Could you lose your house over a water bill?

The Consumerist tells a chilling story about tax liens.

"Say you fall behind on your property taxes, or choose to make your car payment instead of the water bill. It doesn't take much for some municipalities to file a tax lien against a homeowner, often a debt of only a few hundred dollars [...] Those liens are often sold to companies that tack on substantial interest rates starting in the 18% range, and upwards of 50%. These lien buyers also charge huge fees to redeem the liens and avoid foreclosure. [...] redemption penalties in Georgia, Iowa, Mississippi, New Jersey, and Texas all exceed 20%."

"There is the Baltimore woman whose $362 water bill was sold off to a lien buyer. Interest and fees caused the amount to balloon up to $3,600. She couldn't pay and lost her house.

An 81-year-old woman in Rhode Island owed $474 on her sewer bill. The tax lien buyer snatched up her lien for $836 and then made a huge profit by selling her house for $85,000."

"The consequences of homeowners not understanding their rights or the process of a tax lien sale is devastating for individuals, families, and communities."

Taxes!

It's getting near the time that taxes are due. I just submitted mine with e-Filing and wanted to give a shout out to Connecticut. As a resident of NY but working in CT I get to pleasure of filing two state taxes. However all the tax softwares charge extra for a second state and I spend enough on the "Delux" version to get a single state.

Fortunately CT has an amazingly easy to use system online that let me file my CT taxes in about 15 minutes with just a few numbers from my Federal Tax return. And it's free!

I love good technology.

IRS has $153 Million in Undelivered Refunds

A university committee was selecting a new dean. They had narrowed the candidates down to a mathematician, an economist and a tax lawyer. Each was asked this question during their interview: “How much is two plus two?”
The mathematician answered immediately, “Four.”
The economist thought for several minutes and finally answered, “Four, plus or minus one.”
Finally the tax lawyer stood up, peered around the room and motioned silently for the committee members to gather close to him. In a hushed, conspiratorial tone, he replied, “How much do you want it to be?”

In an annual reminder to taxpayers, the IRS announced November 30 that it has a total of $153.3 million in undeliverable refund checks for 99,123 taxpayers with mailing address errors. The average undelivered refund check was $1,547 this year.

Taxpayers who are missing a refund should check out the Where’s My Refund? tool on IRS.gov. The tool  provides the status of refunds and, in some cases, instructions on how to resolve delivery problems. Taxpayers can also access a telephone version of Where’s My Refund? by calling 1-800-829-1954.

Bottom Line

The IRS recommends e-file and Direct Deposit of refunds to avoid delivery problems (IR-2011-113).

PS

to acompany the joke at the top, here's my favorite involving a mathematician...

An engineer, a physicist, and a mathematician share a hotel room. Each falls asleep while smoking.
The engineer wakes up to discover his bed on fire. He grabs a trash can, fills it with water, puts out the fire, and goes back to sleep in a soggy bed.
The physicist wakes up with his bed on fire also. He sees the trash can, makes many calculations in his head, then fills the can with just enough water to perfectly extinguish the fire. He goes back to sleep in a warm, dry bed.
The mathematician wakes up with bed aflame. He sees the trash can and the sink. He concludes, "Ah ha, a solution exists!" and goes back to sleep in the burning bed.

Obama by the numbers

"If I don't have this done in three years, then there's going to be a one-term proposition." - Barack Obama, 2009

There is an excellent Infographic at Flicker called The Obama Presidency, By the Numbers.  In each case below I'll list the before Obama # i and then the  current # under our President - each has a great quote by Obama which I'll paraphrase here:

War on Poverty - "led him to a life of service" 
Povert Rate: 13.2% (2008),  14.3% (2010)

"We have to have a president who understands that the essence of the american dream is a good job" - Obama 2008
U-6 Unemployment 14% (Jan 2009), 16.2% (Aug 2011)
Avg Weeks Unemployed  19.9 (Jan '09), 40.3 (Aug '11)
Jobs 142,201,000 (Jan '09), 139, 627,000 (Aug '11)
Families on Food Stamps:  31.9 million (Jan '09), 45.2 million (May '11)

"America families, since George Bush has been in office, have seen average family incomes go down $2000." - Obama 2008
Ditto for Obama: $52,029 (2008),  $49,445 (2010)

After the great ObamaCare,
Average Family Health Plan:  $12,680 (2008), $15,073 (2011)

There's more at the link above. It's interesting to contrast Obama's words with his accomplishments.

Bottom Line

The President's defense is, it would have been worse without me. That is not a provable statement and also highly unlikely. In a typical recession, the economy rebounds after 18 months and employment picks up. No so now. A trillion dollars was spent and after three years the economy has not recovered. The excuse given, we did not spend enough, again an unprovable statement.

What if we spent too much already? Or spent it on the wrong things? That's the Tea Party position.

