Discuss: Let's Fix Taxes this Week!

So this week I participated in a blog and the issue of how to fix the tax code came up. My answers appear with the questions below (with links for taxes you may not have known about) and I would like to open it up to you readers. If you were the tax guru and had the opportunity to fix the tax code, how would you do it? Use the questions below as your guide. I'd love to hear your opinions. (And you don't have to answer every question if you don't want to).

- Would you retain a progressive system or switch to a flat tax?
Flat tax. Hands down. It would involve no altering of the Constitution (like the Fair Tax requires). I would put forward a "20-20" plan, I would exempt the first $20,000 from any tax, then tax each dollar above that amount by 20%. I would also raise the interest income to 20% as well (currently it sits at 15%), so no matter where you make money, it's taxed at 20%. It would bring a steady flow in, and even if you live off your interest (meaning you don't pull an income), you would be taxed at 20%. Sounds fair to me.

- Would you decrease income tax and increase usage (eg, gas) taxes?
Sure. I know Libertarians suggest this all the time. They tend to follow a "legalize it and tax it" approach to things like prostitution and marijuana. I'm not a Libertarian, but I don't think it's a bad idea. If red states like Nevada and Colorado don't have a problem with it, I don't see it as a major issue.

- Would you alter our withholding system so employees keep more money until taxes are due?
No. the reason why it was put in place to begin with is because as a whole we tend to spend what we make. Some people are convinced that "they don't even pay taxes, because the government pays them," when actually they are getting a refund. Withholding enforces the idea of "out-of-sight, out of mind," and keeps people from going into bankruptcy when they get a $7500 tax bill in April.

Would you tie the AMT to inflation, scrap it, or leave it?
Scrap. AMT (Alternative Minimum Tax) was an envy tax, and now everyone is getting bitten. Let the government find a way to budget properly and cut spending, like the rest of us do.

Would you change SS (Social Security) and Medicare payroll tax rates? Change the SS cap? I might leave it the same, but I just don't feel as if I'm getting any SS anyway. SS is supposed to go under in 2042, just when I turn 62 and can start to claim benefits. Knowing that I probably won't get any return on my "insurance investment" will probably make me more reluctant to raise the cap on how much more of my hard-earned paycheck they can take.

- Would you (continue to) promote saving and investment through tax policy? Home owning?
You know it! Saving is very important, and we need to convince future Americans to save like their grandparents did, to have a supplement for Social Security. And I would favor responsible home-owning and discourage giving out loans to people who cannot pay them (like we see in the risky sub-prime market).

- Would you permit taxpayers to target a portion of their payment towards specific programs?Not a bad idea, as long as it's properly regulated. I wouldn't want people to cheat the system by having John Smith donating to the "Smith Family Empowerment Fund." However, it would be interesting to direct your tax funding to a certain government department (education, energy, defense, etc.)

- Would you change the child tax credit? Change rates for married filing jointly? Nah, I'm not heartless. The EITC and Child Tax Credit is helpful to families who need a little help sometimes. I would extend this. If you're married filing jointly, I would not penalize you for this either.

Would you eliminate the gift tax? The inheritance ("death") tax? To compromise, I would bring both down to the flat tax rate of 20%. 55% is kinda harsh. I agree money can be taxed "every time it changes hands," but we should be reasonable, so that we won't have an AMT-type problem in the future.

-Would you tinker with the rates for different brackets? With what goal in mind? See first answer above. My goal is to help educate people that they are funding the government and they should keep an eye on how their money is being spent in Washington.

Now it's your turn. Discuss!

Energy (Money) Saving Tips Around the House

This week, a few savings tidbits:
Those of you who run your A/C regularly in the summertime (and you pay for your electricity), Con Edison has a cost to run it--about $0.25/hr. Now, that may sound like small change, but it does add up. Say that you run your air from 7pm (when you get home) until 7am (when you get up). That's 12 hours of consistent running of cooling air. At 72 degrees, that's 0.25 X 12 = $3/day. For 30 days, this brings us to $90 per month, which does not include other items in your home running on electricity.

Now, I understand that there's nothing like coming home from a long commute to a cooled, welcomed home. However, it's probably best to set your AC timer (if you have one) to start about 30 minutes before you are expected to arrive home.

By the way, most energy companies suggest you set your thermostat to 78 degrees--this is the "sweet spot" for savings. Every degree below that adds about $4 to your total cost per month. So, if you raise your thermostat from 72 to 78, you could save about $24/month on your average $100-a-month power bill.

1 - If every home in America completely replaced the five light fixtures they use most with Energy Star qualified models, we would collectively prevent greenhouse gases equivalent to the emissions of more than eight million cars.

2 - If every household in the country replaced four 75-watt incandescent bulbs that burn four or more hours a day with four 23-watt fluorescent bulbs, we would save as much energy as is consumed by approximately 38 million cars in one year.

OK, so as far as the environmental impact, I doubt much will matter in this case. The bigger issue I can see here is the bonus savings you can get economically. Although compact fluorescent bulbs are not the safest thing out there, it will definitely bring you long-term savings to your energy bill.

You can find more savings tips here from Georgia Power. We'll put more up later on. Take care!

Good Advice, Bad Advice.

