Tag Archives: Tax

Interesting Thought Experiment Combined With Legal Process

scales of justice

So, this story is interesting:

WASHINGTON — Worried the Internal Revenue Service might target you for an audit? You probably should be if you own a small business in one of the wealthy suburbs of Los Angeles.

You might also be wary if you’re a small-business owner in one of dozens of communities near San Francisco, Houston, Atlanta or the District of Columbia.

A new study by the National Taxpayer Advocate used confidential IRS data to show large clusters of potential tax cheats in these five metropolitan areas. The IRS uses the information to target taxpayers for audits.

The taxpayer advocate, Nina Olsen, runs an independent office within the IRS. She got access to the data as part of an effort to learn more about why some taxpayers are more likely to cheat than others.

The study also looked at tax compliance in different industries, and found that people who own construction companies or real estate rental firms may be more likely to fudge their taxes than business owners in other fields.

This whole concept resonates with me.  In my line of work I’m pretty aggressive in trying to sift through data to find root causes and trends.  I get this idea.  On the other hand, is it legal?  Can certain citizens face increased scrutiny, based only on what might be arbitrary profiling?

What is the difference between profiling wealthy citizens in certain industries that live in certain regions with, say, profiling certain people by age, race, nationality and religion?

Or, for a more pertinent subject, profiling citizens in order to reduce gun violence?

The Cost of a Pencil

The other day my daughter and I were walking through the grocery store when she saw a pencil.  She asked me if she could have it.  Normally I like that kind of “toy” request; I can make the deal contingent on a poem, a math problem or a little story.

But this day I said “no”.

But daahhh-ad!  It’s only a dollar!  How long does it take you to earn a dollar.

So I bought her the pencil and when we got home I taught her about taxes.

It turns out that just accounting for my portion of the North Carolina sales tax, my federal income tax and then North Carolina income tax, the cost of that $1.00 pencil goes to $1.68.

I didn’t bother to go through the FICA, the gas tax, and the tax on the car that drove us to the grocery.  Just the three.

Think of that, 40.48% of my income, just accounting for those three taxes, are consumed to buy a simple pencil.

North Carolina GOP – Unemployment Benefits

Another legislative agenda for the state’s republican dominated state government:

 Tens of thousands of unemployed workers receiving federal emergency unemployment will likely lose their benefits starting July 1 as legislators overhaul the program.

Legislative leaders said this week that they will push ahead with a July 1 start to cuts in weekly benefits for unemployed workers. The measure would put the state in violation of the recently passed federal relief package that would have provided benefits to laid-off workers through December 2013. The federal legislation specifically forbid the states from altering the weekly benefit amount, which the General Assembly is poised to do as it returns to session Wednesday.

The reason for the change?  Well, it turns out that the federal government funded the North Carolina’s unemployment payments.  Funded to the tune of nearly $2.5 billion.  And until that debt is paid, North Carolina businesses are required to higher federal unemployment taxes, or FUTA.  In fact, each year that there is an outstanding balance, businesses in NC have to shell out an additional $21 per employee per year, cumulative.

As a response to this ever growing tax burden faced by employers, the idea is to reduce the scope of the state’s UI payout to reduce the normal tax payed.

Is it popular?

Worker advocates called the measure unnecessary and shortsighted.

“This will push thousands and thousands of North Carolinians off an artificial cliff and deny hundreds of millions in dollars to businesses and communities. That money adds nothing to our debt and had already been appropriated,” said Harry Payne, former labor commissioner and worker advocate for the North Carolina Justice Center.

The extended benefits was being funded entirely by the federal government. Each week, that program funnels $25 million in benefits to about 85,000 laid-off workers.

“If anyone wants an example of thoughtlessness, I’ll hold this piece up high,” Payne said. “This is about not understanding what people are going through.”

Certainly not.

However, as the tax per job increases, more and more NC businesses will look to get out of the way of those taxes.  And the only way to do that is to constrain jobs.  Something we certainly don’t wanna do.  Further, by reducing the size of the UI check, the incentive to look for work increases, driving more and more people into the labor force.

