IRS note

Dear IRS,

Thank you for the automatic extension.

I think the software messed up here and my loss on that rental should not all be deductible, but they are the professionals so I went with them.

I have included the penalty and interest for my late payment.

Sincerely

John Q. Taxpayer

PS  I am not now, and I have never been, a member of the Tea Party.

Estate taxes

(paraphrase) John Oliver:  "You (anti tax folks) shouldn't be complaining about the estate tax (which you call the death tax) because they are doing exactly what you want:  They are taking your money over your dead body."

Tax rates

Does anyone know the rationale for taxing capital gains at a lower rate than earned income?

U.S. Corporate Tax Rates vs Other Countries

A link to an article highlighting the complexities of the question of whether the U.S. has the highest corporate tax rate "in the world".  Also links to other current stats regarding international tax rates.  What is a country's corporate tax rate?  Depends on what taxes you include in the corporate tax rate.  In the U.S. discussion we generally are referring to the top federal coporate income tax rate.  But is using that rate to compare really an apples to apples comparison?  Maybe...maybe not.

http://businessfinancemag.com/article/does-us-really-have-highest-corporate-tax-rate-0109

Those spending cuts

For those of you who don't know the highest income tax rate being paid right now is 35%.  What would you think about it if the Speaker offered to count the income that is coming in from between 31% and 35% as a tax hike?

I'll bet you would agree that that little hypothetical was laughable.  The next one is not a hypothetical.

For those who do not know the interest rates that the government is paying right now are very low.  According to the PBS Newshour 12-18-12 the president is offering the interest that we don't have to pay because of those low rates as part of his spending cuts.

PBS noted it, but they didn't laugh.

Taxes 2

  You have been hearing the elected Republican officials acknowleging that taxes will have to go up on the "rich"!  I  saw Democrat Howard Dean on TV acknowledging  that taxes will have to go up on the middle class as well!

In a piece in the Washington Post -  Yesterday’s tax revenues can’t support tomorrow’s America 

Ezra Klein of MSNBC states clearly and plainly that, if we are going to continue providing government services at the current level, then the amount of revenue taken by the federal government is going to have to go significantly above the historical level of 18-19 percent of GDP .

He also suggested that it couldn't be collected through the income tax.

He also suggested a value added tax

My, my!

These guys (other than some of the republicans) are not the players, but perhaps they are harbingers.

Is there, in our future, a serious discussion of our fiscal situation?

PS 11PM  I am referring to what may or may not happen after the smaller fiscal cliff thing is done.

Campaign 2012 Obama Domestically

A continuing description of the candidates in several aspects of the job.  I am putting this up, not for your benefit, but for mine. I am soliciting your comments in the hopes of improving my own perspective.

See also Campaign 2012 Obama Foreign Policy for thoughts on that.

In domestic policy the thing that I wanted from Obama was NHI (= national health insurance.)  I would have preferred that it be a single payer thing and that the financing be honest.  See YA NHI1 and YA NHI2 

Of course we did not get NHI, but we got ACA which I consider to be a giant step in that direction.  We also did not get a fiscally sound system.  The second shortcoming of ACA is part of the more general fiscal problem.

With respect to the giant step.  I believe that we have not had NHI because of our system of employer provided health insurance.  People are afraid of what they do not know and so they cling to what they have.  The ACA offers employers a very good deal if they decide to not offer health insurance to their employees: a $2,000 “fine” instead of a $5,000 to $15,000 health care plan.  Hmmm - I wonder which they will choose.  Within a few years there will be far less employer provided health insurance.  Shortly after that we will have national health insurance.

I give a lot of credibility to the argument that we were in a very deep hole when Obama came in.  We are coming back.  They tell me that when the recession comes from a failure in the financial industry, then the comeback is slower. 

