Tag Archives: Taxes

The Impact Of The Fiscal Cliff – CBO Analysis

Anyone who pays attention, and even a few of us who don’t, know that we are facing what the experts are calling “The Fiscal Cliff.”  This is in reference to the set of economic or fiscal policies set to be enacted if nothing changes.  That is, it is already law and will be implemented unless new laws are passed to change them.  Key among this cliff are two main components:

  1. Allowing the Bush Tax Cuts to expire.
  2. Sequestration – Mandatory budget cuts.

Recent headlines have cited a CBO report issued earlier this month.  In it, the CBO reports that tax hikes on the wealthy won’t really hurt the economy:

(Reuters) – Allowing income tax rates to rise for wealthy Americans, and maintaining rates for the less affluent, would not hurt U.S. economic growth much in 2013, the Congressional Budget Office said on Thursday, stepping into a dispute between Republicans and Democrats over how to resolve the so-called “fiscal cliff.”

The report by the authoritative non-partisan arm of Congress is expected to fuel President Barack Obama’s demand for higher taxes on the rich, part of his proposal to avoid the full impact of the expiring tax cuts and across-the-board spending reductions set to begin in early 2013 unless Congress acts.

The narrative is that allowing Obama to follow through on the class warfare rhetoric wouldn’t really be that harmful to the economy; almost saying that any negative impact is worth it in order to restore “fairness.”

This report, and other just like it, are using the individual analysis of each portion of the fiscal cliff:

Extending all expiring tax provisions other than the cut in the payroll tax and indexing the AMT for inflation— except for allowing the expiration of lower tax rates on income above $250,000 for couples and $200,000 for single taxpayers—would boost real GDP by about 1¼ percent by the end of 2013. That effect is nearly as large as the effect of making all of those changes in law and extending the lower tax rates on higher incomes as well (which CBO estimates to be a little less than 1½ percent, as noted above), primarily because the budgetary impact would be nearly as large (and secondarily because the extension of lower tax rates on higher incomes would have a relatively small effect on output per dollar of budgetary cost).

So, by keeping the tax cuts for everyone under 250k we grow by 1.25%.  But if we keep ALL tax cuts we grow by 1.5%.  And the analysis is that the 1/4 point in GDP isn’t significant.  Perhaps.  But it represents 16.67% more growth than if we raise the taxes on the wealthy.

16.67 percent seems like a pretty big “get,” especially when the President is struggling as is.

But how about jobs:

The CBO said the tax hikes for the wealthy would reduce job growth by around 200,000 jobs…

For a President that is interested in growing jobs, he has a funny way of showing it.

So, what happens if we avoid the cliff?

Output would be greater and unemployment lower in the
next few years if some or all of the fiscal tightening scheduled
under current law—sometimes called the fiscal
cliff—was removed.


But is that all?

However, CBO expects that even if
all of the fiscal tightening was eliminated, the economy would remain below its potential and the unemployment rate would remain higher than usual for some time.  Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) …

Yeah….that’s interesting, but what happens if we do nothing and just fall over the cliff?

…Moreover, if the fiscal tightening was removed and the policies that are currently in effect were kept in place indefinitely, a continued surge in federal debt during the rest of this decade and beyond would raise the risk of a fiscal crisis (in which the government would lose the ability to borrow money at affordable interest rates) and would eventually reduce the nation’s output and income below what would occur if the fiscal tightening was
allowed to take place as currently set by law.

Not for nothing, but I think that reading ALL THE WAY to the second paragraph and reporting on the part of the report that kinda isn’t friendly to Obama is somewhat important.

Be that as it is, if it were me and I was the Speaker, I’d tell the Barackness Monster to go to hell, hold on and jump.  We’d be better off.


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!

Beer And Taxes

A friend of mine posted this on Facebook.  I’ve posted here before but I think every now and then it’s important to take time and understand what taxes are really meant to do:

Raise funds to pay for the proper role of government.

And. because we uses a system of taxation that is progressive, when we reduce taxes, that reduction will also reflect the nature of that progressive tax system.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100…
If they paid their bill the way we pay our taxes, it would go something like this…
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7..
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do..