Laffer Curve: PGA Style

Imagine a curve.  On the left hand side the value is zero.  Then, as you move from left to right, the slope goes up peaking somewhere then slides down back to zero.  That’s the Laffer Curve.

If you tax income at 0%, you realize $0.00 of tax revenue.  If you tax income at 100% you will also realize $0.00 of tax revenue; no one works for free.  In between is the sweet spot.

And it appears that, for Lefty, a 63% take is just too much:

LA QUINTA, Calf. — Phil Mickelson started his 2013 PGA Tour season at the Humana Challenge in partnership with the Clinton Foundation with a tie for 37th place. But after a final-round 66, Mickelson did more than hint that the 2014 season may see some big changes for the World Golf Hall of Famer.

“Well, it’s been an interesting offseason. And I’m going to have to make some drastic changes,” Mickelson said at the Palmer Course at PGA West in La Quinta. “I’m not going to jump the gun and do it right away, but I will be making some drastic changes.”

And what changes might he be making?

PHIL MICKELSON: Well, it’s been an interesting offseason. And I’m going to have to make some drastic changes. I’m not going to jump the gun and do it right away, but I will be making some drastic changes.

Q. Meaning leaving from California?

PHIL MICKELSON: I’m not sure.

Q. Moving to Canada?

PHIL MICKELSON: I’m not sure what exactly, you know, I’m going to do yet. I’ll probably talk about it more in depth next week. I’m not going to jump the gun, but there are going to be some. There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state and, you know, it doesn’t work for me right now. So I’m going to have to make some changes.

And why does he think he needs to make these changes?

PHIL MICKELSON: Yeah. I’ll probably go into it more next year or next week. But if you add up, if you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent. So I’ve got to make some decisions on what I’m going to do.

France learned it.  And now California is about to.  When you tax the living snot out of people they are going to react.  They’ll either move or quit.

And that results in $0.00 tax revenue.

Laffer Curve – Who Is John Galt

So, it took, literally, 3 business minutes for our financial planner to e-mail us the morning after the election.  He suggested that we talk, asap, in order to adjust our portfolio.

The call occurred this morning and this is the takeaway:

  • We immediately stopped the auto investment of equities that rely on Capital Gains and Dividends.  The money that was designated for such investments will now be routed to cash
  • Begin the auto investment of purchasing municipal bonds.
  • Develop a plan to determine how much of our cash position should be allocated to those muni’s in a lump sum purchase.
  • Develop a plan to determine how much of our equity position should be sold to protect our risk to the market.
  • Review the household budget and identify the cash flow impact of maxing out 401k contribution.
  • Initiate a tax exposure picture at key levels of income.
  • If our salary  hits a level that triggers negative tax implications strongly consider giving the money away to reduce our taxable income to more favorable conditions.
  • Consider acceleration of retirement.  In essence, negotiate a more work/life balance friendly role at the office in exchange for less money/salary.  Enjoy life more and stress less while maintaining the ties to the corporation until such time as a higher income is better protected.

The advice was jarring.  The analysis was clear, direct and immediate.  The market’s reaction to the election was negative and complete.  Investors all over America were having conversations just like this one.  A massive sell off is underway with people moving money out of equities and into safer tax free vehicles like the bonds mentioned above.

Or just getting the hell out of the equities and sit on the cash.  And wait.

And that wasn’t the most chilling advice, that came in the later recommendations.  The first was somewhat humorous and carried an element of a gut reaction:

If the government is going to take 40% of your property move out of the way of that and just give the money to your favorite charity.

Seriously.  Just give it away.  The thinking is that I’m really only out 60 cents on the dollar and the charity is much more efficient at handling the money than the federal government of the United States.

But it was the third piece that really got me.  The advice was to “Go Galt.”  Negotiate, in essence, a demotion at the office in order to reduce the salary to a more friendly level and have more time to enjoy the things we might be pushing off or rushing through.

