Three Nickels...

Via reader Jim M.:

A father walks into a restaurant with his young son. He gives the young boy 3 nickels to play with to keep him occupied.

Suddenly, the boy starts choking, going blue in the face. The father realizes the boy has swallowed the nickels and starts slapping him on the back. The boy coughs up 2 of the nickels, but keeps choking. Looking at his son, the father is panicking, shouting for help.

A well-dressed, attractive, and serious looking woman in a blue business suit is sitting at the coffee bar reading a newspaper and sipping a cup of coffee. At the sound of the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper and places it on it on the counter, gets up from her seat and makes her way, unhurried, across the restaurant.

Reaching the boy, the woman carefully drops his pants; takes hold of the boy's testicles and starts to squeeze and twist, gently at first and then ever so firmly. After a few seconds the boy convulses violently and coughs up the last nickel, which the woman deftly catches in her free hand.

Releasing the boy's testicles, the woman hands the nickel to the father and walks back to her seat at the coffee bar without saying a word.

As soon as he is sure that his son has suffered no ill effects, the father rushes over to the woman and starts thanking her saying, "I've never seen anybody do anything like that before, it was fantastic. Are you a doctor? "

"No," the woman replied, "I'm with the Internal Revenue Service."

I'm not absolutely certain whether this is apocryphal or is a true story.  Seems plausible...

Think the IRS is Bad Now? Just Wait...

Senator Orrin Hatch, writing in the Wall Street Journal ($):

Under the Affordable Care Act, premium subsidies—tax credits in ObamaCare designed to defray the cost of purchasing health insurance—will go to some seven million tax filers and flow to households earning as much as $94,000 a year. The credits are both advanceable and refundable, meaning the IRS will pay them first and verify the claims for them later, what some call "pay and chase."

Refundable tax credits are essentially a form of spending through the tax code, something the IRS has struggled to administer for years with other programs. That's why it's not far-fetched to say that these premium credits will go to a lot of people inappropriately, and that we can expect to see a lot of erroneous and fraudulent payments.

Look at the Earned Income Tax Credit. Whether you like this refundable credit or not, the Treasury Department's inspector general for tax administration reported in April that improper payments account for 21% to 25% of total EITC payments in 2012. Take the percentage of improper EITC payments and apply it to the approximate $1 trillion we'll spend on ObamaCare premium credits in the decade beginning 2014. The math shows that we could see between $210 billion and $250 billion distributed to those who shouldn't get it—because the IRS has no system in place to verify reported household income.

Put all the potential fraud and improper payments with these credits on top of the already soaring budget for the premium subsidies and we're headed for a disaster.

This speaks to something that puzzles me deeply about advocates of big government (i.e., Progressives and Liberals).  Anyone who experiences the joys of “service” at the DMV, or at the U.S. Post Office surely must at least have doubts about the efficiency and efficacy of government-run enterprises.  Anyone who has ever been in the U.S. military can regale you with endless tales of waste and mismanagement.  I was once part of a large working party on a Navy ship that had the job of taking a brand-new, never-used spare computer and throwing it over the side of the ship in a deep part of the Pacific.  Why would we do such a stupid thing?  Because the budgetary rules determined next year's funding level by this year's spending.  One way to spend a bunch of money: throw an expensive (roughly $300k) computer over the side!  That's your government bureaucracy at work.

I think the solution is more radical than what Senator Hatch proposes, though: the entire income tax system should be rethought from scratch, with an emphasis on simplicity and transparency.  Little Estonia is an inspiring example with its flat tax...

Junk the Whole System...

The conclusion from a post by Megan McArdle:

When government has power, it will be abused. Sometimes that's the unavoidable side effect of something we need to do. But this isn't. It's time to junk the entire elaborate system.

She's talking about corporate income taxes and charitable deductions.  I'd extend those same thoughts to the rest of the personal income tax system as well.  It's time to start over...

Quote of the Day...

From Defending Enterprise:

I find that a politician's syntax matters less when he cuts taxes.

Oh, yes indeedy!

Tax Day...

I'm angry.

You should be angry too, if you're an American.

If you've been even moderately successful in your career, today is the day when your federal government, and most state governments, forcibly steal a large fraction of your income.

Through the trick of employer withholding, the governments manage to fool most people most of the time; they scarcely notice the taxes they pay.  That's a real shame (though it was very clever politics).  I'm certain that if people had to write a check today for the entire amount of their taxes due, they'd be paying considerably more attention to this miserable day.

Then, too, if the politicians (being clever again, dang it!) had made Tax Day October 15th instead of April 15th (making it just before Election Day), I'm sure our taxes wouldn't be so high.

