5/27/14 – Taxes Are Going Up, Inch by Inch

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on May 27, 2014 1:30:00 PM

and tagged Commentary, Politics and the Economy

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I ended last week on a note of shared sacrifice. This week, let’s talk about some of the forms that sacrifice will likely take.

IRS rules on employee benefits

Per a recent IRS announcement, when companies give employees cash to pay for benefits—for example, if a company were to stop providing health insurance and instead give workers a cash grant to purchase their own insurance—that payment is taxable. In other words, if the company pays for your insurance, it’s tax-free. If the company gives you money to buy insurance, it’s taxable.

In effect, this makes a large and growing chunk of the employer-provided benefit base taxable. The result: higher costs for employers and employees, but higher revenue for the U.S. Treasury.

Besides raising revenue, the idea behind this is to prevent employers from dumping their employees onto the public health care exchange system—which seems a bit strange, after all the hype about the benefits thereof. Be that as it may, the IRS has determined, presumably with political approval, that the government needs the money enough to offset any other benefits.

Social security taxes creep up

Up to 85 percent of social security payments are now taxable, depending on your other income. This is a stealth way of means testing payments: the higher your income, the less of the benefits you actually get to keep. Basically a benefit cut, it’s proven an effective way for politicians to avoid being electrocuted by the third rail while still reducing benefits.

The next step is an increase in the taxable wage base for social security tax. (This hasn’t happened yet, but it has been studied.) For 2014, the limit is $117,000, up from $113,700 in 2013, an increase of 2.9 percent. For comparison, the annual increase in the Consumer Price Index for the past 12 months has been less than 2 percent, so the taxable wage base is increasing in real terms. Workers are getting hit on one end and will get hit on the other as well.

And then there’s the proposal to change the index used to calculate increases in benefits, with the result of cutting benefits over time. This proposal hasn’t passed yet, but it keeps coming back again and again.

What does this mean going forward?

Of course, this is just at the federal level. States have been forced by their budget crises to cut both spending and benefits, while raising taxes and fees.

I’ve pointed out that the U.S. fiscal situation has improved dramatically—and it has—but the improvement is temporary. Over the next couple of weeks, we’ll take a more detailed look at what that will mean going forward. Some of the answers aren’t pretty.

Upcoming Appearances

Tune in to Bloomberg Radio's Bloomberg Businessweek on Friday, February 28, at 3:45 P.M. ET to hear Brad talk about the market. Stream the show live at https://www.bloombergradio.com/, listen through SiriusXM 119, or download Bloomberg's app, Bloomberg Radio+.

Tune into Yahoo Finance's The Final Round on Thursday, March 12, between 2:50 and 4:00 P.M. ET to hear Brad talk about the market. Exact interview time will be updated once confirmed. Watch at finance.yahoo.com

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