Robbing Peter to Pay Paul

By SAM URETSKY

The official definition of poverty dates from 1960 when Lyndon Johnson created his War on Poverty. The starting point was an estimated market basket representing the cost of maintaining a healthful diet for a family of four. This was tripled to represent additional costs such as rent, medical care, transportation and other necessities. Each year the number was adjusted to account for inflation. Based in the 2017 Census Bureau calculations, the official poverty rate was 12.3%, meaning 39.7 million Americans lived at or below the poverty line.

The Supplemental Measurement of Poverty is considerably more involved. It includes adjustments for cost of living in different states, as well as adjustments for programs which might increase or decrease the poverty status of an individual or family, such as safety net programs and Social Security, According to supplemental poverty measure, the poverty rate was 13.9%.

While the United States lags behind many other nations in maintaining a social safety net, the programs it has are at least well intentioned. Social Security is probably the most important, along with SNAP (Supplemental Nutrition Assistance Program), Medicare and Medicaid. Other programs include the Employee Retirement Income Security Act of 1974 (ERISA, 401k, 403b) and the federal student loan programs. Many of these programs help those who are old, or sick, or frequently both.

The Social Security Act of 1935 created Social Security, financed through payroll taxes. The 401(k) and 403(b) plans were included in the Revenue Act of 1978 and require contributions by the employee. The money saved is pre-tax, allowing it to accrue more interest over time.

There is more money sitting in the Social Security trust fund and 401(k)s than politicians can resist, and so Sen. Rand Paul (R-Ky.) introduced S. 2962, the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act. He claims this is a “a pro-taxpayer plan to help Americans more quickly and easily pay off their student loan debt and save more money for retirement.” The best thing about it is the acronym. His plan would allow people to withdraw money from a retirement account without penalty, and use it to pay down student loans.

In a "Fox & Friends" interview, Paul said the bill would allow for not only using money that's already in an IRA, but specifically putting money in there. “So, let's say you're already paying your student loans off -- you're paying them with after-tax dollars. This would allow you to take that money, put it in the 401(k), and pay with pre-tax dollars,"

The trouble with the plan is that it leaves out ifs and ands. Dr. Paul explains, “The plan would enable two parents and a child, for example, to put over $15,000 in pre-tax funds in one year toward tuition or loan repayment if each set aside the maximum. Currently, Americans can only pay for their student loans with after-tax money, placing an unnecessary constraint on their budget.” This is a classic example of borrowing from Peter – and the problem only kicks in when the parents or student reach retirement age, and the money isn’t in the 401(k).

In addition to Sen. Paul’s plan, President Trump signed an executive order deferring collection of payroll taxes. The order claims “This modest, targeted action will put money directly in the pockets of American workers and generate additional incentives for work and employment, right when the money is needed most.” *New York Times* columnist Paul Krugman called it “the hydroxychloroquine of economic policy.” There are many things wrong with President Trump’s notion, not the least being that it does nothing for the unemployed. Also, payroll taxes are used to fund Social Security and Medicare, both of which need the money. So far Congress has dealt with the shortfall in Social Security collections by raising the retirement age – kicking the can down the road.

While the progressive plan for a wealth tax faces strong opposition, a proposal to eliminate the “step-up in basis” for capital gains” is more popular. Leon Cooperman wrote in *Financial Times*, “Some wealthy business owners largely avoid paying income taxes by taking very little out of their companies in the form of salary or dividends and sitting on massive unrealized gains in their stock that can then be bequeathed to charity with no tax ever being paid.” The step up costs the government between $30 and $60 billion a year, and almost all the benefit goes to the wealthiest individuals. CNBC described it as “The wealth tax that Democrats and Republican billionaires both support.”

Sam Uretsky is a writer and pharmacist living in Louisville, Ky. Email sdu01@outlook.com.

From The Progressive Populist, October 15, 2020

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