Category Archives: Taxes

She Makes a Good Point

I’ve liked Elizabeth Warren since I saw her in a documentary about the credit card industry.  She makes a lot of sense a lot of the time.  If you watch this short clip I think you’ll find what she says to make a lot of sense, but if you’re like me you’ll recognize that in the end she leaves one large question unanswered: “How big a chunk should the successful factory owner pay forward?”  Watch the video and you’ll know what I’m referring to.

Like I said I don’t think anyone, well at least anyone who’s semi-adult and reasonable, will dispute that the successful factory owner didn’t get that way on his own and benefited from the many resources provided by our society and that the factory owner needs to “pay it forward.” I do think, however, that many semi-adult and reasonable people can and will disagree quite vehemently as to HOW MUCH the factory owner should pay forward.

The Most Patriotic Thing You Can Do

Mark Cuban says the most patriotic thing you can do is "Bust your ass and get rich." More:

I’m not against government involvement in times of need. I am for recognizing that  big public companies will  continue to cut jobs in an effort to prop up stock prices, which in turn stimulates the need for more government involvement.  Every cut job by the big companies extracts a cost on the American people in one way or another.

Entrepreneurs are needed to create and grow companies to absorb those people in new jobs. If entrepreneurs don’t create those jobs, the government ends up having to spend more money to help them one way or another…

In these times of “The Great Recession” we shouldn’t be trying to shift the benefits of wealth behind some curtain. We should be celebrating and encouraging people to make as much money as they can. Profits equal tax money. While some people might find it distasteful to pay taxes. I don’t. I find it Patriotic.

I’m not saying that the government’s use of tax money is the most efficient use of our hard-earned capital. It obviously is not. In a perfect world, there would be a better option. We don’t live in a perfect world. We don’t live in a perfect time. We live in a time where the government plays a big role in an effort to help lead us out this Great Recession. That’s reality.

So I will repeat my point. Get out there and make a boatload of money. Enjoy the shit out your money. Pay your taxes.

It’s the most Patriotic thing you can do.

Per Capita Tax Revenue Down, Down, Down – Who Cares?

When I was working in direct marketing we would spend weeks writing the sales copy for our letters and sales brochures. One thing we always looked at was how we would describe any discount we might be offering.  Say we were offering a 20% discount on a $1,000 item, we'd try and figure out which would have more impact, writing "You can save $200 by ordering right now" or "You can save 20% by ordering right now."  We didn't have a hard and fast rule, but generally the lower the dollar amount the more likely we were to use a percentage instead.  Saying you saved someone 30% is a whole lot better than saying you saved them $3 on a $10 purchase.

That memory hit me when I read this post on Tax.com by my go-to guy on taxes, David Cay Johnston:

We take you now to the official data for important news. Federal tax revenues in 2010 were much smaller than in 2000. Total individual income tax receipts fell 30 percent in real terms. Because the population kept growing, income taxes per capita plummeted.

Individual income taxes came to just $2,900 per capita in 2010, down 36 percent from more than $4,500 in 2000. Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010.

Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

Payroll taxes increased slightly overall, but slipped per capita because the nation's population grew five times faster than the number of people with any work. The average wage also declined slightly.

You read it here first. Lowered tax rates did not result in increased tax revenues as promised by politician after pundit after professional economist. And even though this harsh truth has been obvious from the official data for some time, the same politicians and pundits keep prevaricating. Some of them even say it is irrelevant that as a share of GDP, income tax revenues are at their lowest level since 1951, when Harry S. Truman was president.

So to compare this to my direct marketing work, in this case we have one side of the political aisle saying "Hey we cut taxes AND raised revenue" while on the other side they're saying "Whoa, we have more revenue only because we have more people and those people are paying a LOT less in taxes than they did 10 years ago."  My reaction?  So what!?

I know sometimes I sound like a broken record, but I really wish we could start arguing about the right things.  Instead of worrying about whether or not lower tax rates generate more tax revenue, let's worry about what we do with that tax revenue.  In other words it's totally irrelevant to me that the per capita tax rate is lower; what's relevant is that we're taking in less money per person BUT we haven't reduced how much we're spending on each person.  As I wrote in a previous post, we get caught up arguing about issues that really are irrelevant in and of themselves and lose sight of the big picture. In this particular case I think it's disingenuous of any leader to focus on how much our tax receipts have grown in the gross sense or shrunk in the per capita sense, without putting it into context by comparing it to a growth in expenses, both gross and per capita.  

To be fair, as Johnston points out later in his post, it's not that politicians aren't also talking about government spending – he highlights several conservative leaders saying that we don't have a revenue problem, we have a spending problem – it's just that we continually get bombarded with arguments like this one about tax revenues that really don't make a hill of beans of difference in and of themselves. Johnston concludes his post by saying it is a revenue problem, but between those two points he also writes that there's a need to figure out what we need our government to do and how we should pay for it. I'm going to disagree with both sides and say what I think is pretty obvious: it's a revenue and a spending problem. 

