Category Archives: Taxes

Winston-Salem Journal: Real Estate Cabal Responsible for School System’s Tardiness!

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Last weekend was the tax-free shopping weekend for school supplies in North Carolina.  Here in Forsyth County many parents, yours truly included, had a common problem: no supply lists from our students’ teachers.  Sure we could buy the basics like pencils and paper, but any parent will tell you that every year they get a list that has some very specific items on there that you just can’t anticipate. 

Heck, we’ve gotten lists that tell us which brand of a particular item to buy, apparently in an effort to avoid brand-envy among students. God forbid a kid show up with a generic binder and not the "BLACKWATER BINDER:  Made of bullet-proof KEVLAR. Tested and approved by the Navy SEALS and perfect for today’s student. Available in green or pink camouflage" despite the fact that the generic costs 1/10 what the BLACKWATER costs.  No, we must make sure our little robots students all look exactly alike!

Anyway, it caused a problem for a lot of parents that we didn’t have a list of supplies for our big tax-free weekend.  Who’s responsible for the lack of supply lists?  Eh, I’m willing to bet the responsibility can be distributed pretty far and wide, but I have to say that the folks who write editorials for the Winston-Salem Journal cast their net of blame in the wrong direction.  Here’s what they wrote:

It would be even more helpful if parents knew exactly what their children will need for school. But some parents told the Journal late last week that they had not yet received supply lists from their public schools.

The culprit here is
the school-calendar law that the General Assembly passed at the behest
of tourism and real-estate interests a few years back. For business
purposes, they wanted a later start to the school year. So, the
tax-free weekend now comes three weeks before the school bell rings,
and teachers don’t have supply lists ready.

Some will propose to push the tax-free weekend to the middle of August. We argue for a different change.

The General
Assembly should repeal the school-calendar law and let school boards,
not real-estate agents, decide on what is best for educating our
children.

So let me get this straight.  The reason we don’t have the lists we need is because several years ago the real estate and tourism lobbies got the General Assembly to move our school start dates to later in the summer?  And the way to fix the problem of our not getting the lists on time is to give the power of school scheduling back to the local school boards? 

Did our school administrators and teachers not get the memo telling them that the start of the school year has been moved back?  Is it too much to ask for our teachers and school administrators to adjust their schedules? And as Celeste (my lovely wife) pointed out to me,  last year we received our lists before the tax-free weekend and we had the same schedule then as we do now.  What changed?

Seriously, it would be like me telling my client that because this year their annual conference is two weeks earlier in the year than it was last year I didn’t get the attendees their information in time.  I think the question they’d ask me as they were cancelling my contract would be, "Since we published the date of this year’s conference over a year ago shouldn’t it have occurred to you to move your timeline up so the attendees would have the information when they needed it?"

Now, I don’t disagree with the Journal about allowing local school boards to determine their own schedules, but blaming the tardiness of our teachers and administrators on the General Assembly’s actions is some seriously flawed logic.  Kind of like the Journal editors’ argument that the state lottery is a tax.

Oh, don’t get me started.

Ironic Realtors

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This morning Ed Cone posted about a site hosted by the North Carolina Association of Realtors that is dedicated to defeating a proposed tax on home sellers’ equity. Ed got a comment on that post he considered golden enough to justify it’s own post.   Hopefully Ed won’t mind if I share it here:

"It’s appalling to think that somebody can require payment of a fixed
percentage of the price just because you are able to sell your home.
Fixed, non-negotiable percentage skim-offs are no doubt a huge drag on
the marketability of real estate. ®ealtors are so right to lead the
struggle against fixed, non-negotiable and onerous percentage charges
to home sellers!"

