Charles Ponzi in the 1920s, Social Security in the 1930s

After reading my cover article pointing out the outrageous truth about Social Security ( Members Only), the two leading contenders for the Republican nomination for president immediately began arguing over whether to call the program a Ponzi scheme.

Ha, just kidding! Doubt either Mitt Romney or Rick Perry have taken time out of their busy schedules to devour the latest issue of SMI. But I found it interesting to read that the Ponzi comparison has a long history:

Not only have a raft of conservatives called Social Security a Ponzi scheme over the years, quite a few very respectable liberals have done so as well.... Jonathan Last has already identified a 1967 Newsweek column by liberal economist and Nobel laureate Paul Samuelson as perhaps the earliest use of the Social Security/Ponzi-scheme comparison in public argument. Samuelson was actually drawing on the Ponzi analogy to defend Social Security. His claim was that the perpetual succession of human generations establishes the conditions for a sustainable Ponzi scheme. Regardless of whether Samuelson was the first commentator to use the Ponzi analogy, he has clearly been the most influential. Policy briefs and books churned out by conservative think tanks such as Heritage and Cato have cited Samuelson’s Ponzi column for years. This is likely how the comparison made its way into public debate.

It's a natural analogy because SS's structure has always relied on supplying new contributors to the system to pay the benefits of the earlier contributors. When you no longer have enough new contributors, the scheme collapses. Good deal for those in early; bad deal for those in late. As SmartMoney points out in 10 Things Social Security Wont Tell You:

Today's workers -- boomers, Gens X and Y -- like to carp about Social Security, but it's not all sour grapes or skepticism about paying into a system with an uncertain future. Employees today pay more in Social Security taxes than previous generations did. They're also likely to get smaller benefits when it's their turn to retire....

For example, a single man who retired in 1980 at age 65 after earning an average wage of $43,500 would have paid about $96,000 in Social Security taxes, and probably received $203,000 in lifetime benefits, according to a study by the Urban Institute, a non-partisan policy think tank in Washington D.C. By contrast, a single man making the same average wage today and retiring in 2030 will likely pay $398,000 in lifetime taxes but receive just $336,000 in lifetime benefits -- about 16% less than he paid in. "People who were first in the system got a great rate of return," says Alan Gustman, chair of the economics department at Dartmouth College. "It's the younger generation that is going to be in the most difficult position."

Of course, Charles Ponzi (and other infamous villains such as Bernie Madoff) constantly needed to find new sources of money to keep things moving along. The U.S government took a simpler route—passing a law making SS compulsory for most of us. Noting the similarities in approach (if not enforcement mechanism), even Mitt Romney has compared those managing Social Security to criminals.

Whether one labels SS a Ponzi scheme or not, it's been obvious for a long time that the program is not self-sustaining and needs to be reformed. Hopefully, the current "crisis" environment regarding the federal debt will provide Washington with the needed backbone to take constructive action.

Need a better understanding of Social Security? Download our special FREE report: IRAs, 401(k)s and Social Security: A Retirement Planning Primer

IRAs, 401(k)s and Social Security: A Retirement Planning Primer

Posted by Austin at 10:07 AM | Comments (0) | TrackBack
Category(s): Retirement, Taxes
Tag(s): investing, ponzi scheme, retirement, social security

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"IRS email" scams

Today I received an email from an old friend who has a tax preparation business. Apparently the number of "tax/IRS related" scam attempts is surging this year, so here are some things to watch out for:

The IRS has informed us of some Tax Scams that you should be aware of. Please take the time to familiarize yourself with the following information so you know what to do if you receive an email from someone claiming to be the IRS.

Emails posing to be from IRS agencies are not new, but this year they seem to have amped up. We want to bring to your attention the newest scams.

One email posed to taxpayers is allegedly from the EFTPS and "notifies" the reader that their tax payment has been rejected and needs to be re-submitted. Please be aware that the IRS does not solicit tax payments via email.

The second scam email targets the tax preparer. These emails contain information regarding IRS Tax Forums and tells the reader to click a link for more information.

In both of these cases upon clicking the links, malware/viruses are loaded onto the user’s computer and the computer is then compromised. The malware sends information stored on the computer back to the scammer.

This page on the IRS website is dedicated to helping people avoid tax scams.

Posted by Mark at 2:55 PM | Comments (0) | TrackBack
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Tag(s): scams, taxes

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Reflecting on tax refunds

A couple of weeks ago, I posted about income-tax refunds, noting the average refund this year was close to $3,000, similar to last year (see the latest filing-season stats from the IRS in the table below).

Tax columnist Laura Saunders at the Wall Street Journal reports that the size of the average refund has nearly doubled since 1999.

Why? Likely answers: changes in the tax code, low interest rates, and a different mindset among younger taxpayers.

The past decade also brought new or short-lived tax benefits for which taxpayers may not have adjusted their withholding.... Examples include the American Opportunity education credit; two of the three home-buyer credits; and the expanded child credit.

But nontax factors likely came into play as well. The conventional wisdom used to frown on large tax refunds, because they amounted to an interest-free loan to the government and reduced investment capital by the same amount. Better, it was thought, to have the money upfront and invest it, or else let it earn interest.

Yet over the past decade the opportunity cost of big tax refunds fell sharply. Interest rates plunged to multidecade lows, while the stock market stagnated....

Meanwhile, with incomes for many people growing only modestly, the notion of a big lump-sum payment grew more appealing. It was like a bonus, in a smoke-and-mirrors kind of way....

[And there appears to be a generational shift,] with younger taxpayers who welcome large refunds, and older taxpayers who don't.

"We try to be withheld to within $100 of our actual tax," says Wes Schultz, 70 years old, a retired financial executive from the Milwaukee area. But he has younger family members who overwithhold on purpose. "One of them earmarks his refund to pay next year's property taxes and replenish his emergency cash supply," he says....

[Dara Rosenberg, a 24-year-old actress in New York,] tries to overwithhold all year long in order to ensure a larger refund; this year, it will be $1,600. Ms. Rosenberg reserves part to pay veterinarian bills for her bulldog, Truman. "I count on that every year," she says.

What about you? Do you go for a large refund? Or try to keep it as small as possible?

(By the way, if you want an "itemized receipt" for your income tax, Social Security, and Medicare payments for 2010, visit the White House's new Federal Taxpayer Receipt page.)

Posted by Joseph at 3:50 PM | Comments (0) | TrackBack
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Tag(s): average tax refund, income taxes, taxes

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When Form 1040 was brand new

While doing research for an SMI project a few months ago, I stumbled across a 1985 Wall Street Journal article about the earliest days of the U.S. income tax.

With this year's tax-filing deadline almost upon us, it's an opportune time to post an excerpt from the article, authored by historian Thomas V. DiBacco (now retired from American University). You'll see that Congress-induced confusion is nothing new.

If you're about to go crazy doing your federal income tax, just be thankful you weren't around in 1914. That was the first year that Americans had to fill out a Form 1040 after the income tax, or 16th Amendment to the Constitution, was ratified in February 1913. Everything was in a mess.

For one thing, Congress didn't pass the implementing legislation until Oct. 3, 1913, which meant that the handful of officials and clerks authorized by the act had too much to do in too short a time.

No tax forms were available until Jan. 8, even though the deadline for submission was March 1....

The biggest problem was that the Internal Revenue regulations didn't answer all the questions that taxpayers had.... One of the most confusing provisions of Form 1040 was the exemption allowed husband and wife filing a joint return: Some taxpayers interpreted the authorizing language to permit a $4,000 exemption for both; others saw it as $7,000 for both; and still others were certain that it meant $3,000 to each.