So if you made me king for a day what would I do? I'd mandate that we all agree that the real questions that need to be answered are:

  • What's the proper scope of government services for our society? Should it just be the basics like fire, public safety, defense of our borders, etc. or should it include healthcare, retirement, etc? 
  • Once we determine the proper scope of our government how should we finance it? Flat tax of 10% on everyone but those living under the poverty line and with zero deductions, a progressive tax structure, or a VAT?

That's it. Simple, huh?  Yeah and if you believe that I have a bridge in Brooklyn I'll sell you.  Honestly I can't think of a tougher nut to crack than determining the role of government in our society, and how much that should cost us.  Everyone has their own ideas, and everyone has their government program that they think is essential.  For every person who thinks we simply can't live without the FDA there's probably someone who thinks the FDA is just another example of over-regulation.  So no it's not a simple problem, but getting distracted by silly arguments over how we measure revenue only makes it worse.

Why It Irks Me To Hear the Wealthy Complain About Tax Rates

I get really tired of hearing intelligent people harp on the taxes paid by the wealthy.  Why?  Because they usually use this argument: "The wealthiest 1% of Americans pay 40% of all the taxes." They're right, but guess what? The wealthiest 1% also have seen their adjusted gross income increase at a much greater rate than the bottom 99%.  Oh, and the wealthiest 400 housholds in the US?  Their effective tax rate has plummeted from 30% in 1995 to 16.6% in 2007.  

How do the wealthiest peoples' income tax rates compare to the Average Joe?  Check out this story comparing the income tax rates of the average resident of the Helmsley Building in New York to the average janitor or security guard.  

Why are effective tax rates on the wealthy so much lower than you might expect?  It really comes down to how they get their income. From one of the articles linked above:

The low effective tax rate for the top 400 filers is largely due to the fact that capital gains and qualified dividends are taxed at much lower rates than ordinary income. In 2007, the top 400 filers derived 66 percent of their income from capital gains and dividends, compared to 22 percent for filers making between $500,000 and $1 million and just 2 percent for those making under $50,000. It is not surprising that two of the largest reductions in effective tax rates for the top 400 filers occurred in two two-year periods (1996-1998 and 2002-2004) that coincided with the capital gains tax cuts enacted in 1997 and 2003 (and, to a lesser extent, the dividend tax cut enacted in 2003). [2] Additionally, these households benefited from the reduction in the top two marginal income tax rates enacted in 2001.

Currently the top marginal tax rate on capital gains and dividend income is 15 percent, less than half the top rate on wages and salaries. The Obama Administration’s FY2011 budget proposes to raise this rate to 20 percent for high-income households, still well below the 28 percent capital gains tax rate enacted under the Reagan Administration and in effect for most of the 1990s. For dividends, at 20 percent the top rate would be roughly half of what it was during the prosperous 1990s. Under the Administration’s proposal, therefore, the very highest-income filers would continue to pay income tax at very low effective rates.

In a nutshell, when it comes to income taxes, if the vast majority of your income is reflected on the W-2 your employer gives you then your hosed.  First off, you most likely are paying a good percentage of your income in payroll taxes which are only applied to the first $106,800 of income. So if you're paid $100,000 then the payroll tax applies to your entire salary, but if you're paid $200,000 then the payroll tax doesn't effect the last $93,200 you make and that brings down your effective income tax rate significantly. Secondly, you can't really fudge the income you report to the IRS since your employer is sending a copy of your W-2 to them stating exactly how much you made.  The wealthy, on the other hand, can afford to pay for all kind of tax "shelters" that keep a good chunk of their income from being touched by the IRS.  Let's put it this way: I have a feeling that the 16.6% effective tax rate reported above did NOT include income that the IRS knows nothing about.  I think it would be a very safe bet that the real tax rate would actually be much lower if you included the "sheltered" income of the wealthy. And last, as the excerpt above made clear the wealthy don't get most of their income in wages which means they don't income tax rates on much of their income and they pay the lower capital gains rate.

So yes it irks me greatly when I hear the wealthy complain about high income taxes. I have no problem with arguments about cutting the size of government in order to keep taxes down, because to me that's a valid philisophical debate about the appropriate role of government.  But when I hear these arguments about the wealthy paying more than their fair share in taxes I start to see a little red; does it not occur to anyone that even if they do pay an outsize share in terms of gross dollars, they also enjoy an outsize share of wealth in terms of gross dollars?  