Solyndra makes a good example. Over $500,000,000 spent on a company with a bad business plan (Their current cost of manufacturing solar panels was greater than the current market price. They had hoped by ramping up production with a new plant they could lower their cost and make a profit. The plan failed when China lowered the global cost for solar panels by building even cheaper than Solyndra could ever hope to achieve.) In the government there is no downside for supporting losers or making bad bets with the public's money. No one in government is losing their job over this and the tax payer picks up the bill.

Overpaid?

"I'll be back"
- Arnold Schwarzenegger, line from several movies

According to the Washingtion Times, a study based on 2009 salaries found that,

More than 77,000 federal government employees throughout the country — including computer operators, more than 5,000 air traffic controllers, 22 librarians and one interior designer — earned more than the governors of the states in which they work. ... Of those workers, 18,351 were doctors — the highest percentage. The second-highest total was for 5,170 air traffic controllers. ... In Maryland, 7,283 federal employees — about 7 percent of all full-time federal employees in the state — earned more than Gov. Martin O'Malley’s $150,000 salary. ... nationwide there were 122 park rangers, 271 environmental protection specialists, 14 chaplains and one prison guard who earned more than their governors.

The highest earning governor was California at $212,179 although Arnold Schwarzenegger did not accept the money. Still 703 federal workers in California earned more than that level of pay. Maine’s governor made the lowest salary at $70,000

Bottom Line

Is a governor's salary a reasonable cap for civil servant earnings? You decide. Are some governors underpaid or are we overpaying Federal employees?

The taxman giveth and taketh away

"The taxpayer - that's someone who works for the federal government but doesn't have to take the civil service examination. "
~Ronald Reagan
From Instapundit.com,

DRIVING AN ELECTRIC CAR? You must be punished for depriving the government of gas-tax revenue! “After years of urging residents to buy fuel-efficient cars and giving them tax breaks to do it, Washington state lawmakers are considering a measure to charge them a $100 annual fee — what would be the nation’s first electric car fee. State lawmakers grappling with a $5 billion deficit are facing declining gas tax revenue, which means less money to maintain or improve roads.”

Bottom Line

Environmentalists claim that "Big Oil" is opposed to Green Cars. But the government also has a stake in the game and less gas used means less tax revenue to spend.

Tax Day!

"There is no worse tyranny than to force a man to pay for what he does not want merely because you think it would be good for him."
-- Robert A. Heinlein

Jacob Sullum at Reason.com has a thought provoking article entitled, Let He Who Is Without Error Conduct the First Audit.

I came across a 2010 report (PDF) from the National Taxpayers Union that summarizes various experiments showing that professional tax preparers disagree about the proper way to file returns for hypothetical families. Worse, the people conducting the experiments—including the Government Accountability Office, which consulted with experts at the Joint Committee on Taxation—could not definitively say who was right and who was wrong.

In a 1998 study by Money magazine:

All 46 tested tax professionals got a different answer, and none got it right. The professional who directed the test admitted "that his computation is not the only possible correct answer" since the tax law is so murky. The tax computed by these professionals "ranged from $34,240 to $68,912." The closest answer still erred in the government's favor by $610.

In his Reason column, Jacob Sullum notes:

The federal tax code, which in 1913 could be published as a single 400-page book, today occupies some 72,000 pages. In the last 10 years alone, [...] "there have been approximately 4,428 changes to the tax code." The instructions for filling out Form 1040, which took up two pages 75 years ago, are 179 pages long this year.

This is a serious problem because the average taxpayer "can be jailed, or fined, or otherwise punished if you get an answer that is deemed 'wrong,'" according to Instapundit. How can we punish amateurs for tax mistakes when the professionals can not agree what is correct?

Bottom Line

Why is the tax code so complicated? Sullum offers this insight,

politicians [think that they] can improve our decisions by using tax preferences to encourage officially approved behavior, whether it's giving to charity, going to college, adopting children, investing in research, converting corn into fuel, or buying a house, a hybrid car, or a health insurance policy. It's bad enough that the government forcibly extracts a share of our income; it should not presume to direct the spending of the rest.

Natural Limit on Federal Revenue

It is a good thing that we do not get as much government as we pay for. - Will Rogers

A new graph is making the rounds on conservative sites showing that regardless of changes in the tax law, 

"From 1930 to 2010, tax revenue collection in the United States has never topped 20.9%, averaging 16.5% of GDP over these 80 years. ...
During the time period examined above, the rate of income taxation on the highest earning Americans has fluctuated drastically, from 25% of income in 1930 to 92% of income in the early 1950’s. Despite these vast differences in these top marginal rates, the total percentage of GDP that the federal government has collected in revenue has changed little."

Green line = tax revenue collected as % of total income

Politicians at all levels, city, state, federal, believe that deficits can be fixed by raising tax rates. But history shows that those individuals paying the most taxes find ways to shelter their earnings so total tax revenue rarely goes up and sometimes even falls. You may say, "well then, close the loopholes", but then new loopholes are found. Don't forget that most Congressmen and Senators are very rich and want loopholes for themselves. And in today's global economy, if US taxes become too high, it's not that difficult to move your business out of the country.

