Medicare Taxes to fund Interest Rate Cut Extension

Something the Dog Said wrote:

pineinthegrass wrote: The Dems are proposing another increase in payroll taxes for some individuals making over $250K. They've already increased payroll taxes for most everyone making over $250K with Obamacare.

From what I've read this new proposal will apply to both Social Security and Medicare payroll taxes. The Social Security portion will go towards SS, but the Medicare portion will not go to Medicare but rather be used to subsidize student loans.

The Medicare trust fund is currently going to run out of money in 2024 (and no, LJ, I did not use the work bankrupt). What crazy scheme would raise Medicare payroll taxes and not use the money to strengthen Medicare? Does anyone really think student loan interest rates are more important than Medicare?

The next thing you know the Dems will propose raising federal income taxes to fund Medicare and SS.

Keep payroll taxes seperate from income taxes. If the Dems want to subsidize the student loans, how about cutting spending elsewhere or at least stick to their traditions and propose raising federal income tax rates to pay for it. But really, shouldn't student loans be self funded?

Interesting that for some, the closing of a tax loophole that enabled some of the wealthy to avoid paying payroll taxes is seen as a tax hike.

That was not my point at all. My point was if you raise payroll taxes it should all go to Medicare and SS. The Dem proposal would send more money to SS, but not to Medicare. I said if Dems want to subsidize the student loans with taxes, they should propose raising income taxes instead.

Getting rid of a "loophole" is a tax hike, not that I'm opposed to getting rid of loopholes.

Now, in this case I'm not sure this is really a loophole or not. Here is one description of the proposal:

Under current law, businesses organized as S-corporations don't pay corporate taxes, and income earned is passed through to shareholders, who report that income on their personal tax returns. But if these shareholders are also employees, they can choose to treat some of their income as business profit — not salary, which lets them escape payroll taxes.

http://thehill.com/blogs/floor-action/senate/223613-reid-proposes-student-loan-bill-with-s-corp-tax-offset

So right now these people can treat some of their income as business profit. My question would be is it really a business profit or not? If it really is a business profit then it should not be taxed with payroll taxes (they'd have to pay capital gains or some other tax). Payroll taxes are only for wages. And this would not be a special case loophole for only the wealthy. No tax payers pay payroll tax on capital gains or interest.

Now if it really isn't a business profit but is part of their wages, then yes, they should pay payroll tax on it (at least for Medicare which isn't subject to a limit).

Anyway, I'm not familier enough with how these S-corp taxes work. I'd need to know more about it.

PrintSmith wrote:

Something the Dog Said wrote: If you want to argue that the surpluses in the payroll taxes should be kept in trust to cover future shortfalls in medicare and Social Security, that is a legitimate argument. But to somehow be outraged by the current administration plan to use this surplus for student loan interest, that is completely dishonest and bogus, as every administration since Johnson has diverted this surplus for their own agendas.

From Johnson forward, the money "placed into trust" funds has been "borrowed" from those "trust funds" by the general government for other uses, not directly appropriated from the tax revenue raised for those programs. The Democrats in the Senate and the President are not proposing to "borrow" that additional revenue and pretending that it will be paid back, with interest, at a later date as all others have done - they are proposing to directly appropriate that tax revenue for other uses without a penny of it reaching either the program or the "trust fund".

No, the surpluses, particularly those raised by the Reagan tax increases were appropriated, not borrowed. There has been no repayment of those appropriations with or without interest. What the current administration is doing has been done by every administration since Johnson with the exception of Carter. There is no "trust fund", that is simply a misnomer that Congress uses. Every cent of payroll taxes goes into the general treasury fund. The Treasury then issues securities to Medicare and SS to cover their obligations. The surplus remains in the general treasury and appropriated as directed by Congress.

Your demagoguery is simply that and is dishonest in attempting to portray the proposed plan by the present administration as something nefarious.

I agree all income and payroll taxes go into the general fund, and Congress has for a long time spent that as they choose.

However, the payroll taxes collected are matched in a trust fund which consists of government treasury bonds. There is no real cash in the trust fund, just bonds which are promises to pay by the US government and they have always made good on them to date.