Hardly a day went by that the Treasury Department did not issue a clarifying interpretation.... By Feb. 21, the government threw up its hands, saying that no more clarifying statements would be issued before March 1....

Expectedly, there were numerous errors in the returns. But the Internal Revenue was scarcely precise about the extent of the problem: The range of errors, it announced, was from 30% to 80%. The most common problem involved the tax period covered by the return (March to December 1913), which meant that only five-sixths of income and deductions were to be reported.

A few months later at the National Tax Conference in Denver, experts raked the government's noble experiment with income taxes over the coals.... A.C. Rearick of New York blamed the confusion of the first year on the taxing verbiage of the congressional act. "To begin with," he said, "the language in which the Act is couched is involved and its rhetoric bewildering. It contains sentences hundreds of words in length, in which clauses are added to clauses and provisos heaped upon provisos."

But there was at least one good thing: the original 1040 had only one page of instructions!

How much tax would you have paid under the original 1913 income tax law? You can find out by using the online calculator here.

Posted by Joseph at 1:20 PM | Comments (0) | TrackBack
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Tag(s): tax history, taxes

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Adjust your withholding?

In the latest issue of Sound Mind Investing we explain how to learn key things about your finances by examining the data on your income-tax return (subscribers' link).

One of the most obvious, of course, is whether you're having too little or too much withheld from your paycheck. Ideally, you don't want either situation. But perfect withholding is a tough target to hit because so many things can affect your tax liability.

Most Americans, however, don't even get within a thousand dollars of dead-on withholding. The Wall Street Journal has the early figures for this year.

As of March 4, the Internal Revenue Service had received about 60.5 million individual income-tax returns. It had issued more than 52 million refunds, up 1.1% from a year ago. Those refunds totaled $161 billion, an average of $3,070.

The WSJ's Tom Herman points out the downside of getting a big refund — and offers a suggestion.

Uncle Sam doesn't pay interest on routine refunds. Thus, these taxpayers effectively have given Washington large amounts of interest-free loans.

Instead of doing this year after year, these people should consider taking a few moments to recalculate their tax withholding for 2011, their estimated tax payments or both.

Sure, it's a nuisance, and it may not seem worth the effort since interest rates remain so low. But tax-preparation software can make the job much easier.... [Also, t]he IRS offers a withholding calculator — at no charge — on its website.

It would make a huge difference in lots of households if that average refund of $3,070 could be dropped to, say, about $600. That would mean an extra $200-a-month in take-home pay for millions of taxpayers. Who couldn't use that?

The March 4 edition of the IRS's filing season stats are shown below, with a comparison to roughly the same period last year.

Posted by Joseph at 11:50 AM | Comments (1) | TrackBack
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Tag(s): Personal Finance Friday, tax withholding, taxes

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Non-cash donations can save money come tax-time

We moved last year, and in our relocation process we gave away a lot of stuff: clothes, housewares, decor, and miscellaneous items. Never wanting to give the government more money than I have to, I'm always diligent about getting receipts, writing down items we've given, taking pictures, and so on. It's a little work, but as you'll soon see, well worth it.

The hardest part in the process is in determining fair market value for the items. I'm never too excited about doing this, but thanks to TurboTax's ItsDeductible, the process isn't as bad as it could be. ItsDeductible is the easiest and cheapest way I'm aware of to determine the market value. And it's free (they are hoping you'll then import the information when you file your taxes through TurboTax). So how does it work?

After logging in with your current TurboTax login info (or creating a free account), you can choose to track your current year's donations, add donations to the previous year, or adjust donations for an amended return from two years ago. I selected the second option.

From there, you are given four types of donations: Items | Money | Stock | Mileage.

I naturally selected "Items." After than you will add/select a charity name and the date of the donation. Then you look up the item you donated. This can be done via search box, or from a list of categories/sub-categories. I find it easier to do a search, then select the appropriate sub-category generated from the search.

Once you've located an item(s), you have the choice of quantity and value: High Value, Medium Value, and Low Value. (I'm have not idea why they include the low-value option; the Pension Protection Act of 2006 disallows tax deductions for any clothing and household items that are not in "good" used condition or better.)

Choosing the value is the hardest part as we don't typically record the exact condition of the item, so there is a judgment call involved. Since we don't give away items in poor condition, I'll usually put half of the items in High Value and half in Medium Value unless I can remember that item's exact condition. (Note to self: Next time, it would be helpful to put an H next to the High Value and an M next to the Medium Value items when then them down.)

Let's walk through an example:

Say you have some blankets you gave away. A search for the term "blanket" generates the following choices: Receiving Blankets, Bed Spreads, Blankets, Comforters, Duvet Covers, Quilts, and Quilt/Comforter. Since you just had a regular old blanket, you select "Blankets."

You're then taken to a few more choices, Electric and Non-Electric. And under each of those are even more options, from the size to the material. Since you remember that you gave away a really nice fleece blanket and a decent acrylic blanket, you put a "1" in the High Value box next to Fleece, and a "1" in the Medium Value box next to Acrylic.

Then you click "Add Items" and are taken to a summary screen showing what you've given so far and the value of it.

From there you can add more items or complete that donation. If you complete it, ItsDeductible shows a summary of all your donations and the estimated savings based on your tax bracket (which you selected in the sign-up process). You can also make edits from this screen, print individual donations, or be done with the donations.

If you're done, you're given a quick summary of all your donations, including any Cash, Stock, or Mileage donations you've entered, along with an option go to more-specific summaries that you can print. If you're not using TurboTax, you'll want to print the donations to include with your tax info.

It sounds like a lot of work, but it's not difficult, and you get faster with it as you do it more. I had it done in less than an hour. And it showed an estimated value of $2,193 worth of goods donated. Depending on your tax bracket, that's a savings of about $200-800... for an hour's worth of work! And that didn't include any Cash, Stock, or Mileage donations (and the miles to and from Goodwill can really add up).

So if you're not taking advantage of non-cash donations when you itemize your deductions, you're really doing yourself a disfavor — that is, unless, you make $200 or more an hour. In that case, hire someone to do it for you!

Posted by Matthew at 1:25 PM
Category(s): Family Finances, Taxes
Tag(s): family finances, money-saving tips, Personal Finance Friday, taxes

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You can still turn an IRA distribution into a donation

Tax provisions don't die easily. Several years ago, Congress authorized a "temporary" provision that allowed holders of traditional IRAs — if over age 70½ — to donate as much as $100,000 directly from their retirement account to a qualified charity tax free.

This was a win-win for affluent taxpayers and for charities. The taxpayer could avoid a tax bite on a required minimum distribution (or RMD), and the charity would likely get a larger donation. It was nice while it lasted, but that provision expired at the end of 2007.

Oh, wait. It came back — "temporarily" — for tax years 2008 and 2009. Then it ended.

No, wait. Under the tax-deal legislation signed last month the distribution-into-donation provision is back once again, made retroactive for 2010 and extended through 2011.

Here's the latest from the IRS:

The qualified charitable distribution [QCD] provisions were renewed for 2010 and 2011, allowing individuals age 70½ or over to exclude from gross income up to $100,000 that is paid directly from their individual retirement accounts (excluding SEP or SIMPLE IRAs) to a qualified charity.

The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs for 2010 and 2011. The deadline for making a 2010 QCD is January 31, 2011.

In other words, you have about two-and-a-half weeks left to donate directly from a traditional IRA to a charity and count it for tax year 2010 (and remember, you have to be at least age 70½).

