Investing Curiouscatblog

Category: Taxes

  • Old and Wealthy

    I am not exactly sure why but for some reason people seem very ignorant of the wealth distribution by age. The richest group by far are those over 65. There are several reasons for this including self preservation. Once you stop working you better have a large pool of capital or you will most likely have little income (you could have a great pension and no other savings but…). Another is that the “miracle” of compound interest. Those that actually saved enough for retirement often find their investments out-earning their spending thus wealth increasing yearly. This effect over time results in wealth increasing dramatically. Many of those that failed to save enough will have their savings dissolve very quickly thus leaving the inverse of a bell curve (a high number of wealthy and of poor and a lessor number in the middle). Social Security helps those that failed to save enough for retirement to slow the decline (and those that saved enough to become even wealthier even faster). The presence of large numbers of poor elderly I think is one reason so many are surprised that they are the richest age group.

    I used to be surprised how few people know this – now I know, for those I talk to anyway, they are always surprised. This has several public policy impacts such as why do we have a huge “social security transfer system” (social security including medicare) to move money from the young to the old when the old are wealthier than the young? People see the 7.65% deducted from their check but the employer has to pay an equal amount to this transfer of wealth between the generations bringing the total to 15.3%.

    It doesn’t make much sense to me to have those working at Wal-mart and McDonalds transfer 15.3% of the income from their labor to much wealthier people. Yes, paying something in I think is fair. But the system should be adjusted. One method I would use is to reduce (or eliminate) payments to the wealthy elderly (continuing the existing payments to the poor elderly is affordable so I see continuing those payments as good public policy) and reduce taxes on the working poor. Obviously others disagree so we transfer a large amount of money from those working at Wal-mart to those with hundreds of thousands in investments. I think this is wrong. I wish at least the facts would be known so that the decision is made with awareness of the facts.

    The median net worth of people 55 to 64 has climbed to nearly $250,000, while it has dropped to about $50,000 for those in their late 30s
    …
    The growing divide between the rich and poor in America is more generation gap than class conflict, according to a USA TODAY analysis of federal government data. The rich are getting richer, but what’s received little attention is who these rich people are. Overwhelmingly, they’re older folks. Nearly all additional wealth created in the USA since 1989 has gone to people 55 and older, according to Federal Reserve data. Wealth has doubled since 1989 in households headed by older Americans.
    …
    The implications are far-reaching and can turn conventional wisdom on its head. Social Security and Medicare increasingly are functioning as a transfer of money from less affluent young people to much wealthier older people.

    Wow, I don’t recall seeing publications actually point out this fact very often. Good for the USA Today.
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  • Buffett on Taxes

    Buffett blasts system that lets him pay less tax than secretary:

    Speaking at a $4,600-a-seat fundraiser in New York for Senator Hillary Clinton, Mr Buffett, who is worth an estimated $52 billion (£26 billion), said: “The 400 of us [here] pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter. If you’re in the luckiest 1 per cent of humanity, you owe it to the rest of humanity to think about the other 99 per cent.”

    Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent. Mr Buffett told his audience, which included John Mack, the chairman of Morgan Stanley, and Alan Patricof, the founder of the US branch of Apax Partners, that US government policy had accentuated a disparity of wealth that hurt the economy by stifling opportunity and motivation.

    The comments are among the most [significant] yet in a debate raging on both sides of the Atlantic about growing income inequality and how the super-wealthy are taxed. They echo those made this month by Nicholas Ferguson, one of the leading figures in Britain’s private equity industry, when he criticised tax rates that left its multimillionaire venture capitalists “paying less tax than a cleaning lady”.

    Last week senior members of the US Senate proposed to increase the rate of tax that private equity and hedge fund staff pay on their share of the profits, known as carried interest, from the 15 per cent capital gains rate to about 35 per cent.