Download Tax: How You Know the State’s Desperate for Revenue

If North Carolina's Revenue Law's Study Committee has its way we residents will soon be paying state and local taxes on ringtones, movies and music we download.  According to the story the committee thinks the state would raise about $8 million and local governments would raise $4 million from the tax.  Considering how deep the revenue hole is for the state I'd say the stage is set for the legislators to enact this really bad idea. Why do I think it's a bad idea?  Well, it has to do with my professional life.

Back in the dark ages I started my career in direct marketing.  Put simply we sold things to people all over the country via mail (think catalogs) and one thing we had to track was the location of our purchasers.  If they lived in the state where our business was located we had to collect sales tax, but if they lived elsewhere we didn't have to.  There were some legal reasons having to do with interstate commerce that I didn't really grasp, but I was always thankful because the logistical headache of calculating all the different state and local tax rates around the country was an absolute nightmare. Also, because of shipping costs the cost to the consumer was pretty even if they purchased by mail versus purchasing from a store, but if you added tax it would become much more expensive to purchase by mail.  That's helpful to local businesses, but only if they carry the item you're trying to purchase.  What if they don't sell that item?  Then you, the consumer are paying shipping and taxes.  

In today's world it wouldn't be too difficult to set up an online shopping cart to automatically calculate taxes based on the buyers addresss, so as far as I know that issue doesn't really apply anymore.  What does bother me about this, though, is that because taxes on downloads aren't being applied in all states we North Carolinians might lose access to some online sellers who decide that it isn't worth doing business with North Carolinians because of the tax headache (calculating, collecting and paying taxes adds to a company's operational costs). That in turn could lead to fewer competitors in the marketplace and a rise in product costs that we'll also have to pay the extra 7%-ish in taxes on.

I'm also curious how the state plans to collect the taxes. In the offline world a retailer collects the tax at the point of sale and then sends it to the state.  Some businesses try to cheat and not send all the collected taxes, but if they do that and the state catches on then the state can take appropriate action.  How will they know when a seller in Fairbanks, Alaska sells a song download to me in Lewisville, North Carolina?  And if they do find out how will they go after the company in Alaska?  I'm sure there are ways, but won't it involve other states' agencies or the feds?  Basicaly, I'd think that the pain-in-rear aspect would prevent them from going after all but the biggest cheats.

All in all I'm just not sure it's such a great idea.

Tax Free Frustration

Once again we’ve reached the infamous tax-free weekend where we’re encouraged to buy all our kids’ school related stuff without having to pay sales tax.  One problem: we don’t have specific supply lists for the kids.  Following is a rant, and if it sounds familiar it’s because I ranted on the same topic this time last year.

This year we have one kid in middle school and two in high school.  I was able to find a generic supply list on the middle school’s website, but even then I had to find it by digging through their site and locating it in the "Document Manager" folder about four levels down from the home page.  Maybe they sent the list home with the kids at the end of school, but even so wouldn’t it be safe to assume that many folks lost it and that it would be a good idea to have a link to it from the school’s home page?  Also, the last item on the list says "Individual team lists with team specific supplies will be available at Open House."  Going to their handy-dandy calendar I find that the Open House is August 19, over two weeks after the tax-free weekend.

As for our two older kids there’s a nice note on the high school’s home page that students in Algebra I, Algebra II, Advanced Functions and Modeling, Pre-Calculus, Calculus should purchase one of three calculators for use in those classes.  Unfortunately there’s no mention of which calculator geometry students should purchase.  We learned the hard way last year with our oldest that you want to make sure you get the right calculator for geometry.  We’re hoping that his sister can use his from last year, but since it’s a different teacher we don’t know if she’ll recommend the same calculator or not. And of course I couldn’t find anything resembling a supply list on the school’s site.

I’m willing to bet that the teachers and administrators blame the state for having the tax holiday too early, and maybe they’re right. Heck, last year the Winston-Salem Journal editorial page went so far as to blame the tourism and real estate lobbies for getting the state general assembly to require schools to open later so that families could vacation at the beaches through August. (You can read the excerpt on my post from last year; unfortunately I think the original editorial is behind the paper’s firewall). But until the General Assembly acts and pushes the tax holiday further back couldn’t the teachers and administrators throw us a bone and have their lists ready and posted on the website by the end of July?  They don’t even have to make photocopies, just post them on the website! 

When you think about the money involved you begin to realize that this stuff adds up.  Specialized calculators can run you $100 or more, and by the time you throw in three ring binders, folders, presentation materials, special books, etc. you’re talking at least a couple of hundred bucks per kid.  Multiply that amount by 7% and you’re looking at real money.

