Taxes

“They Still Have Libraries? Give Everybody an iPad.”

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This article was featured on Drudge today (do you really have to hat tip Drudge anymore?). It is about the library staff all mad at Mayor Rahm for cutting the budget to the libraries.

In the comments, one guy (I think smartly) said the title of this post.

I think he is partially right. The new Kindle Fire (which I have an order in for and will review when it gets to me sometime later this month) is only $199. The cheap Kindles are only $79 now. Kindles come with tens of thousands of free titles of classic books that everyone should be reading anyways. That is the most exciting part of getting a Kindle Fire for me, the ability to have this immense database at my fingertips, for free (after the initial cost).

I imagine if you took the list of “frequent flyers” who actually USE the library (not just hang out there, I mean those who really check out books and return them) and bought them ALL Kindles for $79, or even the nice new version for $199, that you would be WAY ahead of the budget it costs to run all of those brick and mortar relics, the staff, and all the rest.

This way, a library would still be partially subsidized, but part user fee as well (if you don’t like the classic titles, buy your own), so folks like me, who haven’t set foot in a real life library in decades would perhaps feel a bit better about paying for libraries.

Generation X To The Rescue?

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I like writing about things I know little about, because typically I learn a lot from the commenters, and get humbled at times. I am sure that the following will be one of those types of posts.

I have had this thought rolling around in my head for quite some time, and wanted to air it out to see what type of play it will get.

Our entitlement programs steam ahead into oblivion here in the US. In particular Social Security, while not exactly a Ponzi Scheme (but close enough), is on the Highway to Hell, if something isn’t done to fix it.

The only time I remember that something was honestly tried to fix SS was when GW Bush attempted to let a tiny portion (was it 4%?) of new inputs be allowed to be managed in a private account. Not many will remember that debate, but it was ridiculous. Literally, I heard over and over that the OLD PEOPLE WERE GOING TO BE THROWN OUT INTO THE STREETS AND FREEZING COLD. The noise was incredible, and very little logical, well thought out debate was presented. I am still disgusted when I think of how that debate was framed.

Every time that I get my pay stub I look at those numbers leaving my net pay and cringe knowing that MY PROMISE will be broken. This is a system that will most likely be insolvent by the time I get to the age of collecting. I have taken it for granted, and so have many of the folks I have talked to that are my age. My age – Generation X.

Loosely, Gen X is described as the post Boomer generation, the 13th to be raised under the flag of the good ‘ol USA. The birth years (again, loosely) are said to vary from definition to definition, but center between 1961 and 1981. I fall almost smack dab in the middle of it. So does my wife. And most of my friends. We talk about things like this.

This time period saw some of the lowest birth rates in the US. We don’t have enough of us to support all of you (I’m talkin’ to you, Boomers!). We are paying into a system (Social Security) that is designed, mathematically, to fail. Of course SS is just one of our many entitlement programs that are going to be under intense pressure in the future – if nothing changes. That is a big if.

The thrust of my thinking here is that it will be up to my g-g-g-Generation to fix this mess. As I look at all the grey hairs in the Senate and House (there are exceptions, of course) my thinking is that these things aren’t about political parties, they are age and culture differences. The folks I hang around with – Democrat, Republican, Tea, whataver, want things fixed, and done right. This isn’t universal, of course, but I hear a lot more common sense out of younger people and younger CongressCritters than the Old Guard.

Paul Ryan is a Gen X’er. I think the guy is fantastic and a breath of fresh air, and I firmly believe that his message and belief system is held in check a LOT by the Old Guard (I am pointing that finger at you again, Boomers). Sarah Palin is also a Gen X’er. Have you heard anyone else in politics say things like this? Again, this isn’t a party thing, it is a generational thing. I sort of feel like in a lot of respects, we have our own old person combine in Washington DC.

If we stay on the current course there will be hell to pay for anyone who hasn’t saved their dough, as far as retirement goes. But most of us (at least the people my age that I talk to) aren’t that stupid. Some of us are.

I guess I am tired of the Old Guard who screwed up the system telling me and others like Ryan how bad it could get screwed up if attempts are made to fix it. To me, it isn’t about parties, it is about generations. Generation X might end up being the folks that have to fix…everything.