To qualify as a QCD, the IRA trustee must make the distribution directly to the qualified charity. Any distributions, including any RMDs, which the IRA owner actually receives cannot qualify as QCDs....

IRA owners who have received their 2010 RMDs may not recontribute those distributions to an IRA to have them redistributed directly to a qualified charity as a QCD.

However, if an IRA owner received a distribution in excess of his or her 2010 RMD, the owner can roll the excess to another or the same IRA within 60 days of receiving the distribution and then have the funds paid directly to the qualified charity as a QCD.

Got that? One other thing to keep in mind: because you get a tax-savings benefit from a direct-from-your-IRA donation, you can't also claim the donation as a charitable deduction on your tax return. No "double dipping" allowed.

For more on turning an IRA distribution into a donation, see this article from the February 2009 issue of the Sound Mind Investing newsletter.

Posted by Joseph at 12:55 PM | Comments (0) | TrackBack
Category(s): Giving and Stewardship, Retirement, Taxes
Tag(s): charitable donations, IRAs & 401ks

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Your voice at the IRS

Every year, the National Taxpayer Advocate sends a report to Congress filled with complaints about the U.S. income-tax system — really.

The latest report came out this week, and since income taxes can have a huge impact on personal finance (to say the least), we thought we'd share a few excerpts from the report in our Personal Finance Friday post.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that acts as an in-house critic. It is headed by Taxpayer Advocate Nina Olson.

Below is some of what she wrote in her 10th annual report to the U.S. Congress.

The most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code.

A TAS analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements. To place this in context, it would require more than three million full-time employees to work 6.1 billion hours, making "tax compliance" one of the largest industries in the United States....

Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities....

Because of tax complexity, taxpayers often suspect that the "special interests" are receiving tax breaks while they themselves are paying full freight. Tax simplification would go a long way toward addressing these concerns.

The most promising approach would involve reducing tax preferences (often referred to as "broadening the tax base") in exchange for lower rates. However, it is essential that the taxpaying public have a realistic sense of the difficult trade-offs involved....

[W]e must understand that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. If tax reform proceeds on a revenue-neutral basis, however, the average taxpayer's liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate....

The IRS needs automation to administer tax laws and tax-based social programs efficiently.... [But] automation can substitute for judgment and discretion, to the taxpayer's detriment....

[P]olicies programmed into decision-tree tools...can result in decisions and determinations that harm taxpayers and that IRS employees, following the law and their good judgment, would not arrive at....

A little human contact and conversation can work wonders in understanding the taxpayer’s financial circumstances....

[If the collection process is] not handled appropriately, real and lasting harm can be visited upon taxpayers — destroying people’s lives and businesses....

Since 1999, the IRS has increased annual lien filings from 168,000 to 1,096,000, a rise of 550 percent. Lien filings can badly damage or destroy a taxpayer's creditworthiness because they are picked up by the credit rating agencies and retained on the taxpayers' credit reports for seven years from the date the tax liability is resolved, or longer if it is not resolved.

If lien filings were clearly correlated with substantial increases in revenue collection, one could at least understand the IRS's position. But over the same period that the IRS has increased lien filings by 550 percent, revenue collected by the IRS's Collection function has remained flat.... By damaging taxpayers' creditworthiness, the IRS may even be reducing long-term revenue collection.

The National Taxpayer Advocate's full report is online here.

Posted by Joseph at 11:55 AM | Comments (0) | TrackBack
Category(s): Taxes
Tag(s): Personal Finance Friday, taxes

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Ain't nobody happy

It's difficult to know what to make of the tax-policy deal struck (click link for key highlights) between President Obama and congressional leaders (including Republicans this time around). As with the report issued last week by the National Commission on Fiscal Responsibility and Reform, everyone is finding something to dislike.

Critics on the left think the president has betrayed their ideals by not standing firm for an income-tax hike for high earners (and many small-businesses).

"Some in my caucus still have concerns," Senate Majority Leader Harry Reid (D-Nev.) said, quoted by the New York Times. Vermont Sen. Bernie Sanders (a Socialist independent who caucuses with the Democrats) is threatening a filibuster.

On the House side, Bloomberg quotes House Democratic Caucus Chairman John Larson (Conn.) as saying it will be "very difficult" to sell the tax deal to House Democrats.

Meanwhile, critics on the right, such as conservative blogger and radio talk show host Hugh Hewitt, think Republicans could have held out for a much better deal, including one that would not have brought back the so-called death tax (i.e., the now non-existent federal estate tax).

[A]ny conservative who votes for the deal is voting to resurrect the death tax. The death tax is at zero right now, driven there by a decade of step downs and a moral argument, widely and deeply held, that this vampire tax is wrong on many levels. Any Republican who votes for the deal is voting to undo that demise.

Any future primary opponent will be sure to campaign on the fact that the incumbent voted to resurrect the death tax — a powerful club with which to beat a senator facing a Tea Party challenge, and some of the redistricted old bulls of the House as well.

The editorial board of the Wall Street Journal, however, largely sides with Republican leaders who argue that the good in the deal outweighs the bad.

Should Republicans have held out for more, since they would return in January with a stronger position? We wish they had won a longer extension [of current tax rates], kicking the next possible tax hike further into the future.... Yet this deal is superior to anything we could have imagined six months ago.

Critics from the right and the left are united on one thing: a belief that this tax deal is not a fait accompli. The title of the NY Times article quoted above is "Obama Defends Tax Deal, but His Party Stays Hostile." The title of Hugh Hewitt's post is "Why Conservative Support for the Deal May Unravel."

So much for the politics. Barron's editor-in-chief Randall Forsyth notes that the announced deal is roiling the bond market.

Yields soared in the wake of the plan that will add upwards of $900 billion to the federal deficit, sending bond prices tumbling, especially in the municipal market....

The potential for the Treasury to sell more securities to fund the larger deficit, plus the likelihood that the Fed could buy fewer notes in [a] more robustly growing economy sent yields soaring. The benchmark 10-year Treasury's yield jumped 24 basis points (hundredths of a percentage point), to 3.17%, a five-month [high]; its price fell nearly two points, or $20 per $1,000 note....

Especially hard hit again was the municipal market, which suffered from an omission from the tax deal — the expected extension of the Build America Bond program, which expires at year-end....

The sharp rise in bond yields potentially could blunt the impact of the fiscal thrust from the tentative bipartisan tax deal.... States and localities, already reeling under budget pressures, hardly need higher borrowing costs.... Only corporations, which already having taken advantage of ultra-low borrowing costs and are flush with cash anyway, would be immune from an uptick in bond yields.

So will the tax deal pass? Tough to say, especially when there is no actual bill yet, just an agreement in principle. When the bill is written, there is likely to be even more "devil in the details."

Update: The Wall Street Journal provides a helpful summary of the deal's major provisions here.

Posted by Joseph at 12:50 PM | Comments (0) | TrackBack
Category(s): Taxes

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The unloved deficit commission report

SMI's assistant editor Joseph Slife, who's been tracking federal spending issues for more than 20 years (he did research for Larry Burkett's 1990's bestseller, The Coming Economic Earthquake), has been reading "The Moment of Truth" (PDF) — the report issued last week by the National Commission on Fiscal Responsibility and Reform (aka the deficit commission).

In a discussion yesterday with host Bob Crittenden on The Meeting House (on Alabama's Faith Radio), Joseph explained why the report is proving to be so unpopular — and why some of its recommendations may be sorely needed.

