debate over the tax of wealth

"I would like to see facts on that. To my knowledge some rich pay 60 to 70% of their income where the middle class and poor pay 10% to 20%."

Payroll taxes include social security and medicare dollars (most of which won't be seen again by the people now paying them). Those account for ~7%. Usually there are state and local taxes (or sales taxes) which account for another 7-10%. Add in that poor people are more likely to consume tobacco or alcohol products (which have government surcharges) and the natural embedded taxes passed from by corporate and business taxes, or direct taxes and tariffs on things like food/sugar/gasoline and virtually everyone in the lower class pays over 50%. The rich and wealthy can use assets (like capital gains and real estate) to shelter the growth of their money. The poor/middle class generally use 401k or pension monies which are taxable at normal, if not "higher" rates (because they're not provided good information for alternatives).

If some rich are paying 60-70% of their income, they need to fire their accountant. The federal marginal tax rate is "only" 35% on only the money over a certain amount of taxable income and there are plenty of ways to get deductions in that 35% range to knock down the taxable amount further.

I am in agreement that the tax rate needs restructuring and balance, but not with a flat income tax. (sales tax, maybe).

"Well that's if you are counting sales taxes and what not but I am just looking at what you give to the government during tax season. Also saying most poor people smoke and drink and the rich do not is kind of a unfair statement. Also if they choose to do that those kind of figures should be set aside completely. That is a choice that they have made the government does not "force" them into buying those products.

I just don't understand your logic. . . the rich do use all of these things you speak of as well??"


No I'm saying that the poor engage in more activities that are essentially taxes. For example: they buy more lottery tickets. They buy more cigarrettes, they drink more. Etc. Since this also constitutes a larger cross-section of the population (the bottom 50%), that's a big chunk of people more likely to do things that inadvertantly increase the amounts of money they pay in taxes every year. To be fair, those taxes are basically subsidizing the increases in medical care costs or sustaining inferior school districts. Those figures should not be 'set aside', because they are a part of someone's overall tax bill (just as sales taxes or embedded corporate taxes are). Some of these taxes cannot be avoided even by choice, legally speaking.

If you wish only to discuss payroll and income taxes, the total percentages are still roughly higher for someone who is poorer in income. The federal marginal income rate is 35% on taxable income over 350k. This is only on taxable income, and only on the money OVER 350k. It's not on the money below it. There the rate is 33%, and so on down the line until someone who has only made around 9k of income when they finally pay no taxes at all (on income). What happens with a decent accountant is that 1) someone making a larger income learns to put money aside where it will grow at lower taxed rates (like capital gains for stocks/real estate) or no tax (life insurance/municipal bonds), generating a much lower relative tax burden and 2) the available income to tax is then attacked with itemized deductions, which come off the top not the bottom of the income bracket. If one is running a business say, it is fairly easy to come up with deductions (this before one calculates in the HMI deduction, which is often substantial), which again lowers the relative tax burden. Since someone of higher income is more apt to have access to these deductions by virtue of being more likely to run a business or own a home/property, they can get out (legally) of much of the additional tax burden we impose (and I don't begrudge them for doing so). It is essentially voluntarily stupid to pay any amount exceeding 25-30% of one's total income in federal income tax unless one is exceedingly wealthy, like 9-10 figures of income. Even then the amount will be roughly 35%. By contrast, the poor do not generally have additional income to contribute to tax-free savings, do not have available deductions (tax credits are a different story) and then to boot get screwed by putting money away in taxable savings (401k) if they can, and usually do their taxes at some place with a sign for instant tax refund credits (@ 2000% interest). I suspect most of those problems would be alleviated with a decent personal finance course, but that's another matter entirely.

As far as payroll taxes, these only apply on the first 97000 of income. Therefore, if someone makes more than that, they aren't taxed at the same rate as someone making less, like say the 9000 a year person. To be fair, this wasn't originally a tax, but we screwed that up decades ago, so it's NOW a tax. It is intended that these dollars are essentially banked away for use by that individual, but most economists seem to understand that Social Security is doomed without some revisions (at some point). Which means if that money may not be coming back it is an additional tax which disproportionally targets the poor or middle class. (now I'd argue we could just get rid of these taxes or make them privatized instead, but that's not very popular either).

estate tax question

"Are you in favor of increasing or eliminating the inheritance tax?"