But here we are, handing over chunks of our income again.

You'll have to pardon me today, because I am having trouble seeing things straight.  My normally clear vision is being clouded by hallucinations of free-spending politicians being strung up like beans – and cheering crowds watching...

But the reality is...that I'll be avoiding jail by handing over way too much of my income to a bunch of incompetents in Washington and Sacremento. 

So I'm angry.

And you should be angry, too.

Forbidden History of Taxes...

Excellent.

Your Federal Income Taxes...

Reader Simi L. has sent this letter to his local newspaper.  I don't think he's too happy about his income taxes (and neither am I!)...

A Realistic Way to Look at Your Federal Income Taxes

We have all been subject to various explanations relating to the absolutely astounding numbers of dollars that our federal government spends each year. Numbers of billions or trillions are just plain difficult to comprehend. And when authors try to explain how large these numbers are, they often use an analogy which is just as hard to understand (try to comprehend the number of inches between the earth and the sun). There has to be a better way and I'd like to propose a useful way of thinking about the dollars our federal government spends.

This current year the federal government will spend approximately 3.8 trillion bucks Holy smoke! But how does this number relate to each of us?

Let's assume you are paying $10,000 in Federal income tax this year (I think I envy you). If the feds spend $3.8 trillion this year as currently projected, a relatively straightforward calculation will show that for each billion dollars the government spends, a little more than $2.50 comes out of YOUR pocket. Obviously then if the govt spends $10 billion on something, such as a new large aircraft carrier, $25 of that came out of YOUR very own pocket. Also, each time the feds spend $100 billion, your forced contribution is $250.00. These are numbers we can all relate to and I find them pretty scary. If you also take into account that approximately 40% of what the feds spend this year is “borrowed” (read 'printed' without the backup of assets of any kind) it is actually quite a bit worse.

Now back to the $10,000 figure. You can calculate your own “contribution” by dividing your total tax by the $10,000 figure (I chose the $10,000 purely to make your calculation easier) and multiplying the result by $2.50 on your handy calculator. For example, if your total tax was $5,000, divide 5,000 by the 10,000 and you'll get 0.5. Multiply 0.5 by 2.50 to get a figure of $1.25. So you pay “only” $12.50 for your share of that aircraft carrier (As an aside, this year that carrier may be one of your best investments).

But how about the money spent to bail out GM and Chrysler? And lets not forget the money we are spending on foreign aid. How many of YOUR dollars would you like to send to Pakistan this year? Dare I even mention our aid to Egypt and Libya at the present time?

Now those billions our government spends don't seem very abstract any more, do they?

Stiff Duties on Solar Panels...

The U.S. government has just slapped stiff import duties on Chinese-made solar panels and solar cells.  This is the kind of thing that just makes me crazy – an action that is clearly against the national self-interest, an action that raises prices for American citizens.  Why would we do such a thing?  Because it's very popular politically, that's why.  It allows a politician (Obama) to claim that he is protecting American jobs from those hateful, marauding Chineses faux entrepreneurs who want to push prices so low that it's unfair to American manufacturers.  American manufacturers stuck with the costs of unions, labor costs near the global top, chained down with regulations that inhibit innovation, and just plain beat by eager Chinese entrepreneurs.

Import duties never work to protect American industry.

Import duties always hurt consumers, both directly and indirectly (from the ensuing trade wars).

And yet we keep trying them.

How long can a nation of idiots survive, anyway?

Romney's Tax Returns...

Megan McArdle speaks for me on this issue with finer prose than I could muster.

It surely is wonderful to see her blogging again.

But reading the comments on her post makes me want to go find another country to live in...

State Income Tax Distortions...

I heard a radio news report of this phenomenon, and did a little digging to see what the heck they were talking about.  The sources for this all suffer from a severe progressive/socialist bias, but on this issue I think they've struck something that ought to be a problem for people of any political persuasion.

Here's the basic idea that some genius politician came up with (I've no idea what the original source for this notion was).  Let's say you're a state politician in New Jersey.  A large company – say, General Electric – is planning to build a large plant that brings 2,000 direct jobs with it, and even more indirect jobs to support it and its employees.  You (the politician) want to persuade General Electric to locate that plant in New Jersey, but you don't want to give even the appearance of spending tax dollars to do it, because that will alienate the voters.  Here's the sly trick: you tell the company that you will give them a special deal – a tax credit equal to the income tax withheld for all its employees.