Analyst Veronique de Rugy, who created the graph above, says, "In recent years, spending, not revenues, has deviated from its historical path; spending must be addressed to rectify the budget."  A few weeks ago I mentioned the Wall Street Journal story, A Sucker's Play -- Each $1 in Higher Taxes Results in $1.17 of New Spending. Estimated projections of new tax revenue results in politicians increasing spending even more - with disastrous results when these projections fall short of reality. In California, a recent report shows that cities and counties will have to pay 55% more to the state for at least 19 years to cover pension expenses; the tax revenue currently collected is far below expectations.

Bottom Line

With politics there is never a time to cut the budget. When times are good and revenue is high, money is allocated to higher civil servant salaries and pensions, and new programs are created for the poor and middle class. When times are poor, it is unthinkable to cut programs for the poor who are most in need (they need even more money!) and there is no way to cut back on civil salaries which are fixed by contract. Obama recently proposed a two year freeze on federal salaries and there were many objections from the left on how horrible this would be! A federal commission to reduce the deficit heard from many organizations - each said, "Yes the government spends too much and must cut back, but not with us, we are essential."aBack in August I wrote about the Laffer Curve, the idea that beyond a certain point, higher taxes lead to greater tax evasion and the net result is less tax revenue collected. This has been observed in states like NJ and Maryland which raised taxes on the rich, only to have them leave the state, and the total tax collection fall. See Actions have consequences.

Politics Roundup

“The single most exciting thing you encounter in government is competence, because it's so rare.” - Daniel P. Moynihan

Here are a few news stories that caught my eye yesterday,

Wall Street Journal: A Sucker's Play -- Each $1 in Higher Taxes Results in $1.17 of New Spending
A presidential deficit reduction commission recommends a 6.5% national sales tax to help reduce the deficit. But a study in the late 80's showed that for every dollar in taxes raised, congress increased spending by $1.58. Repeat studies continue to back this up. The most recent results show that from post-WWII to today, an average of $1.17 of new spending is approved for every extra dollar taxed. Economist Milton Friedman said, "Politicians will always spend every penny of tax raised and whatever else they can get away with."

Who's in charge of the State Department? Taliban Leader in Secret Talks Was an Impostor

"For months, the secret talks unfolding between Taliban and Afghan leaders to end the war appeared to be showing promise, if only because of the appearance of a certain insurgent leader at one end of the table: Mullah Akhtar Muhammad Mansour, one of the most senior commanders in the Taliban movement. But now, it turns out, Mr. Mansour was apparently not Mr. Mansour at all." ... “It’s not him,” said a Western diplomat in Kabul, “and we gave him a lot of money.”

Irish Debt Crisis Forces Collapse of Government

"The impending collapse of the Irish government after an expensive bailout seemed only to reconfirm fears that the financial crisis was far from contained."

Is California paying attention? Is the US? This can't happen to us, right?

From Instapundit, DOES THE TSA KILL?
According to a Cornell study on risk-shifting and risk-increasing roughly 130 travelers die every three months as a result of traffic fatalities brought on by choosing to drive instead of suffering the inconveniences of flying. That’s the equivalent of four fully-loaded Boeing 737s crashing each year.

Bottom Line

I'm reminded of the theme song from a weekly sketch on Hee Haw, "Gloom, Despair and Agony On Me"

National Debt

After 20 years in Congress, I still believe that smaller government and lower taxes are the most effective economic policies.
- Howard Coble (R - NC, 6th District)

Time for my next government rant. :-)
I've been seeing many stories this past week on the size of the National Debt.

Our Debt Is More Than All the Money in the World points out that in 2008 the US debt was conservatively estimated to be $70 Trillion. (70,000,000,000,000) At the same time the global M3 money supply ("meaning cash, consumer-account deposits, checkable accounts, CDs, long-term deposits, travelers’ checks, money-market funds, the whole enchilada") was $60 Trillion. The Global GDP (value of produced goods) was also $60 Trillion. So in 2008 (pre-Obama) neither all the money in the World nor the total value of ALL goods produced was suffient to pay our debt. The debt has since become much worse.

For 2010 the annual US budget deficit will be the second largest in 65 years compared to GDP. The largest gap in 65 years was last year with the famous Stimulus package at 9.9% of the GDP. This is the same as spending 109.9% of what your takehome pay. This year we are over budget by 109.1%. Suppose you earn $100,000 with $70,000 net after taxes. With overspending at 10%-9% you add an additional $7,000 - $6,000 to your credit card EACH year that you can not pay back.

Where did this money go? Who knows? The beaucrats won't say, Financial crisis panel stonewalls Congress.

Bottom Line
How bad is the problem? Investors are losing faith in America, Treasurys Tumble Following Weak 30-Year Sale. (That's 30-year bonds backed by the US Government).