Listen below (17 min.) — or download an mp3 file (right click/save as).

During the discussion, Joseph mentions this column by Robert Samuelson that appeared in yesterday's Washington Post.

Posted by Matthew at 11:55 AM | Comments (0) | TrackBack
Category(s): Taxes
Tag(s): federal budget, federal spending, radio

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It's beginning to look a lot like... a tax mess

Not to put a damper on your holiday cheer, but it's time to talk about — taxes. We're roughly one-month before the end of 2010, and the direction of key areas of tax policy for 2011 remains anyone's guess. Indeed, almost nothing has budged since Mark Biller wrote about the uncertain tax situation (subscribers' link) in our November issue, although President Obama and congressional leaders today pledged to resolve the impasse.

Barron's Washington editor Jim McTague says it is increasingly likely that things will get messy.

It's already fairly certain that 2010 tax refunds for millions of filers will be delayed by many weeks, because Congress is waiting so late in the year to patch the alternative minimum tax to prevent it from snagging 20 million to 27 million new taxpayers.

Circumstances might become more taxing if Congress doesn't reach a deal on the extension of the low Bush brackets — 35%, 33%, 28%, 25%, 15% and 10%. If the Bush brackets expire, withholding taxes in tax-year 2011 would shrink paychecks across the board, literally taking away milk money for families in the $40,000 range. The new brackets would be 39.6%, 36%, 31%, 28% and 15%....

There are only four weeks left on the 111th Congress' legislative calendar. On top of this, members of Congress who lost their seats or who are retiring or moving up in seniority are expected to be packed up and ready to move from their Capitol Hill offices the first week of December. Under such circumstances, how much serious work can they get done?...

Meanwhile, back in the real world, payroll departments are awaiting word from the Treasury on the exact amount of taxes they will be required to withhold from employee paychecks in 2011. The tables generally are released in mid-November, but they are being held this year because of the unresolved issue of the Bush tax cuts.

Over at the Wall Street Journal (under the same ownership as Barron's), reporter Laura Saunders lays out a few ideas for making decisions in the face of such a highly fluid situation. The WSJ piece is rather extensive, but it's worth reading if you're considering any investing move between now and the end of the year that could trigger a taxable event.

Of course, even if you are doing nothing that'll trigger a tax event over the next month, the unresolved tax issues before the lame-duck Congress could still affect you. Back to Jim McTague at Barron's:

My advice: Assume the worst, and take some profits and income in 2010. And plan for less take-home pay in the first part of 2011.

Posted by Joseph at 1:35 PM | Comments (0) | TrackBack
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Deficit commission on Social Security

Building on our post last week about the draft report from the co-chairs of the White House deficit commission, here's a separate article detailing the recommendations for Social Security.

Not surprisingly, the approach suggested is to make modest adjustments over an extremely long period of time. The retirement age would continue to rise, to 68 by roughly 2050 and 69 by 2075. Benefits would gradually be scaled back for wealthier recipients. Cost-of-living adjustments would be tweaked. The taxable wage base would be gradually broadened. More workers would be added to the system (new state and local workers after 2020 — didn't know they weren't already included).

Naturally, most everyone will find something to hate about this proposal (as they will with the broader list of recommendations).

That's what happens when compromise is required to solidify a budget, which is exactly what we're talking about here. Everyone smiles when it is expanded, and grimaces when it needs to be constrained. (Sounds pretty similar to every budgeting discussion we've ever had in my house.)

What's most striking to me in reading the Social Security recommendations, as well as the broader plan, is how doable all this sounds. I mean, really. For all the end-of-the-world-as-we-know-it carrying on of recent years, these changes really aren't that tough. (That's not to say we shouldn't all immediately go protest in the streets and burn stuff, as seems to be the popular response around the globe.) We're not talking about distributing ration cards here.

But for any of this to get passed, I think it'll all have to happen as one big package, and that concerns me because I'm not sure our politicians are serious enough to get something that significant done.

Taken together, most of the provisions put forth in these proposals seem pretty reasonable. There's a mix of distasteful medicine in there for everyone — rich, poor, old, young, Democrats, Republicans. And as long as everyone feels like this is legitimately a shared sacrifice, I think the people will accept it. (Wishful thinking?)

But if these provisions start getting split up into smaller proposals, forget it. That's when the problems start. Because if that happens, the seniors will get their legislators to kill the tough SS and Medicare stuff, the realtors will get their legislators to kill the home-mortgage deduction provision, the farm states will get theirs to kill the agricultural stuff, etc., etc.

Still in all, I'm encouraged by this report. There's nothing ruinous in here. Now granted, it doesn't solve all our fiscal problems either. But if we can get anything close to this passed, we'd be taking a huge step forward, one that would likely take a huge weight off the country's shoulders. If nothing else, it would help a great deal in turning the psychology around from the "we're all doomed, it's just a matter of time" feeling a lot of Americans have been carrying the past few years.

It can be done. Something like this is doable. Will our representatives rise to the challenge? That's the real question.

Posted by Mark at 8:55 AM | Comments (0) | TrackBack
Category(s): Retirement, Taxes
Tag(s): federal budget, federal spending, Social Security, taxes

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Leaders of deficit commission release draft proposals

The final version isn't due for three more weeks, but the co-chairs of the National Commission on Fiscal Responsibility and Reform (i.e. the White House deficit commission) issued their preliminary recommendations yesterday — and the howls of protest have begun.

"There are things in there that I hate like the devil hates holy water," Democrat Sen. Richard Durbin (Illinois) fumed — despite the fact that he serves on the commission. Outgoing House Speaker Nancy Pelosi (D-Calif.) called the recommendations "simply unacceptable."

(At right are a two tables — prepared by the Wall Street Journal — listing many of the draft plan's suggestions that would cut $200 billion in spending in 2015.)

Half-way around the world, in South Korea, President Obama "urged leaders of his own Democratic Party to hold their fire over the recommendations," according to the WSJ. "Before anybody starts shooting down proposals, we need to listen, gather up all the facts, and be straight with the American people," he said.

You can get fuller details on the draft plan's recommendations here (PDF), but the Journal offers this summary:

[I]n its current form [the plan] would end or cap a wide range of breaks relied on by the middle class — including the deduction for home-mortgage interest. It would tax capital gains and dividends at the higher rates now levied on wage income. To compensate, one version of the plan would dramatically lower and simplify individual rates, to 9%, 15% and 24%.

For businesses, the controversial plan would significantly lower the corporate tax rate — from a current top rate of 35% to as low as 26% — but also eliminate a number of deductions....

Overall, the plan would hold down the growth of the federal debt by roughly $3.8 trillion by 2020, or about half of the $7.7 trillion by which the debt would have otherwise grown by that year, according to commission staff. The current national debt is about $13.7 trillion.

Other proposals include gradually raising retirement for full Social Security benefits to 68 by 2050 and 69 by 2075 and effectively cutting SS benefits for wealthier retirees by changing how benefits are taxes.

Always one for a colorful quote, commission co-chair Alan Simpson, a retired Republican senator from Wyoming, offered a metaphor that evoked Captain Ahab's quest for Moby Dick: "We have harpooned every whale in the ocean, and some of the minnows," he said.

Here are more details on early reaction, also from the WSJ:

Some conservatives, such as Grover Norquist of Americans for Tax Reform, castigated the recommendations as too heavy on tax increases and too light on spending cuts. But many Republicans held their fire.

