Tag Archives: taxes

The Public Payroll

Back before the economy tanked not many people griped about what government employees made, likely because not many people viewed the jobs as particularly exciting nor well-paying.  Since the economy tanked the public has pulled a 180 thanks in part to the fact that just having a job is something to celebrate and also to the fact that many governments are facing tremendous budget pressures.  Now people are paying very close attention indeed to what government employees are being paid.

The Winston-Salem Journal has a story about the compensation of Winston-Salem's 91 highest paid employees which totals $8.5 million.  Here's an excerpt from the story:

As it turns out, 21 full-time employees make at least $100,000, according to the report of Budget Director Ben Rowe. Earning between $75,000 and $100,000 are 70 full-time employees, according to the report. The total salaries of those 91 employees are valued at about $8.5 million, according to Rowe. They’re lawyers, managers, supervisors, chiefs, coordinators and other top-brass employees.

Excluding those 91 employees from the proposed 1.5 percent merit pay increase would save about $150,000, according to the report.

Cutting that amount would be merely symbolic, Council Member Dan Besse said. Besse, who had asked about the possible savings during a budget meeting last week, said he wanted to know because he opposes the idea of raising salaries the same year that the property-tax rate will be increased…

“The question then becomes: What’s the right balance on things like salaries?” Besse said. “Tentatively, I’m trending toward considering that we can’t simply say, ‘No increase for anybody this year.’ It appears we’re starting to experience problems with recruiting and retaining people in certain positions, like police officers.”

Is it fair to exclude the top level employees from the merit pay increases that the rest of the employees would enjoy to save a symbolic $150,000? Isn't the better question whether or not they did their jobs well, and if they did do their jobs well shouldn't they be compensated appropriately?

It's understandable that people would want to freeze or reduce pay in the face of budget crunches and potential tax rate increases. You might be asking, "How is that any different from a company freezing pay or laying off people when their sales drop or the company is losing money?" Well, the comparison really isn't that simple. Government employees don't get to pick their customers; they have to serve everyone. They also don't have much control over the income side of the ledger since tax revenues are tax revenues. What they can control are expenses and how effectively they do their jobs. If they do that are they to be punished?

Here's another point from the story that should not be lost in the shuffle:

To make up for the $7 million loss, the city would have to increase the tax rate by about 10 percent to 54.25 cents for every $100 of assessed value from the current rate of 49.1 cents. Rather, Garrity has proposed raising the city’s tax rate about 8 percent, from 49.1 cents for every $100 of assessed value to 53 cents.

Because of the revaluation, a large majority of city property owners would actually receive a lower tax bill even if the council members approve the increase in tax rate.

So in other words the symbolic freeze of the highest paid city employees wages would come despite the fact that many taxpayers won't be paying any more in taxes than they did last year.  Five years ago when these folks were largely viewed as average bureaucrats you probably wouldn't have seen this kind of discussion, but now that times are tough those same folks are viewed as overpaid executives ripe for symbolic flagellation. Doesn't quite seem fair to them.

IRS Should Just Hire a Bunch of Direct Marketers and Listen to My Mom

During a show about how much tax revenue the IRS doesn't collect – 17% or $450 billion a year – the folks at Freakonomics talk about how a little-known unit of the British government called the Behavioral Insights Unit gooses the UK's tax collection efforts:

One of my favorite examples of this comes from a small unit in the British government called the Behavioral Insights Team.  What they do is experiment with all kinds of cheap and simple nudges.  For instance, sending out letters that appeal to the herd mentality in all of us. Here is the unit’s director, David Halpern:

David HALPERN: So what we do is we simply tell people something, which is true, which is 9 out of 10 people in Britain pay their tax on time. And by putting that single bit of information into the top of a letter, it makes people much more likely themselves to pay the tax on time.

GARDNER: So it’s peer pressure?

DUBNER: That’s exactly right — we like to run with the herd.  They also tried another super simple trick, which was just handwriting a message on the outside of the tax envelope.  This message would just say simply that the contents are important, but it’s written in hand.

HALPERN: Of course people are like ‘oh my God, but how can that possibly be practical?’ Well we’ve now just got the results in. It turns out that for every pound or every dollar that you spend on getting, you know, someone to write on the envelope, you get $2,000 return.  A one to 2,000 return. So it’s a nice simple illustration of these small things and how consequential they are.

Anyone who's spent even a week working as a direct marketer could have told you this would work. The IRS should just hire a bunch of laid off direct marketing folks and they'd pay for themselves in no time.