Here's how that might work.  General Electric, with the new plant's 2,000 employees, might withhold and pay an average of $3,500 per year, per employee for New Jersey state income taxes.  With 2,000 employees, that works out to $7 million per year – not chump change, for sure.  With the special deal, however, General Electric gets a tasty $7 million dollar check from the state, exactly offsetting the employee income tax they paid.  That's really just a bookkeeping trick, though – what really happened is that General Electric's 2,000 employees paid state income taxes to General Electric instead of to the state.  The companies that receive this credit aren't even required to tell their employees about it, and of course they don't.

A video primer:


Much more on this here and here.

There are several things very wrong with this practice.  The one that offends me the most is the opaque expenditure of tax-payer dollars. By making it a tax credit instead of an appropriation, the politicians have carefully disguised this expenditure.  It is effective, too, for most tax payers – even those tax payers who actually pay attention to such things.  I had no idea this practice existed until yesterday, and apparently it has existed for over a decade.  There are other big problems as well: the government is picking winners and losers (always, always a problem), only large and well-connected companies will ever get this sweetheard deal, and it presents large and very obvious opportunities for Russian-style political corruption (which I have no doubt has already happened, and frequently).

The politicians promote this program as if it was a job creator, but of course it is no such thing.  The jobs involved will be created somewhere, just not in the state that doesn't offer such a deal.  The politicians also claim this program is free, but it obviously is not.  If New Jersey gives General Electric a $7 million check, either there's $7 million less to spend on other programs, or the state has to raise $7 million from other tax payers.  It is not free in any sense of that word.

Finally, there is an unintended consequence that is becoming a big problem in the earliest states to adopt this idea (and will be an increasing problem as the others “catch up”): companies who already are in the state are now threatening to leave these states unless they too get this special deal.  States are caving into this “job blackmail” for fear of the political consequences.  In these increasingly common cases, enormous tax credits are being granted to companies already located in a state – and all because they were originally offered to bring new companies in.

This is a corrupt practice with a veneer of legality poorly glued on.  It's also a great example of the kind of political rot that occurs in any government the longer it's been in existence.  Many political theorists have postulated that all systems of government have a natural lifespan that has never been exceeded, basically because the accumulation of this political rot eventually causes the government to become completely ineffective at its most important jobs.  When I learn about things like this happening in America, my thoughts immediately go to these theorists...because it looks like damned good evidence that they are correct.

Doom is not a particularly pleasant thought for a Friday morning...

The 47%...

Romney's remarks about the 47% who do not pay (Federal) income tax has been much in the news recently.  I've wailed about this myself.  The graph at right nicely illustrates the issue (from this article).  When I first entered the workforce (in the late '60s), only about 12% of the workforce paid zero taxes.  At my first paid job (as a dishwasher/busboy at Howard Johnson's on the NJ Turnpike), I was paid minimum wage (then $0.85/hour for teenage workers, and $1.25/hour for adults).  I paid taxes out of those wages, enough taxes to thoroughly piss me off.

But Megan McArdle (writing at her new home with The Daily Beast) writes some uncomfortable truth.  Uncomfortable for conservatives, that is.  As she points out, the reason so many people don't pay Federal income tax is that Congress has started using the tax code to promote social policy, by picking winners and losers.  The winners (those paying less tax or getting credits) are those who follow the supported social policy – and many of those policies are those supported and promoted by conservatives.  In the chart above, the numbers don't lie: for the most part, the massive increases in the percentage of the workforce paying zero Federal taxes have occurred in Republican administrations.

Ms. McArdle strikes directly to the right problem: the use of the tax code to support social policy.  She supports this use of the tax code; I (and many others) do not.  The only way to eliminate all this picking of winners and losers would be to completely flatten the income tax – one rate, charged on all income over a threshold level, with zero exemptions, deductions, or credits.

Now if I can only live long enough to see this happen...

It's Wrong...

Via my lovely bride, something that has been much on my mind recently (as I contemplate the outrageous taxes we're about to have stolen from us by The One's administration and his sidekick, Governor Moonbeam):

Taxmageddon...

If the current tax laws aren't changed before this coming January 1, we face “Taxmageddon”, including the likely loss of 30% or so of the stock market's value.  Such a thing is not in the interest of either major political party, so my bet is that the laws will be changed in time to avoid this.  Given the current state of political polarization, the most likely scenario is a “kick the can down the road” sort of fix – one that lasts a year or so, well past the upcoming election.  That's exactly how we ended up in the current position, thanks to our incredibly disfunctional government and its perverse political incentives...

Taxes...

I'm “doing” my taxes today. 