    Related: Estate Tax Repeal – USA Federal Debt Now $516,348 Per Household – Income Inequality in the USA – General Air Travel Taxes Subsidizing Private Plane Airports – Warren Buffett bio

  • USA Federal Debt Now $516,348 Per Household

    The federal debt is not officially calculated the way that other accounting is done. Future obligations are not included, thus promising ever larger payments for health and retirement programs are not accurately reflected in government official debt totals. There are some legitimate arguments for why using exactly the same standards as others does not make sense for the federal government accounting. However the current methods make it too easy for politicians to claim they are not spending our grandchildren’s money for promises they make today. Rules ‘hiding’ trillions in debt:

    Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later. The federal government does not follow the rule, so promises for Social Security and Medicare don’t show up when the government reports its financial condition.

    Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. By comparison, U.S. households owe an average of $112,043 for mortgages, car loans, credit cards and all other debt combined.

    Foisting debts on our grandchildren because we elect politicians that refuse to either cut spending (and promised spending) or raise taxes is a sad legacy of the last 30 years for the USA.

    Related: Washington Paying Out Money it Doesn’t Have – Is the USA Broke – The Fallacy of Estate Tax Repeal – Social Security Trust Fund

  • General Air Travel Taxes Subsidizing Private Plane Airports

    This is the kind of stuff that makes so many people so cynical about how those with the gold make the rules. Somehow unless enough people pay enough attention to stop every single boondogel the politicians seem to keep throwing money at their rich friends. Then those rich friends give a reward the politician’s re-election campaigns for the taxpayer money they received. Traveler taxes awarded to small airports:

    The federal government has taken billions of dollars from the taxes and fees paid by airline passengers every time they fly and awarded it to small airports used mainly by private pilots and globe-trotting corporate executives.
    …
    Passengers pay as many as six separate taxes and fees on a single airline ticket, adding up to more than $104 billion since 1997, the AP found. Yet these assessments often are overlooked by the millions who click the “buy” button to purchase tickets online, even though they can exceed 25 percent of the total airfare.
    …
    Congress will decide later this year whether to curtail the huge public subsidy for small airports, while pilots’ associations, airport managers and other interested groups are fighting to keep it.

    Any guess on what they will do? I would guess fund their friends and themselves. It is true if the public actually pays attention then I believe they would stop until they think the public won’t notice and then slip the millionaire subsidies back in.

    J.T. Wilson Field in Somerset, Ky. got more than $12 million since 2001, much of it through the influence of local Rep. Hal Rogers, a longtime Republican member of the House Appropriations Committee who uses the airfield for trips home. Wilson Field is home base to 26 small planes and one jet. Despite millions in improvements, including a passenger terminal, the airport has yet to see scheduled commercial service.

    The article includes many more examples.

  • Alternative Minimum Tax

    Congressional Budget Office on the Alternative Minimum Tax (AMT):

    Until 2000, less than 1 percent of taxpayers paid the AMT in any year. Under current law, however, the number of taxpayers affected by the AMT will grow from just over 1 million in 2001 to nearly 30 million in 2010 before falling back to about 23 million in 2014 after the expiration of the 2001 and 2003 tax cuts. Twenty percent of all taxpayers–and 40 percent of married couples–will owe AMT in 2010. AMT receipts in 2010 will total about $90 billion, roughly 7 percent of total individual income tax revenue.

    The Looming Challenge of the Alternative Minimum Tax, Alan D. Viard, Federal Reserve Bank of Dallas:

    While the AMT applied to 200,000 taxpayers in 1990, roughly 4 million will pay it this year, according to the Urban-Brookings Tax Policy Center. But that is only the beginning. Under current law, the AMT rolls will explode to 22 million in 2007. The AMT’s revenue yield follows a similar pattern, having risen from $2 billion in 1990 to $22 billion this year. It’s projected to nearly triple to $65 billion in 2007.

    Related: Families Face Alternative Minimum Tax, NPR – Brookings Institution article on the AMT – Preparation Softens Blow of Alternative Minimum Tax – IRS on the AMT

  • State of the nation? Broke

    State of the nation? Broke:

    If you want to correct for the $185 billion collected by Social Security as surplus cash flow in 2006 — that is, the taxes came in today to pay for benefits promised in future years — then you have to look at the on-budget deficit, which Walker calls the “operating deficit.” The on-budget deficit came to $434 billion in 2006. The on-budget deficit shrank from 2005 to 2006, just as the unified budget deficit did, but the drop was much smaller: to $434 billion in fiscal 2006 from $494 in fiscal 2005.

