Pay as You Go Taxes Term Paper

Download this Term Paper in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from Term Paper:

The people who opt for early retirement stop staring contribution to pension system where as they start getting the benefits of pension system. (Prieto, 1997)

The traditional unfunded social security system is facing lot of problems in the United States and other developing countries with the increasing life expectancy of the people. The cost of providing any level of service is directly linked to the percentage of people who are employed against people who have already retired and enjoying pension in a pay-as-you-go system. The problem is continuing and increasing with people's move towards early retirement which is encouraged in many countries social security system. Even in the event of retirement being stabilized, the steep increase in the ratio of the aged against that of working age is contributing to the substantial raise in the cost of pay-as-you-go system. The United States estimators, who work for social security system, forecast an increase from current 12% of covered payroll taxes to 17% for cost of providing the benefits covered under the social security system. This is estimated to be 20% by 2070. (Campbell; Feldstein, 2001)

In pay-as-you-go system, taxpayers pay high cost to obtain any given benefit which demonstrates the comparative low rate of return the contributors earn on taxes paid by them in an unfunded system. Only the growth in the base tax rate is the implied rate of return on taxes payers' contribution in an unfunded system as shown in 1958 by Paul Samuelson in one of his famous papers. In U.S. system the tax is based on the cash wages which is the mode of finance and the future total growth in cash wages is the factor which determines the rate of return. The assumption that the future reduction in population growth rate will limit the implied real rate of return to less than 2% per annum is the only factor based on which the social security estimators estimate the future required tax rate increase. In spite of U.S. social security system being a pay-as-you-go module, where in the every current year, the total tax collection is used for paying benefits of retirees who are already enjoying retirement benefits; there is still an investment in government bonds in the form of a trust fund. (Campbell; Feldstein, 2001)

The overall rate of return the contributors get on the taxes they contribute and the funds available to pay the annual benefits is affected by the rate of return on the trust fund invested in government bonds. But since these interests are just a transfer within two government accounts this has no substantial economic contribution, though they can contribute to raise the return on payroll tax payment at the expense of income tax payments. Overall rate of return that participants get on their social taxes are very little influenced by the overall return on trust fund since the trust fund is very small, comprising just two years worth of benefits and not even up to 10% of current total obligations under the social security system. The actual rate of return is determined by the growth and in effect the system effectively operates on a pay-as-you-go basis. (Campbell; Feldstein, 2001)

The pay-as-you-go system costs are increasing and there are three simple ways to control these increase in costs under this system which are reduction in benefits, increase in taxes and pre-funding. These methods can be used together or individually to control the increasing costs under pay-as-you-go system. Some experts are of the opinion that by cutting the future benefits, the raise in future tax can be controlled. The changes should be to the existing structure of social security benefits with a move towards more fundamental shifts from the existing structure of social security system to a uniform benefit structure such as increase in retirement age and modification to the post retirement inflation adjustment. Some other experts are of the view to continue with the same benefit by increasing the tax rate significantly in the future. (Campbell; Feldstein, 2001)

However since both these measures of large tax rate increase or major reduction in benefits does not go well with politicians, the idea of pre-funding future benefits by keeping aside resources now and investing those set aside funds together or on individual accounts is not encouraged. The common feature of pre-funding is that of increase in national saving resulting in increase in national capital stock though the pre-funding proposals have many variations. Future retirement consumptions are financed by the increased national capital stock resulted from additional national income which makes possible to maintain benefit without raising taxes. However the pre-funding concept was not accepted well by people since long because of the problem of transition generation ending up with paying twice. The transition generation has to pay the pay-as-you-go taxes to finance the benefit of those who have already retired and enjoying retirement benefits but at the same time saving for their own retirement. With the current rate of over 12% on wage income, this method will be a double burden with the transition generation ending up with paying above 24% tax on wage income. (Campbell; Feldstein, 2001)

Considering this the concept of pre-funding is not accepted since it is unfair on transitional generation and/or politically impossible to introduce. Actually the additional cost on transitional generation is smaller than that of what is highlighted by the critics since with the pay-as-you-go system; the implicit rate of interest is much lesser than the rate of interest on real saving. The actual savings required to finance any future benefits is lesser than the related pay-as-you-go tax rate. The extent of pay-as-you-go benefits can be gradually reduced because of retirees receiving some benefits from the funded part of system during the transition phase. Despite the increased aging population, without increasing the combined amounts of pay-as-you-go taxes and the compulsory savings by 2% of wage income, that is from the current 12.4% payroll taxes to a maximum of 14.4% and also without any changes in the current or future benefits a transition from pay-as-you-go system to a funded defined contribution system could be achieved as shown by Feldstein and Samwick. (Campbell; Feldstein, 2001)