I understand that Obama could not get any more stimulus than he did, but it should have been spent on infrastructure rather than tax cuts (Republicans) and bailing out state governments (Democrats).  [Just on that thought, I too am a national debt worrier.  Perhaps even a "Krugman denier".  But there are limits.  Scheduled, short term debt is different.  More and more people are pointing out the lunacy of our not taking advantage of the following:  we have high unemployment, major infrastructure needs, and money that the Fed. Govt. can borrow for 10 years at less than 2%.  When the gods make you an offer that you can’t refuse, don’t refuse it!  We could borrow and spend a trillion dollars, earmark Obama’s tax on the rich (or something else) to pay it back over ten years. You can do that for a total interest cost of 11% of the loan.]

I blame the Republicans for the profligacy of continuing the “Bush tax cuts”, the Democrats for the subprime mortgage fiasco which the government financed and which has not yet been unwound, and both of them for constructing a financial system which includes entities which were too big to fail.   They have not fixed any of these things.  (Capitalism without failure is an oxymoron.  If a company is too big to fail it is too big to exist.  Break it up.)

The GM-Chrysler thing is something that I cannot judge – whether Romney’s direct bankruptcy and then refinancing was essentially the same as Obama’s except that the unions got a special deal from Obama which was funded by the government. (We still own a lot of GM.)

Obama’s attitude toward business worries me.  Like so many liberals he gives the impression that, if he had his druthers, he would really like to have his capitalism without so damn many capitalists in it.  The context from which his little “you didn’t build it” line came is more troubling to me than the line itself. “You say you worked hard.  There are a lot of hard workers out there.”  Seriously, what exactly is the conclusion that we are going for here?  (If you are going to answer this, go a little deeper than – “there is luck involved”.  Who among us does not know that there is luck in life?)  Seriously, if you were going to talk to people about what goes into starting a business, wouldn’t you at least mention risk?  And it is not just business.  A lot of successful people had to take risks to be where they are.  For example, if you are a doctor then you have all of the costs of the ten years of schooling beyond HS and the cost to live during those ten years.  But, perhaps the biggest thing is that you go for those 10 years without earnings, without building up any savings, without building up any equity in a home.  And nobody guarantees that you will actually become a doctor.

The main negative for Obama in this area is the fiscal problem.  I believe this is a very serious problem.  Not just the “fiscal cliff” that you hear about on TV from those who don’t know the difference between the debt and the deficit.  I mean the long term short fall.   I am not convinced that he takes it seriously. 

We the people have been borrowing and spending all of this money, not just in the recession, we have been doing this for years.  Who is doing it:  the “great middle class.”  That is the POWER in this country.  Who will speak truth to POWER? The politicians have been pandering to that POWER.  Listen to how often all of them talk about how they are going to protect the great middle class.  It is a constant pandering which is hard for us to hear because they are pandering to US. 

The left wants a larger government.  An honest liberal will tell me (or at least give me a signal) that to achieve his vision (with fiscal responsibility) we will need serious tax increases on the middle class (as well as the rich).  I have not heard that from Obama.  In fact what I have been hearing from Obama is a litany of promises to maintain all of the goodies that the various groups get from the government.

The right wants a smaller government. An honest conservative will tell me (or at least give me a signal) that to achieve his vision (with fiscal responsibility) we will need to cut some programs that are dear to my middle class heart and pocketbook.  I have heard that from Romney’s first choice: Paul Ryan.

grade B (revised from a C 10-9-12)

Raising Taxes vs Contributing More Revenue

I just watched an interview with Paul Ryan.  He came across to me as intelligent, knowledgeable, handsome, great hair (I am jealous), with a talent for changing the meaning of the interviewers question with his answer.  This last characteristic seems to be a must with all successful politicians.

I have one question though that is bugging me.  He and Romney are very critical of the President’s proposal to raise tax rates on the wealthiest Americans because it raises rates on many “small businesses” (to be clear I am not in favor of it right now either, or any other plan that takes more money out of the economy).  Ryan described his and Romney’s plan as being much better because it lowers rates on everyone.  When pressed for exactly how this helps decrease the deficit he said that they planned to do away with some “loopholes” (also known as deductions) that benefit the wealthiest, by in large, and therefore they would be “contributing more revenue” than they are now.