So in this case, the Dems are proposing to increase payroll taxes collected, but not match them in the Medicare trust fund.

So I'll ask, has this ever been done before?

And once again, yes, Reagan in 1983.

Its very confusing. Medicare tax increase to fund Obamacare. Mortgage tax to offset 2% payroll tax cut. S-corp payroll tax loophole to offset student loan interest. Nobody can possibly keep track of all this craziness.

Unified Budgeting. http://en.wikipedia.org/wiki/Unified_budget

In the United States a unified budget is a federal government budget in which receipts and outlays from federal funds and the Social Security Trust Fund are consolidated. The United States government adopted a unified budget in the Johnson administration in 1968, beginning with the 1969 budget. The surplus in the Social Security OASDI (Old Age Survivors and Disabilities Insurance) budget offsets the total deficit, making it appear smaller than it otherwise would.[3]

The Budget Enforcement Act of 1990, however changed this so that the two Social Security Trust Funds, and the operations of the Postal Service, are considered to be 'off-budget' and are excluded from the unified budget.[3] This means that the Social Security Tax is not counted as revenue to the General Fund, and interest paid to the Trust Funds is counted as an expense to an external entity. Often Federal budget reports will contain two sets of numbers for the yearly Federal Budget: an 'off-budget' deficit (or surplus) and an 'on-budget' deficit (or surplus) the former of course including the receipts and outlays of these budgets, but by law for purposes of balancing the budget they are 'off-budget'.

Simple really. BTW the Trust funds have no relation to solvency of SS and Medicare. They are merely an accounting of money in paid - money paid out. The money has all been spent over the years.

Insert standard "Medicare/Social Security is broke" nonsense here: ________________________________

LadyJazzer wrote: Insert standard "Medicare/Social Security is broke" nonsense here: ________________________________

Oh no, it's overflowing with cash rofllol
What a dumba$$.

Something the Dog Said wrote: And once again, yes, Reagan in 1983.

Not true - the "trust funds" got non-marketable Treasury Securities to hold in "trust" for the money that was "borrowed" from them during the Reagan years, just like they have under every president since the first one found they just couldn't keep their hands off of money that was just sitting there begging to be used to purchase the votes of those who voted for their living. The trust funds were compensated, just as the current administration has provided for the current "Payroll Tax Cut" to be returned to the "trust fund" at a later date. Never before, since the inception of the programs, have they not been credited with the revenues from the taxes levied to fund those programs. Never before have Medicare Taxes been diverted to other uses without Medicare receiving an IOU for that money as is being proposed now.

I'm calling your bluff Dog - let's see the cards.

PrintSmith wrote: The Democrats in the Senate and the President are not proposing to "borrow" that additional revenue and pretending that it will be paid back, with interest, at a later date as all others have done - they are proposing to directly appropriate that tax revenue for other uses without a penny of it reaching either the program or the "trust fund".

Are you sure this is right PS ? I don't see how its possible to identify the funds, and doesn't seem legal to call it a medicare payroll tax if it is not for the Trust fund. How would they keep track of the money?

I think they may be talking about an "offset" using the unified budget rules. Same trick they pulled "funding" Obamacare.

pineinthegrass wrote: So right now these people can treat some of their income as business profit. My question would be is it really a business profit or not? If it really is a business profit then it should not be taxed with payroll taxes (they'd have to pay capital gains or some other tax). Payroll taxes are only for wages. And this would not be a special case loophole for only the wealthy. No tax payers pay payroll tax on capital gains or interest.

Now if it really isn't a business profit but is part of their wages, then yes, they should pay payroll tax on it (at least for Medicare which isn't subject to a limit).

Anyway, I'm not familier enough with how these S-corp taxes work. I'd need to know more about it.

