More Healthcare Spending - More Taxes

CBO report: New taxes will pay for Senate health care bill
10/08/09 - OpenMarket by Fran Smith

[edited] The Congressional Budget Office reports that the Baucus healthcare bill in the Senate would reduce federal budget deficits by $81 billion during 2010-2019. Supporters were ecstatic.

The government and most news reports emphasize deficits. But, it is the SPENDING that matters. This healthcare bill gigantically increases spending. It reduces the deficit by increasing taxes and fees by more than the increased spending. Further, past healthcare programs have been 5 to 10 times more expensive than estimated at the time they were enacted.

A clearer statement would be:
"Healthcare legislation will raise government spending by at least $829 billion. But don't worry, it will raise taxes and fees by $910 billion, providing an extra $81 billion to the Treasury."

Read more ...

The major problem for the Baucus healthcare bill has been to hide the massive tax increases on people. It pretends these taxes are on businesses and insurers. But, all of these "business taxes" will be passed on to the people, at all levels of income.

The savings included in the bill are unrealistic. They are there only to get a good score from the Congressional Budget Office. The CBO must assume that those savings will be there, because the bill says they will be there.

Businesses organize work. They aren't a magic piggy bank. Taxes on private health insurance companies must be paid by charging more for insurance. So, the company writes the check, but the customers pay those taxes.

Taxes on employement must be paid out of the total productivity of the employees. Employee salaries are what is left over. The government wants to charge companies 8% of salaries to support government health insurance. That 8% actually would be paid by employees as a reduction in salaries.

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The truth about the Baucus bill - Part Two
10/12/09 - Washington Examiner Editorial

[edited excerpts] The Baucus bill generates revenue or shifts costs in many ways:

• Cuts to Medicare and Medicare Advantage - $426 billion
• Fines imposed on those who do not purchase insurance - $4 billion
• Levies on health insurance companies providing high-end health insurance plans - $201 billion
• New taxes on medical devices and drugs - $180 billion
• New income taxes on individuals - $83 billion
• New taxes on employers - $25 billion
• Reductions in Medicare reimbursements to hospitals, which will require more cost shifting from such facilities to their patients

Price Waterhouse Coopers has released a study done for the health insurance industry.

• Average family health insurance is now $12,300.
  This will be $18,400 by 2016 doing nothing.
  Baucus will make it $21,300.
• Individuals average $4,600.
  This will be $6,900 by 2016 doing nothing.
  Baucus will make it $7,900.
• Obamacare advocates say that higher costs will be largely offset by tax credits for lower-income families. But, tax credits only shift the burden of payment from Peter to Paul [from the middle class to the poor].

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Memo - Health Plan Deficit Reduction
09/2008 - EasyOpinions Outlink

A (fictional) memo has surfaced revealing the thought guiding healthcare policy.

Excerpt: "The estimated deficit for our health reorganization plan is causing us trouble in the press. President Obama has promised not to raise taxes on the middle class, and not to increase the deficit. Unfortunately, we have to live with this until the plan passes Congress."

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The Real Tax Burden
01/2009 - EasyOpinions

The real tax burden is current government spending. Government borrowing and delayed taxes are merely finance. It won't be just "the other guy" who will pay. The middle class and rich will pay in dollars. Poorer citizens will lose employment.

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Company Paid Health Insurance is Part of Your Salary
12/2008 - EasyOpinions

You generate all of the wealth that pays your salary and the taxes associated with your employment. The employer writes the check, but you earned that money, and it would be part of your take-home pay if the burden did not exist on the employer. Competition for skills would arrange that outcome.

In the same way, when a company pays for your health insurance, it is merely writing the check with part of your earnings, earnings that you never see, but could control yourself.

2006 Tax Comparisons

The information below for tax year 2006 is from the Tax Foundation "Federal Individual Income Tax Data 07/18/08".
These tables are also available as an Excel workbook.

This page shows a scrolled version of the tables. You can also view a wide format version with no need to scroll.

2006 Tax Data Split Into Separate AGI Slices

(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)
Slice	Rank	Tax Returns (MM)	AGI Min	Total AGI (B)	Percent of AGI	Tax Paid   (B)	Tax Rate on AGI	Tax Rate Ratio	Tax Share	Slice	AGI Per Return	Tax Per Return	Tax Per Return Ratio
All	100%	135.7	$0	$8,122	100%	$1,024	13%	1.8	100%	All	$59,844	$7,543	2.3
1%	99%	1.4	388,806	1,792	22%	408	23%	3.3	40%	1%	1,320,289	300,893	92.8
4%	95%	5.4	153,542	1,186	15%	207	17%	2.5	20%	4%	218,434	38,187	11.8
5%	90%	6.8	108,904	865	11%	109	13%	1.8	11%	5%	127,532	16,071	5.0
15%	75%	20.4	64,702	1,693	21%	158	9%	1.3	15%	15%	83,147	7,781	2.4
25%	50%	33.9	31,987	1,570	19%	110	7%	1.0	11%	25%	46,265	3,243	1.0
50%	0%	67.9	0	1,016	13%	31	3%	0.43	3%	50%	14,979	450	0.14

This table reports data from the Internal Revenue Service about all tax returns showing positive AGI (Adjusted Gross Income) whether or not any tax was owed.

