Many policymakers have convinced the public that tax increases will shore up the federal budget deficit and affect only the wealthy.  Of course, the question is, who are the wealthy?  Let’s take a look:

• Capital gains taxes:  If you are currently in the bottom two tax brackets, you pay 0 percent on capital gains.  Next year, you will pay 10 percent.  (Most income earners in the bottom two tax brackets don’t think of themselves as wealthy.)
• Dividends taxes:  Anybody of any income level that has a savings account or mutual fund earns interest or dividends. Qualified dividends are currently taxed at the same low rates as capital gains.  Starting in 2013, they will be taxed at the ordinary income tax rate, ranging from 15 percent to 39.6 percent.  (Most people with ordinary savings accounts or a little money put away in mutual funds do not consider themselves “wealthy.”)
• Federal income taxes:  Current marginal income tax rates range from 10 percent to 35 percent.  Well, forget that in 2013.  Rates will revert back to pre-2001 levels, ranging from 15 percent to 39.6 percent.  Funny, most taxpayers in the 15 percent bracket don’t consider themselves “wealthy.”  By the way, the marriage penalty returns too.  (Marriage is hard enough without the tax penalties, and most married couples trying to make ends meet and save for their kids’ college expenses don’t consider themselves “wealthy.”)
• Estate Tax:  Don’t forget about the estate tax.  Estates are currently entitled to a $5 million exemption with a top marginal tax rate of 35 percent.  It’s time to start giving it away, since 2013 will bring back a much lower exemption of $1 million and a top marginal rate of 55 percent. (Rural landowners in Mississippi may not consider themselves “wealthy.”)
• New Medicare Taxes:  For the filthy rich, let’s not forget the new Medicare taxes on unearned income.  Couples earning more than $250,000 a year will be subject to this tax.  Of course, there is much debate on whether $250,000 a year really makes a household rich.  Houston? Maybe.  Manhattan? Not so much.

The bottom line is, if all tax cuts expire, then we are ALL considered “wealthy.”  Workers of all income levels will share the pain. 

As I mentioned in a previous blog post, this does rate only counts people who are actively looking for work.  It does not include those who have become discouraged and given up, or those who are prefer a full-time job but are working part-time.  Add in these folks and the rate remains stubbornly high at 14.5 percent.  Also, a smaller percent of the working-age population is actually working.  The labor force participation rate is now at 63.6 percent, the lowest it has been since December 1981.  (See figure below)

Labor Force Participation Rate, 1980-2012, Bureau of Labor Statistics

An even less talked about statistic is labor productivity, as measured by output per hour.  Overall output increased 2.7 percent, but hours worked increased even more at 3.1 percent.  This is in stark contrast to the trend from the first quarter 2011 to first quarter 2012, where output increased more than hours worked.  What is so important about labor producitivity?  A more productive workforce means higher wages.  But if labor productivity trends downward, this, combined with a slack labor market, will put downward pressure on wages.  Recovery will be an uphill climb.

The reason for this nonsensical nanny-ism? Safety. Children employed in agricultural jobs are more likely to be injured than those in non-agricultural jobs, but according to a Department of Agriculture study, the rate of injury per 1,000 farms fell 40 percent over eight years.  Also, according to the Centers for Disease Control, while unintentional injuries are the leading cause of death among children ages 1 to 19, the majority of these injuries are caused by auto or accidents or pedestrian and bicycle-related accidents. 

So which is safer – selling a cow at a livestock auction or driving down a busy urban highway to get to a job at a fast food restaurant?  Evidently, as the DOL sees it, the livestock auction is fraught with danger…the I-405 interchange in Los Angeles?  Not so much.

Many workers, taxpayers and savers treat the Internal Revenue Service as this trustworthy “friend.”  They over-withhold taxes from their earning in order to receive a generous refund the following year.  This is the only systematic way that some workers save.  After all, the money is out of sight, out of mind.  Surveys show that many will take their generous refund and pay down debt or put money into savings.  Only a few spend it on something lavish.  But is this the best way to save?  Of course not. 

While it seems disciplined, it robs the taxpayer of a better return.  Over withholding means that the federal government gets an interest-free loan from YOU:

• Contributing $200 a month in overwithholding for 12 months yields a tax refund of $2,400. (The government thanks you for this, by the way).
• But contributing $200 a month to an individual retirement account for 12 months yields:
• $2,458 at a 5 percent rate of return (compounded monthly).
• $2,519 at a 10 percent rate of return (compounded monthly).
• Additionally, if the contributions are going into a tax-deferred retirement account, you could save up to $600 in tax payments.

A little self-control goes a long way with a retirement account, or you can continue to bank at the I.R.S.  The choice is yours.

Women have made great strides over the past several decades, equaling and even outpacing men in the areas of high school graduation rates, attainment of bachelors’ degrees and the labor force participation rate.  President Obama has stated that he wants to help working women, but ironically, many of the things that would really help working women (actually, all women, no matter what endeavor they choose and yes, raising children is full-time work) have mere or no mention in his re-election campaign.   Let’s take a look at the issues that are much less talked about:

Worried about becoming disabled?  Women are disadvantaged by a bizarre Social Security insurance system that punishes them for exiting and re-entering the labor force (see the NCPA publication).  Women are more likely to take years off from work to raise children.  When they re-enter the workforce they may or may not qualify for disability in the Social Security system, even if they accrued SS benefits in previous working years.