Just quit and walk away.

My wife and I hold jobs that are incredibly specialized.  The work we do, the hours we allocate to that work and the degree of competence is exceptional.  In the case of my wife I’m simply reflecting fact and you’ll just have to believe me.  As far as MY level of expertise goes, some of you may have your doubts based on the content and style of this blog; I don’t blame you that discretion.

If we did leave, the jobs wouldn’t be back-filled; they’d be absorbed.  No one would get promoted as a result.  The company would be out our production and expertise and the economy would be out the money we now couldn’t spend because we aren’t earning it anymore.

Now, for the Laffer Curve.

Let’s pretend that I’m right smack dab in the middle of the 28% tax bracket.  If I double the 401k contribution we make I will reduce my tax exposure by $7,929.  That means the government gets $7,929 x 28% = $2,220 LESS than they would have had we not gone and elected this unqualified train wreck of a President.

Not to mention the 28% of the money they lose if I just give it away.  Or the 28% they lose if I take a lower salary.

And if I DO increase my 401k contribution that means I’ll have 8 grand a year less to spend on just random stuff here in North Carolina.  It’ll mean fewer dinners out at my favorite pizza joint.  The BBQ shack down the road?  Out my business.  Ice cream for the kids and coffee at the local coffee joint?  Gone.  Jeans will have to last a few months longer, there will be fewer books paid for and less craft beer from the local beer store that just opened around the corner.

All this on top of the losses they have already incurred as a result of me investing in tax free municipal bonds. [Which, by the way, is how people like Romney get to such a low tax rate – they invest in tax free vehicles.  The nerve, right?]

Any money that Obama THOUGHT he was gonna get as a tax hike has actually resulted in a net LOSS to the coffers of the Federal Government.

But hey, Obama knows better than Romney in things like tax policy and how to increase revenues.

Good job America!

The Power Of A Word

From The Economist - True Progressivism

I was going through my edition of The Economist the other day.  It was a treat really, in the “old days” I used have lunch across from the Barnes and Noble, buy the print edition and read it over Thai food.  I’ve long given that ritual up in favor of a subscription and electronic reading but hey….

So, anyway, there I was with my Phad Thai and the print version of the Economist.  I flipped to the “Leaders” section and just shook my head when I say this title:

True Progressivism

I’ve come to see The Economist as a more moderate magazine than I used to, but every now and then I hit an article that makes me wonder.  I nearly just turned the page and walked away.

But I read on.  And boy am I glad that I did!

To be sure they came out of the gate pretty slowly:

BY THE end of the 19th century, the first age of globalisation and a spate of new inventions had transformed the world economy. But the “Gilded Age” was also a famously unequal one, with America’s robber barons and Europe’s “Downton Abbey” classes amassing huge wealth: the concept of “conspicuous consumption” dates back to 1899. The rising gap between rich and poor (and the fear of socialist revolution) spawned a wave of reforms, from Theodore Roosevelt’s trust-busting to Lloyd George’s People’s Budget. Governments promoted competition, introduced progressive taxation and wove the first threads of a social safety net. The aim of this new “Progressive era”, as it was known in America, was to make society fairer without reducing its entrepreneurial vim.

Ugh.

But the plot improves quickly:

Thus, on America’s campaign trail, the left attacks Mitt Romney as a robber baron and the right derides Barack Obama as a class warrior. In some European countries politicians have simply given in to the mob: witness François Hollande’s proposed 75% income-tax rate.

I’m willing to trade a whole bunch of ideology to someone who’s willing to admit that the left is nothing more than class warriors.  So anyway, the article moves along and then comes some true gems:

In the rich world the cronyism is better-hidden. One reason why Wall Street accounts for a disproportionate share of the wealthy is the implicit subsidy given to too-big-to-fail banks. From doctors to lawyers, many high-paying professions are full of unnecessary restrictive practices. And then there is the most unfair transfer of all—misdirected welfare spending. Social spending is often less about helping the poor than giving goodies to the relatively wealthy. In America the housing subsidy to the richest fifth (through mortgage-interest relief) is four times the amount spent on public housing for the poorest fifth.