Each row is data for a "slice" of taxpayers. The usual IRS data reports averages for groups of taxpayers from the top (as shown in the table far below). The IRS data reports on the top 1% 5% 10% 25% 50% and All returns. I split out each slice by computing the difference between groups.

This presentation makes it easy to compare your situation to your "tax neighbors". Are their taxes fair? Should they pay so much less or more than you do?

Read more ...

The first row is for all returns averaged together. The last row reports the 50% of tax returns with the lowest AGI's. The row "25%" reports the next one-quarter of tax returns having higher AGI's. The next higher rows report the one-quarter of tax returns with the highest AGI's.

The "25% row in yellow is the one I use for overall comparison. It is the "middle class" slice, the second one-quarter of returns from the top.

Column (10) "Tax Share" is the one usually quoted in articles. The top 1% of taxpayers paid 40% of the income tax in 2006. The top 10% paid altogether 71% of the tax, amounting to $725 billion.

Compare this to the additional $4-6 trillion in borrowings that the Obama administration wants to spend. That additional spending is 6-8 times as much as the total tax paid by the upper 10% of taxpayers. So, who is going to pay for that additional spending?

A middle class taxpayer with $46,300 of AGI paid about $3,300 in federal tax. $4-6 trillion in extra spending, spread out in proportion among all taxpayers, would require a payment of $13,000 to $20,000 from that person, being 28-42% of one year's AGI.

An upper class taxpayer at the 90% rank now pays 13% of AGI in tax. He would have to pay 52-78% of one year's AGI to pay for the increased spending, if spread in proportion among taxpayers.

Column (9) "Tax Rate Ratio" compares your effective tax rate to your tax neighbor. The middle class, yellow row is set as the standard (set to 1.0), paying 7% of AGI as tax. Note that this is the "whole" rate, 7% of total AGI. It is not the "marginal" rate that is quoted in the tax tables in tax return instructions.

The average tax on the first 50% is a whole rate of 3% on AGI, a .43 fraction of the rate paid by the middle class slice. Someone earning about $130,000 paid a whole tax rate of 13%, which is 1.8 times the rate paid by the middle class slice.

From the Tax Foundation link, 43 million tax returns had exemptions, deductions, and tax credits resulting in zero tax. Some even received money back from the IRS for the Earned Income Tax Credit (and other credits), which are not included in the IRS data. These returns are part of the lowest 50%, but are not split out because they are not separately reported.

Legend:

  (1)  Slice - Groups of taxpayers according to AGI (Adjusted Gross Income). AGI is total income less deductions for such as IRA contributions, and moving and business expenses. You get Taxable Income when you subtract deductions, allowances for dependents, and qualified expenses (eg. child care).

  (2)  Rank - Where each row ranks according to AGI. The yellow row represents 25% of all individual tax returns, and sits above 50% of all tax returns.

  (3)  Tax Returns (MM) - The millions of tax returns in the slice, 33.2 million returns in the yellow slice.

  (4)  AGI Min - The minimum AGI for returns in this slice. Returns in the yellow slice have AGI between $30,881 and the next higher slice ($62,068).

  (5)  Total AGI (B) - All AGI reported in this slice.

  (6)  Percent of AGI - (Slice AGI)/(Total AGI). The percent of AGI contained in this slice. Note that the slices are not equally wide and have different AGI's, so these numbers don't relate easily to each other.

  (7)  Tax Paid (B) - Total tax paid for this slice, in billions.

  (8)  Tax Rate on AGI - (Col 7)/(Col 5). Tax paid as a percent of AGI.

  (9)  Tax Rate Ratio - The effective tax rate for this slice compared to the 7% tax rate for the "middle class" yellow slice. For example, the value 1.8 for the "5%" row says that those people are paying tax at a rate that is 1.8 times the rate for the "middle class". The ratio is 1.0 in the yellow row because we are comparing this row to itself.

(10)  Tax Share - The percent of total tax collections paid by this slice.

(11)  Slice - Repeats (Col 1) for convenience in reading the table.

(12)  AGI Per Return - The average AGI reported for each return in the slice.

(13)  Tax Per Return - The average tax paid for each return in the slice.

(14)  Tax Per Return Ratio - This compares the amount of tax paid by an average individual in each slice, to the average "middle class" return in the yellow row.

 

2006 Tax Data by Upper AGI Groups

(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)
Group		Tax Returns (MM)	AGI Min	Total AGI (B)	Percent of AGI	Tax Paid   (B)	Tax Rate on AGI	Tax Rate Ratio	Tax Share	Group	AGI Per Return	Tax Per Return
All		135.7	$0	$8,122	100%	$1,024	13%	0.9	100%	All	$59,844	$7,543
Top   1%		1.4	388,806	1,792	22%	408	23%	1.6	40%	Top   1%	1,320,289	300,893
5%		6.8	153,542	2,978	37%	616	21%	1.5	60%	5%	438,805	90,729
10%		13.6	108,904	3,843	47%	725	19%	1.3	71%	10%	283,169	53,400
25%		33.9	64,702	5,536	68%	883	16%	1.1	86%	25%	163,155	26,029
50%		67.9	31,987	7,106	87%	993	14%	1.0	97%	50%	104,710	14,636
Low 50%		67.9	0	1,016	13%	31	3%	0.22	3%	Low 50%	14,979	450

This table gives Federal income tax statistics in the usual way, reporting on groups from the top by AGI. For example, column (11) in yellow reports that the top 1% of tax returns collectively paid 40% of all Federal income tax, and the top 5% collectively paid 60%.