Huh?  How is making the wealthy pay more by lowering rates but doing away with deductions that will result in the wealthy paying more tax superior to simply raising rates on those same wealthy resulting in them paying more tax.  Since they have refused to tell us, or even give us a hint, what deductions they are planning to do away with, it’s impossible to say if Ryan’s description is accurate or not.

But forgive me if I am suspicious.  Why would the wealthy be so enthusiastic about the Romney/Ryan plan, which will result in them paying more taxes through doing away with deductions, and at the same time be so adamantly against a plan that would result in them paying more taxes through a rise in the highest tax bracket rate?  That was the comparison that Ryan presented in the interview, as I understood it; lower rates with less deductions vs. higher rates, both resulting in increased taxes for the highest earners.  Until we know specifically what deductions are going to be done away with there is no way to compare bottom line results, a person’s tax bill under one plan vs. a person’s tax bill under the other plan.  I feel the old bait and switch coming on if they win the election.  The phrase “pig in a poke” comes to mind.

Please feel free to correct my understanding if my interpretation of the Romney/Ryan plan with regard to income taxes is incorrect.

U.S. Firms Move Abroad to Cut Taxes

Well, we have been told that some companies that moved their operations overseas are moving back to the good ol' USA.  But, we are now told that some public companies are moving their place of incorporation overseas to cut their tax burden, among other reasons. 

http://professional.wsj.com/article/SB10000872396390444230504577615232602107536.html?mod=WSJPRO_hpp_LEFTTopStories

Tax medicare as income

To the receiver of Medicare it is insurance (very good insurance I might add).  That insurance has a value which can be calculated in a simple way (or complicated if one wanted to).  The government gives me that insurance like it gives me SS.  In the case of SS the govt computes how much I paid for it and  calculates the rest as income.  We should do the same for Medicare.  (I would do the same for any insurance paid for by an employer.  But that is another question.)

It is simple "fairness".  If you work you pay taxes on the income.  If you win the lottery you pay taxes on the winnings.  If the government gives you healthcare insurance, then you should pay taxes on it.

Notice that it is elegantly simple and also progressive.  This income would be taxed at the taxpayer's highest marginal rate.  Someone with enough income to pay at a higher rate would pay more.  I would pay (considerably) more.  However,  the poor (including a lot of our mothers) could add the value of their healthcare onto their income and still not be owing any income tax.

The proceeds should be placed in the Medicare Trust Fund.  It would go a long way to solving medicare's  long term problems and be quite progressive without the onerous label of "means testing" medicare.

If you have not heard about this proposal, that is because it would hit the biggest sacred cow in the American tax universe:  THE MIDDLE CLASS.

The reason both sides offer pixie dust solutions is that they want the public to believe that they are the ones who can solve the money problem WITHOUT hitting the middle class.  I do not believe it.

Of course the rich should pay more per person than anyone else,  they do so now, and they would pay even more with this proposal.  But you can't get it all from them.  The tax  loopholes uh "opportunities" that are owned by the middle class are huge:  untaxed healthcare, mortgage interest deductions, child deductions, and charitable contributions.  These are called tax expenditures and they are defended vigorously by all of the middle class's agents in Washington i.e. the politicians.

Of course, this is not a complete solution to the fiscal problem.  But it would be a significant step.
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IRAs and capital gains

There exist investment advisers who believe that the primary advantage of an IRA is the possible difference in tax rates at the beginning and at the end.  I long ago realized that this was not the case and that the main advantage came from the fact that the government lets you keep those taxes and those taxes grow too.  I was talking to a friend, Adam Madison on this blog, who very quickly reduced my lengthy explanation to one simple sentence:  In a IRA you don’t have to pay capital gains taxes.  This is disputed here and there.

Let’s consider three different cases  In each case we will use 10,000 pretax dollars.  Assume your marginal rate for the whole 10,000 is 30% now and in the future .  (We will omit the possibility of an added advantage of being in a lower tax bracket later which is a minor advantage for most of us.)  Let’s say we leave the money in until it doubles.