It doesn't touch the really wealthy anyway. Estate planners are trained to move assets around to prevent the tax from kicking in, or to find ways to cover it as a cost and transfer wealth anyway. The only way to tax wealth is to tax consumption of it.

good st wall

http://news.yahoo.com/s/ap/20080331/ap_on_bi_ge/fed_overhaul

What the hell?

Insurance and banking are generally regulated on state levels. The idea that a federal mandate was necessary or would have averted the present mortgage crisis is ridiculous. What might have helped the mortgage crisis was a simple piece of paper describing the loan terms in English, but that isn’t listed as a prospective change here anyway. I’m not sure what insurance companies were doing wrong that they need federal oversight. Maybe health insurance. They already got bail-outs from the fed after Katrina and other disasters. There again the same crime of not offering a simple explanation of terms probably is the key issue (anyone ever read their policies?)

The primary problems with the financial industry as a whole is similar to the crisis of doctor malpractice suits. Explain things in English (or whichever plain language we’re referring to). End the insistence on mystical and arcane language and focus .. and critical elements that any client would have to deal with. None of that is something that can be reasonably fixed by federal activity and is in fact more likely to be impeded because federal mandates will impose importance on issues that may be irrelevant or insignificant in particular cases, destroying the ability of advisers to offer flexible and actionable advice (look what HMOs have done to medical care, same concept only the government instead of the insurance companies). The only good news of these proposals is that they will likely remain delayed in committees and there to die by the hand of the financial lobbyists. It’s possible the Democrats will try to pass some elements, but they’ll undoubtedly wait until November unless they’re up for a contested re-election (likely considering Congressional approval ratings). The language of the key Dems in the story suggests even this is unlikely (if only because they want STRONGER regulation, idiots).

On reflection, it does appear to consolidate what are now inter-agency tasks into more powerful agencies. I’m not sure if this is necessarily good or bad yet, it’s less confusing, but it’s unclear if whatever regulation is offered will be effective or meaningful. My initial read is that this is probably ultimately good for business and investment (by removing overlapping regulatory agencies) by essentially regulating de-regulation. That’s the good part.. the bad part is that it creates new regulation over industries that aren’t directly involved in the ’mortgage crisis’, which I don’t understand the point of doing so (unless it’s a measure to streamline competition by destroying vast intrastate barriers, especially in health insurance. Property insurance or car insurance seem best left to state authorities). Most of the agencies that are being gutted are banking or investing related (SEC/OTS/CFTC). It is true that some sort of oversight is needed for these industries, but most states already possess some sort of sentry duty for this purpose. Expressing pressure for states to move in certain directions would be sufficient, expanding the power of federal government does not seem like the appropriate response to the problem. The problem is caused by inappropriate actions taken by both lenders and lendees, etc. Communication between these groups must improve, which regulation does not guarantee will happen.

Other note. The stock crash in 29 didn’t cause the Great Depression. I wish people could figure this out. What caused the Depression was in fact the banking crash in 32. This was related to the stock crash because of the money banks and margin buyers through banks investing.. but until confidence in the stability of banks and loans collapsed, the economy was still reasonably vibrant. Why the media somehow imposes this magical power on the ups and downs of the market upon the economy as a whole makes no sense. Probably because they don’t understand the economy anymore than anyone else does and figure these numbers must mean something so they’ll report on them. In fact the market going down caused more Americans to become rich than had ever been true before in America (stocks became so undervalued that people could purchase huge amounts when they went back up). But without stable banks to entrust the money to, that’s a real problem. Stock is an intangible asset, it’s supposed to rise and fall as people decide whether it’s more or less valuable. Money is basically an intangible agreement.. once that agreement is set aside economies stall (or fail to expand, looking at some developing countries).