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20”. Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from every body’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

The “tax cut” above resulted in the rich man saving more dollars.  But he was paying more dollars to begin with.  Remember this when the left screams, “The tax cuts unfairly benefit the rich!”

Romney’s Tax Plan

It seems that the whole campaign season has been about Romney’s tax plan.  Namely that it’s nothing more than a giant gimme to the rich at the expense of the middle class.  The argument goes along the lines of this:

You cannot reduce the marginal rate by 5 points across the board and eliminate enough deductions from the wealthy to make the plan both revenue neutral.  Therefore the plan MUST raise rates on those of us not in the upper 5 to 1 percent in income.

First this: I am a firm believer in the Laffer curve, a concept that describes what people do with their money to expose it to a tax burden.  The idea is that a tax rate of 0% will bring in the same amount of income as a tax rate of 100%.  Revenue increases at the beginning of each end until it reaches some theoretical maximum along the way.  Conservatives like to use the Laffer Curve as an argument against HIGHER taxes.  In this I am using it as an argument against LOWER taxes.  While I disagree with liberals that we need to raise taxes, I think that inserting a level of confidence that we are simply going to keep tax rates consistent is enough to grow the economy.

Second this: Romney’s plan has three planks –

  1. 5 point reduction across the board
  2. Deficit neutral
  3. Revenue neutral

Admittedly I get frustrated by the confusion created when “deficit” and “revenue” are used interchangeably, but it is what it is.

With all of that said, if Romney’s plan IS impossible, all it means is that what he is describing cannot be done.  It does NOT mean that there MUST be a tax hike on the middle class.  Of that he’ll blow a hole in the deficit.

For example, it could mean that he can’t move the rate by 5 points for the wealthy.

Okay, so my two issues aside; is the Romney tax plan impossible as the Obama campaign posits?

Rumor has it at “Yes.”

Princeton professor Harvey Rosen tells THE WEEKLY STANDARD in an email that the Obama campaign is misrepresenting his paper on Romney’s tax plan:

I can’t tell exactly how the Obama campaign reached that characterization of my work.  It might be that they assume that Governor Romney wants to keep the taxes from the Affordable Care Act in place, despite the fact that the Governor has called for its complete repeal.  The main conclusion of my study is that  under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on taxpayers with incomes above $200,000 about the same.  That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.

I’ve always thought that Romney’s plan counted on growth.  Growth of existing salaries and then growth of the transition from unemployed to employed.

Now, do I think that’s the path we need to take?  Not necessarily.  But do I trust Romney more than Obama on anything, and I mean ANYTHING financial?  Most assuredly.

Mitt Romney And The 47%

I’ve listened to the Mother Jones video several times now – I just listened to it again –  and I don’t hear a controversy.  I don’t hear anything inflammatory.  I don’t hear one word said in malice or with the intent to hurt anyone.  And I certainly don’t hear anything not true.

Nearly Half of Americans Don’t Pay Federal Income Tax

In the Mother Jones video Romney makes the claim that 47% of Americans don’t pay a federal income tax.  He’s right, or at least he was right when he made the claim.  In 2011 that number was only 46%, but in 2010 the percentage of Americans not paying the tax was 47%.  Just like Romney said.

According to the CBO, in aggregate, the poorest 60% of us don’t pay a federal income tax.  Worse, the top quintile, the wealthiest 20%, pay more than 94% of federal incomes taxes according to the most recent numbers in 2009.

Ninety Four Percent!

Continue reading

If We Try Very Hard We Too Can Be Italy

This guys is serious.  He’s honestly making the case that the United States doesn’t pay enough in taxes and that if we only paid more, we could enjoy the benefits of Italy:

Italy may be in a funk, with a shrinking economy and a high unemployment rate, but the United States can learn a lot from it, and not just about the benefits of public health care. Italians live longer. Their poverty rate is much lower than ours. If they lose their jobs or suffer some other misfortune, they can turn to a more generous social safety net.

Mr. Porter makes this case with what I can only assume is a straight face.  What he calls a “funk” is really an economy that is one of the worst in Europe, perhaps only behind Greece.  And he’s actually trying to make the case that we, the United States, can learn a lot from Italy.