As I’ve written about before, I’m not a big fan of the realtor business as it’s currently structured (note I didn’t say realtors themselves).  Want some interesting reading?  Check out this recommendation on the DOJ site dated Nov. 2005.  Here’s the introductory paragraphs:

1.1 million real estate agents in America(1)
average only six home sales
per year.(2)
  Each works about forty hours per sale,(3)
which amounts
to 12% of the work year,(4)
or five hours per week.  Most of the
balance of hours is devoted to getting new business.(5)
  Brokers
receive a median $52,800 income yearly.(6)

The average couple selling the average home will need to work five
weeks each — ten weeks total — to pay the commission of the agent
who will work only one week on that transaction.(7)

Oh, and for the record I’m against the proposed tax.  I already pay property tax every year, and I don’t see why I should pay a tax if I happen to realize a gain on the sale.  Also, if I have a house I buy for $200,000 and during the time I own it I put in $40,000 to improve it and then turn around and sell it for $230,000 because that’s all the market will bear and then pay a 1% tax on my "gain" I don’t think that’s quite fair.  I’ll have to check on this but I don’t think I get a tax break on improvements I make to my property over the years, which means I’d really be getting hosed on the deal.

* *Update** Got an email from my mom who points out that when you sell your house you can deduct the improvements you’ve made from any gain you have in the house.  That’s a good point.  Also, upon further reading (see this article) it looks like the proposed tax would be up to 1% on the value (i.e. sales price) of the house, regardless of gain or loss.  That’s a royal hose job if you ask me, because you’ve been paying property taxes all along so to pay an "exit fee" when you sell your house seems like a nice case of double taxation. 
 

So I agree with the realtors but I have to say that their position is somewhat ironic.

Sex and Taxes: Now That’s a Reporting Gig

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David Cay Johnston is a reporter for the New York Times who has written many articles about the IRS and the US tax system.  Heck he’s written books about taxes, so imagine my surprise when I saw that he wrote an article titled Is Live Sex On-Demand Coming to Hotel TVs? I can imagine some other reportorial combinations that might make more sense, like say taxes and celebrity obituaries (death and taxes, get it?), but sex and taxes?  He’s also written an article titled Indications of a Slowdown in Sex Entertainment Trade so I’m guessing he’s bringing the same in-depth research to porn that he does to taxes.

Oh, wait he has written an obituary so I guess my death and taxes idea wasn’t too far off.

I’m wondering if Lex is looking to start covering the sex trade.  He spent years covering religion so it wouldn’t be much of a stretch (insert Catholic priest or Jimmy Swaggart mention here).   I wonder if JR would let him?  I’m thinking it might be a good way to kick start the News & Record’s multimedia ambitions.  I can pretty much guarantee you that they’ll be beating WXII to the punch, as it were. And maybe he can get some video tips from Lenslinger.  And what the heck, I guess I can step up and help with the research.

Last thought on this tangent: when staying in a hotel always, ALWAYS, sanitize the remote before you use it, or at least wash your hands vigorously after using it.  You really don’t want to know where it’s been.

Follow the Money

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One thing I’ve learned in all the years I’ve done marketing is that you base your decisions on your customers’ actions rather than their words.  I can’t tell you how many survey’s I’ve done asking customers if they are interested in a product at a certain price, had the vast majority say "Heck yeah!" and then when I launched it had about 10% actually buy it.  They weren’t lying, it’s just that when it came time to actually pony up some money they decided they didn’t really need that product after all.

The lesson I took out of this is that if you really want to know what people value just look at how and where they spend their money. I think the same can be said of society in general, and that’s what makes looking at how our government spends our money so interesting.  After doing a little research I was able to find the following numbers (source: http://nationalpriorities.org), and I’m using all the zeroes to make sure we all understand that this is a buttload of money:

Overall Federal Spending FY06: $2,470,000,000,000

Mandatory (i.e. entitlement) Spending: $1,500,000,000,000
Here’s how the mandatory spending breaks down:

  • Social Security: $510,000,000,000
  • Income Security: $285,000,000,000
  • Medicare: $285,000,000,000
  • Health: $195,000,000,000
  • Net interest payments on national debt: $180,000,000,000
  • Veteran Benefits & Services: $45,000,000,000

Discretionary (what Congress allocates each year) Spending: $960,000,000,000
Here’s how the discretionary spending breaks down:

  • National Defense: $518,000,000,000
  • Education, Training, Employment & Social Services: $86,400,000,000
  • Health: $57,600,000,000
  • Other*: $57,600,000,000
  • Income Security: $48,000,000,000
  • International Affairs: $38,400,000,000
  • Administration of Justice: $38,400,000,000
  • Veterans Benefits & Services: $28,800,000,000
  • Transportation: $28,800,000,000
  • National Resources & Environment: $28,800,000,000
  • General Science Space & Technology: $28,800,000,000

*Other is defined as energy, agriculture, commerce and housing credit, community and regional development, general government and the administration of Medicare and Social Security.

I’m still kind of sifting through all this and trying to figure out what it means, but I can tell you that I’m pretty surprised that our spending on science and technology is only  1.17% of federal spending, or that one discretionary category, national defense, is the largest segment at 20.99%.  I had assumed that Social Security would be the largest but it is a little less at 20.65%.

I understand that some of these numbers are generalizations; for instance there is definitely quite a bit of money spent on science and technology (R&D) that is probably under the national defense umbrella, and it does lead to some technological breakthroughs that are then licensed to businesses, but it is a relatively paltry sum.  Still, these broad numbers give us a sense of where our tax dollars are going, and it’s important to keep them in mind as we debate the future priorities of our country.

We also need to keep in mind where all this money comes from.  Here’s a breakdown:

Total FY06 Revenue: $2,000,000,000,000
Here’s how it breaks down:

  • Individual Income Taxes: $894,000,000,000
  • Social Insurance: $774,000,000,000
  • Corporate Income Taxes: $227,000,000,000
  • Other: $159,000,000,000

So 44% of the country’s revenue comes from the individual income tax, 39% from social insurance taxes and a little over 11% from corporate income taxes.  Keep in mind that the social insurance taxes are mostly funded by payroll deductions on individuals (6.2% for Social Security and 1.45% for Medicare) with an equal amount paid by their employers.  So if you take half of the social insurance and apply it to individual taxpayers they are contributing just over 64% of the revenue and if you apply the other half to corporate taxpayers they are contributing just over 30%. (These are definitely not specific numbers since social insurance also includes things like unemployment and general retirement, but I think it’s close enough).

What’s interesting to me is that the percentage of revenue from individual income taxes has remained steady over the last fifty years at 44% while the percentage from corporate income taxes has decreased from 27% to 11%.  I have a sneaking suspicion that the reduction in corporate income taxes is probably directly correlated with the growth of business PACs and their influence on K Street. 

It’s also interesting to note that the Social Security and Medicare taxes are only applied to the first $84,900 of income so higher salary earners actually pay a lower tax rate than those under the $89,400 line.  And 75% of taxpayers pay more in Social Security and Medicare taxes than they do in income taxes, which highlights how many are near or below that $84,900 line.

After looking at these numbers, and keeping in mind that we’re coming up on a rather important mid-term election, I think we, as a society, need to decide what our priorities are.  We need to figure out if we want to continue electing people who are spending our money as highlighted above, or if we want to change our spending habits.  Do we pick on the silly pork barrel projects like the "bridge to nowhere" or do we concentrate on the big fish like defense, medicare and social security? Of course we should do both, but I suspect that if we took care of any one of the big three we would do as much as we would if we tackled every single pork barrel project.

We also need to decide how we’re going to pay the bills.  Do we continue to with our current tax policies or do we restructure them to relieve some of the stress on individual taxpayers?  Do we phase out income tax in favor of a federal sales tax?  Or do we keep the income tax but simplify it and go to a "flat" tax? Many people call these regressive taxes because the disproportionally impact the poor, but is this true?  And if it is do we as a people believe that the wealthy should contribute more since our society has allowed them to prosper? Do we continue to levy Social Security and Medicare taxes at the current level or do we raise them or lower them?