Curiously, CNN didn’t even have this as a story anywhere on the front page.
I found this an intriguing political point: "It’s probably a bad idea to spend too much time debating the organization of the fire department while the fire is still burning and no independent investigation of the cause of the fire has yet been completed" The basic problem and reason this won’t really get much play is that Democrats have already ’established’ the ’cause’ as big bad business and will insist on regulation to ’control’ those businesses (even though such regulations inevitably favor those businesses against new blood and are eaten away at the margins by back-scratching tax breaks or other methods). But the central point is that the re-organization of federal and state agencies who should be attempting to work with banks and other institutions to come up with appropriate responses to consumer complaints is a waste of time and a diversion of resources. I disagree.. because I’m not convinced that the regulatory agencies can really do much of anything to avert the ’crisis’ anyway, but that’s a different story.

modern mythology

http://www.businessandmedia.org/specialreports/2007/toptenmyths/mediamyths.asp

Something tells me if we had a dispassionate media we might have a more involved public. Since our public has to go to such lengths to get actual information, most of it seems pretty lazy and contented to swallow whatever strangeness is offered at the news desk.

10 -- Airlines. One thought that came up, virtually any level of infrastructure has become utterly outdated -- bridges collapsing. Airplanes are running on 1940/50s technology. Water and sewer pipes are over one hundred years old. Not a good things. I'm not impressed that airlines are blameless. The behavior of airlines (as noted at times by the strange expulsion of young women on their clothing) is not helping either. But to hear the media, making a profit is a vile thing. Not when it comes to efficiently moving hundreds of people from one side of the country to the other. It would be better if they could hire 3rd party screeners (rather than government idiots) and take better care of our luggage. But that's about the only gripes I have right now.

9 -- Consumers should stop spending themselves into the poor house at the behest of these strange economic indicators that make no sense. Saving money is much more important in economic sense. While there are economic theories that say government should spend money, it's hard to say that even those theories make any sense. It is expected that there will be a good deal of spending, especially in retail sectors, at this time of year. I would rather see more savers (hint: stop buying me gift cards and just go with cash).

8 -- Stock market is always seen as some hideous monster that will devour people's money. Or it's only evil rich people with hedge funds that own stocks. When in reality, often through retirement accounts, most people own some stock somewhere. And as described, it's not overvalued as a whole. The global economy is huge and America's stake in it is still fairly large. On the plus side, people who panic about stocks have other ways to invest money or save it. But the long term prospects of stocks are what most people are 'investing' for. So who cares if it crashes once in a while.

7 -- Been there and done that. But seriously global warming causing allergies, wildfires (which happen predictably every few years.. ) and obesity? We're clutching at straws here.


6-- I'll eat what I want thank you. I do think that while we're subsidizing health care for the poor, it might make sense to make unhealthy choices more expensive (and thus subsidize healthy choices like quit smoking aids or local produce).

5 -- People who are losing their homes made screwy loans. It does sound like the facts that were quoted were wrong. I'm glad I never heard those numbers and instead had real information. It was inevitable that the real estate market would fall apart. The same thing happened in Tokyo some years ago. At one point the entire city was worth more than the entire continental US in book value. Obviously people didn't want to pay what someone claimed it was worth, as now in America. There was a reason why Japanese investors went nuts buying properties in America at crazy prices. It was still cheaper than what it was in Japan.

4 -- There's some truth here. Not everything green is cheap. But much of it is cheaper in the long run, if not immediately. Halogen lights/LEDs or hybrids are more expensive up front than their conventional alternatives. But they can pay for themselves over time easily enough. Recycling eventually should reduce the cost of new goods or at least provide used/recycled goods at reasonable prices as an alternative. Not everything green is bad either. But it's not always great press and great money. It might be useful if instead of a 'man on the moon' project, the government simply incentivized 'going green' in practical ways like purchasing fuel efficient vehicles and the construction of zero energy or alternative energy homes and so forth. Occasionally it's necessary to game the system (the free market I mean).

3 -- Lenders do need to release information in English. But really all they did was provide loans to people who wanted stuff or property and didn't want to be bothered with reading.

2 -- Free health care isn't free. It'd be nice if it was.