X         Before IRAs:  You take the $10,000 and pay the tax up front and put the remaining $7,000 into a regular investment account.  In 14 years it grows to $14,000 and you owe capital gains taxes on the $7,000 gain in the account.  You have $14,000 minus that tax.

Y        You take the same $10,000 and pay the tax up front and put the remaining $7,000 into a Roth IRA.  In 14 years it grows to $14,000 and you owe no taxes on that $14,000.

Z        You pay no taxes at the outset and put the $10,000 into a regular IRA.  14 years later you take out $20,000 and pay 30% in taxes leaving you $14,000 after taxes.  Your $7000 doubled without a capital gains tax.

           

(Z is the one where it is harder to see how it is happening.  The 10K in the account can be thought of as $3,000 of taxes that the government lets you keep plus the (after tax) $7,000 that is yours.  Your $7,000 doubles, but the $3,000 of taxes that the government LETS YOU KEEP doubles also, and it is yours!    That second $3,000 is the real benefit of the IRA and it matches the regular taxes that you will owe on the net increase of $10,000.  One might say that the “growth of the taxes pays the taxes on the growth.”)

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Our Income Tax System

There has been much discussion recently regarding income tax rates and the rate structure. Overhauling the income tax system is a popular promise our politicians are now making due to demand from their constituents. We will no doubt hear dueling overhauling ideas over the next few months until November 6 (which, apropos of nothing, is my 60th  birthday).  Citizens seem to believe that the system needs to be simplified because they are certain, or at least fear, that the current complexities result in their individually paying more tax than they would pay under a simpler system. Or that they are paying an unfair portion of the total taxes collected under the current system.  Or even that the government is hiding in this cloud of complexity, some dark deceptive secret that is sucking their soul out.  The last one is not as popular as the other 2 but it's going around.   There is no question in my mind that our income tax system is extremely complex. 

Probably the radical overhaul that I hear favored by most people who button hole me at various occasions is the Flat Tax.  The description of the flat tax system I hear most is "you just take one single rate for everyone and multiply it times your income".  When I ask about deductions they say that there should be no deductions.  The rates I hear favored are normally a rate less than the person I am talking to is currently paying, all the way down to 10%.

Arguing against the Flat Tax--
1.  This country decided a long long time ago that it favored a progressive tax system; the highest marginal rates are levied on the higher income earners (a marginal rate being what rate you pay on the last dollar of income you make that year, so that if you made $200,000 your marginal rate would be the rate you paid on the 200,000th dollar).  Right now our rate structure generally has six rates, 10, 15, 25, 28, 33 and 35.  If your "TAXABLE INCOME" is $200,000 you are in the 33% tax bracket which means that the first $8,700 is taxed at 10%, the next $26,650 is taxed at 15%.  The next $50,300 is taxed at 25% with the next $90,800 taxed at 28%.  Finally the last $23,550 is taxed at 33% (though I don't intend to discuss this in this piece, note that though the taxpayer is said to be in the 33% bracket, only $23,550, about 10% of their TAXABLE INCOME, is actually taxed at 33%.  This, I believe, is greatly misunderstood by the taxpaying public in general).  In this example the taxpayer is single and has no income from stock ownership.  I think when discussing the progressive tax rate, it is not enough to simply say "that's how we've always done it so we must keep doing it that way".  The question is begged, do we believe that a progressive tax rate structure is desirable over a more regressive income tax, like the sales tax, or, like some countries have, a VAT (a single rate value added tax), or in this case a flat tax, and if so, why?

The desired result of a progressive income tax rate structure is to have the higher income earners pay a higher percentage of their income than lower income earners.  Here is a link to a paper by Cornell's Robert H. Frank, The Progressive Income Tax, which speaks at great length about practical benefits of a progressive income tax rate structure from one economist's point of view.  I found it to be very interesting and persuasive on the whole.  But I don't think that the average citizen will give 2 hoots and a holler about what Robert H. Frank thinks.  Many will be distrustful of him just because of his status in the academic world.  And many will be distrustful because his conclusions are, to many, counter intuitive and therefore not "common sense".