Later in the podcast they talk about an idea from a behavioral psychiatrist at Duke:

Dan Ariely, a behavioral psychologist at Duke, has a nice idea: to let taxpayers direct a small portion of their tax money to the parts of the government that they most care about:

Dan ARIELY: So I’m not sure what’s the right percent — five percent or ten percent.  But what if we got people to have a say about where some of the taxes go? All of a sudden you’re not looking at it as you against the government.  You’d have to look carefully at all that the government is doing for us — building libraries and roads, and education and military and so on and so forth and say, what do I care about?

My mother made this same argument when I was a kid. Her argument was that if she could earmark even one or two percent for any program/department of her choosing she'd feel better about paying her taxes in general. She also made another interesting point: taxpayers would be able to indicate with their dollars which programs they felt were most important. In essence we'd be able to tell which programs were truly valued by us, the taxpayers, and not have to trust politicians to divine what we wanted. That's why I figured it would never come to pass, and I haven't been wrong yet.

Hidden Costs

One of the interesting changes we're seeing in the US is the different behavior of health care consumers when they are actually allowed to act like consumers. From the Wall Street Journal:

Last fall, two big employers embarked on a radical new approach to employee health benefits, offering workers a sum of money and allowing them to choose their health plans on an online marketplace. Now, the first results are in: Many workers were willing to choose lower-priced plans that required them to pay more out of their pockets for health care.

The new online marketplace, operated by consulting firm Aon AON -0.29% Hewitt, a unit of Aon PLC, was used by more than 100,000 employees of  SearsHoldings Corp.  SHLD -0.86%  and Darden Restaurants Inc.,  DRI +0.43% as well as Aon itself, to pick plans for 2013. The employers gave workers a set contribution to use toward health benefits, and they could opt to pay more each month to get richer plans, or choose cheaper ones that might have bigger out-of-pocket fees, such as higher deductibles.

"When people are spending their own money, they tend to be more consumeristic," said Ken Sperling, Aon Hewitt's national health exchange strategy leader.

Go figure. When people are given pricing options and asked to consciously weigh costs/benefits and risks/rewards they make "consumeristic" decisions. Forget for a moment all the details about "Obamacare" and your feelings towards it, and instead ask yourself these questions: Can any health care reform program succeed if it doesn't allow people to behave like a logical consumer? How can a logical consumer exist in a market where pricing is obscured? To that end, the next time you go to the doctor's office try this exercise: ask them what your appointment is going to cost before they do anything. They likely won't be able to tell you because they simply don't know – the cost depends on what kind of insurance you have and the rates your insurer has negotiated with the doctor's network. Craziness, huh?

Changing gears, but sticking to the hidden costs theme, have you ever wondered why we it's been so difficult for people to grasp the true costs of the wars in Afghanistan and Iraq? It's because the bill has shown up in the form of an exploding deficit and not a "War Tax." Deficits are like credit card debt: you know they're bad and that they can be a drag on your financial well being, they are hard to get overly excited about because your daily life doesn't change much until you run out of credit and the bills come due. On the other hand if you're paying cash – or a War Tax – the cost of your action is immediately clear and you're far less likely to be so sanguine about whatever you're doing. 

So here's a rule of thumb we need to teach our children: if the cost of something is hidden, or if you aren't asked to pay for it up front, it is likely much higher than you think so you should really think hard before making that purchase decision. There should also be a corollary: if it's a politician doing the selling then you should probably just walk away or be ready to spend 100x whatever you think the cost is (see War, Iraq).

Starving the Beast

Those of us old enough to remember the Reagan years can probably remember hearing the phrase "Starving the Beast." What did it mean? From Wikipedia:

Starving the beast" is a political strategy employed by American conservatives in order to limit government spending[1][2][3] by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending. The short and medium term effect of the strategy has dramatically increased the United States public debt rather than reduce spending .

Those of us still around to see what happens when terms like "fiscal cliff" and "sequestration" enter the lexicon are able to see what will happen when the starvation takes hold:

Imagine that just before Thanksgiving a major retailer, say Nordstrom or Wal-Mart, announced it would furlough 10 percent of its sales, collections and accounts payable staffs.

The stock would tank. Indeed, it is hard to imagine the CEO or the board of directors keeping their jobs as customers switched to other retailers during the holiday buying season, costing the company revenues far in excess of the savings. Not only would the corporate overseers become everyday laughing stocks, they would surely be enshrined in a Harvard Business School case study as the worst of all corporate dunces.

Well, on March 1 — right in the middle of tax season — the IRS will be faced with cutting staff ten percent under the federal budget sequester…

Rational people would think that a law-enforcement agency which saved taxpayers more than 150% of its budget would get some support from Congress because its highly cost-effective. The operative word there is rational.

