Category Archives: Income Taxes

The Rich Pay All the Taxes

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Jane Wells reported last December on CNBC that the Congressional Budget Office had issued a report analyzing the amount of taxes paid by the “five tiers of wage earners” for 2010.The report doesn’t seem to indicate that the rich are getting away without paying their fair share, although those who advocate there is income inequality will find ammunition for their argument if they read deeper into the report. The report presents the statistics on payment of taxes by the different income groups in a variety of graphs and written discussions. (The report is overly long and not written to keep your attention, but it contains thought-provoking information.) Table 3 on page 13 shows the lowest wage-earning quintile pays 0.4% of all federal taxes, the second quintile pays 3.8%, the third 9.1%, the fourth 17.6% and the top quintile pays 68.8%.

The report includes the interesting kicker that the top three quintiles pay all the taxes!  Page 11 of the report says, “Much of the progressivity of the federal tax system derives from the individual income tax. In 2010, the lowest quintile’s average rate for the individual income tax was -9.2 percent and the second income quintile’s rate was -2.3%…(A group can have a negative income tax rate if its refundable tax credits exceed the income tax otherwise owed.)…For example, although the lowest quintile’s average rate for individual income tax was about -9 percent, more than one-quarter of the households in that quintile had an average rate below -15 percent, more than one-quarter had a rate of zero or higher, and nearly half had an average rate between -15 percent and zero.” Continue reading →

Fiscal Cliff Shenanigans

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President Obama has repeatedly talked about imposing a “Warren Buffet Rule” for income taxes, which refers to the outrage he is said to feel that his wealthy supporter pays a lower income tax percentage than his secretary. Drilling down into the recently passed “Fiscal Cliff” bill that Mr. Obama signed into law reveals some curious aspects that don’t seem to be consistent with that position.

An article by Brad Plumer of the Washington Post gives a good start to understanding how much our elected leaders care about fair taxation. Section 322 provides a $9 billion tax break to manufacturers such as General Electric and big banks for what is called “active financing.” That section allows deferring U.S. taxes on overseas income. I’m not against helping U.S. companies be competitive in the global market. However, I recall Mitt Romney was chastised by the media for not pledging to end the provision which President Obama has now quietly signed it into law.

There are other aspects of the law that are even more curious. “Carried interest,” which is the share of profits paid to private equity and hedge fund investment managers are not taxed at the same rates as salaries. The new law will allow those payments to be taxed at a top rate of 20% for individuals earning over $400,000 or $450,000 for joint returns. If that one doesn’t bother you, how about a100 % exclusion on gains from qualified small business (QSB) stock held for at least five years. How many middle class Americans will benefit from that or have even ever heard of it? Continue reading →

Fair Income Tax Rates

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The primary campaign strategy of President Obama to secure his re-election was to advocate that wealthy (successful) people should pay higher taxes. I assume that resonated because many assumed that the government having more money would provide them more benefits. That discounts the continuous television ads pointing out that Mr. Romney is a Capitalist, that he did not believe it was the place of government to provide free birth control, and the government should pay for Big Bird episodes. (And, yes, I’m oversimplifying.)

So here we are in the midst of a government-created economic crisis about whether the primary objective of Congress is to raise taxes on those who have been successful, to cut spending, or to do nothing and see what might happen next. My bet, and I make that bet without judging whether it is the best approach, is that our highly paid government officials will do whatever they think is best for their political careers.

Government officials from areas where Democrats dominate will hold out for tax increases on the wealthy and will not risk suggesting reform of entitlement programs that they know are economically unsustainable.  Republicans will feebly demand some sort of spending and entitlement reform. The country will continue to be awarded with a lack of leadership from the President and Congressional leaders. I predict President Obama will continue to campaign that everything is the fault of Republican leaders going back to George W. Bush. I also predict that he will be heartily awarded with applause for that meaningless rhetoric. Continue reading →

Dueling Presidential Candidate Gaffes

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With less than a week until we learn who will be elected president it seems the time is right for a mention of gaffes by the two candidates. It wouldn’t be a duel if the subject referred to Joe Biden and Paul Ryan, since Mr. Biden would win on the numbers of gaffes by an overwhelming margin.

Mitt Romney stirred understandable criticism when he foolishly mentioned that he need not campaign to the 47 percent of Americans who are “dependent on government” and consider themselves “victims.” He later said that he understood that he wasn’t going to get the vote of people who expected that the government’s job is to redistribute wealth, and that “I’m not going to get them.” He added “I do believe we should have enough jobs and take-home pay to allow people to pay taxes. I think people would like to be paying taxes.”

Mr. Obama presented a different opinion in an appearance at Loyola University in 1998 when he was an Illinois state senator. The admittedly 14 year-old video has Mr. Obama saying, “The trick is figuring out how do we structure government systems that pool resources and hence facilitate some [wealth] redistribution — because I actually believe in redistribution, at least at a certain level to make sure that everybody’s got a shot.” Continue reading →

Underground Economy

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Dr. Art Robinson’s wrote a book “Common Sense in 2012,” and a quick summary is that it presents his positions for his campaign to be elected to the House of Representatives from Oregon. He is running for Congress as a citizen volunteer committed to help stop Congress from exceeding the powers granted by the Constitution. I mention in the review that reading the book prompted me to send a donation to Dr. Robinson’s campaign despite the fact he is running for office in Oregon and I live in Colorado.