The Financial Markets took it on the chin this week. However, while everyone around you is in full panic, it's important to keep your head. Those of you in our year-long Stock Market game (it's still not to late to jump on in), probably have experienced first hand the perils of day-to-day monitoring and trading in such a volatile market. This CNN Finance article provides some sound insight on the importance of investing a few nuggets, especially for you who hold 401(k) portfolios:

Fluctuations in the market shouldn't get to the 401(k) investor. Keep in mind your time horizon - most of us are going to be invested in the market until we retire, often decades from now.

On average, stocks move higher - their long term average gain is 10.8 percent each year, according to Hugh Johnson of Johnson Illington Advisors.

Over those long time horizons, stocks will move up and down. It will be nearly impossible for you to call the highs and lows. If you sell now, you run the risk of missing gains and paying fees to re-invest in the market.

Here's an example of how damaging moving your money around can be:

If you sold your stocks at the market bottom in September of 1998 when the Dow was at 7539.07, you would have missed out on portfolio gains of 21.8 percent by the end of that year.

Amen to that. Main point here--trust the long-term returns of the market, and shun the emotion to sell off your investments, especially if you have established, blue chip companies or sound value stocks in your folder.


ON the flip side:

Sometimes, conventional wisdom and common sense coincide. The problem is, people often times cannot find this part of the Venn Diagram of Realistic Thinking. This young unfortunate soul, who actually works for a company that gives out investment advice (although he apparently was not hired on much merit) encourages shunning Personal Responsibility and instead bumming off of your friends, family, and Credit Card companies.

No really--I'm not kidding:
To wit:

What happens if your car breaks down and you need money to get it running again? What happens if you lose your job and need to support yourself? What happens if you get arrested and need to bail yourself out of jail?

If you get in trouble and need to bail yourself out, the last thing you want is to spend your own money. The best way to avoid that is to make sure you can't afford to fix whatever the problem is. Young people are better positioned to pass off the cost of emergencies than any other group...

Every financial hardship is an opportunity -- an opportunity for your parents to show you how much they love you. Nobody's going to label you a parasite if you ask for help when you're in trouble -- that's the beauty of it.

Yikes!

If you're wondering what Estate this sheltered young man came from, understand that he is a Harvard Grad. (Not the common-sense Harvard Grad, but the stodgy, trust-fund, stereotypical kind you see on TV.)

So what do you guys think? Am I misjudging here? Perhaps up is down, and bad advice is the new good advice (and vice-versa). I'm sticking with my guns, and hoping this guy is just trying to build an audience to give real advice. Let me know if I'm missing something.

Also, what more would you like to see from our site?

See you next week.

Forbes' 10 "Hidden" Taxes you Probably Pay, Part I

With the 2008 election season in full swing (really?!), you've probably heard quite a bit about tax plans—some want to raise taxes on certain groups; others seek to either flatten the tax system to a single bracket for everyone, or even change the entire system altogether (fair tax/national sales tax). However, there are certain taxes you take for granted everyday that you probably didn't realize you pay. A Forbes article describes the "everyday" taxes regular Americans hit all the time. Here are five of them.

1. Gas Tax – Those of you who drive and are tired of the high gas prices know that taxes are already "built in" to the price, but ever wonder how much? Try 18.4 cents per gallon. And this is only the federal tax built in. State taxes bump it even higher—on average, the combined federal, state, and local taxes levied on gas is about 45.8 cents on every gallon. Want to know more on how your gas dollars are spent? Click Here!

2. "Sweet" Tax – Not a purely tax outright, but usually it's built into products like sugary cereals.

3. Payroll Tax (Good old FICA). From the article:

Employers and employees split the cost of payroll taxes--the Social Security, Medicare and miscellaneous taxes you see listed as "FICA" on your paycheck. But many economists argue that you're paid less so that your employer can compensate for tax it pays just to keep you on the payroll. If you earn $97,500 or less, this could mean a 15.3% reduction in your take-home pay. (Half in the payroll tax you pay, half in your employer's share.) According to the Tax Policy Center, about two-thirds of all wage earners fork over more to Uncle Sam in payroll taxes (including the employer's share) than in income taxes.

4. Airline Tax – When you buy a ticket, the price "skyrockets." Again, from the website, we get the following "blurb."

Ever wonder why the price of an airline ticket jumps by $50 or so when taxes and fees are applied? Under current law, you pay a 7.5% ticket tax, a $3.40 segment tax (which increases by about a dime every year) for every leg of your trip, and an airport fee of up to $4.50 per ticket. Fly overseas and you can be charged as much as $30.20 for an international arrival and departure tax. All money goes to fund the Federal Aviation Administration. And these amounts don't even include various Homeland Security Department taxes, such as the $2.50 per ticket "Sept. 11" fee that goes to pay for airport security.

Yikes. Something to think about, especially if you fly on your own a lot.

5. Alternative Minimum Tax – Perhaps the most ridiculous tax of them all, I just call it the "envy tax." Back in the 60's this tax was written by our government to make sure that a couple hundred rich folks pay their "fair share" to the government (who of course, went on to frivolously spend and run deficits on the money). They didn't index it for inflation, and because of it regular people pay much higher taxes. How many people? Well, if nothing is done, about 50 million people will be hit by the AMT within the next 3 years. Astonishingly (but not really), Congress hasn't bothered to permanently alter it or even index it for inflation. Don't expect them to—the AMT brings in about $800 billion a year.

So, apparently there's no escape from them. Personally, I take a measured approach to taxes—some I don't mind, others are ridiculous. But just keep this in mind—for your awareness' sake.