Questions like that last can’t be answered in a vacuum, but rather are contingent on answering questions related to spending, i.e. should we even continue with Social Security?  Much like losing weight is about diet AND exercise, setting the course for our country is about taxing AND spending and I think it’s high time we got serious about both.

I’ve Been Thinking About Taxes

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Before I get started I want to say one thing: when I write about taxes I reserve the right to change my mind, just as I do when I write about other topics.  Okay.

I’m in the middle of a little self-education campaign re. America’s tax system.  The reason I’m doing it is that it occurred to me that while I’ve always complained about paying taxes, I’ve never really understood them.  I mean when I entered the work force I had no idea what Social Security, Medicare/Medicaid or FICA was.  I just knew there was a chunk of change being pulled out of every paycheck to be held by the government for when I was an old geezer, and what 16-25 year old cares about that?

Then a few years ago I started reading that Social Security probably wouldn’t be there when I retired, or that the government was dipping into social security to pay for stuff.  My little English-Lit brain kind of went, "Huh?" and then moved on because I had things like kids and work to worry about.

Now, though, I want to take the time to understand.  I want to know what income taxes are, why we have them and why our tax system is so complicated.  So I went on-line and bought a bunch of used books and I also went to the library to check out one book in particular, David Cay Johnston’s "Perfectly Legal."  It’s been a real eye opening experience.

Side note: I don’t agree with some of Johnston’s recommendations but I
found a lot of his background information fascinating and some of his
arguments compelling.  Definitely a worthwhile read, as is his coverage
of the IRS for the New York Times.

I still consider myself on the front end of the learning curve on income taxes, but after reading Perfectly Legal and starting in on a history of taxes in America (Federal Taxation in America: A Short History, by W. Elliott Brownlee) I can say that I think the following:

  • Income taxes are absolutely necessary.  While we can all argue about how much we should pay in taxes and about how much government we should fund (i.e. what the government should do with the money) I think we can all agree that part of being in our society is contributing to the common well-being of the nation and income taxes are an effective means to that end.
  • Income taxes can be fair, but currently aren’t.  I’ve read a lot of arguments for flat taxes and federal sales taxes, but I have to say that if the income tax system is fixed properly I think it has the most potential to be the most equitable.
  • Republicans and Democrats are both responsible for the current state of the income tax system. 
  • Our income tax system is unnecessarily complex, and that complexity hurts the middle class most and helps the upper class most.
  • The system is complex because the various loopholes and incentives that create the complexity benefit Congress’ most influential constituency, what Johnston calls the political-donor class.
  • The reason that the middle class is hurt the most by this system is that most people within the middle class have what I’d call normal income; wages and salaries.  They also have a higher share of their income taxed for Social Security.  The wealthy, especially the extremely wealthy, get most of their income via interest on their equities, stock options, etc.  Also, the average middle class person is taxed before they get their money while the wealthy are taxed after they’ve had their money in their pockets for a while.
  • The debate about taxes needs to start with a debate about defining income. We need to define income before we can get serious about tax reform.
  • We also need to debate the goals of the country, the fiscal priorities of the country, while we debate tax reform.  We may discover that we can reduce all of our taxes if we get serious about cutting back on what we expect the government to do.
  • The average American is woefully ignorant of the tax system, how it works and its history.  I’m willing to bet that the vast majority of Americans don’t know that income taxes didn’t exist until 1913 or that the top income tax rate during WWII was 90%.  Puts the current top tax rate in a different perspective doesn’t it?
  • Finally, there is no one in power that has an interest that would be served by fixing the system.  I wouldn’t count on anyone in power today to fix this thing.  It will have to be a remarkable grassroots effort.

Here’s the biggest thing I’m struggling with: should the wealthy pay a higher percentage of their income in taxes?  The rationale for this "progressive" taxation is that the wealthiest have accrued the greatest gains from our society and thus should pay a requisite share.  On the other hand if I make $100,000 and you make $1,000,000 and we both pay 20% then I’m paying $20,000 and you’re paying $200,000.  It looks to me like you’re already paying more.