The hidden costs of employment

“The best minds in government? If any were, business would hire them away.” - Ronald Reagan

I highly recommend reading Why I'm Not Hiring by the president of a small company in NJ with 83 employees. In the article he breaks down the taxes and fees for his "median" employee, the one exactly in the middle of the payscale.

She makes $59,000 a year but before that money hits her bank, it is reduced by
-$2,376 for medical and dental insurance,
-   $126 for state unemployment insurance,
-   $149 for disability insurance and
-   $856 for Medicare.
-$1,893 in NJ income taxes. The federal government gets
-$3,661 for Social Security and 
-$6,250 for income tax withholding.
That's roughly $15,000 or 26% of her pay going to the government. [The math has been corrected. The article mistakenly says $13,000] Her take home pay is $44,000.

There are additional costs paid by the employer that don't appear in the paycheck:
-$9,561 for employee/spouse medical and dental,
-   $153 for life and other insurance,
-     $56 for federal unemployment coverage,
-   $149 for disability insurance,
-   $300 for workers' comp and
-   $505 for state unemployment insurance.
-   $856 for Medicare (employer's share) and
-$3,661 for Social Security (employer's share).

"When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. ... Governments impose a 33% surtax on Sally's job each year."

Bottom Line

"Because my company has been conscripted by the government and forced to serve as a tax collector [and insurance provider], we have lost control of a big chunk of our cost structure. Tax increases, whether cloaked as changes in unemployment or disability insurance, Medicare increases or in any other form can dramatically alter our financial situation."

The article goes on to explain that this year his insurance company is charging %28 more for a new plan with less coverage. That's the biggest increase ever and the NJ company will need to increase sales or increase prices to cover the cost. But neither option is likely during a recession.

"Only governments can raise prices repeatedly and pretend there will be no consequences."

So the only option for paying higher taxes and higher insurance rates is cost cutting where possible and cost control with a hiring freeze.

Tax the Rich! Fails again.

Taxation with representation ain't so hot either. ~Gerald Barzan

What a topic today - I get to discuss government, sports and mathematics!

Since April, foreign sports stars competing in Britain have been liable for a top income tax rate of 50%. Now this is unpleasant but it gets even worse. Controversially, the tax is charged not just on the money they earn in Britain but on a proportion of their worldwide sponsorship income.

Many sports stars are voting with their feet and refusing to complete in Britain. The impact is being felt in Olympic type sports like track and field as well as tennis and golf. The organizers of UK sports are asking the government to repeal this tax.

A year ago I wrote about the unintended consequences of raising taxes on the rich,
Actions have consequences. The rich either move or declare a house in another state as their primary residence and the net tax revenue collected declines! The Financial Times reports that the number of Americans giving up their citizenship to protect their families from America’s tax system has jumped rapidly.

The idea that people flee from high taxes is captured in the Laffer Curve; a key part of Reganomics and much criticised by opponents who claim it has been discredited. Actually the stories above show exactly the opposite. It is politicians who are discredited by not understanding the Laffer Curve and negatively impacting the revenue collected with over taxation.

The theory goes like this. When the tax rate is 0%, the tax revenue is zero. Now consider the other extreme; when the tax rate is 100% what happens? Why would anyone work when all the money goes to the government? They'll opt out, collect unemployment, work off the books, use barter, leave the country, or find tax shelters. The end result is very few, if any, will choose to work for non-existent pay and the revenue collected is again zero (or very small).

From calculus you learn that a curve that crosses zero at two points must have a high point, a maximum value. (see image above) To the left of the max, raising taxes increases revenue to the government; but on the right side of the max, raising taxes results in less total revenue.

Bottom Line

Sadly the Laffer Curve is much misunderstood. It does not promise that revenue will always go up when the tax rate falls. It depends on which side of the maximum the current tax rate is. And unfortunately the Laffer Curve does not tell us where that max revenue value is. You have to find it by trial and error to get the perfect tax rate - neither too high nor too low.

http://www.vistech.net/users/rsturge/laffercu.html
http://en.wikipedia.org/wiki/Laffer_curve

Unintended Consequences

“The supply of government exceeds demand.”- Lewis H. Lapham

My latest commuting lecture series on CD has been on the Fundamentals of Economics. With all the problems in the economy and odd government behavior, I decided to brush up on my Micro & Macro Economics that I learned so long ago in college. As the instructor points out, it would be a good thing for ALL government leaders to brush up on the basics.

For example: Supply & Demand. You don’t have to like it but it’s a “force of nature” that cannot be denied. It explains behavior in all kinds of economies – capitalism and socialism - around the world. It results in all manner of unintended consequences in “well-meaning” legislation.

Case in point – the economics professor says one should NOT use prices to bring about social change. The setting of price caps or wage floors upsets the balance of Supply & Demand and nature will not be denied. It will find ways to compensate.

