Paul Ryan, the absence of a tax policy debate, and my dental bill

So, Rep. Paul Ryan is chosen as Mitt Romney’s vice presidential running mate.

Predictably, conservative commentators love him – Democratic special interest groups despise every breath he takes.

It would be nice if the US taxpayers sat back and debated the pros and cons of the Republican versus Democratic tax policy issues (or any other issues, around government, for that matter). Unfortunately – many (most?) voters don’t have the time nor the inclination to become more educated on taxes and economics – hence my ‘tax literacy blog.”

Commentators can throw out lines like the ones you see below in bold.  Many people will, with an uncritical eye, accept them as truth (and by the way, Republicans aren’t immune to this, as Sarah Palin’s “death panel” rants pointed out years ago).  So let's look more deeply into some of these claims against Paul Ryan.

“Representative Ryan has made a name for himself in the halls of Congress for tax giveaways for the wealthy and big corporations while proposing to gut vital services like Medicare and education….” – Mary Kay Henry, President of the Service Employees International Union

Really? GIVEAWAYS?  So Ryan is creating tax policy which gives away billions (probably hundreds of billion dollars) to wealthy people and big corporations with absolutely no rationale expectation of any return on those tax breaks – like increased investments, more jobs, productive efficiency gains, etc.?  And he is doing it so that poor old people and young children will suffer?

REALLY?

Who would create a tax policy platform like that?  Why would Ryan do that? Is he mentally ill? On drugs always?  A habitual drunkard?  Is someone (or lots of some “things”) paying him off? Actually to get Ryan (or anybody else) to do that, I suspect corporations would have to pay him at least a few billion… in which case I also have an idea that he would have already converted that to diamonds and gold and fled to a country that doesn’t have a treaty with the US…  and make sure the country has a nice beach too… and certainly not bother running for VP.

“Aligning himself with the poster child for ending Medicare and social security puts to rest any suggestion that Romney has a clue what the middle class needs…” Richard Trumka, President of AFL-CIO

You know, call me a fool – but short of … I don’t know… nuclear war?  I can’t see social security ending… Everyone (Republicans and Democrats) agree it is a program that must be preserved for future generations.  How to get to that point is debatable – but I don’t see Ryan saying “Ah, screw it.  Stop the check printing run for the first of next month to those 50 million old people…”

“By picking Rep Paul Ryan, Governor Romney has doubled down on his plan to gut Social Security and end Medicare as we know it…” – Rep. Harry Reid

Ryan must have a serious dislike of old people…..

You can debate how to fix Medicare – but don’t ignore the actual issue that it needs repair.  Don’t think that you can just raise taxes on every married couple filing joint whose taxable income is greater than $250,000 and generate enough revenue for that and a host of other wants.

Frankly, I like the conceptual idea of vouchers – medical care in some areas needs more competition.

I will give you an example of my dental experience recently.

I needed a bridge put in my mouth.  I got an estimate from a dentist in north Texas - $2900, of which I will pay $2100, insurance pays the rest.  I then went to suburban Detroit, and saw the dentist my dad uses.  He would provide the same services - $2100, of which I pay $1300. 

So even with dental insurance, if I did the work in the suburban Detroit, I save $800.  Since I come home for visits 3-4 times year anyway, I chose my dad’s dentist.

I guess you could wonder why “dental costs” are not universally the same across the US.  I think that might be since General Motors and Chrysler’s bankruptcies, they have cut the dental insurance program for retirees(a lot of whom live in the Detroit area) – hence the demand (and price) of dental work near Detroit is less than it once was.  Of course, that is simply a guess on my part.

Anyway, I liked the idea of being able to compare prices – and chose the one with the lowest fee.  You don’t see that very often in the dental (or medical) business.

I am willing to listen – and not to stopping the check run….

Jim DeMint needs to revisit taxation without representation...

An editorial by Senator Jim DeMint - a Republican from South Carolina, published in the Wall Street Journal a couple of days ago.

http://online.wsj.com/article/SB10000872396390444226904577559414267708728.html

In the article, he argues that internet sales taxes amounts to taxation without representation and it overburdens small businesses.

I would like to take exception to both his arguments.

1) Taxation without representation - in the article, Sen DeMint states "So they'd like their allies in Washington to make it legal for them to tax people who can't vote against them."

Really? Yes, that's true.  On the other hand, have you ever rented a car at an airport in a different state than you lived?  Notice how much in "taxes" you pay on the rental car fee?  In some cities, it can be over 30% of the total.

And then you drive your rental car to a hotel.  Ever notice how much you pay in taxes on the hotel room?  12% to 20% would not be unusual.