In other words, I'm spending my own time (valuable at least to me) computing how much money our federal and state governments are going to steal from me.  I do this only because I will be fined or jailed if I do not.  I know that 90%+ of the money they steal will be spent in ways that I do not approve of.  I have no choice in this matter; the bureaucratic thieves are going to win.  It's as if I were forced to allow burglars to come into my home, hold me at gunpoint for a day while I compute how much they're going to steal, and then help them load up their truck.

You can probably guess my mood.

That is all.

USA: The Highest...

The highest what?  The highest corporate income tax rate.  In the world.  Starting on April 1st.  From an opinion piece in today's WSJ:

April 1 is a date that every politician and business executive in America should circle on the calendar. That's when Japan cuts its corporate tax rate to 36.8% from 39.5%. The United States will then hold the title of highest corporate tax rate, with average combined federal and state profit levies of 39.2%.

Yes, that's higher than Sweden. Higher than Russia. And China, Mexico, Denmark and even France. Doesn't it make you want to break out in a chant: U-S-A, U-S-A? 

I can almost hear the progressives cheering.  “Yes!”, they'll say.  We're leading the world, as we should be.

Me?  I just cry for my country's future.

And, as always, remain amazed at how little attention issues like this get from everyday people.  As though they don't matter...

What's Wrong with this Picture?

The chart at right covers most of my lifetime.  When I first entered the workforce, 88% of all Americans paid income tax.  I paid income tax while working in my very first “real” job (that is, one I was being paid wages for) – as a dishwasher for the New Jersey Turnpike's Howard Johnson's restaurant.  That was a minimum-wage job.  I paid income taxes.

The same has been true for each and every job I have ever held.  I have always paid income taxes.

The same is not true today for about half of all Americans.  What this chart doesn't show is that the majority of that half who doesn't pay income tax actually receives money from the federal government (in the form of the “Earned Income Tax Credit” – the name of which is a terrific example of politically-motivated doublespeak).  Those of us who pay taxes are paying many of those who do not.

I don't know about you, but I find this involuntary transfer of my money to someone else quite infuriating.  And I will remember that in November...

62% Top Marginal Tax Rate?

This is so depressing...

Historical U.S. Top Marginal Tax Rates...

Over the years I've been surprised many times by the general ignorance U.S. citizens have of how their top marginal tax rates have changed over the years.  In particular, few people seem to know how much higher these rates were between the FDR and Reagan administrations.  The chart below shows this very nicely (as usual, click to enlarge).

There are many interesting observations one can make from this chart.

One that progressives like to make is that we have a lot of experience in economic boom times (say, the late '50s) with very high top marginal rates – therefore such rates are not the destroyer of jobs claimed by the conservatives.  However, it is simultaneously true that the very wealthy back then had relatively easy access to tax shelters, and in fact very little income was actually taxed at that rate.  The real world is messy and complicated.

An observation that conservatives like to make is the strong correllation between the dropping of tax rates and the subsequent ramping up of the economy (this happened both in the late '20s and early '90s).  But progressives can point to other factors that influenced those economic upturns, including other roughly simultaneous changes in the regulatory environment.  The real world is messy and complicated.

So be careful reading too much into the squiggles on this chart.  Nonetheless it's a useful piece of any U.S. citizen's political education – no matter what one's political beliefs, this chart encapsulates the past century's history of one of the most significant consequences of elections: the setting of our tax rates...

If You Hear Yelling and Cussing...

...from the general direction of Southern California today, that's probably me.  I'm doing my taxes today, toting up all the money that the federal government is going to steal from me.  As I watch the dollars add up, I'll be thinking about how the likes of Reid, Pelosi, Obama, Schumer, etc. will find wasteful ways to spend it.

If I have a good day, a liter or two of vodka should get my blood pressure under control this evening...

Torn...

So the Democrats are split – some are ok with Obama's tax cut compromise; others are angry that he compromised at all, and are threatening to scuttle the compromise.  And I'm not sure which side to root for...

On the one hand the compromise is very good for me personally; my taxes would be thousands of dollars lower next year if it passes.  On the other hand, continuing the deficit spending is clearly a bad thing for the country, and will come back to bite us one of these days – in ways that will probably be bad for me personally.

This tax compromise is really just more politics-as-usual.  While it solves a problem about to smack us all upside the head in a few weeks, it does absolutely nothing to address the fundamental problem (federal spending exceeding federal taxes), and in fact makes it worse (reducing taxes while not changing spending).  So I'm having a hard time getting excited by this.

It sure would be nice to have a problem-solver go to work over there in D.C...