House Appropriations Committee Democrats on Feb. 13 offered these rational observations on what sequester would do to the IRS and to taxpayers: 

  • Sequestration will be particularly devastating to the IRS, since it will require furloughs to take effect during the 2012 filing season. Furloughs at IRS call centers equate to longer hold times on the phone for taxpayers, if the call is answered at all. Fewer enforcement agents will be available to investigate fraudulent claims, leading to an increase in the number of identity theft cases unresolved. Further, each dollar invested in enforcement actions returns $4 in additional revenue to the Treasury. Cutting investment in enforcement will lead directly to an increase in the deficit.

It's hard to generate any sympathy for the IRS, but if we must have an IRS (as we must) then we should make sure it has what it needs to complete its mission.

Taxing the Middle Class

It doesn't matter which party sponsors it or which party fights it tooth and nail – any tax package that causes taxes to rise significantly on the middle class should prompt a "throw the bums out" campaign that will jolt Congress indiscriminately. It should, but given America's private history it probably won't even if some of the numbers in this Washington Post story end up becoming reality.

So although households earning $100,000 to $200,000 a year would save about $7,000 from the lower tax rates in the GOP plan, those savings would be swamped by eliminating major deductions, according to the report by the Democratically controlled congressional Joint Economic Committee.

The net result: Married couples in that income range would pay an additional $2,700 annually to the Internal Revenue Service, on top of the tax increases that are scheduled to hit every American household when the George W. Bush-era cuts expire at the end of the year.

Households earning more than $1 million a year, meanwhile, could see a net tax cut of about $300,000 annually.

“According to this report, while millionaires will receive a huge tax break, earners making under $200,000 will see their taxes rise significantly,” said Sen. Robert P. Casey Jr. (D-Pa.), who chairs the Joint Economic Committee.

If you read the whole article you'll see that the analysis is based on some assumptions about likely tax breaks for the wealthy and the elimination, or reduction, of certain tax breaks for the middle class. That's why there's a healthy dose of the unknown tied to the story, but given the past history of the parties involved some of those assumptions are likely accurate, and given the proclivity of the powers-that-be to rob from the middle to pay the very-rich it's a safe bet that those making less than $200k a year are looking down the barrel at a healthy screwing.

Here's a nice table to drive that point home:

Middleclassscrew

Not Exactly the 1099EZ

According to the this if you printed out GE's tax return it would be 57,000 pages:

In a November 28 letter to IRS Commissioner Douglas Shulman, Congressman Frank Wolf, a Republican from Virginia, wants to know how many hours IRS employees spent reviewing General Electric’s massive 2010 tax return and what it cost the taxpayers.

Wolf says that, according to an article on the Weekly Standard’s website, if printed out, GE’s 2010 electronic tax filing “would be the equivalent to 57,000 printed pages.” If those pages were stacked, they would stand more than 19 feet tall – 19 feet! (Now that’s a monster if ever I’ve heard of one.)

According to Wolf, “A return of this magnitude was clearly necessary to take advantage of every loophole and earmark in the tax code to avoid paying federal taxes.” (May I note that “every loophole and earmark” in the tax code was put there by the United States Congress.)

BTW, Rep. Wolf has one of the all time great lazy-man signatures. See it here.  Basically it looks like a hastily written "8".  I'm thinking of making mine "9" which should save me many hours over my remaining years…oh wait, I rarely sign anything.  Never mind.

NC Senator Co-Sponsoring “Repatriation Holiday” Bill

If you had to guess which North Carolina Senator, Republican Richard Burr or Democrat Kay Hagan, was co-sponsoring a bill with former Republican Presidential candidate John McCain that would provide a "tax holiday" for multinational firms which would you guess?  Of course it wouldn't be blog-worthy if it was Sen. Burr, so you'd be right if you guessed Sen. Hagan.  Over at Tax.com Christopher Bergin isn't too happy about it:

Why am I worked up? Because tomorrow two Senators, Democrat Kay Hagan and Republican John McCain plan to introduce a bill they will call the Foreign Earnings Reinvestment Act to provide a repatriation holiday. They should really call it the Outrageous Grab Under False Pretenses Act…

Why? In part because the U.S. economy stinks and they see an opening, neatly laid out in WIN America's mission statement: "We have an opportunity right now to make a significant investment in our struggling economy, boost U.S. businesses, and help put people back to work." They urge that "Congress should pass legislation to offer an immediate reduction of taxation on income earned overseas by innovative American businesses to allow that money to be brought home and invested in the United States." 

Trust me, there's nothing innovative or new here. The Heritage report correctly points out that this proposed “sequel to a similar 2004 holiday would, like its predecessor, have a minuscule effect on domestic investment and thus have a minuscule effect on the U.S. economy and job creation." So, the idea is that you line the pockets of large corporations at a time when regular taxpayers are struggling to hold onto their jobs, their houses and their way of life.