1 -- who cares. Do you have a job? Is there any reason to believe it won't be there next year? Aside from manufacturing, it's probably still going to chug along.

good news for debtors

Found some tidbits of info on the credit card war. The war I'm speaking of is the card companies versus their customers.

The Fed Reserve finally got around to issuing new regulations and they're doozies.
1) Card companies must give 45 days notice before changing terms and conditions. This means in English that instead of the previous 15 days before jacking up an interest rate (to something in 30%+ range), they must give 45. That doesn't help much if you owe a pile of money, but if its possible to pay it down relatively fast or transfer it somewhere else, there's more time to escape. One extra month is huge for procrastinators (people who would have problems being on time with payments anyway)

2) Card companies must explain in English (instead of lawyerese in mice type) what the rewards are and how to attain them. And must also do so with penalties, such as late payments. In some manner which demands attention. In other words, not in mice type and not in vague suggestion, but in clear delineated form. Make a late payment and interest rate goes to__. That information is on the T&C sheet most of the time, but there is no mention of what the rate would be if a late payment or other error occurs.

3) This is the big one. With all the offers for transferring balances out there, the manner in which a card with a transferred balance (with its special rates) and a regular balance on the same card is paid out is important. Currently a payment is applied to the lowest balance rate. Which means that if there is a transfer balance rate, it goes toward that and not the much higher consumer rate. Which means that the card company makes more money and you the debtor must pay for a lot longer to get out of debt. The new regulations say the money goes to the highest interest balance first. Excellent news.

Now the bad news is this is merely a regulatory agency, the Federal Reserve. Credit companies are still fighting the regulations as well as seeking overturning legislation, so these are not official changes to date. But they do illuminate some processes that are going on beyond the curtain for most consumers out there so it was time to share.

By the by, if you're looking to get out of debt much faster, pay half payments in consistent amounts every two weeks. This is very easy if you get paid that often and it basically means that debt becomes a budgeted feature. The card company will begin lowering your minimum payments until they reach a floor figure to attempt to string out the debt, but if the payments remain basically the same, this is irrelevant. It also makes an extra monthly payment over the course of a year and applies some extra money each month to principal and not interest because of the way credit card interest charges are computed. If you're of the internet generation, this is usually extremely easy and doesn't cost extra money from stamps.

money talks

In an interesting twist, a sudden correction in the market was blamed (by talking heads) on sub-prime mortgages. All due respect to the people involved in the news processing, the economy, even something as simplified as the Dow Jones, does not rise or fall on the strength/weakness of a single economic indicator. I always liken these crashes to the occasional random sales going on in the retail or other sales worlds. But then, most people don't have my stomach for roller coasters.

Now I agree though these loans are terribly bad news. But I also blame the people taking them. Making a purchase as large as a house or even a car is a purchase that should be made with a modicum of educated decision making. Very few people can go out and purchase a house on a whim. And it's a long and involved process (as some of us have seen lately). There are plenty of opportunities to know or at least gain insights into what someone is walking into. Asking questions, no no, just sign here on the dotted line. Its much too complicated for a simple person to understand.

Maybe so, but its done deliberately. Making something easy to understand isn't in the lingo of the trade, but in the wake of events like this (and taken in the idea that maybe docs have the same problem), maybe it would be better if more people in my profession tried to speak and put things into regular terms instead of something more arcane and purposefully confusing.

401k Good, bad and Ugly

Back again to my real job (which is not complaining about politicians).

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401k Plans are a type of qualified retirement plan. Most of these share similiar features that make them an imperfect way to save for retirement, at least by themselves. We are sold on them for a variety of reasons, that the company matches, that it is easy, that it will grow, and that we receive a tax break for them. Ultimately we are told also that we will be in a lower tax bracket when we receive distributions, which makes the tax deferral a useful strategy. I propose to examine these tall tales and see what's left of use.

First keep in mind there is one true tidbit of note and use. The employer match. This is free money. It's not as substantial as people think. If they gave us a check for us to do with as we pleased immediately, it would be a true match. As it is, the money is subject to a partnership. With the I.R.S. Who tells us how much they are going to take. Doesn't sound like a partner to me. Additionally, they tell us when we can use it. If we want to use it sooner, they usually hit us with amazing penalties and taxes. So ultimately that match turns out to be alot less because of the eroding factors of taxes and time. But yes, it's still free money. That's the good.

