Tag: taxes

Income vs Consumption

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I found it fascinating to read You Are What You Spend to see how different the economic picture is depending on the way we measure economic position.

. . . renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being.

It’s true that the share of national income going to the richest 20 percent of households rose . . . while, families in the lowest fifth saw their piece of the pie fall . . .

Income statistics, however, don’t tell the whole story of Americans’ living standards. Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society.

Comparing the richest 1/5 of society with the poorest 1/5 using different metrics leads to widely different conclusions on the gap between those two groups.

Income ratio – 15 : 1
Income per person – 8.2 : 1
Consumption ratio – 3.8 : 1
Consumption per person – 2.1 : 1

Simply adding in the per person statistic cuts the gap in half and moving from an income base to a consumption base (which largely indicates standard of living) makes the gap 1/4 of what it might appear on the surface.

I’d love to see how this has changed over time. We know that the income gap has increased, but I’ll bet that the statistics would show that the consumption gap has decreased between the top and bottom income groups over time. If I’m right, the reason for this is that we have taught the poorest 1/5 to spend what they don’t earn and we have ingrained the expectation that they should be able to do that into our government which has adopted the same policy for itself.

Tags economics, taxes

National State

Why We Need A Tax Debate

If anyone wonders why I think we need a tax debate here’s a good example. Congress passed their omnibus spending bill and today Senator Bennett announces that he got $290 Million for Utah in the bill. The assumption underlying his announcement is that any money he brings to the state from the federal government is a good thing.

Obviously if I leave near the Moab Atlas Mill Tailing site I’m happy for the $24 Million dollars. If I work at the Space Dynamics Lab in Logan (which I used to) then I’m pleased as punch that we got nearly $400,000. On the other hand I’m not excited about the golf course in Pennsylvania that the government paid for and the people of Pennsylvania are probably not too thrilled that they have to clean up the tailings mess in Moab so we can all complain that the government is wasting money. Besides that, when the $24 Million is gone will I be satisfied with the tailings cleanup myself?

We need to make federal spending more transparent and start to talk about what we believe is the proper place for government intervention – in other words, what things are appropriate to receive government funding Is government in charge of health care? defense? border security? my retirement? education? my transportation options? the cost of my groceries? what religion I practice (or get exposed to)? the speed of my internet access?

I think that anyone who says’s yes to all of the above, or no to all of the above is extreme.

Tags discourse, taxes

National

A Tax Debate Would Be Wise

Post author By David
Post date December 15, 2007
8 Comments on A Tax Debate Would Be Wise

Apparently the New York Times would like to have a public debate about taxes. The editorial board expresses their despair that none of the presidential candidates talk about taxes. I think that they are completely right that such a debate is necessary. Beyond that it seems that there is hardly anything that we agree about on this subject. When they turn to discussing their views as opposed to the positions and rhetoric of the candidates they start by saying:

Still, going forward, competent governance, let alone achieving great things, will require more revenue, period.

I consider it to be a very safe bet that they mean that on an perpetual basis. As a proponent of fiscal responsibility I could be sold on the idea that we need more revenue for the time being (meaning the next few decades) to help us dig ourselves out of the financial pit we are in (as a result of our spending in the last few decades). But I think that part of the solution will have to include reducing the spending on some government programs this should include increased efficiency in such programs, but wisdom dictates that it also include a reduction in some programs or services.

The editorial board suggests three opportunities that we can address in the necessary tax debate. Of those three, only one really strikes me as a real opportunity rather than empty dialog:

To create a system that does not disproportionately favor investment income over income from work.

I think we agree that the idea that the Democrats gave lip-service to when they gained the majority of both houses of Congress – paying for new programs with reductions elsewhere or new taxes – is a nice idea. The problem is that it really makes little difference if they do that without also making sure that they are actually paying for existing services as well, rather than allowing for deficit spending where it already exists.

The bias of the New York Times is irrefutable when they make statements such as:

. . . the exorbitant cost of the flat tax would likely be paid by cutting Medicare, Social Security and other bedrock government services.

If Medicare and Social Security are “bedrock government services” then I wonder how our nation survived its first 150 years without those services. Though I may easily be accused of being willing to punish poor people for being poor by cutting these government programs, I promise that I would happily support any such program if we did not have debts in the Trillions and if Congress were not deficit spending to implement the programs. Though I believe that these programs are not necessary for government, I am not one to believe that government can never do any good with such programs. The problem I see is in allowing our federal government to use illusory tricks such as deficit spending that even state governments (let alone private individuals) are not allowed to do. The fact is that if a business operated like the government the leaders of that business would be prosecuted and jailed in a truly just society.

More difficult than tax reform itself may be the search for a candidate with the political courage to speak frankly to the American people about the nation’s budget problems and the leadership skills to solve them.

There is a candidate with the political courage to speak frankly about our budget problems – his name is Ron Paul. They might decide to argue that he lacks the leadership skills to solve the problem but nobody can credibly argue that he lacks the political courage to speak frankly about it. I think that this is a debate we should have. Perhaps the New York Times could start it by hosting a debate or forum in which they could invite Dr. Paul to participate. They could also invite David Walker, the Comptroller General of the United States, who is also anything but timid in speaking about this subject. They can invite whoever they want to defend their positions where they obviously differ from these two men, but with their influence the debate would be hard to ignore once they got the ball rolling. We might even get all the candidates talking about it like they should be.

Tags economics, issues, media, New York Times, Ron Paul, taxes

National

The FairTax

I began to take a closer look at the FairTax proposal because Mike Huckabee (currently the most visible supporter of the FairTax) is rising quickly in the polls and also because I have had some co-workers ask my opinion on the proposal. My immediate answer was, “I want more details.” I read two articles on the same day, one for and one against the FairTax, that helped me to clarify my position.