Of course the reality is that in today’s system my $100,000 is actually less because I’ve had Social Security taken out of a huge chunk of it.  In fact you paid the same amount of Social Security on your one million as I did on my 100k, so right there I’m playing catch up.  And you’re much more likely to have loopholes to exploit and to have paid a tax lawyer to find them for you.  So in today’s system maybe we need you to pay 35% to make it equitable.

But if we redefine income to include all money we gain in the year no matter how we gain it, and do away with the loopholes and then come up with a tax rate that will serve the country’s needs, do we need to have a progressive tax?  One point here is that we’d probably want to have a lower rate (or  no tax) for the truly poor, but above that line we might be able to have one fair rate.

I’ve also read the argument that if we went this route we’d kill the incentives for investing in public companies, which is a key driver of economic growth.  I don’t know if I buy that though, since you’re still basically making money for doing nothing other than gambling on a company’s success, and that’s pretty easy money.  Can’t see the possibility of paying income taxes on easy money reducing its allure.  (I’m thinking that Greensboro blogger David Boyd might be prepared to debate/educate me on this point).

But, here we come to another sticking point for me: how do we tax someone who hasn’t realized the gain yet?  In other words if I’ve invested in Microsoft and the company gains 10% on the year, should I get taxed on the capital gains now or should I get taxed when I actually sell the stock and get the cold, hard cash?  I guess I could pay the capital gains now and then if I lose money the next year claim a deduction, but then we start getting back into complexity don’t we?

So like I said, I’m on the front end of this process and I have a long way to go, and I’m sure my thoughts will evolve on these matters.  But one thing I’m pretty certain will not change is my feeling that the system is broken, it’s not fair and we need to fix it for the good of our country.

Tax Cheats

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David Cay Johnston is a New York Times reporter who wrote Perfectly Legal, a book I highly recommend if you want to: a. Get thoroughly pissed off and b. Get a better understanding of how our tax system does and/or does not work. Johnston has an article in today’s Times about how, according to a report from the US Senate Permanent Investigations subcommittee, tax cheating by the superrich is out of control.  Here’s some excerpts from the article:

The report details how the Quellos Group, a tax shelter boutique
based in Seattle, “concocted a tax shelter” using $9.6 billion “worth
of fake securities transactions that were used to generate billions of
dollars of fake capital losses.”

Senator Levin said that when
investigators asked for trading records they were first told the trades
were private, over-the-counter transactions. He said investigators
asked for trading tickets or other evidence of who owned the $9.6
billion worth of stock and were told the stocks were never owned by the
parties involved.

“They just wrote down numbers on paper and
claimed losses,” he said. “It was just like fantasy baseball, except
the taxes not paid were for real.”

And more:

The investigation, which took 18 months, involved 74 subpoenas, 80
interviews and the collection of more than two million documents, and
yet Senator Levin said “the six cases we present are just examples,
just a pinhole look.”

The 400-page report recommends eight
changes, some of them aimed at going after the law and accounting
firms, banks and investment advisers that the report says enable tax
schemes that rely on complexity, secrecy and compartmentalizing
information so that advisers can claim they had no idea that the
overall transaction was a fraud.

“We need to significantly
strengthen the aiding and abetting statutes to get at the lawyers and
accountants and other advisers who enable this cheating,” Senator Levin
said, adding that “we need major changes in law to stop the use of tax
havens” by tax cheats.

And finally this:

The report details a scheme created for Mr. Saban to avoid more than
$300 million in taxes from sale of his half interest in the Family
Channel and related properties.

Mr. Saban told Senate
investigators that he never understood the transactions but undertook
them after asking two questions of Mr. Wilk and his personal tax
lawyer, Matthew Krane.

Mr. Saban said he asked whether the deals
were legal and whether a major law firm would certify them as proper.
The two lawyers, Mr. Saban said, answered “yes to both,” so he went
ahead.