It called "tax exportation" and is in hundred (probably thousands) of state and local laws through the US.

Why?  Because EVERY STATE IN THE US has state congressman who want to tax people who can't vote against them!  And those state representatives and senators realize the vast majority of people renting car and staying in hotels don't live in those states.

And since every state does it, effectively you have widespread "taxation without representation" already going on...

 -- Just as an aside, if you have ever gone to Disney World in Florida, you will notice they charge sales tax "built into" the admission ticket.  Generally, you don't charge a tax on services (think haircuts, car washes, etc).  But in this case, the state of Florida allows it.  Any guesses why? --

2) DeMint also states:

"A 2006 PricewaterhouseCoopers study found that tax-compliance costs for small businesses (those having $1 million to $10 million in annual sales) are nearly 2.5 times greater than those of larger firms. For businesses under $1 million in sales, those costs explode to 16 cents on every dollar of revenue."

That would be true of nearly every fixed cost - it is called economies of scale.  As a business gets bigger and bigger - certain costs which are fixed (or nearly fixed) decline on a per item basis.  This isn't something "new" to just tax compliance costs or internet sales taxes.

For example, in some states it is required that a business pay a fee (say $100) each year for doing business in the state.  If you sell only 100 items, the fee is $1 per item.  If you sell a million items, the fee become incredibly small.  That's simply how businesses incur fixed costs and the incentive that businesses have to "grow bigger."

The more important point DeMint should be focusing on is that tax compliance costs have decreased dramatically due to the widespread availability of the internet over the past 15-20 years, and that beneficial effect has been particularly felt by small businesses.  No longer must calculations and forms be filed out by hand and mail and state tax laws are now widely accessible over the internet (and do not need to be physically mailed to a business).  In hindsight, tax compliance in 1990 looked like the Flintstones (with chisels and stones)!

Government overreach again?

There is an interesting article on Politico.com

http://www.politico.com/news/stories/0712/79041.html

Basically, the article says that President Obama over-promised on delivering more college graduates by 2020 (which he thought he could do through both federal grants plus federal tax credits and deductions on individual 1040s).

I think it brings up another topic – that of the effectiveness (or ineffectiveness) of a long-term stated goal of government funding – that of overshooting the good and ending up with a wasteful situation.

Whenever the government decides to engage in this sort of activity of subsidizing an activity, they end up helping some but also wasting federal tax dollars on others because they simply "push it too far."

A good example is in 2004 and the coming of the housing bubble.  Fannie Mae and Freddie Mac were encouraged by officials in the federal government (then President Bush, both houses of Congress, etc.) to increase the availability of home loans and get more people into their own homes.  Obviously this was well-intended, since home ownership is considered an American Dream as well as creates other positive things (better neighborhoods, schools, etc.) 

Homeownership rose to record levels – topping out at 69.2% in the fourth quarter of 2004.

Guess what?  All those people in all those houses probably shouldn’t have been there – since a few years later, many were foreclosed on -  as the economy recessed and housing prices fell.  This was government “overshoot” – too much money put into a great idea pushes some people into a situation where they simply don’t belong.

Unfortunately, government overshoot also means that some people who SHOULD have purchased a home never did…  so not only does the government overshoot, it also is not very precise either.

I think the same thing is happening right now with the push for more college graduates through more grants and tax credits/deductions.  Some high school kids are simply not best served by going to and trying to graduate from college – at least not at 17 or 18 years old.  They would be better off learning a trade, or going to the military, or some place besides college – and maybe come back when they are older – like 20 or 25 or 30… or then again – maybe never.

Yet these increased federal grants and tax credits and deductions results in overshooting – pushing too many people into a situation where they simply don’t belong.

And just like housing, the government also misses – there are still 17-20 year olds who belong in college but the government can’t get to them due to imprecision of the policies.

Optimal tax policy on human versus physical capital

Interesting article on the American Enterprise Institute web site recently - showing that human capital inputs far exceed the physical capital input in creating our economy:

http://www.aei.org/article/society-and-culture/immigration/human-capital-in-a-global-age/

I agree with many of the article’s premises.  In fact, when you think through the course of human history, so much of wealth and power were concentrated in the ownership of land – physical capital – from the time of Christ through Karl Marx.  The past 100 years is really the first time this hasn’t been the case – where wealth could be generated from intangible assets – like education and knowledge.  And even today, this isn’t the case in many countries outside the US – for them, the ownership of land still dominates everything.