We can.  But not in the way that the author is trying to point out.  What we have to learn from Italy is what NOT to do.  Certainly not WHAT to do.


No wonder we can’t afford to keep more children alive. In 2007, the most recent year for which figures are available, the United States government spent about 16 percent of its output on social programs — things like public health, food and housing for the poor. In Italy, that figure was 25 percent.

Here again, Porter is lamenting the fact that the United States spends “only” 16%  of our output, GDP[?], while Italy spends 25%.  Yet no mention that Italy is deeply in debt and failing to grow its way out of the danger zone.

In short, the government has spent too much money.  So much so that Italy is deeply in danger of economic catastrophe.  Hardly a fair price to pay for  extended unemployment benefits.

It’s safe to say that when presented an argument that we need to raise taxes in order to emulate Italy you are dealing with a deeply partisan statist.


Bigger Government – Higher Taxes: A Liberals Charity

For a long time now we’ve know that religious belief, political affiliation and charity correlate.  Certainly correlation isn’t causation but it does provide for interesting conversations.  Which brings me this story:

BOSTON — A new study on the generosity of Americans suggests that states with the least religious residents are also the stingiest about giving money to charity.

Like I said, this is well known and not surprising.  I would like to say that freedom loving individuals intuitively know that we need to care for our neighbors, but that legalized theft is not the way to do it.  However, I don’t think most people think it through like that.

But it would be fin to try and explain this:

The study released Monday by the Chronicle of Philanthropy found that residents in states where religious participation is higher than the rest of the nation, particularly in the South, gave the greatest percentage of their discretionary income to charity.

The Northeast, with lower religious participation, was the least generous to charities, with the six New England states filling the last six slots among the 50 states.

The study also found that patterns of charitable giving are colored in political reds and blues.

Of the 10 least generous states, nine voted for Democrat Barack Obama for president in the last election. By contrast, of the 10 most generous states, eight voted for Republican John McCain.

Whatever the reason, I think it has to do with how the brain works.  For example, there are studies that show people who “be green” are then more likely to be rude or less moral; at least for a time.  Scientist feel that by contributing to the health of their plant, that “need” in their mind has been met and they are now free to act less charitable.

In fact, I’ve always felt that liberals aren’t less generous, they simply feel that government is their charity.  I honestly feel that when a liberal lawmaker is successful in voting for someone else to build a school for the poor with someone elses money, they feel the same sense of accomplishment that someone who volunteers for Habit for Humanity and actually swings the hammer that builds the school, or house.

Not surprisingly I’m often called out for this line of “garbage” and am told that I’m simply looking at it through too simply and too bias a lens.  Perhaps.  Tribalism is tough and resentment is an unattractive date.  Which is why I was surprised to see this:

Alan Wolfe, a political science professor at Boston College, said it’s wrong to link a state’s religious makeup with its generosity. People in less religious states are giving in a different way by being more willing to pay higher taxes so the government can equitably distribute superior benefits, Wolfe said. And the distribution is based purely on need, rather than religious affiliation or other variables, said Wolfe, also head of the college’s Boisi Center for Religion and Public Life.

Wolfe said people in less religious states “view the tax money they’re paying not as something that’s forced upon them, but as a recognition that they belong with everyone else, that they’re citizens in the common good. … I think people here believe that when they pay their taxes, they’re being altruistic.

I’ll differ with the good professor a little bit here.  I don’t think it’s the act of PAYING the taxes that causes democrats to be less charitable than others, I think it’s the act of VOTING for more spending that causes liberals to be less charitable.

No one likes to pay taxes and even democrats avoid it when they can.

Obama: You Didn’t Build That

Obama’s words are now famous.   In context, out of context, fair not fair, it’s all out there.  The republicans are running with it and the president is denying it.  However, this much is true.

Obama was making reference to the fact that business owners did not get to where they are entirely on their own.  Much of their success is based on the fact that those who came before created an infrastructure, roads and bridges, teachers and firemen, who have made their success possible.

And because of this, Obama feels, the very wealthiest among us, should be willing to “give a little back.”  Now, it’s important to put this in context, as ironic as that might be.  Here Obama is talking about his desire to let the Bush tax cuts expire for the wealthiest Americans.  Those Bush tax cuts that he wants to keep are the federal income taxes for all Americans earning less than $250,000.

