Loaning the Government Money for Free

---

The Motley Fool recently published a post titled: "Getting a Tax Refund? Here's Why That's a Bad Thing".
Following are a few points from it.

• Don't let fear hold you back: That fear might be hurting your finances. Instead of paying down your credit cards you are overpaying taxes. Imagine how much richer you could be if you invested that money.
• Avoid temptation: Large tax returns tempt the best of us to spend it on vacations and large purchases. In reality, had you been getting that money in your paycheck all along, you could've found a more responsible use for it

While many of us are inclined to believe that getting a refund at tax time is far better than owing money, in reality, owing a small amount isn't necessarily such a bad thing. If anything, it means that you, not the government, got to benefit from an interest-free loan, which is actually a pretty sweet deal when you think about it. [read the post in full here]

---

The Earnings Suspense File

Have you ever heard of the file mentioned in the post title? According to a Seattle Times article titled "Illegal immigrants pay Social Security tax, won't benefit" ...

"Social Security officials keep a record of wages that do not match up with real names and numbers in their system. The record is called the earnings suspense file.

While many Americans believe illegal immigrants don't pay taxes, billions of dollars deducted from paychecks issued to undocumented workers flow to the Social Security Administration (SSA) every year. Those workers almost certainly will never see that money again.

In 2009, the last year for which figures are available, employers reported wages of $72.8 billion for 7.7 million workers who could not be matched to legal Social Security numbers."

Causes me to wonder how much more revenue would be collected if the United States somehow found a way for these immigrants to become citizens. In truth we baby boomers need these immigrants. Unlike our parents we have had small families which means that this next generation of tax payers will not be able to foot the bill for the Medicare and Social Security benefits that we boomers will withdrawing from those systems in the coming years.

---

Should Capital Gains Tax Rates be Higher?

The past few days have been rife with discussion of Mitt Romney's fourteen percent tax rate that he has paid on his investments. Paul Krugman speaks to this issue of why gazillionaires pay so little, percentage-wise, in an editorial titled "It's hard to justify low tax rates on the rich". Here are a few thoughts from it:

The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains - three-quarters of which go to the top 1 percent of the income distribution - warrant such special treatment.
...
When you hear about the low taxes of people like Romney, what you need to know is that it wasn't always thus - and the days when the superrich paid much higher taxes weren't that long ago. Back in 1986, Ronald Reagan - yes, Ronald Reagan - signed a tax reform equalizing top rates on earned income and capital gains at 28 percent. The rate rose further, to more than 29 percent, during Bill Clinton's first term.

Low capital gains taxes date only from 1997, when Clinton struck a deal with Republicans in Congress in which he cut taxes on the rich in return for creation of the Children's Health Insurance Program. And today's ultralow rates - the lowest since the days of Herbert Hoover - date only from 2003, when former President George W. Bush rammed both a tax cut on capital gains and a tax cut on dividends through Congress.

There is a rationale that says that capital gains rates should be low because people who reap dividends from stocks and bonds are partial owners in entities that already pay taxes. My thinking is that these gains are not all that much different from the dividends and interest that is paid on savings accounts and should be taxed as ordinary income. And looking at the chart above it looks like gazillionaires once paid higher tax rates on capital gains.

---

Taxing the Rich

Transparently speaking, I have flip flopped all over the place on this idea of taxing the ultra-rich. On one hand I listen to gadillionaire Warren Bullet speak about how he pays less, percentage-wise, than his secretary. On the other hand I watch a 60 Minutes piece that tells me that corporations and the ultra-wealthy are not paying taxes here but pay them where the rates are cheaper.

Consider these points from an article (from a somewhat biased site) titled
Tax The Rich? 14 Facts You May Want To Consider ...

• The top 1 percent of all income earners already pay 39.5 percent of all federal income taxes. When you take all forms of federal taxation into account, the top 1 percent of all income earners pay 28.1 percent of all federal taxes. The top 20 percent of all income earners in the United States pay approximately 86 percent of all federal income taxes.
• One recent poll found that 64 percent of Americans are in favor of raising taxes on those that make $250,000 or more a year in order to help balance the federal budget deficit. Another recent poll found that 72 percent of Americans favor raising taxes on those making $250,000 or more a year.
• Approximately 45 percent of all U.S. households pay absolutely no income taxes at all. Overall, U.S. households are now receiving more income from the U.S. government than they are paying to the government in taxes. This is clearly not anywhere close to sustainable.

Those are interesting but this is the one that got my attention:

The ultra-wealthy keep much of their wealth outside of the United States so that the government cannot tax it. It has been estimated that a third of all the wealth in the world is held in "offshore" banks.

Got me to wondering if our government is really smart enough to squeeze a few more bucks from the ultra-wealthy or if attempts to do so would just chase them, and their money, to other countries? All of this is starting to get me wondering if my friend Lynn is right about taxing spending rather than income. Conceptually it seems that such a plan would be more difficult to scam than our current one. What do you think our leaders in DC should do?

The Sixteenth Amendment

Today is Tax Day in the United States.. that day when all tax forms must be postmarked before midnight and mailed to the Internal revenue Service. It is good to remember that there has not always been a federal or national tax in this country. Here is a brief history of federal taxation from Wikipedia:

• The first income tax suggested in the United States was during the War of 1812 but is was never imposed.
• The first Federal income tax was adopted as part of the Revenue Act of 1861. The tax lapsed after the American Civil War. Subsequently enacted income taxes were held to be unconstitutional by the Supreme Court because they were not given to the states.
• In 1913, the Sixteenth Amendment was ratified, permitting the Federal government to levy an income tax without giving all of it to the states. It states:
  

  The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

• Federal taxes were expanded greatly during World War I, after the Wall Street crash of 29 and throughout the rest of the twentieth century.
• Federal income tax rates have been modified frequently. Tax rates were changed in 34 of the 97 years between 1913 and 2010. 