From Responding to still more absurd attacks on the FairTax I gathered the following:

Lambro is right in asserting that some people actually spend all of their earnings just buying the basic necessities of life. What Lambro obviously doesn’t understand is that under the FairTax every single legal household in this country would receive a check (probably in the form of a credit to a charge account or a debit card) every month equal to the amount of the FairTax which that family would be expected to pay on those necessities during the ensuing month. By way of example, using current poverty statistics the “prebate” for a household of four people would be $506.00 per month. Add that $506.00 to the fact that no household will see anything deducted from their checks for income taxes or for Social Security or Medicare taxes … and you see a substantial rise in real income for the very families that Donald Lambro was so concerned about; the poor and middle income. The president’s own tax reform commission stated that the FairTax was the only tax reform plan out there that would completely untax the poor (at the federal level). How does that square with Lambro’s dire warnings on the effect of the FairTax?

That is what immediately sounds appealing about the FairTax. There would be no taxing people and then giving money back (vouchers, credits, or deductions) based on activities we decide to subsidize. I’m not sure how it works out that, “You don’t pay any more for your toilet paper and milk than you do now,” if the government is still taking the same amount of money and we are getting more in our paycheck. I guess they expect that your toilet paper and milk type necessities will only cost as much in taxes as the prebate you receive each month.
Huck’s Daft Tax Plan made these points:

To avoid the risk of getting both a national sales tax and an income tax, FairTaxers would have to repeal the 16th Amendment. Good luck. Huckabee’s magic wand will come in handy.

Then, there’s the rate of the sales tax. FairTaxers say that a 23 percent rate would be enough to replace current revenues. What they really are talking about is a tax of 30 cents on every dollar — what most people would consider a 30 percent rate. The government would pay the tax on all its purchases, a gimmick “done solely to make revenues under the FairTax seem larger than they really are,” writes economist Bruce Bartlett. Budget trickery aside, the congressional Joint Committee on Taxation has estimated that the rate would have to go as high as 57 percent.

The tax would apply to everything, even medical expenses, so it would amount to an incredibly regressive tax on even the most necessary purchases of low- and middle-income taxpayers. The home mortgage deduction would be gone, and instead buyers would pay a 30 percent (at least) tax on their homes. To make up for this burden, the government would send monthly “prebate” checks to all Americans based on income. (And you thought our current tax scheme was complex?)

The addition of a sales tax and an income tax would be unwanted and I agree that repealing the 16th Amendment would not be easy, but if people were willing to pass the FairTax they would probably do so by setting income tax rates to 0% across the board. If the plan were successful for a few years I would think it would be easy to convince people to repeal the 16th Amendment.

The funny think about whatever rate the taxes would be set at is that the amount of money is not changing. If we are talking about replacing current revenues with the same level of revenue then whatever rate they establish is the same rate we are paying now, either by ourselves, or through increased costs for the goods we purchase. The only difference is who pays and when. The same holds true for the mortgage argument. If I am taxed at 30% on the interest of my mortgage payment that sounds bad, but right now I get taxed on my savings instead of my debt. The current system encourages debt. It appears that the FairTax would encourage savings (which would not be taxed). That seems to be a better system to me.

I like the idea of the FairTax, but I am under no illusions that it will make me wealthy overnight.

Tags issues, taxes

General

Useless 401K

Why is it that the government gets to tell me when I can spend my money?

That’s a question I have asked myself many times. The “you can’t touch it until you’re 60” rule is proof of why it is not the business of government to get involved in what private citizens do with their money (within the bounds of the law). I remember hearing a story from the Romney campaign about Mitt Romney sitting down with his sons at dinner and asking them about their savings. He was surprised to learn that none of them had any savings in the form of 401K or IRA accounts. Their reasoning was that they could not afford to lock up money in that kind of long term plan because they would not be prepared if they had any financial emergency. I remember thinking “I can relate to that.” For Mitt Romney the result was that he now proposes a Tax Free Savings Policy:

Governor Romney Will Make Middle Class Savings Tax Free. Governor Romney’s plan will allow middle class Americans to save tax free by changing the tax rate on interest, capital gains and dividends to absolutely 0%. By helping more Americans save and invest, we can meet the challenges of an aging population and ensure the financial security of America.

– Governor Romney’s Plan Will Allow Over 95% Of American Families To Save And Invest Tax-Free. Any taxpayer with Adjusted Gross Income of under $200,000 would pay a tax rate of absolutely 0% on all of the income they earn from their savings, capital gains and dividends.

My experience has been that I got a job and could not contribute to the 401K plan at the company for 6 months – of course that was when I was technically working as a contractor from a temp agency. At the end of the 6 months my job status changed to being a direct employee of the company and the clock restarted on their waiting period before I could contribute to their 401K plan. I had hardly begun contributing to that 401K plan after their waiting period before the company started downsizing and I was out of a job. I now work for a very small company that does not offer a 401K so I have to roll over my pittance from the other plan into a personal IRA, but I can’t actually invest the money until I have many time more money than I would be rolling over. My current company offers a 403B but there is no guarantee of their matching anything I contribute so the incentive is absent.

As I was contemplating that predicament I also started to consider the implications of contributing to either a 401K, a 403B, or an IRA – anything I might put in any of those would be locked away. What if I had a need, or what if I wanted to retire early? If I put my savings in any of those I would have to have a separate means of savings to fund an early retirement. Essentially the government is locking me into working for at least 30 years unless I have a very lucrative career.

From my perspective the tax-free savings policy sounds like a good thing. I hope it gets enacted. Maybe our current lame-duck president could start pushing for it. If he did I can guarantee that I would view him more favorably at the end of his term than I currently view him.

Tags money, Romney, savings, taxes