Consider rent control laws. Landlords have no desire to support apartments that return less than market rates. They will let the place run down, or charge high fees (like key deposits) to make up the balance. New landlords stay out of an unprofitable market resulting in fewer “low-cost” places to live. There are also consequences for the renter. When supply of rent-controlled apartments diminishes, those that have them hold on to what they have, no matter what. They become reluctant to move or “trade up” because they have a great below-market deal. The apartments become family assets that are passed on to children or (illegally) subleased, sometimes at higher rates. Because the rent is fixed for everyone, there is little to stop the rich from getting great deals. A congressman from NY has 4 rent-controlled apartments in the same building that he combined into a nice living space.

What are the alternatives to rent-control? If the government wants to help low-income families to find affordable living, then target these families directly (not indirectly with prices that affect everyone). Give them an apartment check that is similar to food stamps – payable only towards rent. Or a tax rebate if rent exceeds x% of your budget for households earning less than $Y.

Or consider tax-cuts & other programs to simulate the economy. Sounds good at first glance – more money in peoples pockets. But what are the unintended consequences?

- More money chasing the limited goods can result in inflation that erodes away the new dollars available. So no one is better off afterwards.
- The extra money may be spent on foreign imports, improving the economies of other nations at the expense of US taxpayers. The “Cash for Clunkers” helped Japanese car makers more than US companies.
- Less tax means the government debt will increase (at least short term until the economy recovers). Government borrowing drains money from investors making it more costly for companies to borrow money or issue bonds/stocks for improvements. Instead of stimulating, the resulting debt can slow down the economy. This happened under FDR, Regan and looks to be happening again under Obama.

The alternative: government spending should focus on long-term improvements that lift up the nation, not handouts to “shovel-ready” jobs for frivolous projects. We could instead build a new Internet super-highway to bring network speeds up to levels enjoyed by nations like Japan. Or build wireless access across the nation. Or fix old roads and bridges and public waterworks. Strengthen our nation’s electricity grid against failure.

Bottom Line

The science of economics is not perfect; it’s not called the “dismal” science for nothing. Just look at the debate of Keynesian vs. Supply-Side vs. other theories on how to “fix” a recession. But an awareness of economic principles and history can teach us that there ain’t no such no such thing as a free lunch. Someone always pays though it may be quite hidden or indirect.

So the next time a politician promises to fix some ill via a law or spending, ask yourself – who will indirectly benefit from this? What will be the long-term consequences and who will suffer? Can this new law/spending be exploited by the rich and powerful [Example: a law was passed requiring government to spend X% of contract dollars on companies with female or minority ownership. What happened – big white-male companies set up dummy companies led by a woman or minority that would subcontract everything back to the big white-male company. There are always loopholes.]

Tax Breaks

“I'm proud of paying taxes. The only thing is--I could be just as proud for half the money.” - Arthur Godfrey

CNNMoney.com has some ideas for lowering the federal taxes you owe. But you must act before Dec 31 to take advantage of these tax incentives:

· New-car sales tax deduction: you can deduct the state and local taxes you paid for a new car purchased between Feb 17 and Dec 31 up to a vehicle price of $49,500 and if you earned less than $125,000 single or $250,000 as a couple.

· “First-time” homebuyers: there is a credit for anyone buying a new house who has not owned a house in three years.

· Green Appliance rebates: see energystar.gov (click on Tax Credits for Energy Efficiency)

· Use your stock market losses: if you sell a deadbeat stock with a loss, you can subtract that loss from profits made on other stocks sold. If you have more losses than gains, you can deduct up to $3000 from ordinary income. For losses to count you cannot buy a new “substantially identical” stock within 30 days of the sale.

· Watch out for the AMT penalty. See the article for details.

· Deduct any gifts you give to charity: this is the last year you can do a direct rollover from an IRA to a tax-exempt organization.

Bottom Line

Be careful with any financial advice. The tax law is full of holes and tricks and it’s easy to make a mistake. See a professional.

We got burned once with bad advice from our estate lawyer. He suggested cashing in the IRA of my wife’s deceased mother over two years to minimize the financial impact on our tax bracket. However he overlooked that there is a one-time partial IRA exemption that is not taxed with an inheritance. By splitting the IRA in two we did not get the full benefit of the exemption and ended up paying more taxes.

Misc

I also liked an article at FiLife.com but there wasn’t enough there for a full post so I’ll tack it on here. How much money can you safely withdrawal from your retirement account without draining it dry before you die? The recommendation is 4.1% to 4.6% annually. At a rate of 4.6%, in order to withdraw $50,000 in the first year, your retirement account needs to exceed $1.1 million dollars. Ouch!

Barter

“All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter.”- Edmund Burke (British Statesman and Philosopher, 1729-1797)

Today I recommend the article, Barter for the Services You Need, on the Wall Street Journal online. It’s a tricky article to summarize; most every paragraph contains useful information.