This rise of ownership of intangible asset of education has been extraordinary important in the increase in the standards of living in the US over the past century.  When you look back at the early 1900s, nearly all people attending college were from upper class, wealthy families, who could not only “pass-down” wealth in its physical form, but also the ability to generate wealth in its intangible form through increased education.  Entire classes of the US population back then, some absolutely of genius intellectual level and far exceeding the academic abilities of probably most in the “upper class,” were excluded from competing against them. 

Part of tax policy is the US has been to encourage or discourage economic behavior (as opposed to mere raising revenues for the government to spend).   This “encouragement” process began in earnest after World War 2 and remains strong today (despite the appeals of Tea Party and Libertarians). 

One of the encouragements has been to create tax credits and deductions for pursuing higher education.

Looking towards the future, and the economic benefits of continuing to have a populace where the dependence of capital ownership is less and less important, I can see where these types of tax encouragements will continue, if not expanded.

Another question, though, is whether the continuing tax encouragement of capital ownership and investment (i.e., through dividend income and capital gain tax preference rates) should remain in place.

So THIS is the 1%?!!!

Interesting article today in on the cnnfn.com website.

http://money.cnn.com/2012/06/05/pf/taxes/top-400-highest-income/index.htm?iid=HP_LN

So THIS is the 1%?!!!

Actually, it is the top 400 returns out of 140,000,000 individual tax returns filed in 2009.

The top 1% would still be about 1,400,000 returns – so you’re way, way beyond the top 1%.

That being said - I have two problems with this article: 1) it doesn't truly represent how the tax is computed for these individuals and 2) it seems to imply that the top 400 club doesn't change.  In the latter case, only 2 percent of the "club" has been in the club for even 10 of the last 17 years, and about 75% changes every year.

In the former case, let's look at the "definitions" of income more closely.

Looking at the underlying IRS data, the income making up the average of $202,000,000 is broken down as follows (keep in mind it won’t total $202,000,000 since not everybody on the list has each item of income):

Salary was (on average) $22,000,000

Interest income was $13,000,000

Dividend income was $26,000,000

Capital gains was $92,000,000

Business income was $10,000,000

S-Corporation/Partnership income was $83,000,000 (there were about 280 of them)

They also paid on average $16,000,000 to charitable contributions and $12,000,000 to other taxing authorities.

I always had a problem with the publication (or, shall we say “promotion”) of effective tax rates (yes, even you, Warren Buffett, and your secretary)….

The standard metric for measuring effective tax rate is federal income taxes paid divided by adjusted gross income (which is basically all income less some business deductions, alimony, 401k contributions, or lines 7 to 31 of a Form 1040).

Individuals aren’t “taxed” on adjusted gross income though – they are taxed on  taxable income, which is adjusted gross income less itemized deductions.

The formula is as follows:

Salaries, wages, interest, dividends, S-Corp income

Less: Certain deductions like alimony, capital losses, business losses

Equals: Adjusted Gross Income

Less: Itemized deductions (mortgage interest, taxes paid to state and local governments, charities)

Equals: Taxable income

The problem with the effective tax rate argument is that is ignores other “taxes” that these high AGI taxpayers pay – like state and local income taxes.  You could also make the argument that it also ignores charitable contributions, which is many cases reduces the need for federal and state funding to certain organizations and individuals (think United Way, for example).

So in addition to  the $40,000,000 in federal taxes each person paid on average, they also paid an additional $28,000,000 in taxes and charitable contributions – or a total of $68,000,000 on $200,000,000 of income, or 34%.

The other problem with publishing the effective tax rate is that it also ignores someone who is particularly generous with charities.  For example, suppose someone  made $100,000,000 last year in income and gave $50,000,000 away to a charity.  His AGI is $100,000,000, but his tax of 35% would be computed on income of only $50,000,000 – or $17,500,000.  His effective tax rate then is $17,500,000 divided by $100,000,000 or 17.5%.

You could read the headlines and say “person making $100 million per year only taxed at 17% rate!!!” –  and think that social security tax alone for a person making $10,000 is nearly half that.  Certainly, that is correct, but I don’t think many people truly understand what is going on here….

Interesting article about the current calculation of the federal deficit and the federal debt.

The popular press has typically picked up the amount of this year’s federal government deficit (revenue minus expenses) as around $1.3 trillion.

The total amount of the debt of the US is around $15 trillion.

The USA Today argued today that the deficit for this year is much larger due to the increase funding required for Social Security and Medicare. 

http://www.usatoday.com/news/washington/story/2012-05-18/federal-deficit-accounting/55179748/1

The addition of just these two liabilities (SS and Medicare) this year, if translated into additional expenses, would push the deficit to $5 trillion (for just this year).