This gives a good idea of what is happening to the top 1% or 5%, but it averages together what is happening to the lower groups. This data is recomputed to give the first table above, "2006 Tax Data Split Into Separate AGI Slices".

Thomas Jefferson Warns Us About Debt

Thomas Jefferson On Debt
01/1/09 - liberty-tree.ca by Thomas Jefferson (July 1816)

Thomas Jefferson was a US Founding Father. He drafted the Declaration of Independence and served as the 3rd US President.

[edited] We must not let our rulers load us with perpetual debt. We must choose between economy and liberty or profusion and servitude.

If we run into such debt, that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our calling and our creeds, then we will have no time to think, and no means of calling our miss-managers to account. We would then be glad to obtain subsistence by hiring ourselves to rivet their chains onto the necks of our fellow-sufferers.

This is the tendency of all human governments. A departure from principle in one instance becomes a precedent for another, until the bulk of society is reduced to be mere automatons of misery. And, the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.

The Real Tax Burden

Watching government at work is like watching four magicians on stage. Now you see it, now you don't, and there is too much to watch. There are plans for higher taxes, surcharges, lower taxes, tax rebates, guarantees, bailouts, "investments", subsidies, fees, loans, borrowings, and just printing more money. Mind boggling.

So, what is the government taking from the society, from the people who work to generate wealth or invest to create jobs? I quote the observations of economists Milton Friedman, and of Russell Roberts at CafeHayek "When a tax cut isn't a tax cut".

The amount of tax that a government imposes is the amount it spends. The timing and amount of tax collections is merely finance.

Read more ...

[edited] If the government cuts rates or gives rebates, but also increases the size of government, then real taxes are higher. Government is taking a bigger share of the economic pie leaving less for private use or investment.

Milton Friedman pointed out that the burden on the private sector is bigger when the government grows as a percentage of the economy. Focus on government spending, not on how government is financed, whether it's out of current taxes or future taxes.

Deficit Spending

A "deficit" is the amount of planned or promised spending that has no source of current funding. It is the amount that must be borrowed to pay for the project. A deficit is a red flag because the government is going to borrow the money, but has no plan for paying it back, other than raising taxes in the future.

For example, say Fred has saved $20,000. One day, he decides to buy a $30,000 boat by borrowing $10,000. That $10,000 is his deficit spending. He better have a plan for paying off that loan, or he is going to lose the boat, usually at a great loss.

That $10,000 is a red flag that Fred may be spending into disaster. But, would everything be OK if Fred buys just a $20,000 boat? Now there is no deficit, and he is not under pressure to find more income. With or without a deficit, buying the boat is a disaster if Fred needs the money for his kids or to repair the roof on his house.

The big question: Is it wise to spend that money, deficit or not? News stories concentrate on government deficits, which are only the underfunding of its projects. Those projects use the resources of citizens, deficit or not. It is no consolation that a wasteful project is fully funded by taking money from the people.

Worse, the government will claim unrealistic future savings or tax collections. It is like Fred claiming that he will save $10,000 on groceries to pay for the $30,000 boat. It makes the estimated deficit disappear, but it doesn't change the amount that Fred is spending. It is no consolation for the government to say: There is no deficit on this project, because we are going to take more money from you in the future to pay for it.

Spending Costs Resources Now

Government spending directs real effort and resources, right now. Most resources disappear in mountains of paperwork and rules. Some resources build useful things, like roads and buildings, but at high cost, and not usually the most useful things. A small fraction goes to absolutely necessary activities such as courts, police, fire, and national defense.

The taxes that support this spending are collected noisily as more taxes, or quietly as inflation. Tax collections are merely a "fairer" way to impose the tax burden than allowing inflation. Inflation is also disruptive, destroying production beyond the amount of government deficit spending.

Obama's Plans

Obama's spending plans are a massive tax increase. The government will have to collect taxes to fund this spending, either now or in the future. If it borrows the money, the taxes will include increased interest payments on that debt. If it merely prints the money, there will be inflation along with devaluation of the dollar.

Obama can try to make the top 5% of taxpayers finance spending increases. It is a brilliant redistribution plan that uses the current progressive tax system, plus "a bit more", to soak the rich in a way not seen since 1960. At that time, tax rates were 91%, and politics was about creating tax loopholes to keep the economy going. There is no doubt; the tax loopholes will be created again.

Obama will avoid saying that he is taxing the lower 95% or 70%. Instead, he will freely implement taxes on business and employment. These taxes must be silently passed along to people in the form of reduced wages and reduced employment.

I think we are going to see:

• Misdirected public spending and "investment".
• Reduced private investment and production.
• Much higher marginal tax rates on "the rich", the people who organize and create jobs and production.
• Higher unemployment.
• Inflation and stagflation

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The Problem Is Spending, not Deficits
12/15/09 - Cato at Liberty by Daniel J. Mitchell (video 6 min)

Politicians fixate on the deficit to pull a bait and switch. They claim that they can raise taxes to solve the problem. That only replaces debt-financed spending with tax-financed spending. That takes a different route to the wrong destination. The likely result is that the required tax increases will weaken the economy and make us all poorer.