"This is a provocative proposal, and while we have concerns with some of their specifics, we commend the co-chairs for advancing the debate. We will continue to work toward solutions that help spur economic growth and restrain the explosive growth of government spending," three House Republicans who serve on the commission, Reps. Dave Camp of Michigan, Paul Ryan of Wisconsin and Jeb Hensarling of Texas, said in a joint statement.

In contrast, Ms. Pelosi, other congressional Democrats, union leaders and liberal advocacy groups laid into the chairmen's conclusions, declaring them dead on arrival.

The WSJ notes that "[m]any of the plan's more provocative elements are intended as starting points for negotiation, not final recommendations." You can expect those negotiations to be boisterous.

The members of the deficit commission (most are members of Congress) are listed here.

Posted by Joseph at 2:55 PM | Comments (0) | TrackBack
Category(s): Taxes
Tag(s): federal budget, federal spending, Social Security, taxes

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Gridlock ahead? And what about the Fed?

SMI's assistant editor Joseph Slife was a repeat guest yesterday on The Meeting House, produced by Alabama's Faith Radio.

Interviewed by host Bob Crittenden, Joseph offered analysis of financial matters facing the lame-duck Congress and discussed what may be ahead for the new Congress in 2011.

In a second segment, he talked about the Fed's attempt to create inflationary pressure by pumping $600 billion into the economy.

To listen, use the audio players below — or right click/save as to download mp3 files of segment one and segment two.

Posted by Matthew at 12:20 PM | Comments (0) | TrackBack
Category(s): Economy, Taxes
Tag(s): economy, Radio, tax cuts

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Links round-up

Rather than writing a post today on a single topic, I want to alert you to several interesting items from recent days.

First, at the Wall Street Journal, Brett Arends observes that many dividend-paying stocks look considerably better than bonds being issued by the same companies, yet the public keeps piling into bonds.

Arends also has a somewhat scary analysis of the "Retirement Disaster Ahead." Bottom line: many people are still counting on unrealistic future investment return numbers. As a result, they aren't saving nearly enough for the type of retirement they expect.

A recent auction of TIPS (Treasury inflation-protected securities) sold notes with a negative yield (-0.55%)! Seems strange, but Mark Hulbert explains why that makes sense, given that these TIPS can be thought of as an insurance policy protecting you against the risks of both severe deflation and hyperinflation.

On that same topic, Eric Jacobson of Morningstar adds some good context to this TIPS news, explaining that if annualized inflation over the next five years is higher than 1.52%, the buyers of these negative-yielding bonds will wind up winners.

While the big twin news events of last week were Election 2010 and the Fed's QE 2 announcement, there was also a surprisingly good (or at least, less bad) jobs report. As the Vanguard video below makes clear (an interview with Vanguard's chief economist Joe Davis), there is a reasonable "case for cautious optimism" on the economy at this point.

Finally, new rules about reporting the cost basis of investments are going to start kicking in for brokerages next year. This will mean brokerage customers have some decisions to make soon. So be watching your mail for information from your broker. This information could have important implications, particularly if you have money in a taxable investment account.

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Category(s): Current Market Events, Economy, Taxes

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Tea Party pressure on defense spending?

In addition to writing for Sound Mind Investing, I also churn out the "Money" page for WORLD, the bi-weekly Christian-based news magazine.

I mention this because my report in the August 28 issue (already available online) relates to a comment someone made on the SMI member blog a few days ago: "I say 'Thank you Lord' for the rise of the Tea Party movement," he wrote. "Wouldn't it be great if the government had to cut back on spending and lower taxes?"

Many Americans would agree with that sentiment — in theory. But where would such spending cuts be made? Social Security (the biggest area of federal spending)? Medicare? Veterans' benefits? The choices quickly get tough because voters are on the receiving-end of so many federal dollars.

That's why it seems likely that the easiest area to cut will be the defense budget, as Tea Party-inspired conservatives make common cause with Congressional doves. Last week, Defense Secretary Robert Gates tried to get out in front of the budget-cutting forces by making his own proposals for defense-spending reductions.

If you're interested in this sort of thing, read the WORLD story, "Tea Party at the Pentagon."

Update: Tuesday's Wall Street Journal provides a brief primer on the Tea Party movement by Dick Armey and Matt Kibbe, authors of the newly released book, Give Us Liberty: A Tea Party Manifesto (HarperCollins).

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Category(s): Taxes
Tag(s): federal budget, taxes, Tea Party

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"The income tax can't support the new era of spending"

Since this is April 15, it seems a fitting time to follow up on my mention last week of the increased attention being given in Washington to the idea of a European style value-added tax (VAT).

I came across a more detailed explanation of how the VAT works in this 2008 article from Fortune magazine. What really struck me about the article is the presumption that only more taxes can solve our problems.

Here are some of Fortune's observations, along with my comments in italics:

Fortune: It's highly possible, if not inevitable, that Americans will soon live under a radically different tax system — one that the pundits and politicians aren't talking about.

Since a VAT likely would not replace any current federal taxes, it's not a "different" tax system. It's an additional tax system.

Fortune: It's called a value-added tax, or VAT, and it's been used for decades to pay the bills and sustain the immense growth of governments around the world, from France to Mexico to Australia. Created in 1954 by a French economist, the VAT is the most potent, efficient machine for revenue generation yet invented.

Hmm. Couldn't we stop the "immense growth" of government spending so a VAT tax isn't needed?

Fortune: And if there's one thing the U.S. government needs as the federal budget balloons, it's a ton of new revenue. "The bottom line is that the income tax cannot support the level of spending that's projected..."

Then maybe we shouldn't plan to spend so much? Just sayin'...

Fortune: The genius of the VAT is that, while the consumer pays it, the actual cash is mostly collected from producers before it reaches the retailer. Since the VAT is essentially a hidden charge embedded in the price of goods and services, raising the VAT doesn't arouse nearly the uproar caused by increasing income taxes. The ease with which a VAT can be increased points to one of its big drawbacks: Governments see it as an easy way to pay for increased spending, which is a potential drag on economic growth.

The "genius" of a VAT is that it's "hidden" from the public?

Fortune: Make no mistake: A VAT may be unavoidable in the United States. The reason is that spending is rising far faster than the revenue that can conceivably be generated by the current tax regime.

Here's an idea: if you can't pay for it, stop spending. That's what our family does.

Fortune: The gap gets far larger in the future, chiefly due to rapidly rising costs of Medicare and Medicaid. To pay for those costs, we'd need to raise taxes by an extra 2% of GDP.

Medicare and Medicaid are in financial trouble? The original projections as to their eventual costs were massively understated? Wow, who knew? Good thing we're not turning the entire health care system over to... oh, wait...

Fortune: The rub is that the fiscal pillar America has relied on since 1913 — the federal income tax — can't possibly support the looming new era of spending....The VAT may be the only answer.

The "only" answer?

Fortune: European governments have typically seen VAT hikes as an easy way to raise revenues during a recession. In some countries, government spending is more than 50% of national income. The results have been fiscal stability, but lackluster growth and a dearth of dynamism and entrepreneurship.

It would seem that those "European levels of spending" have some nasty side effects. (For more on this, see "Europe's VAT Lessons," an editorial in today's Wall Street Journal.)

Fortune: Given the budget numbers, the United States has already chosen a path of far bigger government. The trap has been set. It's unlikely America can escape without a VAT.

A "trap" may have been set, but we have a chance to "escape" this November. That's why our Founding Fathers created a representative form of government — the people get a say-so, not just the politicians (and their apologists in the press).

Please pardon today's tax-day rant. Every now and then, the insanity reaches epic proportions and I can't contain myself.