Obviously, this is not a good situation – but unfortunately, there are so many assumptions that go into this model, it could just as easily be close to a zero deficit as $5 trillion. 

Let’s just take one example of how “iffy” those numbers could/can be.  The US currently “owes” $15 trillion.  Well, last year, prices (the CPI index) went up about 3%.  That means the $15 trillion deficit is actually worth less this year – by about $450 billion (or 3% of $15 trillion).  Inflation eroded the value of the bonds and hurt those holding those bonds – so when eventually they get their money back, they will be able to purchase less with the cash proceeds.

Yes, you can argue that those bondholders were compensated by interest payments from the US government.  Very true – and those interest payments are included as government expenses.  But the fact the government now theoretical owes less to each person because of inflation (which is revenue to the government) – is not included as a $450 billion decrease in the government deficit for the year.

And this is just one of many, many assumptions that the US government “accounting” has to make in arriving at a number such as $1.3 trillion or $15 trillion.

Unfortunately, a comment made at the end of the article by Sheila Weinberg of Institute for Truth in Accounting implies that accounting, particularly at this level, can be simple – like “arriving” at a single number or amount.  Not true.  Even in my introductory financial accounting course, I point out all the ways “assumptions” can significantly change the reporting results of companies (like in expensing for depreciation and bad debts).

Dallas CPA Annual CPE Day

Yesterday (Friday, May 4, 2012) I was in attendance at the annual Dallas CPA Society continuing professional education day.  It is a day were around 1500 CPAs from northern Texas meet in one hotel (this year, the Dallas Hilton Anatole) to list to eight hours of updates in various fields of accounting.

The lunch speaker was one of Texas' US senators, John Cornyn, whose talk was entitled "The Prospects of Tax Reform."

And this year (2012), in case you're wondering, it is basically none. Actually, he never got around to saying that - but you could surmise it from all the "Bad Obama" this and "Bad Obama" that the Republican senator managed to utter in a 15 minute speech.

One of the interest tidbits he mentioned, though, was past presidents who had passed capital gains cuts - including Kennedy in the early 1960s, Carter in the later 1970s and Clinton in the 1990s - all Democrats.

The implication being that Democrats could pass capital gains tax cuts - but Obama was too headstrong to realize how good it can be for the economy.

Absent from Cornyn's discussion (and something I would have loved to ask him) was why he didn't mention the ultimate Republican of the 20th century, Ronald Reagan - who actually RAISED capital gains tax rates in 1986.

http://www.americanprogress.org/issues/2012/01/ta_012612.html

Why did Reagan allow this to happen?

Well, first, he brought the capital gains tax rate up to the same tax rate as ordinary income (wages, for example) - and that made the tax code simpler.  No longer did you have to worry about defining what a capital asset was, or its holding period as long or short term, or whether corporations or other taxable entities could be used to take advantage of the difference in rates.

Reagan also believe that not EVERY SINGLE YEAR IN HUMAN HISTORY does a cut in capital gains tax rate spur more investment than the resulting decrease in investments from the government using the cash instead (which many members of the Republican party seems to erroneously believe).  If you cut the capital gains tax rate, you give more money to the people and away from the government.  You better hope the people invested it quickly in projects which will spur jobs, increase standards of living, etc.  Nowadays though, in a risk-adverse US economy, that isn't happening.  Many people are content with sticking their money in a bank paying near zero percent interest rate, and banks aren't interested in lending money to anyone with a risky profile.

Somehow as Cornyn went down the list of democratic presidents who cut the capital gains tax rate, I knew he would never get around to the republican president who raised them... what a surprise... NOT!

So is this why Occupy Wall Street is Rest in Peace?

There was an article on CNBC.com last week by reporter Robert Frank entitled “Voters: Tax the Rich, But Fix the Rest First.”

In the article, Frank summarizes the results of a recent Gallup poll, which found that “increasing taxes on the rich” to be the least important policy change of 12 different choices.  Increasing the number of jobs took first place, followed by reducing corruption in the government, and reducing the deficit.  Even improving the environment and raising moral standards were ranked higher.

I suppose this is not surprising.  Each of the other policy changes has a “result” – like people getting work and wages, clearer environment (and government), and less debt for future generations.

Raising taxes on wealthy merely is a social policy of sort – it doesn’t really “fix” or “improve” a first order quality of life issue for most people.  It “MAY” mean they pay less in taxes themselves (or see the debt decrease, or social security solvency improved) – but not necessarily.  It “MAY” improve a person outlook on life by knowing that the rich are paying more and more – but that typically “class envy” doesn’t work – or at least not for very long. 