I suspect that the reason we have had a progressive income tax from 1913 on is that it maximizes the revenues a government can collect while minimizing the amount of political protest.  After all wealthy citizens have much more of what is called discretionary income and will feel the pinch of income taxes, if they feel it at all, to a much lesser extent. 

And maybe, from an emotional, moral and ethical standpoint, Americans have had, throughout most of this country's history, a soft spot for the hard working but down trodden poor and "soon to be poor" and even the almost poor, all the way up to "I can see the almost poor from here".  And so perhaps the progressive income tax rate structure appealed on that basis also.  Placing all other matters aside, perhaps we felt that if the government needs to take revenue from its citizens, perhaps they should stay out of the pockets of "the little guy".  The rich won't miss it near as much.  No rich person will do without because they pay a heftier portion of the income tax.

I believe that there are good reasons to keep the progressive rate structure.  Mr. Frank lays out a persuasive technical argument for it. 

However, there are those that would say that the progressive rate structure is now a myth anyway, due to allowing differing rate structures for differing kinds of income.  The 15% top rate on dividends and capital gains is the quintessential example that we have currently.  When our R Presidential candidate is paying a14% effective rate, Warren Buffet, one of the richest people in the world is paying a 15% effective rate and our President is paying a 20% effective rate then one must question whether we have a progressive income tax system at this point.  Many of us, with much less, pay a higher effective rate (an effective rate being the percentage of your taxable income being paid in taxes). If we take that as a sign that the progressive tax rate system is already gone anyway, then it is hard to use it as an argument against the flat tax.  However, there are still a lot of wealthy people that derive their income from sources that are not capped at 15%.  So, they are paying in the top marginal rate, now 35%. While not pure, we still maintain a progressive rate system.  I would still maintain that, in spite of its impurity, there is still plenty of reason that the progressive rate system that we have is still superior to a flat tax system.

2. When people talk to me about the flat tax, as I said earlier, I always ask about the fate of deductions in their flat tax plan.  Most say "no deductions".  I usually counter "even for self employed people...no deductions for the costs and expenses incurred in earning the revenue?  I would not be able to deduct my office expenses, computers and telephones and scanners and wages paid to employees and the cost of taking on extra contract labor when needed, office supplies, etc. etc.?  Some say "well of course you could deduct those".  Others actually say "no, no deductions of any kind."  But either way you go there are huge pitfalls and unintended results.

If a business owner (and for purposes of this discussion I am leaving out businesses that must file a return of their own such as partnerships S Corporations and C Corporation) can't deduct the costs and expenses of doing business then, even if the rate is very low, there will be situations that will arise where a business has very large revenue, but for whatever reason, that particular year they lost money on a cash basis or some other generally accepted accounting method.  That business would be hit with a large tax even though it lost money. 

So let's say that we DO allow businesses to take deductions for their "ordinary and necessary" business expenses.  The door is now open.  We CPAs and the tax lawyers and just plain ol' smart people will be burning the midnight oil, and making lots and lots of money, figuring out schemes (tax planning) whereby a taxpayer can have a new business and deduct expenditures that would otherwise be considered personal expenses under the law.  After all, they are now ordinary and necessary business expenses.  TA DA!  Maybe the schemes won't be allowed, so we'll think of some more and the government will have to expend a bunch of resources in policing and litigating tax law compliance.  Well, there goes one of the strongest arguments in favor of the flat tax, ease of and less costly administration.  To a great extent that kind of thing goes on under the current system.  You can't take a tax deduction for a hobby loss.  So my rich clients that want to play gentleman farmer have to tread very lightly because...NEWS FLASH...gentleman farmers lose a LOT of money.  Over the years there has been developed through court rulings and Tax Regulations some safe harbors that these people can use.  As long as they meet certain measurable criteria they can play gnetleman farmer and deduct the 1 or 2 or three hundred grand it costs per year.  THAT is why I know what would happen even if you allow business deductions.  Suddenly with a shift here and move over there those expenses are business expense.  Again, TA DA!