In these cash strapped times, barter can help you obtain desirable items and services without spending money. An example given is exchanging painting or carpentry work for a week’s stay in your vacation home. I have a friend who exchanges computer repair with a Dentist for free dentistry for his family.

The article lists some online resources to find/post barter opportunities. But also warns you to get references before trusting the barter partner. My wife used to rent out rooms before we married. A well-mannered young man in her church offered to mow the law, paint the house and do other house repair in exchange for a free room over the summer while he interned. She agreed but he failed to live up to his half of the bargain and did very little real work.

References are always a good idea. We hired a painting company, the low bidder, without checking them out. They used college students to do the work with very little training. We fired them after the first day when our bricks and windows were paint splattered and the walls they had painted were peeling.

The article concludes by pointing out that the IRS taxes barter. You need to report the value of goods or services received on form 1099-B.

Bottom Line

Barter can be fun if you have a sense of adventure and are willing to stand up for yourself and not be taken advantage of. Don’t forget to pay the taxes!

And this just caught my eye - some services may not be bartered legally...
Yep, Trying To Trade Sex For World Series Tickets Is Illegal

Government Spending (2)

"America is a land of taxation that was founded to avoid taxation"~Laurence J. Peter

To anyone who thinks higher taxes will fix government spending deficits (for example politicians in California) consider this graphic:

Since 1970, spending by the Federal government has risen seven times faster than the average household income. This is just not responsible and not sustainable.

Bottom Line

The TaxProf Blog also highlights another scary statistic of federal taxes. 53% of the households carry the entire tax burden, nearly half get a free ride:

47% Will Pay $0 Income Tax in 2009

Is there a solution? I would suggest eliminating the complex income tax with all its loopholes and impose a federal shopping tax for everyone. Add 5% to the cost of everything. Those who have little and buy little will not pay much tax. Those who have much and spend much will pay a lot. Everyone will pay a fair share. And think of the money saved when the IRS department is eliminated.

Government Spending

“The Constitution is not an instrument for the government to restrain the people, it is an instrument for the people to restrain the government - lest it come to dominate our lives and interests.”-Patrick Henry

With the financial collapse of California there is a lot of finger pointing and shouting about whether California is spending too much (Republicans) or not collecting enough taxes (Democrats). The spenders claim that there will be hardships for the people if deep cuts are made. Personally I think the public has become too dependent on government handouts and support.

For example we think that government spending is essential for free education and yet for many decades the quality of US public schools has been very low. (In 2000, only 12 percent of graduating seniors were rated "proficient" in science, and international surveys rank our graduating seniors 19th overall out of 21 nations.) Those with money gladly pay for private education while still being taxed for public schools. Some economists have argued that we would be better off privatizing the school system with subsidies or vouchers to low income families. As it stands now we subsidize a huge bureaucracy of teachers and administrators and school boards with no penalties for poor performance and no incentives for good performance. See “A World without Public Schools” for more details.

Out of the blue, I decided to figure out how much the Federal Government costs the American people. Are we getting our money’s worth? The Federal Budget for 2009 (not counting TAARP and the Stimulus which are extra) is 3.1 trillion dollars. The official US population is 306 million. So we could say the cost of government is a little over $10,000 for every resident. That does not sound too bad.

But where does that money come from? Taxes on working adults. Let’s exempt 27.7% of the population who are under age 20 and 12.6% who are 65 and older. If we tax every person aged 20 to 64 (183 million persons) then each would contribute almost $17,000 annually.
Sadly not every adult is employed. Some are taking funds from the government via the many health and welfare programs instead of contributing. Also for this exercise, I’d like to exclude the 22 million persons who are directly employed by Federal and State governments (Military, Civil Servants) and those indirectly employed via government grants and programs. Any taxes they pay just return the government’s money to itself.

This leaves us with 109 million persons employed in the private sector and a tax burden of $28,440 each. (Interestingly if look at the number of total households, we get a similar figure of $27,433 per household. But let’s stick with actual private wage earners.)

Is $28,400 per earner reasonable or is it too much? Let’s look again at the median wage, $25,737. “Median” means that 50% of working Americans earn less than $25,737. So the cost of the Federal government (if evenly distributed) would consume the entire wage of over half the working population. This figure gets even worse if we include state and local taxes.

So how does the government stay afloat? Two ways: taxing the rich and taxing companies. Since the average worker does not have the funds the government needs, the federal budget must rely on taxes from high income earners, let’s say the top 25% to cover the other 75%. However top earners who are over taxed (e.g. 50% rate) may “go John Galt” and opt out of taxes by leaving the country, finding tax shelters, or cheating on their taxes thus reducing revenue collection.

What about taxing companies? In a phrase popularized by Robert Heinlein, “There Is No Just Thing As A Free Lunch.” Companies create products and services that are sold for a profit. Companies must generate the taxes paid by either reducing expenses (like wages) or charging more for their product. So corporate taxes eventually mean less income for workers or customers. I’m not saying corporate tax is bad but it helps to think of it as a hidden sales tax.