Posted by Austin at 10:55 AM | Comments (0) | TrackBack
Category(s): Taxes

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Workers of America, celebrate!

Today is a big day. After laboring for the first 98 days of 2010 at the behest of our governments, today we escape the bonds of servitude. This is Tax Freedom Day:

That means Ameri­cans [have worked] well over three months of the year, from January 1 to April 9, before they [had] earned enough money to pay this year's tax obli­gations at the federal, state and local levels...

Tax Freedom Day does not count the deficit even though deficits must eventually be financed. Since 1948, when Tax Freedom Day was first calculated, the difference between what governments are spending and what they're collecting has never been as great as during 2009 and 2010. If Americans were required to pay for all government spending this year, they would be working until May 17 before they had earned enough to pay their taxes.

Almost one-half of American households have a different tax-related reason to celebrate: the April 15 tax-filing deadline is just not that big a deal. Why? Because they pay no federal taxes at all. In fact, about 40% of all U.S. households actually receive a check rather than needing to write one, courtesy of the taxpayers who are celebrating Tax Freedom Day.

Key paragraphs from an Associated Press article in USA Today:

[April 15] is a dreaded deadline for millions of Americans, but for nearly half of U.S. households, it's simply somebody else's problem.

About 47% will pay no federal income taxes for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability....

The result is a tax system that exempts almost half the U.S. from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10% of earners — households making an average of $366,400 in 2006 — paid about 73% of the income taxes collected by the federal government.

The bottom 40%, on average, make a profit from the federal income tax system, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

While we're talking taxes, there is one more thing worth mentioning. Our current tax structure apparently is incapable of keeping up with Washington's spending, so we're again hearing talk of the need for a value-added tax (VAT). It's complicated in design, but relatively simple to explain — think of it as a hidden national sales tax.

In fact, you may want to pause a bit from your celebrating to learn some of the things you need to know about this type of tax.

Posted by Austin at 9:10 AM | Comments (0) | TrackBack
Category(s): Taxes

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IRS announces 2010 IRA limits

The IRS has released its "IRA Contribution and Deduction Limits" for tax year 2010.

The limits separate taxpayers who are allowed to contribute to a Roth IRA from those who are not. They also mark the line between those permitted to make deductible contributions to a "traditional" IRA and those who are not allowed to do so.

Next year's limits are in table below.

Note: The income levels shown reflect "modified adjusted gross income," which the IRS defines (but not too clearly) here.

Posted by Matthew at 8:40 AM | Comments (0) | TrackBack
Category(s): Taxes

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A surprising skeptic on "cap and trade" — the concept's originator

In early July we pointed out some of the economic ramifications of the proposed "cap and trade" legislation. Recently, concerrns about the effectiveness of "cap and trade" have arisen from an unlikely source — the economists who came up with the idea originally. From today's WSJ:

In the 1960s, a University of Wisconsin graduate student named Thomas Crocker came up with a novel solution for environmental problems: cap emissions of pollutants and then let firms trade permits that allow them to pollute within those limits.

Now legislation using cap-and-trade to limit greenhouse gases is working its way through Congress and could become the law of the land. But Mr. Crocker and other pioneers of the concept are doubtful about its chances of success. They aren't abandoning efforts to curb emissions. But they are tiptoeing away from an idea they devised decades ago, doubting it can work on the grand scale now envisioned. [More...]

Posted by Austin at 11:08 AM | Comments (0) | TrackBack
Category(s): Economy, Taxes

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How the "cap and trade" bill will change your life

When Mark mentioned the Obama administration's push for "cap and trade" legislation back in a February blog post, his emphasis was on the tax burden it would impose. Those taxes are one part of the story, but another is the "Big Brother" aspect of the entire effort.

For example, how would you like it if you couldn't sell your current home until you "retrofit" it with the energy "improvements" dictated to you by Washington? It's not clear to me if there would be a direct prohibition via national zoning requirements, or if the same goal is accomplished by mandating that all Fannie Mae and other government-related mortgage programs require the retrofit before buyers would qualify.

Here are two recent reports concerning the scope of this legislation. Read them and you'll get a picture of just how bad this is going to be.

First, from the National Review, comes an article listing what the authors say are 50 reasons to fight the recently-passed House bill (by opposing it in the Senate). Excerpts:

Two main things to understand about Waxman-Markey [the American Clean Energy and Security Act]: First, it will not reduce greenhouse-gas emissions, at least not at any point in the near future. The inclusion of carbon offsets, which can be manufactured out of thin air and political imagination, will eliminate most of the demands that the legislation puts on industry, though in doing so it will manage to drive up the prices consumers pay for every product that requires energy for its manufacture — which is to say, for everything.

Second, it represents a worse abuse of the public trust and purse than the stimulus and the bailouts put together. Waxman-Markey creates a permanent new regime in which environmental romanticism and corporate welfare are mixed together to form political poison....

The House of Representatives, famously, did not read this bill before passing it... We cannot cover every swirl and brushstroke of this masterpiece of misgovernance, but here’s a breakdown of its 50 most outrageous features....

21. The bill regulates every light fixture under the sun. Actually, the sun might be the only light source that isn’t regulated specifically in this legislation. There are rules governing fluorescent lamps, incandescent lamps, intermediate base lamps, candelabra base lamps, outdoor luminaires, portable light fixtures — you get the idea. The government actually started down this road by regulating light bulbs in the 2005 energy bill. This bill merely tightens the regulations, which means the unintended consequences produced by the 2005 bill — more expensive light bulbs that burn out quicker — will probably get worse.

22. The bill extends its reach to cover appliances as well. Clothes washers and dishwashers, portable electric spas, showerheads, faucets, televisions — all these and more are covered specifically in the bill. You thought we were kidding when we said this bill represents the federal government’s attempt to expand its regulatory reach to cover everything. We weren’t....

24. The bill requires the EPA to establish environmental standards for residences, meaning a federally dictated one-size-fits-all policy for greening every home in America. When you’re retrofitting your home according to EPA guidelines, it will come as little comfort to know that the government is reimbursing you for your troubles, especially if you’re doing the work around April 15....

29. The bill undermines federalism by prohibiting states from creating their own cap-and-trade programs. Nearly half of all U.S. states have already taken some sort of action to cap greenhouse-gas emissions by forming regional compacts and implementing their own emission standards. Understandably, these states support a federal cap so that they are not at an economic disadvantage to states that do not cap emissions. If these states want to hamstring their own economies in the pursuit of green goals, that should be their business. States that don’t see any reason to do so should not be forced to share in their folly....

This is very serious stuff. The article is rather lengthy and not layman-friendly, but worth investing a little time trying to understand how it will change our country, your city, and your personal financial life and freedoms.

Reuters weighed in with this summary of the bill at the time it was passed in the House. Here are a few excerpts:

Section 201 of the Waxman-Markey Act calls for the development and adoption by state and local governments of a national energy efficiency code. A summary of the main provisions are as follows:

1. Establishes a “national energy efficiency building code” for residential and commercial buildings, sufficient to meet each of the national building code energy efficiency targets.

Goodbye to local authorities having the codes they think best for their state/city. Washington will now handle that little task, thank you.

2. Sets energy efficiency targets for the national building code...

Hmmm, and I wonder what happens if you don't meet the targets?

4. Requires that states and local governments comply with or exceed the national energy efficiency building code, and provides for enforcement mechanisms for states which are out of compliance.

Can't wait to learn more about those "enforcement mechanisms."

