Today is the deadline for filing tax returns. For many independent practitioners and small business owners, today is the day to post the deposit extension and pay the money that is in the bank account that day.
Most people are only familiar with income taxes and sales taxes. But taxes come in other forms. Politicians don’t call it a tax or realize it is a tax. This does not mean that every payment to the government is a tax, such as paying an entrance fee to a public park or a golf course.
Today, let’s look at two payments that aren’t called taxes but look like taxes and have the effect of taxes: health insurance and student loan interest.
Health insurance
As of 2014, the Affordable Care Act (or “Obamacare”) required Americans to purchase health insurance. If they don’t, they have to pay a “shared liability” penalty to the IRS (well… not really). For those with low to moderate incomes who meet certain criteria, the government offers a tax credit to fully or partially subsidize the cost.
The basic economic theory of Obamacare is that it will reduce health care costs for consumers because insurance companies will be motivated to lower monthly premiums and deductibles to gain market share. But that hasn’t happened, at least not yet. Previous insurance coverage was canceled and premiums increased. When people went into an uproar, insurance companies blamed everyone but themselves: government mandates, the recession, divided public opinion and uncertainty over whether Obamacare will be repealed or survive. judicial review. Young people were the most affected by the largest increases in insurance premiums. This was the goal because their participation is necessary to subsidize the elderly and those with pre-existing conditions.
Young people will find it difficult to pay for their health insurance on their own. Most receive non-Biglaw entry salaries and must pay living expenses and student loans. This leaves them with little disposable income to pay for health insurance. Others are unemployed, underemployed or, worst of all, working for a cheap and sleazy solo practitioner. These people will have to rely on government grants and tax credits or go without insurance and risk paying the penalty tax.
Those who can afford to pay will resent being forced to pay for something they don’t need. When their bounty money is used to subsidize others, even if the goals are for the greater good, it’s like paying a secret tax.
Interest on student loans
Until recently, I was under the impression that the government offered student loans to help people of modest means get an education. Although not perfect, it is meant to be a win-win policy. Graduates will increase their earning potential and chances for a better quality of life. The government will get its return on investment primarily through higher income tax payments. In addition, there are other positive effects on society, such as reduced crime and violence.
Federal student loans have scary legal provisions to maximize the chances of being repaid as agreed or as soon as possible. They are almost non-dischargeable in the event of bankruptcy. Federal preemption supersedes all state consumer protection laws favoring debtors. Social Security payments and tax refunds can be intercepted. The government can also take collection action without having to go through the usual legal procedures of private creditors.
Since student loans serve broad economic and political purposes with legal protections and collection powers that would make a mob boss jealous, federal interest rates on student loans should be lower than those on other loans. But they are not. Since 2013, federal student loan interest rates have been tied to market rates. As of this writing, mortgage interest rates are lower than student loan interest rates.
Although the numbers vary, the federal government will get a pretty penny from interest income on student loans. The Congressional Budget Office projects that the government will receive about $127 billion over the next ten years, mostly from graduate and professional students. The Government Accounting Office projects that the government will generate $66 billion in profits on the $454 billion in loans it issued between 2007 and 2012. Although the accounting methods used to arrive at these figures are questionable, the government has l intention to make profits even taking potential flaws into consideration.
Few would argue that reasonable interest should be paid when a loan is disbursed. But the federal government should charge lower interest rates for student loans and instead rely on future income taxes for the return on investment. Otherwise, interest income acts as an alternative source of tax revenue.
These secret taxes will create a disincentive to work and earn money
I suspect most recent graduates will apply for alternative student loan repayment programs such as IBR, PAYE, and PSLF to lower their monthly payments and start the countdown to loan forgiveness.
Some will be able to repay their loans. But others will pay little or nothing for years and see the interest accrue to astronomical levels. At some point, it will be in their overall interest to “PAY” their loans instead. If it comes down to it, there’s little incentive to make a lot of money.
Think about it. Earning more money means you will lose tax benefits and be placed in a higher tax bracket. You also lose or limit health care subsidies from Obamacare, which could be a deal breaker if you have kids. Finally, you’ll have to make higher student loan payments, most of which will apply to any accrued interest you didn’t pay in the beginning. Now, I don’t think people will deliberately live on poverty-level income just to avoid paying off a student loan. But it can make people think twice about taking higher paying jobs, especially if it requires more time in the office or if they are in the final years of IBR/PAYE before the loans are canceled . This means that the government loses potential tax revenue and student loan interest income.
Speaking of loan forgiveness, some people worry that when the debt is forgiven, the amount will be included in taxable income, creating a huge tax bill for some. While there are ways to deal with debt income cancellation, I wouldn’t worry too much about that. When debt affects a large enough group of people, Congress will act. Eight years ago, when the housing market collapsed on an epic scale, many mortgage debts were written off and former homeowners faced a potentially huge write-off of the income tax bill from the debt. In response, the Mortgage Forgiveness Debt Relief Act was passed, which allowed taxpayers to exclude income from debt forgiveness on their foreclosed homes. Additionally, unless the current student loan system changes drastically over the next few years, a large percentage of voters will be IBR/PAYE lifers. These people will not hesitate to vote for a party operating on a student loan forgiveness ticket.
Except for the very wealthy, student loans and health insurance are secret taxes imposed on young people. Many will barely be able to afford both and some will rely on alternative repayment schemes, putting them further into debt. At some point, it wouldn’t make economic sense to earn more than a certain amount of money, because most of the extra income would go to taxes, student loan interest, and higher health insurance premiums. raised to subsidize others. Not only will this create moral hazard, but it is also bad government fiscal policy.
Shannon Achimalbe was a former solo practitioner for five years before deciding to sell herself and get back on the corporate ladder. Shannon can be reached at sachimalbe@excite.com.