Bottom Line

After examining the numbers I’ve concluded that the Federal Government spends too much. No government should consume per capita more than the earnings of over half its privately employed population.

Resources
The Obsolete New York Model, Where a tax-eating majority votes itself a permanent income
The True Size of Government (1999 but still interesting)
US Households Census
Bureau of Labor and Statistics
Average & Median Wages

Update:

Tax Burden of Top 1% Now Exceeds That of Bottom 95%. “Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the ‘rich’ are not paying their fair share of taxes. Indeed, the IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.”

Unemployment

“The best way to appreciate your job is to imagine yourself without one.”-Oscar Wilde

Here is some bad news from a WSJ article, The Economy Is Even Worse Than You Think, written by MORTIMER ZUCKERMAN, editor in chief of U.S. News & World Report.

The Bureau of Labor Statistics estimates that 7.2 million people have lost their jobs since the start of the recession. Job losses over six months are the worst since WWII. The total jobs lost are now equal to the jobs gained over the past nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The WSJ gives reasons why unemployment is worse than the official rate of 9.5% with 7.2 million people:

• Many companies (and states like California) are asking employees to take unpaid leave. These people don't count on the unemployment roll.
  
• 1.4 million unemployed people were not counted because they did not look for work in the 4 weeks prior to the most recent government survey.
  
• The WSJ estimates that 25 million workers are under-employed. 9 million workers (5.8%) are “employed” in part-time jobs because they cannot find full-time jobs. Another 11% of the workforce had their working hours reduced. The average workweek has slipped to 33 hours, the lowest level in 45 years. Factories are running at an average of 65% capacity.
  
• The prospects for new job creation are dim. When the economy does pick up, it is cheaper to assign additional work to the underemployed until they are full-time again. For many large companies, job cuts are permanent as entire divisions and plants have been closed.
  
• The average length of unemployment has climbed to 24.5 weeks (again the highest since numbers were first tracked in 1948). My own unemployment was about 25 weeks.
  
• State budgets are doubly hit as tax revenue is down and expenses are up assisting the unemployed. State and local governments, representing about 15% of the economy, are beginning the worst contraction in postwar history.

Bottom Line

So how is the government responding to the failed stimulus plan and record unemployment?

Option 1. Spend yet more money on a second stimulus plan.
Obama recently declared that the first stimulus “has worked as intended.” But Republican Minority Whip Eric Cantor says, “Let’s remember the context that we took this so-called stimulus bill up in. It was passed almost in the dark of night, 1,100 pages. No one in the House read that bill because the urgency was such that the president said we had to act now and if we acted now, we would stave off job loss and we’d get America back to work. That hasn’t happened.” The whole point of spending a trillion dollars (with interest included) was to keep unemployment below 8% and now it’s 9.5% and climbing.

Option 2. Let’s save the environment now with a “Cap & Tax” bill that places new burdens on struggling factories. “Job losses are so certain under this new cap-and-tax plan that it includes a provision accommodating newly unemployed workers from the resulting dried-up energy sector, to the tune of $4.2 billion over eight years.”

Option 3. Raise taxes now to provide Health Care for everyone
Another editorial in the WSJ looks at the Rangel plan to pay for Health Care by taxing small businesses. It ignores the fact that, “A new study by the Kaufman Foundation finds that small business entrepreneurs have led America out of its last seven post-World War II recessions. They also generate about two of every three new jobs during a recovery.” The current chief White House economist once wrote, "tax increases appear to have a very large, sustained and highly significant negative impact on output." In other words, tax hikes are an antistimulus. If the plan were adopted as written, the U.S. would have close to the most punitive taxes on small business income anywhere on the globe. How's that for biting the hand that feeds you?

Take to heart President Obama’s own words from February: “I expect to be judged by results and … I’m not going to make any excuses. If stuff hasn’t worked and people don’t feel like I’ve led the country in the right direction, then — you’ll have a new president [in 2012].”

Actions have consequences

America is a land of taxation that was founded to avoid taxation.~Laurence J. Peter

As I wrote on July 4, many (most?) of our state and federal congressional leaders have no real business experience. When expenses rise the solution to balancing the budget is rarely ‘spend less’. Instead the answer is more often ‘raise taxes’ or make the rich pay more. But politicians forget that money is mobile. The wealthy can move and businesses can relocate to another state or overseas if local conditions become unfavorable.

The Wall Street Journal looks at an attempt by Maryland to “soak the rich” which resulted in “Millionaires Go Missing”

Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley … declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. [Down to 2000 from 3000 filers] … On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires [combined] paid $100 million less in taxes than they did last year -- even at higher rates.

The WSJ in “Soak the Rich, Lose the Rich” notes that California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon are also trying to raise taxes on the wealthy. The rich respond by moving:

We found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Do low-tax states lack key services. No, they just budget better.

[New Hampshire] the Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.