Even if you're not particularly activist when it comes to contacting your U.S. senators, this looks like a good time to speak up. Their phone numbers, where you can register your opposition to the Waxman-Markey energy legislation if you wish, can be found here.

Posted by Austin at 1:25 PM | Comments (0)
Category(s): Family Finances, Taxes

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July 4th Kentucky "Tea Party" recap

We can't get enough of finances around here. So rather than grilling out and shooting off fireworks, I attended my second Tea Party of the year (the first one was April 15th).

In case you're not aware of these protests or their purpose, here's a relatively objective description from Wikipedia:

The Tea Party protests are a series of locally organized protests across the United States, beginning in 2009, most of which have developed into nationally coordinated events. The events are in protest of President Obama, the federal budget and, more specifically, the stimulus package, which the protesters perceive as examples of wasteful government spending and unnecessary government growth. They oppose the increase in the national debt as well. The protesters also objected to possible future tax increases, with taxes on capital gains, estate taxes, federal income taxes, and cigarette taxes. Many of the protests were held on April 15, 2009 to coincide with the annual U.S. deadline for submitting tax returns, known as Tax Day.

I blogged live on Twitter, and here's a recap for our blog readers.

This Tea Party was in Kentucky's capital city, Frankfort, on the steps of the capitol. It was one of more than 1,400 such protests reportedly being held on July 4th across the nation. In spite of the sporadic rain, I'm guessing between 1,000-2,000 had gathered, The rally started with prayer and worship music. This seemed a bit unusual to me, I must confess. On one hand, it was wonderful to be so public about our faith, but the slow music initially zapped the energy.

Things livened a bit when the speeches started. A collection of politicians, pastors, and lobbyists from across the state spoke on everything from our overreaching government to school choice to gun control, even industrial hemp farming. But most of the cheers (and boos) came from one-liners concerning increased taxes and proposed energy bills.

And speaking of the crowds, there was a typical array of signs and t-shirts, ranging from anti-socialism to lower-our-taxes and, not surprisingly, plenty of anti-Obama sentiments. My favorite sign was being held by a child: "Mortgaging my future doesn't stimulate me."

All in all, the crowd was mild and respectful. In fact, I brought a friend who'd never been to such a gathering. His oft-repeated observation, "This is crazy. Everyone's so... normal." Mainstream media would have you believe that these rallies were filled with whacked-out right-wing extremists. Truth is they're filled with normal, everyday working folk who want to voice their displeasure with how the government is spending money it doesn't have (and the anticipated tax increases to pay for it all).

So two hours and some nice one-liners later (like "Our rights aren't inherited, they're defended"), the protest was over. I was glad the rain mostly held off, glad I attended, and glad to make my voice known. But mostly, I was just glad to live in a country where protesters can gather peacefully thanks to God's provision and the sacrifices of men and women who have fought to keep our country free for 233 years... and counting.

Posted by Matthew at 3:10 PM | Comments (0)
Category(s): Current Market Events, Taxes

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Outlook for Social Security darkens

The 2009 report from the Social Security Board of Trustees is due to be released any day now. Preliminary indications are that the system's financial outlook has gone from bad to worse.

A story in the Washington Post notes that "the [Social Security] trust fund's annual surplus is forecast to all but vanish next year — nearly a decade ahead of schedule — and deprive the government of billions of dollars it had been counting on to help balance the nation's books."

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the [Congressional Budget Office], the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes....

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits.... But the rapidly deteriorating economy — particularly the loss of more than 4 million jobs — has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year [rather than the $80 billion originally forecast] and only $3 billion next year....

Though [President] Obama has pledged to address the precarious financial situation of Social Security, the administration currently has no plans to do so. Under pressure from congressional Democrats who argued that Social Security should not be at the top of the new administration's agenda, the White House last month dropped a proposal to name a task force to reexamine the program.

Future Social Security obligations have long been the "800-pound gorilla" sitting in the middle of Washington's living room — readily apparent but generally unacknowledged.

Proposals for fixing/reforming/improving Social Security have been around for decades, but they remain only proposals. Will members of Congress continue to ignore the warnings, just as they failed to heed warnings about Fannie Mae and Freddie Mac?

Posted by Joseph at 4:05 PM | Comments (0)
Category(s): Economy, Taxes

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Perspective on Obama's $100M budget cut

Since we're doing perspective posts today (see post below), we may as well make it a double.

Here's MarketWatch's surprisingly candid take on President Obama's announcement today that he's asking his cabinet to find $100 million in budget savings:

To get a handle on how insultingly trivial the announcement is, one need only compare the targeted cuts to the administration's spending plan for 2010.

With cuts in federal spending by $100 million, the government will save roughly 1/36,000 of the $3.6 trillion it expects to spend next year.

Put another way, if the budget were a yardstick, the administration would be proposing to shorten it by 1/1000 of an inch. That's 25.4 microns, or about half the width of a human hair.

Ouch. Guess you have to start somewhere, but it's a little late to play the fiscal responsibility card.

UPDATE: The Associated Press notes that "[t]he thrifty measures Obama ordered for federal agencies are the equivalent of asking a family that spends $60,000 in a year to save $6."

The Heritage Foundation has a picture worth a thousand words.

Posted by Mark at 4:32 PM | Comments (0)
Category(s): Economy, Taxes

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Louisville Tea Party report

It was 45 degrees and overcast but the spirits were high at the Louisville Tax Day Tea Party rally. Roughly a couple thousand people came to show their patriotism by song, sign, and speech. Among the rally participants were folks from every walk of life, age, and political party (the organizer is a registered Democrat). In case you didn't follow us on Twitter, here were a few of my favorite lines from the various speeches.

A college student quoted Thomas Jefferson's, "A government big enough to give you everything you want is a government big enough to take from you everything you have."

A woman started her speech, "I'm just a mom without a teleprompter."

The chair of the local Republican Party quoted Milton Friedman's, "If the government were in charge of the Sahara Desert, in 5 years there would be a shortage of sand."

And the mere mention of Barney Frank resulted in a collective "Boooo" that went echoing throughout downtown, perhaps the loudest outburst of the event.

Hopefully the 2,000+ rallies happening today will get the attention of our representatives. All in all I believe it was a successful grassroots effort. If you attended one in your city/town, we'd love to hear your assessment.

Posted by Matthew at 4:07 PM | Comments (0)
Category(s): Taxes

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April 15 - Time for a TEA Party

We've mentioned the growing TEA Party movement (that's "Taxed Enough Already") that's been bubbling up from the grassroots over the past few months. While some TEA Parties were held earlier in the year, most of them will occur tomorrow, on April 15.

Some will no doubt question the point of gathering in local communities and cities across the nation to protest the reckless spending of our government. Does anyone actually pay attention to this stuff?

Given the mocking coverage the events are receiving from some quarters of the media, it seems the TEA Party movement is at least beginning to be recognized. I would guess that a political class that relies on apathy and inertia to continue its reckless trajectory must get at least a little nervous when large numbers of its citizens start organizing and expressing the fact that they are "TEA'd off." (Sorry, I had to slip at least one of those in somewhere.)

Check out this map of TEA Parties scheduled for tomorrow. Pretty impressive. For most people, there's something going on near enough to consider attending.

Here are a few other TEA Party links:

Main TEA Party website

FOX News coverage of the TEA Parties, including live video streams from several locations

Pajamas TV coverage of the TEA Parties

It's the heaviest part of the monthly writing cycle here at SMI, so we're planning to send a single representative from the SMI offices tomorrow. Matthew is planning to attend and report back on what he finds here in the weblog.