I suspect this is one reason why the Occupy Wall Street faded.  It was great (for a while) to take about how unfair the 99% feels – but then what exactly do you want from the 1%?  More money?  What are you going to do with it?

And I often wonder if that was a multi-year, multi-decade, multi-generational transfer?

By the way, as I discussed previously in this blog – we don’t impose taxes richness or wealth (except for the estate tax, which I am pretty sure this survey wasn’t asking about).  We tax “taxable income” – which is gross income less some (many, in fact) allowable deductions.  There are many increases in wealth a taxpayer can have during any year which are NOT taxable – real estate value increases (not sold), 401(k) contributions, gains from stock (not sold), etc. 

The real wise and savvy tax planner can figure out how to make plenty of wealth increases during the year, and plenty of increases in their “wealthy” status – without generating high taxable income.

Hmmm... State of the Union or NickJr....

I was faced with a decision this week on what to watch on TV - the State of the Union address of Nick Jr (of Dora, Diego, Yo Gabba Gabba, etc.).

I chose the one with more reality and less fantasy - Nick Jr.

Seriously, I read the "tax portion" of President Obama's speech the next day.  Once again, he wants to eliminate the Bush tax cuts for families making more than $250,000 per year, and increase the tax rate on capital gains.

Hey, this may be a good idea.  It may even be a GREAT idea - but it has NO CHANCE of passing Congress this year.... so why bother even mentioning it and wasting time on a fantasy?

Someone could argue that he is "angling" for 2013 and trying to get more Democrats in the Senate and House.

Sure - let's see - he would need to retake control of the House (doubtful, even very doubtful at this point, from this perspective in January of 2012) - AND - get at least 60 Democrat senators (from the current 53) to override any filibuster in the Senate.  The latter is impossible absent a miracle... actually, I can't even think what that miracle could be, but it certainly isn't "angling" on the State of the Union address for votes.

Obama's best shot at raising taxes is getting reelected and then letting the Bush tax cuts expire at the end of December, 2012.  That would raise taxes on everyone.  Let a few months go by in 2013 while letting this tax hike settle in - then see who is willing to negotiate something different.

And if there are no negotiations - look on the bright side - that tax hike is estimated to be worth $4 trillion over the next 10 years - which would substantially lower the US debt growth rate and might even bring back the AAA credit rating the US government lost in August of 2011.

Now, back to Nick Jr....

Don't get married...ever....

There was a article this week on cnnfn.com that I thought was rather lopsided in its arguments.

http://money.cnn.com/2011/12/26/pf/taxes/gay_marriage_taxes/index.htm

Certainly same-sex couples could face more potential tax liability under certain circumstances - as the article points out.

On the other hand, there are many, many reasons they should be happy they can continue to file "single" instead of "married filing jointly."  Some of the comments below the article attest to this lack of a balanced argument.

 In fact, my tax advice, if you are married and looking for some tax breaks is to get a divorce! Kidding  :)

I'll give you five short reasons why the tax code discourages getting married (there are many more, but for the sake of "blog brevity" - I will limit it to five):

1) Capital losses - For an individual, capital losses are limited to capital gains plus $3000.  For two single people, that means a total loss of $6,000.  Get married - it is back to $3,000. Advantage - FILING SINGLE.

2) Roth IRA contributions - If you want to make a contribution to a Roth IRA in 2011 - for single, your income must be less than $107,000.  Does it go to $214,000 if you are married filing jointly?  Nope - only to $167,000.
Advantage - FILING SINGLE

3) Rental losses - If you invest in a rental house and actively participate in its management, you can deduct the losses from that enterprise IF your adjusted gross income is below $150,000 (it phases outs between $100,000 and $150,000.  If you get married, does the phaseout double (to $300,000)?  Nope - it stays at $150,000.  Advantage - FILING SINGLE

4) Social security income - Your social security is taxable if you are single and you have total "modified" income of more than $25,000.  Does it go to $50,000 if you get married?  Nope - only $32,000.  Advantage - FILING SINGLE.

This is also one of the reasons why many seniors who find a partner after their first spouse dies, live together but never marry.

5) Last but not least is the Obama's "end Bush tax cuts" proposal - he wants to end the Bush tax cuts for families (read married filing jointly) making more than $250,000, or for individuals making more than $200,000.

http://content.usatoday.com/communities/theoval/post/2011/11/obama-gop-prepare-new-battle-over-bush-tax-cuts/1

I guess I don't need to tell you that Obama is discouraging married filing joint status, do I?