Now the bad. It's true it is easy because the money comes directly from our paychecks. But the tricky part is where it goes. Some companies require the match or even the entirety go into company stock. This is really dangerous. Relying on one stock for financial independence is generally ill-advised to begin with. But when that stock also happens to be your employer, if they go belly-up not only would you lose your retirement, but also your job. The double-whammy is certain failure. My advice there is to look for a way to move it as soon as possible. Even without a forced match, many people are overwhelmed by the options, large-cap, small-cap, etc. Without someone of reasonable economic education to advise them, most people either choose to invest when they should be saving (which is riskier) or save when they should invest (which is often too conservative). Concurrently, many people treat this as a private savings account that they can use. When they switch employers, rather than rolling over the accounts, they spend them. Thus not only is the money used poorly, it's gone and it generates a huge out of pocket tax burden. This is really, really bad.

The ugly is the last mystery and myth behind the curtain. We are told that we are receiving a tax break and that we will be in a lower tax bracket when we go to use the money. First of all a tax deferral is not a tax break. The tax is still there, but now it is an uncertain tax that we will owe on the earnings as well as the principal. No problem, we're told we'll be in a lower tax bracket when we retire. But how does one achieve this mythical status? There are three ways to be in a lower tax bracket. First is deductions, such as home mortgage interest, but the house is paid off usually by that time, so that's out. Second is children, but the kids better be moved out by 59 1/2. So that leaves make less income. Since many people may be foolishly counting on pensions (which are dying off) or social security income (already dead to me), this is entirely possible that it will be true that there will be less income. But is this assumption that we will have less income a good one, or even a healthy one? I submit that it is not. Consider the expansion of technology that has occurred over the past 30 years. Did the average person have a computer, cell phone, DVD player in their homes 30 years ago? They did not. These are all new expenses to a daily lifestyle which is potentially increasing. Did the average person spend as much on medical care? They did not. The assertion that we will need less money to live on when we retire is probably a poor diagnosis. And in fact, we find evidence that it is a poor diagnosis when we examine what financial planners are telling us. They tell us cure to this problem is to work longer or accept lower standards of living. This is a cure? Why not just simply keep the same standard of income to begin with without having to work longer? Shouldn't this be what our planner has been doing for us?

There is still another problem. The tax is still out there floating on us. We cannot say with any certainty what the tax rates themselves will be in the future, but it is perhaps safe to assume they will be higher than they are at present. If that's the case, even if we stay in the same bracket we will pay more. It's entirely possible we could move into that lower bracket and still pay more. Taking the lack of control we have over tax rates out of the equation, the assumption that we should be in a lower tax bracket is still valid. But we can only do that by having income that is not taxable. The income from a qualified plan, the 401k, is entirely taxable. Both income and principal are sitting there over many years generating interest and earnings for us, and our partner. Einstein called compound interest the 8th wonder of the world. This would be true if it wasn't subject to compound tax as well. Our partner, the I.R.S, will decide to tell us when we go to retire and spend this money what they will take of it. Sharing in our success and tireless saving with the greatest of ease.

So what can be done about it? Certainly getting the free money from our employers is a laudable goal. Beyond that, there is no reason to use a 401k as a vital asset for our financial independence. It must be combined with other more flexible (and non-taxable) methods in order to work effectively. There are some better options coming into the situation in the form of ROTH 401ks for example. But thus far, few employers have gone into this, and even fewer will have bothered to explain the potentially vital difference. ROTH accounts are taxed on the initial contribution only, all the earnings are free of tax so long as they are used in specific ways (such as retirement, but also education, buying first home,etc). This subtle difference is potentially a great one when we go to spend the money we've earned over a lifetime.

do nothings

I'm growing tired of blogging on the environment; largely because I feel my position is the most reasonable one out there anyway. So aside from poking fun at the people on both sides running for the hills; it doesn't leave me much to say. But fortunately, the politicians haven't given me much to complain about lately. Because they aren't doing anything 'productive'. You know like pass legislation. At least the kind that affect me. And if they are, they're being damned clever at keeping it quiet (like the union one was). Nope, instead they're busy bogging up the whole war effort. Which is fine by me. I'm not convinced leaving the place is much good either, but so long as it keeps the politicians from actually DOING anything, I'm happy.