3.  Lastly, I would argue in favor of our current system, that as flawed as some of the laws are, at least we have flexibility in our ability to change it.  I think we have changed it too much since 2000.  Practically every year there has been major tax legislation.  But sometimes change is very helpful, even necessary.  And I see the inflexibility of  the flat tax as a bad thing, even if there were nothing else wrong with it.  With a flat tax where do you go from there but back to where we are now? 

And I think there is no argument that tax law is a vital and powerful component in fiscal policy.  The flexibility of having that powerful tool in the fiscal policy tool kit could make or break the country in some circumstances.  It's a complex world we live in...even moreso than I can fathom.  It's not 1780 anymore.  We are not an agrarian society.  Our government is not made up of a few slave owning gentleman farmers. We are the most powerful nation on Earth and in many ways that makes the world a lot smaller for us and a lot more complex than for most of the rest of the world (except in Alaska.  That place is like brand new).  Economics is more complex than ever in history.  We are juggling a heck of a lot of balls in the air.

The Bankers and Fiduciary Club of Houston has a lunch every month that I used to go to.  I hate stuff like that but business is business.  They always have a speaker and sometime they even have one that is interesting.  Dick Armey used to come and speak to us every now and then when he was a big shot in Washington in the 90s.  I was a serious Republican back then so I was pretty impressed.  Anyway, he would always harp on the flat tax and how it would solve all of our problems.  There are a LOT of CPAs and tax lawyers in the organization who knew more about taxation then Dick Armey ever even dreamed of.  And it was fun when one of them would take Armey on on this subject.  It would get really tense because he was passionate about it...probably because he had invested so much of his time in speaking about it that he had kind of become synonomous with the subject.  But after the first time he came and spoke about it I spent some time reflecting on the whole concept and what I would do as a tax professional if the country decided to go down that road.  I told Marhsi, my wife, that if the country could ever come up with a better tax system that would do everything we need it to do, whether it was a flat tax or some other kind of tax, if it resulted in me having to change my work focus I would do it and be happy to do it.  I never want to be one of those people that always "kicks against the pricks".

I have included a link below for a website which shows the income tax rate structure since 1913.

http://www.taxfoundation.org/files/fed_individual_rate_history_nominal&adjusted-20110909.pdf .

Is the Affordable Care Act constitutional?

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For those of you who cannot wait until June I thought that I would go ahead and tell you how the Supreme Court will rule on this question. (I am not an attorney, but I once had dinner with one.)

The decision will be yes, the ACA is constitutional.

The rationale will be as follows:

1. Clearly the government has a right to require a citizen to pay for health care via taxation. In fact, with Medicare the government requires a 20 year old citizen to pay taxes for health care that he will not even begin to receive until 45 years later.

2. The ACA mandate is a tax* by another name.

3. The court will not overturn a major piece of legislation on the basis of semantics.

A long shot: The yes vote will be at least 6 and the opinion will be written by the CJ.

However it goes, which ever side loses this argument will have their supporters outraged by the loss and they may find a silver lining in the fall election.

Check back here in June when I will either crow or eat crow.

*Perhaps it was not labeled a tax because its authors had promised not to raise taxes.
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A rich guy’s case for higher taxes

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A good case for increasing the top marginal rate can be found in this article by Ezra Klein .

Except for the part where he compared a rich person's income tax to a middle income earner's income + payroll taxes it is a pretty good article.

Here is a sample (he is talking about the Bush tax cuts):
It would be one thing, Levine says, if the economy had performed so much better after taxes on the rich were cut. But it didn’t. Some of the fastest economic growth of the post-war period came in the 1950s, when the top tax rate was above 80 percent. The slowest growth came in the 2000s, when the top tax rate was 35 percent. ...

a bit more on the fragility of democracy

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A thought experiment from Biting my Tongue in support of The fragility of democracy which appeared here Feb. 28.