Concerned about having enough for your retirement?  Women are more likely to work part-time or for a firm that does not offer a 401(k) plan.  Sure, they have the option of saving into a traditional or Roth IRA account, regardless of their employment status.  But the annual contribution limit on these accounts is $5,000 in 2012 ($6,000 for people age 50 and over).  Compare this to the annual contribution limit for an employer-sponsored 401(k) plan of $17,000 (plus an additional $5,500 for those age 50 and over).  Thus, many women are limited in how much they can sock away for retirement.

Would you like to start your own business?  Good luck. It’s not easy. Women are largely responsible for the growth in small businesses that provide services.

• Women comprise about three-fourths of all salon owners and employees.  Most of them are independent operators who rent their own space.
• Women own or work in 95 percent of child care facilities.
• Almost two-thirds of home-based businesses are owned by women.  Women are more likely to produce or sell a tangible good out of their home, (such as crafts or food products, or personal care items), while men are more likely to provide a clerical service.

While onerous and burdensome regulations and requirements make it tough for both male and female business owners to operate, women are especially hit hard.  Nail technicians, home bakers, child care providers, and many other female-dominant self-employment industries must comply with myriads of costly regulations, licensing requirements and so forth.  Most of these are at the state and local level, of course, but it bares mentioning that the “war on women” takes place at all levels of government.

Think you’re not earning enough?  You may be paying a higher share of your income in taxes than your spouse if you are a secondary wage earner.  Your income on a “married filing jointly” tax return may bump you into a higher marginal tax bracket than a single worker earning the same amount.  It makes no difference if your annual income is $15,000 or $50,000.  Your marginal taxes on that amount could be as high as 35 percent.

Many things can be done to make the wonderful world of economic activity gender-neutral. And they do not involve more layers of bureaucracy.   (See the NCPA publication for more on these issues:  Leaving Women Behind: Modern Families, Outdated Laws.)

• 35 percent of 50 to 66 year olds expect to retire after age 66.
• Another 23 percent expect to work into their 70s.
• A staggering 40 percent of middle-income boomers (those earning between $30,000 and $75,000) have stopped contributing to their 401(k) or individual retirement account.

These are sobering statistics.  But there may be a silver lining for future generations.  MSN Money recently reported that today’s 20-some year olds (Generation Y, as they are called), have seen the struggles of their baby boomer parents and do not wish to experience the same fate.  The good news is: they want to prepare for retirement; the bad news is: they are not sure how.

If there was ever a time in history to mandate finance classes in high school and/or college, the time is now.  A few lessons in finance do not have to be at the detail of graduate-level international finance, accounting or banking.  But it would be helpful for today’s youngsters to know how banks really work (and not what they read on an “Occupy” protest sign), how financial markets work, and the different options available for saving and investing.  Most of all, young savers need to know the truth about compound interest (yes, it works beautifully when you save early and often), buying stocks and mutual funds (anybody can buy, not just the wealthy) and Social Security (it will likely be there, but you will be disappointed with its rate of return compared to what you could invest yourself). 

Otherwise, the retirement plans of Generation Y will be lost to years of apathy and financial ignorance.

On a positive note:  Subway’s “sandwich artists,” as they are often referred, are probably making a better living than the city’s “starving artists.” Of course the downside to all of this is the minimum wage hardly does much good at lifting anybody out of poverty if the price of food has to increase in order to absorb the cost.

• Increasing the Medicare eligibility age to 67.
• No changes for seniors currently on Medicare.
• Giving future Medicare recipients an alternative to the traditional program by allowing purchase of private insurance on the market with premium supports.

What is peculiar about the vociferous attacks on Rep. Ryan is that the left has been strangely silent about the Obama administration’s own planned Medicare cuts, while Ryan is being portrayed as the evil henchman trying to undo Medicare.  Consider the Obama administration’s plans on chipping away at Medicare “as we know it.”  Plans from his 2013 budget include:

• Increasing Part B and D deductibles for current and new Medicare enrollees beginning 2017.
• Imposing home health care copayments for new beneficiaries beginning 2018.
• Introducing surcharges on Part B premiums for first dollar coverage beginning in 2017.
• Strengthening the Independent Payment Advisory Board (IPAB) to reduce long-term drivers of cost growth (this is the rationing board that will decide what treatments are cost-effective and who gets what).

Despite the premium increases and surcharges to seniors in Obama’s budget, it does not take the prize for any deficit reduction.  Consider:

• Ryan’s budget will reduce federal spending by $5.2 trillion more over 10 years than the Obama administration’s.
• Ryan’s budget will reduce the growth of the deficit by about $3.3 trillion more over 10 years than the Obama administration’s.
• Ryan’s budget will reduce the growth in debt held by the public to 61 percent of GDP in 2023, compared to the Obama administration’s CBO analysis of 96 percent of GDP.

So it appears that both budgets will implement changes to Medicare, but apparently one set of changes is better than the other as media reports would have it.   Future Medicare recipients should be jumping for joy over premium increases and reductions in physician payments and limits to services, while they should be filled with doom and gloom over the idea of using premium support payments from the government to pick the type of plan they want.  Readers, what is your take on this?