Other news. Work is busier, although still slower than I'd hope. I want to be down to one job by summer's end. That's not happening at this pace. I suppose I shouldn't cheer the Congress when I'm not accomplishing much either. If the damned weather would act spring-like again, I'd least be able to run around some. It's rather hard on the lungs, the cold air and jogging. I heard the odd tale of golfing with snowflakes coming down. That'd be lots of fun, but still easier on the lungs than a long winded sprint or one of my diatribes in oral form. I'm very tired of these ads for 'fashion' on my computer. I am quite possibly the least interested person in Madison Ave. That's about it for random thoughts of the day. Brain-dump complete. Back to work. Maybe

tax refunds? why you shouldn't be getting one

Since I've received my old w-2s finally, I guess I'll say something semi-related to my actual job instead of ranting aimlessly on the grave political conundrum we're in.

Here's my point. Tax refunds. The average for 2005 was roughly $2400. This is of dire concern to me. There are many reasons why giving the government an interest free-loan is a stupid idea (not the least of which is what they do with the money when they get it). But lets have a look at what could be done instead.

First of all. There is a large segment of the population who somehow believes this money is the government giving them a check. There are some people for whom this is true. They are mostly totally broke (EIC) however, so we'll ignore them. For most people it is the government returning funds that belong to them as though they sat in a wallet and were suddenly found at the end of the year. This does not mean it is free money, it is a refund. 'Refund' implies you paid them too much money, not that they are giving you money. If you paid at a restaurant or store too much you would expect the cashier to give you your change right then and there, at least I would, not we'll mail this to you in about 8 to 10 months.

Second. Its is not a savings program. If you want savings, take the $2400, split it into 12 months and put $200 in the bank every month. The bank pays you for your money. The government does not. This is not a savings program. It is your money being held hostage for 12 months. A decent online bank nowadays pays at least 5% interest. Which, over $2400 means at least an extra $120 dollars on top of it. 2520 is greater than 2400 last time I checked. This doesn't sound like much, but you could also put it to work in other ways.

What do most people do with the money? Well, they either blow it (vacation!) or spend it on bills. Bills like credit cards or loans. Hmm. They charge interest don't they? What if you used the $200 each month instead? Well, that saves you interest every time. Paying a lump sum if you have low or no interest on them is probably ok. But in every case, paying a consistent sum (above the mins) will attack principal and that means less interest is paid over time. Which means you're in debt less and end up paying less (alot less). I can run people through the numbers, but in general, you're better off having the disciplined attack than taking the lump sum. Interest payments destroy your earnings potential. Only a mortgage is deductible, the rest should be avoided like plague if at all possible.

There are a variety of side effects to this also. A person who disciplines themselves to use the money for good effect each and every month develops a habit of saving or at least of paying loans prudently. The lump sum can be shown in the effects on lottery winnings. Many lottery winners blow the winnings in under 5 years (and this is including people who get the money over many years). Millions of dollars just thrown away; makes me angry to think of it. People don't deserve power if they can't use it responsibly. I'll take the disciplined person over time over a lottery winner any day.

One other note. If you go through a tax service, don't get the money advanced to you. They charge about 2000% interest. If thats the case, who cares if you must wait an extra 2 to 3 weeks. If you're smart you have the money direct deposited anyway and only wait a week or two.

This does not mean you shouldn't pay only the amount you owe. If the government owes you some money back, take it (something like 100,000 people a year don't claim their refunds). But for next year, get set up so you can keep your money and put it to work. You can go to about a 10% underpay without penalty, but shoot for as close to zero as possible for the safe play. Otherwise, you're sending them a check every April 15th which isn't exactly fun either.