WOW!

The Economist is calling out the label, “Too Big To Fail.”  And then the truly Libertarian line of logic that begins to pin back the lawyers and the docs.  Who WOULDN’T love the racket that allows barristers and snake oil salesmen to restrict competition?  And how about that fact regarding the mortgage-interest?

So, ideas?

Compete, target and reform

The priority should be a Rooseveltian attack on monopolies and vested interests, be they state-owned enterprises in China or big banks on Wall Street. The emerging world, in particular, needs to introduce greater transparency in government contracts and effective anti-trust law. It is no coincidence that the world’s richest man, Carlos Slim, made his money in Mexican telecoms, an industry where competitive pressures were low and prices were sky-high. In the rich world there is also plenty of opening up to do. Only a fraction of the European Union’s economy is a genuine single market. School reform and introducing choice is crucial: no Wall Street financier has done as much damage to American social mobility as the teachers’ unions have. Getting rid of distortions, such as labour laws in Europe or the remnants of China’s hukou system of household registration, would also make a huge difference.

Next, target government spending on the poor and the young. In the emerging world too much cash goes to universal fuel subsidies that disproportionately favour the wealthy (in Asia) and unaffordable pensions that favour the relatively affluent (in Latin America). But the biggest target for reform is the welfare states of the rich world. Given their ageing societies, governments cannot hope to spend less on the elderly, but they can reduce the pace of increase—for instance, by raising retirement ages more dramatically and means-testing the goodies on offer. Some of the cash could go into education. The first Progressive era led to the introduction of publicly financed secondary schools; this time round the target should be pre-school education, as well as more retraining for the jobless.

Last, reform taxes: not to punish the rich but to raise money more efficiently and progressively. In poorer economies, where tax avoidance is rife, the focus should be on lower rates and better enforcement. In rich ones the main gains should come from eliminating deductions that particularly benefit the wealthy (such as America’s mortgage-interest deduction); narrowing the gap between tax rates on wages and capital income; and relying more on efficient taxes that are paid disproportionately by the rich, such as some property taxes.

Thoughts on paragraphs 1, 2 and 3:

1- A gigantic FU to the teacher’s unions and labor laws!  What I wouldn’t do to compromise if the deal included teacher’s union destruction and the loosening of labor laws.  I mean, holy shit – “No Wall Street financier has done as much damage to American social mobility as the teacher’s unions!”

2- Welfare reform.  We can only hope to slow the increase, but we should!   Though they do slip on early education; there isn’t any data that suggests the gains last beyond 3rd grade.

3-  This sounds exactly like Romney’s tax plan.

And to think, I almost passed this by because of the word Progressivism.

Romney’s Tax Plan

A recent report from the Tax Policy Center is showing that the Romney tax plan will result in an added tax burden on folks with the lowest incomes:

Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.

I haven’t read all of the report nor have I taken much time to study the plan offered by the Governor.  However, the broad brush strokes seem to be that there would be a 20% reduction in the tax rate at all tax brackets.  Further, Romney would broaden the base by eliminating deductions.  Last, Romney claims that his policies would spark the economy into 4% growth as opposed to the anemic sub 2% that we’ve grown accustomed too.

It should be no secret that I’m a small tax small spend kinda guy.  So I’m a little concerned that the main thrust is surrounding tax rates and not spending rates.  Cutting taxes is fine, but unless we shrink government, we’re only left with larger deficits.

I’m also a big believer in the concept of the Laffer Curve.  This is the idea that tax rates of 0% and 100% will result in the same amount of tax revenue.  And that as tax rates increase from 0% more and more tax revenue will be generated until a peak is hit at which point any further increase in the tax rate will result in lower revenue.  I think this is true.  It’s important to emphasize the concept of both sides of the curve and I think that Romney may be forgetting the 0% side and arch of the philosophy.