If at all possible, we encourage you to go to your local TEA Party. And if you're so inclined, we'd love to hear about your experience — how many people you think were there, a brief recap of what went on, and so forth. Hopefully we'll have reports from all around the country.

As the political philosopher Edmund Burke once said, "When bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle."

The popular modern paraphrase: All that is necessary for evil to triumph is for good men to do nothing.

This is a small something. If you can, we encourage you to get involved. When it comes to statements like these, the number of those involved does matter.

Update: Glenn Reynolds reflects on the potential impact of the TEA Parties on American politics.

Posted by Mark at 4:47 PM | Comments (0)
Category(s): Taxes

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The tax man cometh?

An editorial in the Washington Post tries to dispel the notion (one we tried to dispel in this August 2007 blog post) that the wealthy don't pay their fair share of taxes.

In 2006, the top 20 percent of earners paid 70 percent of all federal taxes.... The very richest — the top 1 percent of taxpayers, with household incomes of over $332,000 — paid 28 percent of all taxes.... The lowest 20 percent of households paid only 0.8 percent of all federal taxes....

Based on these numbers, it would be hard to argue that the country doesn't already have a significantly progressive tax system.

(A related chart from RealClearMarkets.com is here.)

The Post then makes the point that given all the spending going on these days, "taxes will have to go up" at some point.

But who will pay?

When taxes go up, they should be increased in a way that makes the tax code more progressive [i.e. the people at the top should pay even more].... But there is a limit to how much the tippy top should bear. President Obama has promised that taxes will not be increased for families making under $250,000. That is a promise that will probably have to be dropped down the road. There just isn't enough revenue to be found above that figure.

Hmm. Who knew?

APRIL 15 UPDATE: In remarks on "tax day," President Obama reiterated his pledge of tax increases only for those who earn above $250,000: "We've made a clear promise that families that earn less than $250,000 a year will not see their taxes increase by a single dime," he said.

Posted by Joseph at 3:52 PM | Comments (0)
Category(s): Taxes

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I.O.U.S.A. (again)

Back in early January, I noted that CNN was airing the documentary I.O.U.S.A. over the weekend. But then I, probably like many of you, got busy and never actually watched it.

For those of you who want to watch this but don't necessarily feel like you can sink 90 minutes (or however long it is) into it, you'll be glad to learn there's a short version created for people like us. In fact, I watched it this morning on YouTube. Powerful, disturbing stuff.

Okay, for some of you, 30 minutes is still too long. I'll do the heavy lifting for you. Watch the first 15 minutes, then jump ahead to minutes 20-22 and watch the financial warfare bit. That'll give you a really good feel for the key material.

If this fires you up enough to actually want to do something about it, a good first step might be to check out the National Tea Party Day activities in your area next week. Obviously we need to vote and be involved that way, but these rallies are a good way to show our elected officials that the people are getting restless. Sadly, getting that message across loud and clear is probably the only thing that will push them to act before the bottom completely falls out.

Posted by Mark at 11:48 AM | Comments (0)
Category(s): Economy, Taxes

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Tyrannosaurus Debt

With the Congressional Budget Office projecting (PDF) that President Obama's budget will produce $9.3 trillion worth of red ink over the next 10 years, it's time for a blast for the past: "Tyrannosaurus Debt," from the 1970s-era series Schoolhouse Rock.

It's fun — but not funny.

Posted by Joseph at 2:35 PM | Comments (0)
Category(s): Economy, Taxes

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Taxing AIG bonuses

I get the outrage over the AIG bonuses. But it makes me very queasy to see Congress decide over the course of just a few days to pass a massive tax against a tiny, targeted group of people, for no other reason than they can claim popular support for it. Talk about an invitation to future abuse of power.

If this goes through, who is the next group to suddenly find that 70% of their compensation is going to be yanked away? You're kidding yourself to think it will be a one-time event if this precedent gets established.

Update: Austin, here. I'd forgotten, if I ever knew, that the Constitution prohibits bills of attainder. According to Dow Jones:

Lawmakers who vented their anger against American International Group Inc. (AIG) managers this week - and there were many - might find their words turned against them in an eventual constitutional challenge to legislation on AIG bonuses, should the bill become law. (More...)

Posted by Mark at 9:15 AM | Comments (0)
Category(s): Taxes

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Proposed changes in the charitable-giving deduction

The Planned Giving Design Center has an easy-to-understand write up about how President Obama's proposed tax changes could affect wealthy givers.

The Obama plan would limit the tax rate at which high-income taxpayers can take itemized deductions to 28 percent (down from the current 33 or 35 percent, depending one's bracket).

Example: A couple...in the 35 percent bracket gives $100,000 to charity. Under current law (presuming they can deduct the entire $100,000 in the year of transfer under the charitable percentage limitation rules), they will reduce their income taxes by $35,000. The net cost of their gift will be $65,000.

Under the Obama plan, the couple will only be able to deduct their gift at the 28 percent rate, thereby reducing their taxes by $28,000. In essence, they will pay an additional $7,000 in tax for the privilege of making their gift, thereby increasing the after-tax cost of their gift to $72,000 — a 10.8 percent increase over current law.

And when the Bush tax cuts expire after 2010, it will cost donors in the top bracket of 39.5 percent an additional $11,500 to make a $100,000 gift. This represents a 19 percent tax on giving — not to mention possible implications on state income tax.

The article includes a bit of history about why Congress, in 1917, created the charitable-giving deduction.

"The government concluded it was more efficient for individuals to give directly to charity rather than having the government tax individuals and then fund the services provided by those organizations," according to Barlow T. Mann, a planned-giving consultant with the Memphis-based Sharpe Group.

President Obama's plan for changing the contours of the charitable-giving deduction isn't a done deal, of course. The plan is meeting stiff resistance in Congress — and not just from Republicans.

MarketWatch has the story.

Posted by Joseph at 1:30 PM | Comments (0)
Category(s): Giving and Stewardship, Taxes

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Tax breaks in the stimulus bill

I vented my frustration with the stimulus bill yesterday, so today we'll move on to more positive endeavors, like figuring out if there's anything in there that will benefit you. Marketwatch provides a good summary of the bill's provisions (remember, there are actually two versions of the stimulus bill that the House and Senate will be reconciling over the next few days).

I wish I could say there was a lot to get excited about here, but for most readers I suspect the impact will be fairly minimal. AMT tax relief is probably the biggest item for many, but as the article points out, that probably would have been passed anyway without the stimulus bill. Still, there are quite a few narrowly targeted provisions that will be helpful if you happen to be one of the people who qualify, so take a quick look.

Posted by Mark at 9:18 AM | Comments (0)
Category(s): Taxes

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No 'required minimum distributions' in 2009

While you were otherwise occupied during holiday season, Congress was passing a potential tax break for retirees (Pres. Bush signed the bill on Dec. 23). The break applies applies to IRA, 401(k) and 403(b) owners who are at least 70½.

Lawmakers temporarily suspended (for tax year 2009) the "required minimum distribution."

Retirement-plan rules generally mandate minimum annual distributions once the account owner reaches 70½, even if the owner doesn't need the money right away and would rather leave it invested.

Congress decided to suspend that requirement because so many retirement accounts have been hit hard by the market downturn. The idea is to allow time for account values to recover before forcing retirees to take their money out.

Of course, since this is a tax-related matter, it's all bit more complicated than it would seem at first. Details here from the Wall Street Journal.

Posted by Joseph at 9:38 AM | Comments (0)
Category(s): Taxes

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