According to the most recent data from the Congressional Budget Office, the bottom 50% of all income earners pay just 3.4% of the taxes collected! Conversely, the top 20% of income earners pay a whopping 85% of the taxes collected. In other words, 80% of income earners contribute a miserable 15% of the taxes collected! When you consider that this lower income bracket is totally dominated by politicians that overwhelmingly favor wealth redistribution, Americans are now able to “vote themselves money.” One is left to wonder if we have already begun to “herald the end of the republic.”

... Years ago, I came across a great analogy to our system of taxes. The story has been printed and e-mailed many times in different formats, but the basic concept remains unchanged. Although the origins of the story are unknown, everyone agrees that the good ole federal government clearly provided the inspiration.

Here it is:

Every evening, the same 10 friends eat dinner together, family style, at the same restaurant. The bill for all 10 comes to $100. They always pay it the way we pay taxes:
• The first four are poor and pay nothing.
• The fifth pays $1.
• The sixth pays $3.
• The seventh, $7
• The eighth, $12.
• The ninth, $18.
• The 10th, (the most well-to-do) pays $59.

One night the restaurant owner announces that because they're such good customers, he's dropping their group dinner bill to $80. Let's call that a tax cut. They want to continue paying their bill as we pay taxes. So the four poorest men still eat free. But if the other six split the $20 tax cut evenly, each would save $3.33. That means the fifth and sixth men would end up being paid to eat. The restaurant owner works out a plan: The fifth man eats free; the sixth pays $2; the seventh, $5; the eighth, $9; the ninth, $12; and the 10th guy pays $52. All six are better off than before, and the four poor guys still eat for nothing. The trouble starts when they leave the restaurant and begin to compare what they reaped from the $20 cut. "I only got a dollar of it," says the sixth man, "but he (pointing at No. 10) got $7." The fifth guy, who also saved a dollar by getting his meal free, agrees that it's not fair for the richest to get seven times the savings as he. No. 7, grousing that the wealthy get all the breaks, points out that he only got two bucks. "Wait a minute," the first four poor guys yell in unison. "We didn't get anything at all. The system exploits the poor!"

PS I support graduated income taxes - I even support an increase in taxes, but I am offended when tax cuts are described the way they are by Democratic Politicians. They are either intellectually dishonest or stupid. (That is a mathematical 'or'.)
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the payroll tax cut

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Well I've been thinkin' for some time how odd it was that I hadn't seen anyone in the media who was noticing that the "payroll tax" that was just passed was being paid for out of the SS trust fund. That is all of that money that we are not paying in payroll taxes is money that will not go into the SS trust fund.

Finally though someone did mention it. I'm sure there were more, but to their credit the list included Tom Harkin D Iowa and Joe Manchin D WV who were willing to point out that this was reducing the time until SS does not have the money to pay the promised benefits. Benefits and taxes were supposed to be adjusted as needed to keep SS solvent for 75 years. That was so you could fix the problems way ahead of time which would make them relatively painless. According to the SS annual report it was good until the early 2030s before this tax cut. Let's see 2033-2012 = 21.

But the politicians (read we) have adopted a tried and true method of getting the people to steal from the future to put more money in our pockets today. They just took another huge chunk out of it with this taxcut. But not to worry. Someone asked Democratic Minority Leader Pelosi about it and she said that SS could handle it. Let's see, is 21 close to 75?

I guess, as they say, its close enough for government work.
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Perry's Flat Tax 2

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Whether Perry's proposal is actually more regressive than the current would depend on what percentage of their total income the wealthier people actually pay now. It is certainly true that with their deductions what they pay now (as a percentage of total income) is less than their marginal rate. Probably, with Perry's plan, their taxes as a percentage of total income would go up for some (those who have a lot of other deductions) and down for others.

One note the Rich Family E in the post may have to pay a bit more (than indicated there) because Perry would disallow deductions for those with income over 500K.