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Tax Relief, Obama Style
04/16/10 - TheBigQuestions by Steve Landesburg
Via Cafe Hayek

[edited] Obama figures that your tax burden is what you are paying right this moment as opposed to what you are obligated to pay in the future.

The reality is that President Obama, like President Bush before him, has dramatically raised government spending, and therefore has raised your taxes. To say otherwise is like saying you got your new swimming pool for free because you put it on your credit card.

When the money is spent, the bill must eventually come due, and the taxpayers must pay it. We are locked into higher current spending and therefore locked into higher future taxes.

The president has not lowered taxes; he has raised and then deferred them. To say otherwise is a flat-out lie, to be blunt.

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See also: Other posts about taxes

The Deadweight Loss of Taxes

Production and employment is reduced by increasing taxes, despite increased government spending. Raising taxes on anyone, especially the rich, lowers production in the U.S., and so lowers the number of jobs and pay levels. It is ironic that taxing the rich makes everyone poorer, the same effect as taxing the middle class. It makes us a lot poorer.

The term "deadweight loss" refers to what is lost or never produced because of some policy. A higher income tax rate produces responses that decrease investment and production (jobs).

Read more ...

The primary effect is to remove money from individuals who would invest it more efficiently than the government. People will also work less, earn less, and pay less tax, if they don't think the extra money they could keep after tax is worth the extra hours or risk.

The secondary effect is to give investments a lower rate of return after tax, so investors tolerate less risk and invest more in tax free bonds and legal advice to avoid taxes. This also lowers investment in new activities and reduces opportunities for better paying jobs.

As an extreme example, a 95% tax rate would convince most people to work less and spend more time and trouble on avoiding the tax. Any investment with even a little risk would be avoided.

In November 1999, Martin S. Feldstein was the George F. Baker Professor of Economics at Harvard University and former President of the US National Bureau of Economic Research. He investigated the current effects of income tax rates on the economy.

Tax Avoidance And The Deadweight Loss Of The Income Tax

[edited] Traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on compensation and consumption [jobs]. The full deadweight loss is easily calculated to be as much as 30% of total revenue.

The deadweight loss caused by increasing tax rates above current levels may exceed $2 per $1 of revenue increase.

I will restate this. Government activities and transfer payments had better be useful to the society, because economic output has already been lowered by 30% of the taxes currently collected. Further, $2 worth of production (jobs) will be destroyed for every additional $1 collected through increased tax rates.

To restate this, society begins with three units of production and jobs. After an increase in tax rates on the rich, those three units disappear, transferring just one unit to the purposes of the government. Two units just disappear, the deadweight loss of increasing the tax. The loss could be all three units if the activities of government produce nothing of value.

This is a severe loss, because there is no "stimulus" from that "extra" $1 in government spending. That $1 would have been invested or spent anyway. Taxes only move goods around from some people to other people, at great expense.

To transfer $1 to a needy voter, or bail out a public loss, the government will take $1 from a richer person, eliminating $2 in production of goods and services, also called jobs. By the same analysis, $1 of reduced tax from lower rates supports increased investment that in turn supports $2 in new production and jobs.

This easily explains why tax rate cuts under Reagan and G.W.Bush increased the prosperity of the U.S. And, it explains why the threat of tax rate increases under Obama has so frightened and lowered the stock market.

Government subsidies, guarantees, and bailouts kill prosperity because they require borrowing now and higher tax rates later. Higher tax rates usually produce increased revenue for government, while destroying twice as much income for the population in the bargain. Government spending today will be paid by printing money "out of thin air". This will cause inflation that will make everyone holding cash in a bank account pay for current spending as prices rise and their savings buy less.

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The Myth of the Economic Multiplier
I consider why it seems there should be a stimulus that goes beyond each dollar of spending, and why this is wrong. Government spending is a banquet, not a stimulus.

Public Tax Meeting
A story about proposed tax policy. What is it like in a small town to raise taxes on the wealthy 35% and give a rebate check to the 65%.

The Historical Lessons of Lower Tax Rates

The Historical Lessons of Lower Tax Rates
11/13/08 - 08/13/03 Heritage.org by Daniel Mitchell

[edited] There is a distinct pattern throughout American history. When tax rates (and marginal rates) are reduced, the economy’s growth rate improves, living standards increase, tax revenues grow, “rich” taxpayers pay a greater share of taxes, and lower income citizens pay a smaller share. This result should lead class-warfare politicians to support lower tax rates.

Conversely, higher tax rates are associated with weak economic performance and stagnant tax revenues. When politicians attempt to “soak the rich,” the rest of us take a bath.

We can look at three United States episodes of tax rate reductions for useful lessons.

• The tax cuts of the 1920s
• The Kennedy tax cuts
• The Reagan tax cuts

Cameron's UK Tax Con

11/11/08 - Stumbling And Mumbling   --> Source

The British Tories (conservatives) propose an employment stimulus package. [edited]

The Tories’ call for tax breaks to employers is a scam. A fiddle. A con. A fraud.

They propose that firms be given a credit against national insurance contributions, who take on a worker who has been unemployed for over three months. This will be £2500 for a full-time worker, and less for a part-timer. They claim this will create 350,000 new jobs, and that the plan will pay for itself in savings on unemployment benefits.

Nonsense. This ignores the enormous deadweight cost of the plan. Hundreds of thousands of jobs are created every year even in declining industries or in recessions (pdf). By the Tories own figures (pdf), 1.5 million people unemployed over three months were reemployed during the 1991 recession.