I Learn Something New Every Day

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I say “I learn something new every day” all the time. Because I do.

With skyrocketing fuel costs, I have begun to do research on more fuel efficient ways to deliver product to my customers. I live in a rural area, so we are forced to reach out and get the business. I work about a sixty mile radius.

I came upon the Ford Transit Connect. This is an interesting vehicle because of the relatively low initial cost and the 27 mpg on the highway. I did a bit of cocktail napkin math and this vehicle would pay for itself in fuel savings alone in about two years when comparing it against some of my gas guzzling diesel trucks.

While doing research on this vehicle, I discovered what the Chicken Tax was. I read about it on wiki.

To circumvent the 25% tariff on imported light trucks, Ford imports all Transit Connects as passenger vehicles with rear windows, rear seats and rear seatbelts.[9] The vehicles are exported from Turkey on cargo ships owned by Wallenius Wilhelmsen Logistics, arrive in Baltimore, and are converted into commercial vehicles at WWL Vehicle Services Americas Inc. facility: rear windows are replaced with metal panels and rear seats removed (except on wagons).[9] The removed parts are then recycled.[9] The process exploits a loophole in the customs definition of a commercial vehicle. As cargo does not need seats with seat belts or rear windows, presence of those items exempts the vehicle from commercial vehicle status. The conversion process costs Ford hundreds of dollars per van, but saves thousands over having to pay the chicken tax.[9] Partly because of this, only the long-wheelbase, high roof configuration is exported to North America. In most places, the high-roof Transit Connect, like most Ford Econoline vans, is unable to access multi-story parking because of its height (6′-6″).

I understand what was written, but was baffled as to why on earth a tariff on light trucks would be called a Chicken Tax.

I got curious, so I ran the wiki on the Chicken Tax.

The Chicken tax was a 25% tariff on potato starch, dextrin, brandy, and light trucks imposed in 1963 by the United States under President Lyndon B. Johnson as a response to tariffs placed by France and West Germany on importation of U.S. chicken.[1] The period from 19611964[2] of tensions and negotiations surrounding the issue, which took place at the height of Cold War politics, was known as the “Chicken War”.[3]
 
Eventually, the tariffs on potato starch, dextrin, and brandy were lifted,[4] but over the next 48 years the light truck tax ossified, remaining in place to protect U.S. domestic automakers from foreign light truck production (e.g., from Japan and Thailand).[5] Though concern remains about its repeal,[6][7] a 2003 Cato Institute study called the tariff “a policy in search of a rationale.”[4]
 
As an unintended consequence, several importers of light trucks have circumvented the tariff via loopholes—including Ford (ostensibly a company the tax was designed to protect), which currently imports the Transit Connect light trucks as “passenger vehicles” to the U.S. from Turkey and immediately shreds portions of their interiors in a warehouse outside Baltimore.[1]

I guess there is no real point of this post, other than to point out that yesterday’s thing that I learned was an interesting one. I now know what the Chicken War is, and also know what the Chicken Tax is.

Social Security – Ending The Myth

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The US Social Security system consists of a tax on employees and on employers. The main components are 1) Social Security 2) Medicare.

How Social Security Taxes are Calculated:

The social security tax rate on individuals is 6.2% up to $106,800 (this amount has been increasing annually, that is the 2011 “cap”) and this rate was reduced to 4.2% in 2011.

The social security tax on employers is also 6.2% up to $106,800. The employer tax percentage was not reduced in the 2011 “payroll tax holiday” that was put in place as part of the grand budget compromise last year.

For medicare – it is 1.45% on employees with no limit, and for employers it is also 1.45% with no limit.

In total – if you are self employed, it is (6.2+6.2 less 2% tax holiday) or 10.4% FICA up to $106,800 and a medicare tax of 2.9% up to your total income.

The Social Security “Trust Fund”

The revenues from social security go into Federal government coffers. Then benefits are paid out of Federal funds. Technically the “surplus” of social security revenues over amounts paid out goes into a trust fund but there is essentially nothing “saved” in a real sense, just an “IOU” from the Federal government promising to use their taxing (and more likely, their borrowing) power in the future to meet this obligation.