As Tom noted (in his comment to the previous post on this topic) this is not progressive enough for some.
Presumably one could add an extra tax for those whose income is over some amount X.

Finally, I like the flat tax but I think it will have to be higher to obtain the income that the government now gets from the income tax.
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Perry's Flat Tax

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I like the flat tax idea with large individual deductions(otherwise, the fewer deductions the better) which will keep it progressive. In this case the individual deductions are $12,500 per family member and, in addition, mortgage interest, state and local taxes, and charitable contributions are also deducted. Your income minus all of those deductions is your taxable income. The tax rate is 20% of that taxable income.

Let me point out a few things about it that get lost in the propaganda from those who want to use the tax code to promote whatever it is that they want to promote.

The flat tax in general and this one in particular is not regressive. Consider a few examples for a family of 4 with this flat tax.

Family A makes 50,000 and pays no income taxes because their deductions are 4 x 12,500 = 50,000 leaving no taxable income.
They actually pay 0% of total income.
This applies to any family of 4 with income (after deductions) of less than 50,000.

Family B makes 70,000 and has a total St and local taxes, charitable contributions, and home mortgage interest of 10,000. They would have 60,000 in deductions and would pay 20% of the remaining 10,000 in taxable income which would be 0.2 x 10,000 = $2,000 in taxes.
They actually pay 2000/70,000 or 2.86% of total income.

Family C makes 150,000 and has a total of 20,000 in deductions. Their remaining taxable income is 80,000 (=150,000 - 50000 - 20,000) on which they too will pay 20% which is $16,000.
That is 16000 / 150000 and They actually pay 10.667% of their total income.

Richer family D makes 400,000 and has 40,000 in deductions. Taxable income is 310,000 (=400,000 - 50,000-40,000). (Notice that a much bigger share of their income is taxable.)
20% of that is .20 x 310,000 = 62,000.
That is 62,000 / 400,000 = .155 and they actually pay 15.5% of their total income.

Rich family E makes 1.5 million and has 70,000 in other deductions. Their total deductions are 120,000. Therefore their taxable income is 1,380,000. 20% of that is 276,000.
That is 276,000/1,500,000 = .184 and they actually pay 18.4% of their total income.

Notice that as income goes up so does the amount of taxes and the rate of taxation of total income. The more you make the higher your actual tax rate is with an upper limit of 20%.
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Fairy Tales

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Thou shalt not follow a multitude to do evil;... Exodus 23:2

In this case the evil is that each side imagines that there is a simple solution if "they" would just do what "we" know that everybody should.

The Tea Party thinks that it is "over taxed." In response to the taxation question ("How much of one's earnings should a person be able to keep?), one of them recently said that you should be able to "keep all of what you earn". Zero taxation! Next they will ban death.

The Occupy Wall Street group apparently wants free stuff. (A sign said, "Free Health Care.") How to get it? Take it from the rich. I asked a liberal friend, "If you took all of the money the rich people had and gave it to the poor, then who would the poor work for?" You know the answer that I got: "If they had all of the rich people's money, then they wouldn't need to work."

Another group, another fairy tale.

Fairy tales are why we don't have compromise. Each side is so convinced of its own fairy tale that it is certain that, in the next election, the rest of us will finally wake up and realize how stupid that we have been all along not to see things as they see them. Then of course we will give them enough power to fully implement their "dream scheme".

Have you noticed how the right's description of the OWS is eerily similar to the left's description of the Tea Party? Substitute mob for racist and you have updated the complaint.
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Elizabeth Warren

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Ms. Warren has been a Law Professor at Harvard, the University of Texas, and elsewhere; was a member of the Obama Administration; and is currently a candidate for the US Senate from Massachusetts.

In a recent discussion she said
"There is nobody in this country who got rich on his own. Nobody."

Warren rejects the concept that it is possible for Americans to become wealthy in isolation.

"You built a factory out there? Good for you," she says. "But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did."

She continues: "Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along."


This was brought to my attention by Gib.

For one presentation of the other side go here.
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