President Obama is creating the narrative.  Federal income taxes.  The wealthy.  Business owners.  Roads and bridges and teachers.


The conversation is federal income tax.  We’re not talking about sales tax.  No mention of property tax.  Not a whisper about social insurance taxes.  This conversation begins and ends with federal income tax.  Keeping the Bush rates for everyone but the wealthiest using the logic that those business owners didn’t build the infrastructure that allowed them to be successful.

In researching TPC’s critique of the Romney tax plan I found some numbers that will prove to be illustrative to Obama’s, his own logic, argument:

It turns out that the middle class didn’t build that.  The poorest among us didn’t build that.  Just as you would imagine, the wealthiest among us built that.  Those few wealthy who not only provide jobs for the rest of us but also provide for the roads and bridges to get us there.


Question On Taxes And Revenues

If an individual is a net Federal Income Tax receiver, is a reduction in the amount of money he receives from the Federal Government a tax hike for him?

I suspect that the answer is “yes.”  Exemptions that are removed seem to be treated as tax hikes.

For illustration, I own a home.  If the mortgage interest deduction would go away I would pay more taxes.  I can see me arguing that would be equal to a tax increase.   And since there is no income level that carries a negative tax bracket, any change in tax policy that would diminish a payment or reduce a deduction would be seen as a tax hike.

I’m only thinking this through right now.  I’m reading the report from the Tax Policy Center on how the plan offered by Romney would impact the tax picture for all of us.

I have two thoughts besides the one above:

  1. Why do we need to be revenue neutral?  Why can’t we cut taxes and just quit spending so much money?
  2. This sentence from the same organization bothers me: “An estimated 42 percent of the 76 million nontaxable tax units will have negative liability in 2011.”

A tax is an amount of money that an individual PAYS to the government.  Reducing the amount of money that someone GETS from the government might not be labelled a tax INCREASE.  In fact, I happen to think that labeling government entitlement programs as “tax cuts” has been a method to get those programs passed.  And this is long before Obama stepped into the White House [DUBYA!]

Serious.  42% of 76 million is a lot of people who are takers.  And 76 million out of 300 million is a  lot of non-payers!

It’s Jobs And The Economy Stupid

I’m not sure that Obama will be able to get from his time fighting inequality as a community organizer in the city of Chicago.  I’m not sure he knows HOW to get away from his time fighting inequality.

But America wants him to focus on fixing the economy and bringing more jobs:

Nearly every major poll indicates that the top issues for voters are jobs and the economy. Making the wealthy pay more in income taxes? Not so much, at least according to a new USA Today/Gallup poll.

An excerpt from Gallup:

“Creating good jobs, reducing corruption in the federal government, and reducing the federal budget deficit score highest when Americans rate 12 issues as priorities for the next president to address. Americans assign much less importance to increasing taxes on wealthy Americans and dealing with environmental concerns.”

In fact, higher taxes for the rich was given the lowest priority of the dozen issues, Gallup reports.

Respondents rated “extremely important” the following issues: “creating good jobs” (48 percent of respondents); “reducing corruption in the federal government” (45 percent); “reducing the federal budget deficit” (44 percent); “dealing with terrorism and other international threats” (42 percent).

After a number of other issues, it jumps down to “dealing with environmental concerns, such as global warming,” (21 percent). The same percentage — 21 percent — cited “increasing taxes on wealthy Americans” as an extremely important issue.

The poll would seem to indicate that the fairness arguments made by President Obama and his campaign aren’t top concerns for voters.

I think this is spot on for two reasons:

  1. People don’t think there is a fairness in taxation issue
  2. In so far as there is, no one really cares.  People compare their wealth to those around them and few see the excesses of the very wealthy.  But what they DO want is to regain some confidence in the job markets.

But that’s probably just me talking, not the folks who support our President:

What’s really striking about the poll results is that not only was this true of voters in the aggregate but of self-identified Obama voters, too.

Among Obama supporters, only 32 percent said raising taxes on the wealthy should be a top priority of the next president. That also put it dead last on the list of 12 issues among that demographic.

Well, maybe America HAS got it right.