    Both of these still understate the size of the deficit. The Bush administration has been adamant about keeping certain costs out of the budget figures. Spending on the war in Iraq, for example, has been included not in budget resolutions but in special emergency spending bills. They are “off budget” in the language of Washington. That spending, estimated by the Congressional Budget Office at $360 billion overall and $95 billion in the fiscal year that ended in October 2006, aren’t in either of these two budget figures. And Iraq funding for fiscal 2007 won’t be included in the budget the president will introduce next month, either.

  • Start Young with 401k and Roth IRA

    Putting away some money is vital, even if you are young and in debt by John Waggoner:

    Your company may also match your 401(k) contributions. Say you earned $50,000 a year and contributed 5% of pay to a 401(k). If your company matches 50 cents on the dollar and your money earns 5%, you’d have $3,847 after a year. In 10 years, you’d have about $56,000, if you got 3% raises yearly and earned 5% on your savings.

    Starting small – If you don’t have a 401(k) available, at least open a Roth IRA. You contribute after-tax money to a Roth, but you pay no taxes on your withdrawals at retirement.

    More on Roth IRA’s.

  • The Value of the Public Domain

    The Value of the Public Domain by Lawrence Lessig:

    Taxes are awful, but necessary. Let’s have them where necessary, but only when necessary. And so why not have them to extend the term of an existing copyright? BECAUSE THIS IS A TAX THAT CANNOT “INCREASE THE BOUNTY.” The work is already produced. No matter what we do today, Elvis is not going to produce any more recordings in 1957. So it is a tax that benefits some plainly (those who get almost twice the term they originally bargained for), but benefits society not at all. I.e., a very bad tax.

    Exactly right. Lessig mentions an interesting article, The Value of the Public Domain by Rufus Pollock that goes into this area in more detail.

    Related: Innovation and Creative Commons – Estate Tax Repeal

  • Washington Paying Out Money it Doesn’t Have

    Aid Is a Bumper Crop for Farmers

    The lawmakers voted to use $8 billion in new taxpayer subsidies to help farmers buy crop insurance to protect them against losses. The insurance would replace the disaster payments and reduce government costs.
    …
    One week before the presidential election, it passed a new $1.8 billion disaster bill to assist farmers hurt by bad weather. Two others followed in subsequent years, totaling more than $6 billion. Today, after a searing drought in the Plains, farm-state legislators are pushing for billions more in aid.

    The result is that farmers often get paid twice by the government for the same disaster, once in subsidized insurance and then again in disaster assistance, a legal but controversial form of double-dipping, a Washington Post investigation found. Together, the programs have cost taxpayers nearly $24 billion since 2000.

    Some politicians talk as though they respect capitalism. They claim to reject taxing people just to give that money to others. Yet they continually increase the debt (taxing our children and grandchildren) and make payments to corporations, farmers and others for no reasonable purpose, other than buying votes. In addition to payments to farmers the government pays those who build million dollar beach house when the predictable storm knocks them down. No rational capitalist or economist would support such behavior (a political consultant might if when voters reward those that buy votes with taxpayer money, which seems to be the case now).
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  • Estate Tax Repeal

    The estate tax is the most capitalist tax that exists. Capitalism, which some seem to think is based on people inheriting assets from their relatives, is not. Capitalism is based on the concept that each person gets to receive rewards for their work.

    Long before Adam Smith, noble rich passed on their wealth to their heirs. It was not Capitalist then and it is not Capitalist now.

    Unfortunately many seem to have skipped economics in school and accepted the claim that Capitalism is about protecting the rich. They seem to believe it is a tenant of Capitalism that those that have the gold make the rules. That is in fact a risk that Capitalists must protect the economy from, not something Capitalist approve of. Those who believe in the wealth being passed from those who earn it to those who they like, believe not in Capitalism but in the state not taxing the idle rich but instead taxing those who don’t have millions given to them. While many have come to believe that such idiocy is Capitalist, it is not. People should read the Wealth of Nations by Adam Smith to get a much clearer idea of what Capitalism is about than those in Washington DC have.
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