September this year had the biggest rise in net unemployment since 1992, yet 227,400 were reemployed. This huge job creation means the Tories’ plan gives taxpayers’ money to employers for doing what they would do anyway. That’s not revenue neutral.

If this plan were implemented the Tories could no doubt point to tens of thousands of claims for the tax credit. But, these claims would consist mainly of jobs created anyway, not of jobs created by the plan.

Warren Buffett and the Estate Tax

11/11/08 - Blog.Oup.com by Edward Zelinsky   --> Source
Via TaxProf Blog

[edited] Buffett has said that inherited wealth is a danger to democracy and that the rich have a moral obligation to give back to society. Buffett outspokenly supports keeping the federal estate tax, and he has complained that his federal income tax rate is lower than his secretary’s. He is an acquisitive investor who believes in success, capitalism, and the marketplace. Bill Gates shares these views about capitalism, inherited wealth, and the estate tax.

Each of Buffett and Gates are contributing the bulk of his assets to the Bill and Melinda Gates Foundation, using meticulous legal means to avoid federal tax on the contribution. They could more easily make these contributions so that federal tax would apply, delivering less to the foundation and more to the government.

I am not surprised that Buffet and Gates want to control every dollar of their wealth, both in life and in death. Each earned it, and should consider it his own to do with as he pleases. This is what all people want to do with what they produce.

Their statements about keeping the estate tax are hypocritical, based on the above post. Here is the lesson for me. Reject public policy recommendations that take wealth and freedom from you. Our leaders don't apply those recommendations to themselves. They are not better than you are as creatures on this earth. Their abilities don't give them the right to make policies that limit your life, but not their own. Demand to be governed as they govern themselves.

Don't want Higher Taxes? Barack Obama thinks you're selfish

10/31/08 at JimTreacher.com   --> Source

The Tax Cut You May Have to Send Back

34% Effective Rates Are No Longer Just for the Rich

Barack Obama has promised a "tax cut" for everyone, except for the 5% of taxpayers who have large incomes and are supposed to pay more. The tax cuts are refundable, meaning that people can apply for a check up to $500 per taxpayer (or $1000 per family) if the "cut" is greater than the taxes paid. Even if no tax was originally paid. Additional refunds are promised for expenses such as college tuition.

This is not a tax cut in the usual sense. People with more income will pay people with less income, and will pay for most of government in addition. Payments from the rich to the poor are usually called "welfare".

Read more ...

I said "people can apply for", because the taxpayer (or non-taxpayer) does not get the money automatically. He needs to document the expenses that are favored for a tax rebate, and file a more complicated tax return.

This is like the $20 off coupons that retailers hand out. Just collect all the paperwork, clip the coupons, do the math, send it in, and get the refund. Your tax preparer will charge a bit more for the service, or you can study the tax booklets yourself.

Some people will lie about eligibility, just as they currently lie about extra dependents to get current tax deductions. The temptation to lie is greater, because they can walk away with a check, not just a reduction in the tax owed. The government will spend even more money trying to catch them, or checking up on you. There is an incentive to file under a false social security number, get the check, and disappear.

Taxes will be made more horribly complicated. Obama proposes phase-outs and rate changes along with the cuts. The cut you get this year may be reclaimed reduced in following years by inflation and any increasing family income.

The chart below is from American.com: The Folly of Obama’s Tax Plan. It shows the Marginal Tax Rate for our current tax law and under Obama's plan. Marginal Rate means how much income the government takes out the next $1000 for each income level.

Obama says he will give you $1000 plus other amounts. The downside is that these benefits "phase out" (reduce gradually) as income increases. So, either you don't get the full benefit at your income, or the benefit disappears if you earn more in the next year. If you lose $500 in benefit, it feels the same as paying $500 more in tax.

From the graphic, say you get a raise from $30,000 to $35,000. Current law takes $1000 of that $5000, a marginal tax rate of 20%. Obama's proposal takes $1700. You give back an extra $700 of whatever benefit was originally granted to you, because something is being "phased out", for a marginal tax rate of 34%.

The very high marginal rate shown in the graphic (the red line and pink area) drops back steeply at $45,000. This means that most of the tax "cuts" have been reclaimed at that income. Much of the rest disappear at an income of about $83,000. This is for a family with two children (see the original article).

The original tax gift feels great. The phase out is a gotcha. Just when you are happy to make more money, you will find out that you owe much more tax. Just hope you didn't spend it already. I'm not happy with Obama's plan or with the current tax law. We should have simpler, understandable tax laws, not a grab-bag that hides who is paying what.

Obama has put forward a complex proposal. He talks about tax "cuts", but they are really gifts that are reduced according to income. He gives no public idea of the social evaluations that he is using to decide how these benefits phase out. It seems detailed and arbitrary. There is no general philosophy to refer to if he is elected and wants to change things around.

Everyone should pay less tax and know what they will keep if they work hard and earn more. You should not need a tax accountant for a $35,000 income. On the plus side (smile) you may have a chance to feel like that rich person, who pays 34% ($340) out of each additional $1000 he earns.

