THE tax bill moving through Congress will tax some working pensioners more on their extra earnings than the rich.
That's what Johnathan Forman, a law professor at the University of Oklahoma, calculates. Enacting the Clinton proposal to tax 85 percent of Social Security benefits for single taxpayers with incomes over a $25,000 income floor and married couples with income over a $32,000 floor "would subject thousands of elderly workers to confiscatory tax rates," he told the Senate Finance Committee earlier this month. "Those high tax rates would discourage work and induce premature retirements."
Apparently Mr. Forman's calculation is right, as far as it goes. But one expert points out that pensioners have enormous tax advantages. The average pensioner with a $30,000 annual income pays on average one-fifth of the taxes of a working person with the same income. Moreover, only around one-fifth of Social Security beneficiaries work. Many of these will not be included among the 22 percent of Social Security pensioners with incomes over $25,000 for individuals or $32,000 for couples.
So Forman is talking about the effective "marginal" tax rate on extra dollars earned by a small minority of pensioners. Their overall effective federal tax rate might be one-fifth as high, the expert calculates.
Forman offers as his prime example a hypothetical "George," a single individual, aged 65, who receives $25,000 per year in taxable pension and investment income and $10,000 per year in Social Security benefits. George works during the Christmas rush at Macy's department store and earns an additional $1,000. That $1,000 would be subject to federal income tax at the 28 percent rate and Social Security taxes at the 7.65 percent rate. In addition, the Clinton proposal would cause another $850 of his Social S ecurity benefits to be taxed at the 28 percent rate. (Under current law it is 50 percent, or $500 in this case.) All in all, on his $1,000 of earnings George would have to pay the federal government $594.50 in taxes and keep just $405.50. That's an effective marginal tax rate of 59.45 percent. It is more than the 42.65 percent that the rich will have to pay under the Clinton plan when Social Security and income taxes are combined. State and local taxes are not included.
Another pensioner, aged 65 to 69, making enough to be hit by the Social Security retirement earnings test, could face a marginal tax rate of 69 percent on his earned income, Forman notes.
John Rother, legislative director of the American Association of Retired Persons, is more concerned about the fully-retired middle-income pensioner than the relatively small number in "George's" category. He figures that about 6 million of those over 65 will face an average hike of $1,000 in their annual taxes under the Clinton proposal. "This is quite substantial," he says. It would raise $24 billion over five years, the government estimates.
To help those in the $30,000- to $50,000-income bracket, the AARP is pushing for an increase in the threshold for taxation of Social Security benefits of $10,000. This, Mr. Rother says, would mean that most of those paying income tax in the 15 percent bracket would escape an increase in those taxes. This would cut the number of affected retirees to about 3 million. But because the better-off retirees would be subject to the 85 percent provision, the revenue gain would be reduced by one-third to about $16
billion."That is still a substantial contribution to deficit reduction," Rother says. He doesn't want to see the bill scuttled.
The AARP figured it would lose the battle for this change in the House. So the 33-million-member association will concentrate on the Senate when it resumes debate on the tax bill after the Memorial Day congressional recess. "We think we have a shot at winning in the Senate," Rother reckons.
Forman, more than 20 years away from retirement, has no qualms about taxing Social Security benefits, noting that most such pensioners did not contribute nearly enough Social Security taxes during their working years to pay for their pension benefits. He sees it as fair to eliminate the $25,000 and $32,000 floors and tax 85 percent of all Social Security benefits. This would reduce the marginal income tax rate to a maximum 28 percent. And it would raise $112.5 billion over five years.
Good economic theory, maybe. But it won't sing in Congress.