The sum of OASI trust fund receipts i.e. The interest on the trust fund balance and the revenue transfer to trust fund on the basis of taxing the benefits of high income retirees and the total of OASI portion of the payroll tax is projected to cross the OASI benefits only by 2021 under the current law. Beyond 2021, public borrowings through sale of government bonds held under social security trust fund should temporarily help to continue payment of benefits. Pay-as-you-go benefits have to be cut or the tax rates have to be raised once the trust fund bonds gets exhausted in 2040. Keeping the trust fund always positive in the future without increasing the taxes, with the projected mixture of PRA annuities and the pay-as-you-go benefits for each group of retirees exceeding the pay-as-you-go benefits, that are projected in the current law is one of the main advantage of a mixed system. (Poterba, 2002)

To make this possible, the pay-as-you-go part of aggregate retirement benefits should be reduced from the extent projected in current law to the extent that can be funded but that are nevertheless high enough for combined benefits to exceed pay-as-you-go benefits projected in current law. There are many ways that a pay-as-you-go benefits can be reduced to equivalent to the extent projected in current law. Simple methods can reduce, pay-as-you-go benefits by 0.3% for each year an individual participates in a PRA system during the first five years of the program from 2003 to 2007 and 0.6% for each year in the next six years from 2008 to 2013 and 0.9% per year after 2014. (Poterba, 2002)

As far as taxes are concerned, there is no need for employees to worry much since most or all of the taxes related to their paycheck is withheld and directly paid to the IRS and state tax department by the employer. The employer does all the relevant calculations and the employee's obligation is just to file the annual tax returns with the IRS and state tax departments. But when an employees starts his own business, the tax life changes dramatically where there won't be any employer to calculate, withhold and pay taxes, instead the self-employed have to do on his own. This requires period tax calculation and filing with the IRS and state tax department which an employee may not be used to while he was an employee and not self-employed. (Fishman, 2006)

To file periodic tax calculation and filing with the IRS and state tax department, one has to maintain records of actual income and expenditure. Also the process of tax calculation and filing of tax returns gets complicated each year. When one becomes self-employed, the federal government is the one which has the biggest bite in taxes paid by…[continue]

Cite This Term Paper:

"Pay As You Go Taxes" (2007, December 13) Retrieved December 10, 2016, from http://www.paperdue.com/essay/pay-as-you-go-taxes-33297

"Pay As You Go Taxes" 13 December 2007. Web.10 December. 2016. <http://www.paperdue.com/essay/pay-as-you-go-taxes-33297>

"Pay As You Go Taxes", 13 December 2007, Accessed.10 December. 2016, http://www.paperdue.com/essay/pay-as-you-go-taxes-33297

Other Documents Pertaining To This Topic

  • Tax Advise Table of Contents Optional Louise

    Tax Advise Table of Contents (optional) Louise is aged 50 and single. Since 1994 she has carried on a retail business as a sole trader. Her trading profits as adjusted for tax purposes and after capital allowances, for the year ended 30th April 2009 were $150,000. The business is carried out from a number of valuable retail outlets, all of which are owned by Louise personally. These units have been acquired over a

  • Pay Back Period Is the Length of

    pay back period" is the length of time that is required to cover the cost of an investment. I would use this in order to make a good financial decision. The calculation that I would do is as follows: "http://i.investopedia.com/inv/dictionary/terms/paybackperiod.gif" d? For instance, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000 / $20,000, or, in other words, $20 per 5 years. The better

  • Business Laws the Most Common

    This most commonly occurs when the item is purchased from a business in another state and shipped to the user's state (most states do not impose sales taxes on products that are shipped to another state). Zoning Laws Zoning laws, which typically include local ordinances that regulate: parking, advertising and signage, use of the land surrounding the business and even the type of business that is allowed to be conduct in

  • Tax Case Study

    Tax Case Study Requirement Tax code section 721 "provides that no gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership." Both parties agreed to contribute personal assets to the partnership, and they, nor the LLC, suffers any tax consequences as a result of the conversion of the

  • Tax Revenues the Author of This Report

    Tax Revenues The author of this report is tasked with describing how to compensate and direct the tax collectors of Elbonia to increase tax collections in a way that is effective and compensates the tax collectors commensurate with the work they are performing and the dollars that they are bringing in. The author of this report will offer a few options that will probably help a lot and a lot of

  • Tax the Benefit Principle of

    Medicare, in addition to covering the elderly, is made available to lower-income individuals, and other direct assistance programs also go to these individuals. Combined with other goods and services such as road maintenance and other infrastructure, national security, etc., which are all consumed essentially evenly (again, in one perspective), this would mean that those at the lowest end of the economic spectrum consume the most and should pay the

  • Small Business Taxes Small Business

    The same goes for business-related periodicals and magazines. (Dratch 2008, p. 2) Mileage: Once again, this involves careful bookkeeping, but the deductions can add up. Keep a dated log of all business-related mileage, tolls, and parking costs. According to the IRS website, the 2009 IRS deduction rate for business-related mileage was 55 cents per mile. Travel, Entertainment, and Meals: For the small business, 100% of travel and entertainment expenses are deductible,


Read Full Term Paper
Copyright 2016 . All Rights Reserved