Reading the book made me wonder how many more businesses are going underground to avoid the interference of government. I want to make it clear that Dr. Robinson does not mention or suggest “going underground.”  An article with the title “The Rise of the Underground” in the Wall Street Journal by Patrick Barta looked to be a good place to start in researching the subject. Most of the article is about people in India peddling on street corners because they have been laid off or couldn’t find a job in the first place. There are several examples given, and most people make a few dollars a day selling food and other commodities. One creative woman was earning $10 a day selling shots of “medicinal wine,” wine mixed with herbs, to truck drivers and motorcyclists. The article called it “…an adult version of the neighborhood lemonade stand.” Of course such a stand would face numerous problems in the United States. There are many localities that require a license to operate a lemonade stand, and I doubt that could be expanded to selling alcohol.

The article also describes “informal workers” in the U.S. “…including off-the book maids, gardeners and ‘gypsy’ cab drivers…” It is estimated as much as 10 percent of the U.S. economy is off-the books (not including the large illicit drug trade,) and the percentage is undoubtedly growing as people are laid off and are forced into doing all manner of part-time contract work.

An article titled “The Mysterious Case of the Disappearing Prosperity” by Baron Bodissey provides some interesting analysis about why the underground economy exists. It is no surprise that taxes play a role. An example is given of someone repairing a computer, and the job is worth $200. You can accept the job to do the repair and reduce your income by paying taxes, demand that the purchaser pay more so you can pay the taxes and still make the $200, or both of you can agree that the money will change hands without the government being told. Massachusetts has created a bureaucracy with the strange title, “Joint Task Force on the Underground Economy and Employee Misclassification” with a toll-free number to allow crooks who aren’t reporting income to be reported. Apparently that allows some people to earn money by being a paid government informer.

The federal government also wants to get its share of any “earned income.” There is a part of Obamacare that requires businesses to file forms not only for non-employees who are paid more than $600 but also for every business they paid more than $600. That’s good news for people with accounting experience, because businesses will need more employees to file all the required forms. That will give government more money to mismanage, but I can’t think of a benefit to the businesses.

Barter is also becoming more popular. Perhaps someone offers to mow your yard if you will prepare them a resume. No money changes hands, although I expect Massachusetts would expect both parties to pay taxes on the value of the services exchanged if they are reported by an informer. The IRS certainly believes taxes must be paid on barter. The link gives instructions on which forms are to be submitted to “…include in gross income in the year of receipt the fair market value of goods and services received in exchange for goods or services you provide.” The IRS is aware that “The internet has provided a medium for new growth in the bartering exchange industry.”

The article by Mr. Bodissey and Dr. Robinson’s both mention a comment by Ronald Reagan. “The government’s view of the economy could be summed up in a few short phrases. If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”

Warren Buffet and his Secretary’s Taxes

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Warren Buffet’s secretary was in the spotlight at President Obama’s State of the Union Address after Mr. Buffet repeated his comments that she is the one paying the higher taxes. I know that Mr. Obama believes this is unfair, because I received a four page letter (perhaps robo-signed) that asks the question, “Do you think it is fair that Warren Buffet’s secretary pays a higher tax rate than Warren Buffet?” He then gives the answer, “I don’t and neither does Mr. Buffet.”

Mr. Buffet believes he and other millionaires should paying higher taxes on their individual returns, but he apparently doesn’t feel the same about Berkshire Hathaway. He owns a big share of that company, and it pays considerable amounts in corporate taxes. However, the company’s annual report discusses the running dispute it has with the IRS about how much it owes. This isn’t new; the IRS has been actively contesting whether Berkshire Hathaway is paying enough for almost a decade.

There are several interesting factors at play in this story. First, do his secretary and everyone else in Mr. Buffet’s office really pay more than Buffet? The answer is obviously no. The secretary does pay a higher rate on her estimated $200,000 salary, although I can’t find how she is paying the reported 35.8 percent of her income. There is a link to a tax calculator that shows a single person with taxable income of $200,000 would pay $50,897 in federal taxes, or 25.45%. A married person filing a joint return with the same taxable income would pay $44,070 or 22.03%. Perhaps Nebraska has really high state taxes or Omaha adds several percentage points for some sort of municipal tax.

Buffet reportedly pays federal income taxes at 17.4 percent of his taxable income, because much of his income is from capital gains that are taxed at a maximum of 15%. The disparity between his tax rates and those for his secretary is what has created outrage and earned her the adoration of those who champion higher taxes for millionaires. I haven’t seen it mentioned in many places that Mr. Buffet pays an estimated seven million dollars on his personal return, which my rudimentary math tells me that he reported about 40 million dollars of income. He wouldn’t have to wait for tax laws to be changed to address his outrage that he pays a lower tax rate than his secretary. He could simply donate another 7 million dollars to the government and there wouldn’t be an issue that needs national attention. I don’t know whether he could claim that donation to reduce his taxable income for the next year. Perhaps he doesn’t really want to send the IRS more of his personal income because his 23% share of the Berkshire Hathaway disputed corporate taxes is over five billion dollars.

It isn’t a surprise that Mr. Buffet is a big fan of Mr. Obama. The President’s decision to cancel the Keystone XL pipeline provides a big boost to earnings of Berkshire Hathaway. The pipeline was to transport oil from the Bakken oil fields in the Dakotas along with Canadian oil, but now much of that oil will have to be moved in railway tank cars operated by Burlington Northern and Santa Fe Railway Company. Berkshire Hathaway already owns 22% of that company and has an offer to buy the rest.

Let’s think about Keystone XL for a bit. The pipeline had been cleared as having minimal environmental impact in a three year study. It would have provided jobs to people making the pipe and installing it. It would have brought large quantities of oil to U.S. refineries that didn’t originate in countries that don’t like us very much. It also would have increased the amount of Bakken oil that would also move to those refineries. Apparently none of those positives would have justified irritating the people who call themselves environmentalists.