Later, when Mr. Saban learned that he had paid $54 million
in fees to Quellos; Cravath Swaine & Moore, a New York law firm;
and others for what turned out to be what the report described as fake
transactions, he said he felt “misled, lied to and cheated.”

Lewis
R. Steinberg, who as a Cravath Swaine partner helped design the deal
and wrote an opinion letter attesting that it was more likely than not
to work as a tax shelter, told Senate investigators last week that he
relied on assurances from Quellos and Mr. Johnson that real
transactions took place, not fake trades. Mr. Steinberg, who is now at
UBS Securities, another firm named in the report, is a prominent tax
lawyer and in 2004 was chairman of the tax section of the American Bar Association.

After reading Perfectly Legal and Conspiracy of Fools I’m convinced that we’ll never see tax-reform or even an even playing field because the real white collar crooks and crook-enablers are in the legal and accounting professions and they have an inordinate influence on the Hill and throughout the halls of federal and state governments.  Unfortunately I think Senator Levin and his allies are fighting a lost cause.

IRS Outsourcing Its Archives? Your Shredder Might Be Useless

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I found this interesting little item via Boing Boing.  Supposedly the writer works for the IRS in the document retention unit and allegedly they were just out-bid (low balled) for the work by a private company.

What with all the security breaches that have occured lately I’m not sure I like this.  Of course the government has had its own share of breaches, but still this would make me a whole lot more nervous.  Nervouser even.

Now if the contractor lets out our personal data can we sue it?  If so then that would be more attractive than suing the IRS itself.  See, there’s a silver lining to every dark cloud.

An Argument for Keeping the AMT

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An economist from the University of Maryland has written a piece in the Washington Post that argues for keeping the alternative minimum tax (AMT).  His argument, in a nutshell, is that if the AMT is allowed to stay in place, and if the temporary raise in the standard exemption is allowed to return to $45,000 for a couples and $33,750 for individuals (the new tax bill raises the standard exemption to $62,550 and $42,500 respectively for one year) with inflation there will eventually be a flat tax in place.  So for once we would have gradual tax reform without Congress having to do anything. The result:

If the present AMT rates were applied as a universal flat tax — and especially if the AMT exemption were reduced and certain remaining AMT exclusions eliminated — the resulting federal revenue might even come to exceed current expenditure levels. The solution would then be to reduce the flat tax rate (the AMT rate) so that revenue and expenditures were brought back into balance.

In the longer run, the AMT could open the way to more radical reforms that might even change the basic nature of Washington spending habits. One option would be as follows: Each year the president would submit his budget proposal, and Congress, in response, would enact final appropriations. A neutral expert commission would then estimate the resulting federal revenue requirements, and a new flat tax rate, calculated to balance the budget, would be set for the forthcoming tax year. If Congress wanted to go on a spending spree, taxpayers would see the consequences directly and immediately in their pocketbooks.

The Social Security system is another area in which the AMT might facilitate radical change. Social Security taxes could be abolished and the flat tax adjusted upward to compensate for the lost revenue. The Social Security trust fund is largely an accounting fiction, and it is time to integrate the Social Security tax with the income tax system. Alternatively, Social Security tax payments could become a deductible credit from the required AMT payment.

Should We Have to Pay Taxes if Government Doesn’t Deliver the Basics?

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An elderly woman in England is refusing to pay taxes until the city (Derby) gets the prostitutes and drug dealers out of her neighborhood.  In thinking about it I wondered what your legal standing would be if you refused to pay taxes if you could prove that the government did not deliver on the basics.  I’m not talking entitlements here; I’m talking about basic health, safety and infrastructure.

For instance what if I could prove that my water service was inadequate and had been for a year, even after I complained?  Or that the police did not provide enough services to my neighborhood as compared to comparably sized neighborhoods across town?  Or that the roads and sewers were not maintained properly leading to polluted waterways, flooded roads, roads that caused severe damage to vehicles, etc.?

Can the government be held responsible for not providing basic services?  Can we refuse payment until said services are delivered?  Or, if after paying can we petition (i.e. sue) to get a refund?

Just wondering.