Obama and the Tax Tipping Point

10/22/08 - WSJ.com By Adam Lerrick   --> Source

[edited] How far can society's top earners be pushed before they stop (or cut back on) producing? The incentives are easy to see. Voters who benefit from government programs will push for higher tax rates on high earners -- at least until those who create jobs and wealth stop working, stop investing, or move out of the country.

Read more ...

Other nations have tried the ideology of fairness and found that reward without work brings decline. In the late 1970s and throughout the 1980s, Margaret Thatcher took on the unions and slashed taxes to restore growth and jobs in Great Britain. In Germany a few years ago, Social Democrat Gerhard Schroeder defied his party's dogma and loosened labor's grip on the economy to end stagnation. Recently in France, Nicolas Sarkozy was swept to power on a platform of restoring flexibility to the economy.

The sequence is always the same.

• High-tax, big-spending policies force the economy to lose momentum.
• Growth in government spending outstrips revenues.
• Fiscal and trade deficits soar.
• Public debt, excessive taxation, and unemployment follow.
• The central bank tries to solve the problem by printing money.
• International competitiveness is lost and the currency depreciates.
• The system stagnates.
• Then, a frightened electorate returns conservatives to power.

The Best Promises Win

Make Them Explain the Bid
Obama's Tax Proposal

Long ago, I planned to renovate part of a two-family house. I would live in the second and attic floors and rent out the first floor. I found an architect to create the plans. I needed a contractor.

My architect asked three contractors, and I reviewed the bids. The high bid was twice the low bid. How would I choose between them? My architect said that they all were OK as far as he knew. Since I had no other information, I took the low bid. My architect would supervise, so why not the low bidder?

I reasoned like this. I had equally poor information about each bidder, only the price was different. If I made a mistake, at least I would spend less money, and I could fix things up later if I needed to.

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It was a mistake. This contractor cut a few corners. Some were visible along the way, and some only showed up years later when some pipes froze. He misread the plans, didn't run the pipes in the space allowed for them (insulated), but did run them in the wall (uninsulated). Maybe the middle bid would have worked out better. I'll never know.

The lesson for me is to find out the evaluations and why the bids are different. I would investigate a lot more if I did it today. I wouldn't go for the low bid, or any bid, until I understood how they came to their number. Just talking to them helps a lot. If they won't talk, I won't buy -- low bid, high bid, or whatever.

House Painter

Another time, I was talking to exterior house painters. One guy was very friendly and seemed knowledgeable. He looked around my house and gave a price, and I asked how he computed it. He said that he just knew. He painted a lot of houses, and this seemed like x men for y days.

I pressed on, because sometimes paint jobs run into problems, and I wanted some structure ahead of time to value and negotiate any changes that might be needed. In particular, was this the price for two coats? He said that the house needed two coats on the sunny sides, but just one coat on the shaded sides. He assured me that when they were painting, he would do two coats if the house needed it, for the original price. So, I could get a low bid and a second coat for free if needed.

I thanked him for the estimate, and I dropped him from consideration. First, he didn't answer my plain question about how he got to his price. "He just knew". Worse, he was willing to "throw in" a second coat on part of the house if needed.

No one cuts his profit by "throwing in" a major item. When a contractor treats an additional cost as a gift, "no problem", then it is because he isn't serious about it. He could promise anything he wanted to, because he wasn't going to do it anyway.

Election Promises

An election invites promises from the candidates. Herbert Hoover in the 1928 Presidential Campaign used the immortal slogan "A chicken in every pot and a car in every garage". He won the election. The promise was broken, as the Great Depression started 10 months later.

President George H.W. Bush, the father of our current President, said "Read my lips, no new taxes" as he accepted the nomination for President at the 1988 Republican Convention. It helped him win election. From Wikipedia:

[edited] As President, the elder Bush made no progress dealing with a House and Senate controlled by Democrats. Bush compromised to raise several tax rates as part of a 1990 budget agreement to reduce the national budget deficit. This reversal caused great controversy, especially among conservative Republicans. Technically there were no new tax items in this agreement, only rate increases.

It seems that politicians are deep thinking philosophers. When they break their promises, they explain that there are subtle problems in understanding their language. You can only determine what they meant earlier after they explain it to you later. Honest men, misunderstood.

All politicians promise to give something to you. Just one problem; they don't do the giving. When they have a choice of granting government favors to their corporate supporters, or giving the money to the "little guy", the little guy loses out.

A worse problem is that raising taxes reduces economic production and government revenue. Politicians want more money, and people want more jobs. Raising tax rates kills both. That has been the interesting lesson of the past 25 years. If politicians want to distribute more money, they have to spend less on political pork, and they won't.

McCain Should Admit It

Obama is promising gifts before an election. He says he is going to give that money to you, and spread the wealth around. These promises probably have worked for all of his career as a Chicago and Senate politician. He has made a bunch of promises: checks in the mail, money for college, mortgage payments, health care, and an expansion of government to give more to everyone (except the 5% who are supposed to pay for it all).

Ironically, a politician is at a disadvantage when he has some vision and scruples. McCain is a rare politician who seems to have a conscience. His military career probably had that effect - Country, Honor, Duty. I think it is hard for him to lie, although he sometimes does, and he has apologized for some past mistakes, a rarity. He does make promises like all politicians, but he seems constrained.

McCain just can't match Obama's promises. He looks at the situation, and tries to explain that lower taxes will bring in more government revenue, and that a smaller government will free up resources for more satisfying jobs.