Look at it this way: If we don’t include things for which we don’t need a list, like clothes, shoes, backpacks, etc. then maybe we’re talking about saving $15-20 in taxes on the items from the teachers’ specific lists.  Heck, let’s be even more conservative and say it’s $10.  Well at my kids’ high school there are roughly 2,000 students so at $10 per student that’s $20,000 in savings.  Isn’t getting a supply list online by the end of July worth $20,000?  Now take that $10 across all 51,000 students in the Winston-Salem/Forsyth County system and you’re talking half a million dollars that parents could be saving on the tax-free weekend.

Think about what $500,000 can get you.  You could fill a Chevy Suburban’s gas tank 1 1/2 times, or give the superintendent a 2% cost of living raise (I know, cheap shot).  Seriously though, this is crazy.  If you’re going to have a tax-free weekend specifically for school purchases then doesn’t it make sense to let parents know what they need to purchase?  Until the state changes the date for the weekend wouldn’t it make sense for the school board to require that schools/teachers have their lists up by the week before the tax holiday?

As I wrote last year there might be a good reason for this.  Teachers may not come back to work in time to get their lists together, but how much does it change from year to year?  Why not have it up on the school’s website before they go on summer break?  Or as my wife pointed out last year, why did we have those lists on time two years ago but not last year or this year?  Maybe the teachers need an incentive.  Well here’s one: we parents might not be so pissy when they hit us up for $3 for this party, and $5 for that achievement prize, and $2 for those extra hand outs to augment their lesson plan if they would help us out on these supply lists.    

Update on the Tax Dodgers

Last week I posted about the Senate investigating offshore banks like UBS in an effort to thwart wealthy US citizens from evading their tax obligations to the tune of $100 billion.  Well, according to this article that Fec linked to UBS is discontinuing its offshore banking operations for US clients.  From the article:

UBS, the world’s largest private banking group, stunned the
financial world yesterday when it shelved all its offshore banking
services for US residents and appeared to rip up the traditional Swiss
franchise of secrecy, saying it was co-operating with the US’s tax
authorities to expose tax cheats…

"I am here today to make it absolutely clear that UBS genuinely
regrets any compliance failures that may have occurred," said Mark
Branson, UBS’s Zurich-based chief financial officer of global wealth
services.

"We have decided to exit entirely the business in question," he said
of questionable banking services for US residents. "That means UBS will
no longer provide offshore banking or security services to US residents
through our bank branches."

But he also announced that UBS was now working with the US
Government to "identify the names of US clients who may have engaged in
tax fraud".

He said while Swiss banking laws prevented client disclosure, "such
privacy protections do not apply when disclosure of client names is
requested in connection with an investigation of tax fraud". Mr Branson
said the 80,000 worldwide employees of UBS — the investment bank has a
substantial presence in Australia — were alarmed by reports of
misconduct.

I’m feeling suddenly heartened, at least a little bit.

Immigration Reform

You read the title of this post, Immigration Reform, and thought you’d be reading a rant involving leaky borders and illegals from south of the border overwhelming our society didn’t you?  Gotcha!  Actually I’m writing about the illegal immigration of our tax dollars to offshore accounts, to the tune of $100 billion.

The Wall Street Journal has an article about a US Senate investigation into allegedly illegal tax shelters that are sold by European firms UBS AG and LGT Group to wealthy Americans.  From the article:

The U.S. loses about $100 billion annually due to
offshore tax evasion, according to a Senate probe that is taking aim at
Swiss bank UBS AG and Liechtenstein’s LGT Group for allegedly marketing tax-evasion strategies to wealthy Americans.

U.S. clients hold about 19,000 accounts at UBS, with
an estimated $18 billion to $20 billion in assets, in Switzerland,
according to the findings from the Senate probe and Justice Department
prosecutors.

It seems that the IRS and their counterparts in other countries are finally getting serious about going after the tax shelters that the rich have enjoyed:

The probe adds fuel to a burgeoning effort by tax authorities around
the globe to shatter the veil of bank secrecy that tax havens hide
behind in catering to the world’s elite.

Update 7/21/08: Via Fec I see that UBS is dumping its offshore banking services for US clients.  Will miracles never cease?

Two years ago I was putting myself through a self-education program on taxes and reading David Kay Johnston’s fine books and articles on the subject of tax reform, and back then he wrote an article for the NY Times on a Senate investigation into tax cheating by the super-rich.  This has been going on for a long time and it is having a very big impact on our society.

It’s not fair to lay everything at the feet of the rich, but it would be equally unfair to not acknowledge the role that their active tax evasion has in the breakdown of our tax system. In his books Johnston does a fine job of explaining how tax reform could actually result in lower effective tax rates for everyone, but with the vested interests in just isn’t happening.  Unfortunately the entire tax system is so opaque that we average citizens don’t have the ability to see how royally screwed we are, but maybe, just maybe, with more investigations like those the Senate is undertaking we can get some sunlight on this problem and get it fixed.

Or hell can freeze over.