Bottom Line

Some states have learned this lesson. Maine just reduced state taxes in the hope of drawing people to it.

Other states are still in the dark. North Carolina just passed a bill to tax online sales. In response Amazon has shut down the affiliate program in NC.

Taxation without Representation

Politicians are like diapers. They both need changing regularly and for the same reason. ~Author Unknown

My newest commuting lecture series is “Cycles of American political thought” by Joseph Fiske Kobylka. Though the presentation is low key, the material is interesting and I’m learning many details of American History that I was completely unaware of. For example today’s CD described the significance of the French and Indian War of 1754–1763 as a precursor to the American Revolution.

I’m familiar with the French and Indian War mostly through Genealogy on my Austin family line that goes back to the early 1600’s in Dover, New Hampshire. Some of my ancestors fought in, or were kidnapped or killed in this War. Historian’s view this war as the North American extension of the Seven Year’s war in Europe between all the major powers of the day. But to some degree this war was inevitable. The French claimed ALL of central North America from New Orleans up the entire Mississippi River to all the Great Lakes and into Canada. The British held the American Eastern seacoast and recognized no western limit to their colonies. Both countries wanted the “Ohio land” between the Appalachian Mountains and the Mississippi River for the prosperous fur trade.

When the war began in 1754, seven of the colonies met in Albany, NY to discuss a mutual defense agreement. Benjamin Franklin presented the "Albany Plan" to unite the colonies "under one government as far as might be necessary for defense and other general important purposes". Franklin's plan was unanimously approved by the delegates but, when sent back to the colonial legislatures for ratification, every colony rejected it. They were proudly independent and proudly British. Yet only 22 years later the Declaration of Independence would be signed and the Albany Plan would became the foundation for the US Articles of Confederation. What had changed?

After ten years of fighting, the French lost nearly everything. They traded Canada to England in exchange for the Caribbean islands of Guadeloupe and Martinique and access to fishing in the Newfoundland Grand Banks region via the islands of Saint Pierre and Miquelon. They gave up all territory East of the Mississippi. France gave Louisiana to their ally Spain in compensation for Spain losing Florida to the British.

The British emerged triumphant but debt ridden. The war in North America and Europe was expensive and now England had to administer and protect vast new territories. In 1764 King George III and British Parliament imposed new taxes upon the colonies to help reduce the debt. In America alone the cost of maintaining a standing army of ten thousand British regular troops was £200,000 annually. It only made sense that America, via the Sugar Act tax, should help by paying £78,000 per year for the soldiers that are protecting them. However the colonists didn’t agree for several reasons.

1. The Americans saw no further need for garrisons of local British soldiers. The French were gone and to appease various Indian tribes, England issued the Royal Proclamation of 1763, prohibiting colonists from engaging in further expansion west of the Appalachian Mountains. Within the newly confined territories of the original colonies, there were no enemies left to fight. Besides the war had taught the colonists how to fight and trained a generation of military men (like George Washington) so if there were an Indian skirmish, the colonist could now handle it.
2. New Englanders felt that the tax was too high. The region had done well during the war (by providing soldiers with food and supplies) but fell into a recession after the war. Local merchants & brewers blamed the Sugar tax for making the Rum business unprofitable.
3. Massachusetts Samuel Adams protested the dangers of taxation without representation:
   
   "For if our Trade may be taxed, why not our Lands? Why not the Produce of our Lands & everything we possess or make use of? This we apprehend annihilates our Charter Right to govern & tax ourselves. It strikes at our British privileges, which as we have never forfeited them, we hold in common with our Fellow Subjects who are Natives of Britain. If Taxes are laid upon us in any shape without our having a legal Representation where they are laid, are we not reduced from the Character of free Subjects to the miserable State of tributary Slaves?"

Because of colonial protests and boycotts, British Parliament repealed the Sugar Act after just one year. But they replaced it in 1765 with a new tax on all paper goods called the Stamp Act which was even more unpopular. This led to more protests, some violent, more boycotts and more politics about colonial rights. The Stamp Act was repealed but replaced by the Townshend Acts in 1767. The Townshend was repealed in 1770 (after the Boston Massacre) except for tea! The Tea Act of 1773 resulted in the famous Boston Tea Party and eventually to the Battle of Concord and Lexington.

Bottom Line

As America is embracing new levels of debt on a gigantic scale, it’s useful to look at a time two centuries ago when a debt-ridden England tried to pay off its debt with the help of "Americans". The Tea Parties we see today are a modern day reflection of “taxation without representation”. With jerrymandered congressional districts and people blindly voting along party lines, most elected officials are guaranteed reelection regardless of what they do in office. Bribery, tax cheats, drug arrests, doesn’t matter! The Tea Parties are an attempt to catch the ear of politicians and say, “Hey, we object to massive bailouts and gifts to friends of Democrats, big donors and to companies with the best lobbyists. Represent the taxpayers instead!”. Sadly most politicians are not listening.