It may seem like a deal with the Devil, but leaving more resources in the hands of productive citizens is going to produce more production, lower prices, and more jobs than handing out walking-around money. McCain is not giving the well-off more money. He is letting them keep more of what they have earned. They do better investing that extra money than the Government does. The society gets more jobs and higher wages, than if the government hires more office workers.

Obama says he will give you everything. This is all a smiling promise with no downside. He will make the rich give you the money. This will be the first time in history that any government will take from the rich, rather than be manipulated by them.

I think Obama can promise everything because he isn't serious. It will all work out, or maybe it won't, but he will be President, and he can worry about it then.

McCain should admit that he can't compete in the giveaways. His sense of reality prevents him from promising everything. Obama clearly makes the bigger promises.

Tax Complications

Barack Obama has promised a "tax cut" for everyone, except for the 5% of taxpayers who have large incomes and are supposed to pay more. The tax "cuts" are refundable, meaning that the government will send a check up to $500 per taxpayer (or $1000 per family) if the "cut" is greater than the taxes paid. Even if no tax was originally paid.

This is not a tax cut in the usual sense. People with more income will pay people with less income, and will pay for most of government in addition.

I said "people can apply for", because the taxpayer (or non-taxpayer) does not get the money automatically. He needs to document the expenses that are favored for a tax rebate, and file a more complicated tax return.

This is like the $20 off coupons that retailers hand out. Just collect all the paperwork, clip the coupons, do the math, send it in, and get the refund. Your tax preparer will charge a bit more for the service, or you can study the tax booklets yourself.

Some people will lie about eligibility, just as they currently lie about extra dependents to get current tax deductions. The temptation to lie is greater, because they can walk away with a check, not just a reduction in the tax owed. The government will spend even more money trying to catch them, or checking up on you.

Taxes will be made more horribly complicated. Obama proposes phase-outs and rate changes along with the cuts. The cut you get this year may be reclaimed in following years by inflation and any increasing family income.

The chart below is from American.com: The Folly of Obama’s Tax Plan. It shows the Marginal Tax Rate for our current tax law and under Obama's plan. Marginal Rate means how much income you get to keep out the next $1000 for each income level.

Obama says he will give you $1000 plus other amounts. The downside is that these benefits "phase out" (reduce gradually) as income increases. So, either you don't get the full benefit, or the benefit disappears if you earn more in the next year. If you lose $500 in benefit, it feels the same as paying $500 more in tax.

From the graphic, for example, say you get a raise from $30,000 to $35,000. Current law takes $1000 of that $5000, a marginal tax rate of 20%. Obama's proposal takes $1750. You give back an extra $750 of whatever benefit was originally granted to you, because something is being "phased out", for a marginal tax rate of 35%.

The original tax gift feels great. The high marginal rate is a gotcha. Just when you are happy to make more money, you will find out that you owe more tax. Just hope you didn't spend it already. I'm not happy with Obama's plan or with the current tax law. We should have simpler, understandable tax laws, not a grab-bag that hides who is paying what. Everyone should pay less tax and know what they will keep if they work hard to earn more money. You shouldn't need a tax accountant for a $35,000 income.

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A Few Words About Policy
July 2009 - Easy Opinions

Where are the policy papers, Obama's/Congress's research on healthcare reform and other vast programs?

Where are the plans that Obama supports, in writing so that they may be analyzed and criticized in a reasonable manner? Hiding the details as a political tactic is fraud on the public.

Or, are Obama and the Democrats putting down all of the odd thoughts and biases that they picked up over the years.

We should ask loudly, how do our representatives know that their legislation will help, or solve anything? The legislative language is less important than the research that should show that the legislation will be of good effect.

Further, people are writing bills, in detail. Where are the research papers that support the writing of the bills? This research has to be there. We need to see it.

The Congress and Obama should proudly present the careful research that supports their proposed rearrangements of our country. Obama is a Harvard trained law professor. He should be up to the task.

The Supply Side Robin Hood

You Can Steal From the Rich Until They Wise Up

The American Legislative Exchange Council (ALEC) promotes free markets, low taxes, and limited government. Their policy recommendations are based on fact filled research.

Rich States/Poor States on their website provides a long study measuring state wealth and success, related to factors like tax rates and regulation. The ALEC-Laffer Economic Competitiveness Index is a downloadable PDF of the study. I have read only a few sections. The following is an excerpt from page 31, edited for flow and clarity.

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The highly progressive tax structures in California or New York do not help the poor, minorities, or the politically weak. Intuition tells us that when government taxes people who work, there are fewer of them. When government pays people who don’t work, there are more of them.

Most of us want to help the people who have difficulty helping themselves. The problem is how to do it.

If the rich are taxed and the money is given to the poor, do not be surprised if the number of poor persons increases and the number of rich persons decreases. People respond to incentives. If you tax an activity, people do less of it. If you subsidize an activity, people do more of it.

Supply-Side Economics is the view that all people are better off, including the poor, when production is encouraged through lower tax rates. The opposite view is that tax rates should be high to pay for programs which aid the poor.

The Supply-Side Version of Robin Hood

Robin Hood and his band of merry men start their days hiding among the trees in the Sherwood Forest waiting for hapless travelers on the trans-forest throughway.

If a rich merchant comes by, Robin Hood strips him of all his belongings. Before you feel sorry for him, remember he is so rich that there will be an abundance of jewels and wealth waiting for him when he gets back to his castle.