Interesting to note that the tax rates in the first three years (1913-1915) ranged from 1-7%. Rates hit an all time high of roughly 20-90% in the fifties and early sixties. During the Reagan years rates were about 12-50%. The four years after Reagan rates dropped for upper earners to 15-28% and 15-31%. Currently rates are 10-35%.

Seems that there have always been severe reactions to taxes in this country. Many today do not want to see taxes raised on the wealthiest Americans. Some want to see the tax code greatly modified. Many want corporate taxes greatly lowered. Some advocate a tax on things purchased rather than a tax on income. It will be interesting to see if anything is done to our system of taxation.

What changes would you like to see in the way we are taxed?

Ethanol: Bad Deal for Tax Payers?

Driving to Chicago this week I filled my tank in Illinois with gas that was about 10% ethanol. The gas was a lot more than I paid in Missouri for gas without it. So I thought that I'd Google a bit and see what was going on. Here are a few bullet points from an article on ethanol subsidies zFacts.com:

• Corn ethanol subsidies totaled $7.0 billion in 2006 for 4.9 billion gallons of ethanol. Here is the breakdown of those subsidies:
1. 51¢ per gallon federal blenders credit for $2.5 billion from our tax dollars.
2. $0.9 billion in corn subsidies for ethanol corn from our tax dollars.
3. $3.6 billion extra paid at the pump.
• Even with high gas prices in 2006, producing a gallon of ethanol cost 38¢ more than making gasoline with the same energy.

I once worked as a contract employee at the US Department of Agriculture and was pretty appalled at the subsidies that the Cotton Industry received from tax payers. Programs like these are testimonials to the power of lobbyists in Washington, DC. I am in favor of new types of energy but you really have wonder about something that needs this much subsidy.

Am I missing something? Anyone have experience with ethanol prices in your state?

The Gluttony Tax

I heard about the Americans Against Food Taxes website yesterday and decided to check them out. Here is a blurb from them:

We don't want government telling us what to eat or drink by taxing our food and beverages. We can decide what to buy without government help. If we let government tax beverages, who knows where it will end? The next time government wants to fund more programs, they'll just slap taxes on more of our groceries. Government needs to trim its budget fat and leave grocery budgets alone.

This all sounds very high minded and ideological until you consider that the list of their Coalition Members is a laundry list of companies like 7-Eleven, Coca-Cola, Pepsi, Yum! and others who would be hurt by taxes on sugary food and drinks.

That aside, I do wonder what some would say if the government raised other taxes because it followed the anti-food-tax rationale and eliminated taxes on cigarettes and alcohol. I think that this kind of gluttony tax is probably in line with these other sin taxes.

All that said I have to admit that I would not support this tax unless it was accompanied by an actual reduction in another tax. Ha! Like that would ever happen!

Is the Fair Tax fair?

My friend Lynn and I had a Facebook dialog about the Fair Tax over the weekend concerning this article . Here are a few of my Facebook comments:

• Why not call it a fair consumption tax? At least the name would actually mean something. And, in this era of "spin", that would be refreshing.
• The "everyone gets the same level of prebate" and everyone pays the same 23% sales tax on new items is an interesting concept. Wonder what kind of shift there would be to used (vs new) cars. Maybe a whole new cottage industry of used stuff would surface.. might free us from China/Walmart? May not be good for manufactuing though?
• Still don't understand what incentive I would have to buy new and pay 23% when I could buy used and pay no tax. And how will people pay taxes on things bought via the internet from other countries? Seems like the idea of this taxis based on the idea that people are stupid and are not frugal in their spending. What happens when folks figure this out?
• I think that people who repair cars, shoes and the like might benefit a lot. But it doesn't seem to be good policy because it seems to exploit people's weaknesses. It seems that the ultra-rich would benefit the most, the poor would probably not be affected but the middle class would bear more of a tax burden because they will be purchasing the most - until they figure it out.

Now I have to issue a caveat.. I think that the Fair Tax would be very fair to me. I am retired, live off my retirement savings and get taxed every time I withdraw an funds from those savings. I would love to not have those funds taxed. And I do not buy many new things so my consumption taxes would be lower than most. Yet I wonder if this kind of tax would be fair to everyone.. especially hard working folks who buy a lot of stuff.

I thought that I might try to evaluate the pros and cons of the Fair Tax but I doubt that I could do this much justice. So, in lieu of that, I invite you to let me know what you think. Do you think that you would personally benefit? Do you have any concerns about it? What are your pros and cons regarding a federal consumption tax?

Tax Refund Anticipation Loans

The Treasury Department has recently ruled that H&R Block, the Kansas City based tax preparation giant, can no longer use HSBC Bank to make Tax Refund Anticipation Loans. The feds are quiet about the reasons. The action is a blow to Block. Here are a few clips from a KC Star article titled H&R Block’s refund loans cut off:

Block collects the cost of the loan and its tax preparation fee out of the refund, another popular feature of the loans, which are mostly used by lower-income filers who want their refunds as soon as possible.

Block is not expected to find another lender soon, certainly not in time for customers who seek the refund loans starting next month.

Rival tax services, however, will still be able to offer the loans through their banking partners, putting Block at a competitive disadvantage.

I have a mixed reaction to the ruling. Firstly, I think these types of loans prey on people who are either in crisis or are simply ignorant of the way that IRS returns work - refunds are usually delivered within a month.. sometimes in a few weeks. Secondly, I feel bad for Block because their competition is still able to offer these types of loans.

I have never acquired one of these loans but know of people who have. How about you?