I’m not so optimistic that we’re sitting on the exact right peak right now and that either a tax hike or a tax cut would reduce revenue.  But I think there might be better ways to spur the economy without introducing tax cuts.  For example, end this continued nonsense surrounding the extension of the Bush tax cuts.  Make ’em permanent and move on.  The taxes in Obamacare?  Remove them too.

Right now, I think that tax certainty would be a sufficient spark to the economy and one that could generate the 4% growth Romney is targeting.

I’ll leave the discussion with one caveat.  I think that we need to reduce our corporate tax so that we’re among the most competitive in the world in this space and not the worst in the world.  Further, I would edit the code to say that all earnings realized in a foreign nation and taxed at the national rate can be brought to America without being subject to further American corporate taxes.  It’s hard to defend the practice of taxing money earned in France, using French -ahem- roads and bridges and then taxing that money further for the construction of American roads and bridges.

Are You Smarter Than A Six Year Old?

This evening I was with my kid and we stopped at the bank.  I had a check to deposit and then I needed some cash.

As we drove away from the drive through ATM the young lad asked me, “Daddy, how much money did you get?”  I replied, “One hundred dollars.”

He scrunched his little face and asked if that was 2 bills?  When I told  him that it wasn’t, rather five bills; $20 bills each.

He then asked if he could have one.  When I answered that, indeed, he couldn’t, he grew a little frustrated.  “But daddy, I don’t have ANY money and you would STILL have 80 bucks!  You would STILL have more money than I would.”

It struck me how parallel his argument is with the liberals in government.

Barack Obama: Giving Something Back

At that small little firehouse in Virginia, Mr. Obama gave us a very real look into his philosophy.  Key among that is how success is built.  Let’s look at his words more carefully:

There are a lot of wealthy, successful Americans who agree with me — because they want to give something back.  They know they didn’t — look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something — there are a whole bunch of hardworking people out there.  (Applause.)

If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.  If you’ve got a business — you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.

So, from his words we see that Obama feels that our success is not ours alone:

They know they didn’t — look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.

So, why are we successful?

If you were successful, somebody along the line gave you some help.

And that help was?

There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.

And because of all this help, what are we expecting the successful among us to do?

There are a lot of wealthy, successful Americans who agree with me — because they want to give something back.

But I’m struck….how did all that help get there in the first place?  I’ll leave that to Thomas Sowell via Mark Perry:

All the high-flown talk about how people who are successful in business should “give back” to the community that created the things that facilitated their success is, again, something that sounds plausible to people who do not stop and think through what is being said. After years of dumbed-down education, that apparently includes a lot of people.

Take Obama’s example of the business that benefits from being able to ship their products on roads that the government built. How does that create a need to “give back”? Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

What about the workers that businesses hire, whose education is usually created in government-financed schools? The government doesn’t have any wealth of its own, except what it takes from taxpayers, whether individuals or businesses. They have already paid for that education. It is not a gift that they have to “give back” by letting politicians take more of their money and freedom.

When businesses hire highly educated people, such as chemists or engineers, competition in the labor market forces them to pay higher salaries for people with longer years of valuable education. That education is not a government gift to the employers. It is paid for while it is being created in schools and universities, and it is paid for in higher salaries when highly educated people are hired.

One of the tricks of professional magicians is to distract the audience’s attention from what they are doing while they are creating an illusion of magic. Pious talk about “giving back” distracts our attention from the cold fact that politicians are taking away more and more of our money and our freedom.

Why should they have to pay for it twice?  Indeed.

Why Do We Tax Those Whom We Tax?

I might be willing to agree that we should tax people according to their income.  I’d be less inclined to agree that we should increase the rate of taxation as the income moved ever higher.

However the debate went, I would insist on this:

Taxation of the people is meant to pay for the necessary role of government.

There is no way that you could get me to agree that we need to confiscate the wealth of one man and simply hand it to another.