but consumption received in-kind is not considered an increase in wealth. In other words, the second interpretation of "net increases in wealth plus consumption" treats taxable consumption as equal to the amount spent by the taxpayer on consumption and ignores consumption received in kind. (174)
nondeductibility, then whether the taxation of consumption received in kind ought to be valued and taxed would turn on whether the receipt can fairly be viewed as the equivalent to the receipt of cash followed by a free-spending choice by the taxpayer--a nondeductible outlay. If it can, as should typically be the case in the employment context and with the provision of in-kind consumption by closely held corporations to their owners, then the consumption should be valued and included. The receipt in kind can fairly be seen in that case as freeing up cash or assets that we feel comfortable the taxpayer would have otherwise spent himself absent the free receipt, (175) and the freed-up cash or assets represent ability to pay. If it cannot be--if the receipt does not fairly represent the receipt of cash followed by a free-spending choice by the taxpayer--then the receipt should not be seen as truly representing ability to pay in the sense that c onsumption expenditures chosen by the taxpayer represent ability to pay. (176) If we can not be sure that the taxpayer would have purchased the consumption himself, we can not be sure that other cash or assets were freed (and thus available for contribution to the fisc) from having to be spent on the same consumption. And the receipt--services or quickly consumable assets with little or no utility to anyone else in the marketplace--does not itself represent ability to pay.
program would not be valued and included in the income tax base. It is fair to generalize that it is unclear whether the taxpayer would be able, absent the provision of the free care, to purchase the care himself. We can not be sure that the receipt of free care freed up other assets (thus representing ability to pay) that otherwise would have been spent on the medical care, and the medical care itself does not represent ability to pay.
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