A Few Thoughts

(cross-posted at Wealth Weekly and Swords Crossed)

8,000 more job cuts were announced as of today. Coupled with Macy's 7,000 cuts yesterday we're up to 15,000 and it's only the third day of February.

- In a not-too-unrelated story, the American savings rate is up to 2.9% of income. Read this article entitled "Americans Saving More, Spending Less" and watch in horror as they tell you why this is a bad thing.

- Dear DC Elites: Pay. Your. #$@%Taxes....and don't wait until you get caught to do so. Signed, The American People.

- And finally, let's try a hypothetical. Imagine that you work for GM or Chrysler, paid hourly on the line. Now when you get home, you check the mail and discover that the Company offers you a $20,000 and BRAND NEW CAR!!! Oh, and you have to quit your job. In this economy. You call your co-workers and discover all the hourlies have been extended the same offer. Would you do it? Ok, now stop imagining and read this.

Ha! You Got (Tax) Shifted!

It’s what happens when state governments get real smart at taking your money away. Let’s say that you really don’t like taxes (that would probably be all of you). Well, because taxes are really unpopular politically, some state governments have engaged in long-practiced method of collecting needed revenue when times are tough (and sometimes when times aren’t so bad). Let’s call it… You Got (Tax) Shifted!

Here’s how it works.

You want low income taxes despite the fact that the cost of running the state/federal government gets more expensive? OK, lawmakers say. We won’t raise your income taxes. So they appeal to the federal government for “relief” (that means cash). However, people across the country don’t want that to happen either. Thus, local governments will increase their sales taxes. But then if that fails, what happens next? Something has to go to be cut, (or go up to bring in more revenue) So what will go up are...other things you don’t really get as upset about. Like:

- Bridge and Road Tolls
- Mass Transit Fares
- License Vehicle Registration/Tag Fees
- Monthly/Yearly Parking fees
- Parking Ticket fees/Speeding Ticket fees


And/or they start cutting back on services. Libraries and other public-service entities close earlier and shut off lights. Small businesses raise fees and cut back on hours as well. People work less. Here in NYC they are talking about eliminating entire lines of subway service and raising fares...again. These consumption fees are not “taxes” per se, but they still work in the same way by bringing in revenue to keep businesses are state-run services afloat. Of course, you can avoid many of these by not consuming these services, but it’s unlikely that you will stop driving, stop parking, flying, riding, etc. Otherwise, our economy, which depends on you spending money, will continue to tank.

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!

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.

Tax Freedom Day and Subprime Bailouts

So today is Tax Freedom Day, the day where most Americans have worked off their tax burden for the year. In other words, because the "average American" falls in the 25% tax bracket and assuming you receive relatively equal check payments across the year, all the money that you've made up to this point is about the amount you owe the government. For the remainder of the year, all the money you make is "yours." (A quick note--Tax Freedom Day varies by state because some states have state taxes as well, so in some areas it's later than April 30, in others its earlier, but generally it falls about 1-2 weeks before or after April 30.)

Of course the government already knows that if cannot send you a bill for three-month's salary. The reason is because the government knows that most Americans cannot budget. (Most of us don't know how much money we spent last week, let alone how much we spent in the past month). So, the government gets its cut upfront by taking three months worth of pay from you but they spread it over the whole year.

In other news, some words on the "subprime meltdown." There is word that US Senator Chuck Schumer (one of my Senators, no less) is out to craft a bill that would "bail out" those who received bad loans from subprime lenders. Luckily, it appears not to be gaining traction. From the Washington Post:

"I'm not interested in (a bailout) at this point. I think this problem can be addressed without going down that route," said Sen. Chris Dodd, the Democratic chairman of the committee.

Sen. Richard Shelby, the most senior Republican on the panel, said he would be "unalterably opposed" to a costly federal program to rescue troubled mortgage borrowers and lenders.

"I believe the subprime problem will go on for several years," Shelby said, but added that market forces would be corrective.

Perhaps the spirit of bipartisanship in government isn't completely over. Personally, I think there is too much emotion wrapped up in the debate here. Some feel that they were "tricked" or "teased" into an introductory rate (from adjustable rate mortgages) that went up too high, but I also think it's the responsibility of the person receiving the loan to know what they're getting into. I'm sure the emotion of owning your own home is great—however, as home buyers we should jump into home ownership with caution—saving a couple years for a down payment and buying a home within you means is still the best way to go. Don't be in a rush to buy a home, otherwise you can end up in over your head. They'll still be making homes in the years ahead—I promise.

I also don't think the government should bail out the businesses who made these loans either. Lenders who lent to people with bad credit at teaser rates probably knew exactly what they were getting into. Bailing out either the lenders or the borrower is a bad idea because it sends a message that its OK to buy a house out of your range or to extend loans to those who most likely can't pay it back. It's a tough lesson for many, but it's necessary.

What are your feelings on bailing out those who chose sub prime loans? What about the lenders who issued them? And do you think our tax system is fair? Speak your mind!

Tax Refunds - Revisited

Hi readers,

My apologies for not posting an article last week, but hobbies of course take a second fiddle when the work you get paid to do demands more of your time. (Add that to the fact that Doubletree actually charges for internet access...)

Anywho, almost one year ago I posted this article about Tax Refunds. The same story still holds true today. Take a look and leave comments!

http://wealthweekly.blogspot.com/2006/02/got-huge-tax-refund-shame-on-you.html

Take Care. See you next week.

--Charles