All of the business profit is passed through to the individuals as personal income when the business operates as an "S" Corp, and all of that income is subject to being taxed at income level of the individual, not as capital gains taxes. The vast majority of the businesses taxed as "S" Corps are individually owned, or owned in partnership with others to theoretically limit their liability to the assets of the company instead of having their personal assets also at risk should the business falter. Take 3 doctors who form an LLC for their practice. If they didn't incorporate, then a malpractice suit against one of them would place the individual assets of the other two on the line as well as the assets of the business to satisfy any judgements that may arise if the suit is successful. Those doctors are the "shareholders" of the corporation. They are also employees of the corporation which they own in partnership with the others. The three doctors will each receive a salary from the corporation which is subject to the OASDI and HI taxes. As their corporation is taxed as an "S" Corp, at the end of the year any profits from the company are split 3 ways and added to their salaries as personal income. Their federal and state income taxes are figured on this aggregate amount. The more profit the company has made, the more money they will be splitting. If there is no profit, or the business loses money, then they do not get any additional income from the business.

The IRS looks at how much money they get as salary and how much they get as their share of the profit from the business. If they are reporting a salary from the company equal to what they would earn working a minimum wage job and $300K as profit from the business, the IRS is going to throw the Bovine Scat flag at them, accuse them of evading their taxes, assign its own figures to salary and disbursement, figure the tax they would have owed and then require them to pay the missing taxes along with an additional penalty assessment - along with telling them that if they don't pay the taxes and the penalty they may face felony tax evasion charges as a spoonful of sugar to help them swallow what the IRS has decided they owe.

These doctors, therefore, will report a salary at or above the maximum that is subject to the OASDI portion of the payroll tax to keep the IRS happy. They will, on that salary, not only pay the 5.65% total payroll tax that everyone else pays, they will also be paying the employers portion of those taxes out of their own pockets for a total tax rate of 13.3% on their own salaries from the company that they own. It used to be that self employed people payed a slightly higher rate than those employed by others, in addition to the employer's portion of the taxes for their employees. That changed in 1984 when the tax code was revised such that self employed people had to pay double what anyone else was paying in addition to matching the taxes paid by their employees. What the Obama and the Democrats are proposing is that these doctors have to pay payroll taxes on everything in excess of $250K - essentially redefining business profits as salary for the doctors - and then taking that extra money raised by the HI tax, which has no income ceiling like the OASDI taxes do, and using that money to pay for keeping the interest rate reduction on student loans. They will not credit that amount into the phantom HI "trust fund" before "borrowing" it from the "trust fund" for other purposes as has always been done in the past, they will simply appropriate the money raised by the HI tax for non-Medicare purposes. Kind of like a student taking money set aside to pay for tuition, housing and books and then appropriating that money to throw a kegger instead without any plans to eventually return that money to the fund from which it was appropriated so that the original purpose the fund was established for - tuition, books and housing - can be realized.

It is a difficult proposition to reach a $250K annual income without having employees to help you. I'm certain that a consultant or a specialized instructor of some kind can get there, but the doctors will have employees to assist them - employees which they are also responsible for paying the 7.65% employers share of the payroll tax on. That is money that is coming out of their pockets in addition to the 13.3% payroll tax coming out of their own pocket on the first $106K of their own salaries (1.45% for HI alone above that). Every $100K taken as personal income from business profits would thus save them $2900 in taxes (1.45% out of their pocket directly and 1.45% out of their pocket as the matching employer's portion) for HI (Medicare) over taking it as salary subject to HI taxation. It won't save them a penny in personal income taxes - and we already know that the top 5% of earners (which is where earning $250K a year places you) already pay 59% of all the income taxes and pay income taxes at a higher effective average rate - 20.7% - than the top 25% of earners do at 15.7% or the top 50% do at an effective average rate of 13.7%.

And oh, by the way, this isn't a "loophole", an unintentional result, in the tax code. It was specifically created by the tax code because in 1984 these self employed people got slapped with an tax rate hike on their own payroll taxes (in addition to a tax rate hike on the taxes they were responsible for matching as employers). Today those who are self employed pay an additional 6% above what they were paying in 1983 on themselves and an additional 1% more as their matching contribution for all of their employees. Bad enough you want to slap them with more taxes, but to slap these self employed people with the entire burden of keeping the interest rate on student loans low is what Democrats call fair? Really?