If a prosperous merchant comes by, Robin Hood takes almost everything. He seizes a moderate chunk of an everyday businessman’s belongings. He takes only a little token from a poor merchant who barely makes a living.

In the language of our modern society, Robin Hood has a progressive stealing structure. This is similar to the California government or other tax systems used in this country.

At the end of the day, Robin Hood and his men take their contraband back to Nottingham to help the poor. They distribute their treasures to citizens based on their poverty. The more a person makes, the less Robin Hood gives him, and the less a person has, the more he receives. Robin Hood robs from the rich and gives to the poor.

Now, put on your supply-side economics hat and imagine that you are a merchant back in Nottingham. How long would it take you to learn not to go through the forest? Those merchants who couldn’t afford armed guards would have to go around the forest in order to trade with the neighboring villages.

Of course, the route around the forest is longer, more treacherous, and more costly. Those merchants who could afford armed guards (today’s equivalent of lawyers, accountants, and lobbyists) would go through the forest and Robin Hood couldn’t rob them. As a result, Robin Hood had nothing to give to the poor. All he had succeeded in doing was drive up the cost of doing business, which meant the poor had to pay higher prices. By stealing from the rich and giving to the poor, Robin Hood made the poor worse off.

And so it is in high-tax states. The poor, who rely on the state for their sustenance, are having their benefits cut to the bone. Because of some states’ unfriendly business policies, unemployment rates rise. We could go on, but the point is simple enough. Progressive tax structures do not benefit the truly needy.

Government never succeeds in its attempts to redistribute income. Taxes do not change the distribution of income, but taxes can and do lower the volume of income. As we look across the world at the progressive tax structure of California and other economies, it is amazing how the distribution of income, if anything, is made worse.

ALEC ranked states by employment, income per-person, and growth in population. From 1996-2006, the low-tax states Texas, Florida and Arizona were the most successful. The high-tax states Illinois, Ohio and Michigan were the least successful.

Obama's 95% Depends On the Meaning of Tax Cut

10/13/08 - WSJ Opinion   --> Source

For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit." Mr. Obama is proposing to create or expand at least seven such credits for individuals.

Mr. Obama's tax credits are phased out as incomes rise. So, they impose a huge "marginal" tax rate increase on low-income workers. The marginal tax rate refers to the rate on the next dollar of income earned. As the nearby chart illustrates, the marginal rate for millions of low- and middle-income workers would spike as they earn more income.

Some families with an income of $40,000 could lose up to 40 cents in vanishing credits for every additional dollar earned from working overtime or taking a new job. As public policy, this is contradictory. The tax credits are sold in the name of "making work pay," but in practice they can be a disincentive to working harder, especially if you're a lower-income couple getting raises of $1,000 or $2,000 a year.

Zero or Less Tax

09/19/08 - Tax Foundation by Scott A. Hodge   --> Source

[edited] IRS statistics for 2006 say 45.6 million tax filers (33% of 138 million filers total) have no tax liability after taking their credits and deductions. This is a 57 percent increase since 2000 in the number of Americans who pay no personal income taxes.

The Tax Foundation estimates that the number of nonpayers would rise by 16 million to total 63 million (46% of 138 million filers), if all of the Obama tax provisions are enacted in 2009. McCain's proposals would increase nonpayers by about 15 million, to total 62 million.

Undocumented Employee Benefit

Great Moments in Government: The Birth of a New Tax Policy

(As it might have been)

Fred: I have a great idea. I got it when I read a story about the FAA, those airplane guys.

Mack: About how to raise taxes?

Fred: Not "raise", just collect the tax that we want, I mean that we are owed.

Mack: I've got to hear this.

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Fred: Well, the FAA has a sweet operation. They make those airlines document EVERYTHING. So, if anything goes wrong, they look it up in the documentation, and there is always some paper mistake, or some rule that wasn't followed. Then, no one talks about the FAA, it is always about the airline's mistakes.

Mack: Come back to earth. How does that help us?

Fred: We allow businesses to deduct "expenses" so they don't pay tax on those.

Mack: Right.

Fred: But, what about stolen office supplies, phone calls home, donuts served at office meetings, extra furniture in the offices that isn't directly related to an employee's work, desk chairs that are more expensive than needed, break rooms with free coffee, and ...

Mack: Are you OK Fred? You are breathing hard. All of those things are allowed under the "Employer Convenience" rule. The employer provides a few free things that encourage employees to be more comfortable and to work better. They are at the employer's convenience and for the employer's benefit.

Fred: Yes, but we could make them DOCUMENT it. In detail.

Mack: That is ridiculous. The documentation work would be picky and enormous. They would never go to the trouble to . . . AH!

Fred: You see. It would be way too expensive to document. We could say, either document everything, or we will just ALLOCATE some part of your expenses to these Undocumented Employee Benefits. The allocated amount is no longer an expense, so we would collect the extra tax.

Mack: This is a moment. You are going to be an Assistant Director. This is big, complicated, and wonderful.

Fred: Yes, and what could they complain about? They can't say that they don't know, or can't keep records. They are running a business, after all.

Mack: You have created a new category: Undocumented Employee Benefit. This is history. But, won't this be a big burden on business?

Fred: The airplanes are still flying, right?

Links

Wall Street Journal: Tax on Talking