While many people have been skeptical about social security’s ability to pay out benefits in the past (including a recent candidate who called it a “Ponzi scheme“), there was at least a logical smidgen of truth to the fact that the US government attempts to tax in a clear fashion from workers that will someday benefit from social security and then pay out benefits in a consistent manner.

Recent Tax Proposals

Recent tax proposals, however, start to remove the last fabric of the lies that allowed social security to be seen as anything other than another government entitlement program, funded by a mix of taxes with a lot of borrowing thrown in (at an unsustainable rate). The new proposals cut the individual rate to 3.1% (and the employer percentage down to 3.1% for smaller payrolls), a reduction from the pre-holiday combined rate of 12.4% down to 6.2% (for smaller companies). There is a separate $50M holiday for companies increasing payroll that makes this calculation more complex, and the medicare portion stays the same at 1.45% for employer and employee to total 2.9%.

Since social security can barely cover its current obligations now out of tax revenues, likely these changes will move it into the red immediately, and eliminate the fiction that the surplus is “saved” in a trust fund anywhere at all. Now social security looks like any other tax program, subject to the whims of the government and changing policy preferences, rather than a pension plan which it is made out to be.

Taxes and Behavior

The current administration is curious. On the topic of raising rates, they don’t think that it changes behavior. Specifically, they fought the prior administration’s tax reduction as “giveaways” to the rich who could afford to pay taxes, as if the rich would work just as hard in order to provide an ever increasing percentage of their income to the government.

But they DO believe that reducing rates can incent behavior other times, such as in “cash for clunkers” or the previous tax reduction holiday. More specifically, they take a myopic short-term view that putting a bit of extra cash into workers’ pockets will help their constituents, but making a more competitive tax policy overall (that will spur investment and growth) isn’t anything that is worth investing in or considering. I am frankly kind of surprised that it took the administration this long to consider a payroll tax holiday, since all they care about is the short term impact on their logical supporters, and this is the quickest way to reach them. I wouldn’t be surprised if the government tried to turn hiring into a tax INCENTIVE, and then just raised taxes everywhere else, or just borrowed more money. If your only goal is to put money in your supporters’ pockets in the short term, this is a (sad) way to do it.

At least these policy proposals put a lie to the myth that social security is anything other than an entitlement program supported by government tax revenues. If nothing else positive comes out of the debate, a little bit of more obvious truth is a small benefit.

Cross posted at LITGM

About Those 15% Capital Gains Rates

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Warren Buffett has been talking virtually nonstop about how tax rates on “the wealthy” need to be increased, and of course the dinosaur media has been praising and amplifying this viewpoint. People who think this way are especially fond of citing the 15% capital tax gains rate and contrasting it with the considerably higher rates on ordinary income.

This simplistic comparison, though, ignores the effect of inflation, which acts to increase the effective tax rate–especially on assets which are held for a long period of time. Consider a simple example: let’s say you bought a stock in 2003 and sold it in 2011, with a 30% price increase. To make the numbers easy, you bought $10000 worth and sold it for $13000. But according to BLS data, the consumer price index has risen by 22% over the years 2003-2011. Thus, your $13000 is really only worth $10655 in 2003 dollars.

It gets worse. The IRS is going to tax you on the full $3000 of “gain,” even though it is largely illusory. At 15%, you will pay $450, which is a very big chunk of your true, inflation-adjusted gains. If you work through the calculations, you’ll find that your real capital gains tax rate for this example is not 15%, but more than 50%. (I’ll post the calculations if anyone wants to see them.) Indeed, if you buy and sell an asset whose value just keeps pace with inflation–ie, if you don’t make any money at all in real terms–you will still be paying capital gains taxes on wholly imaginary profits. If we get Jimmy-Carter-style inflation…say, 40% over the next decade…and you have an investment which just keeps pace with inflation, then federal taxes will take 6% of the value of your investment (15% times 40%) when you sell it. And that’s assuming that the current capital gains rate does not increase, and ignoring any state-level taxes on capital gains.

Warren Buffett is surely aware of the preceding considerations, and anyone who writes about finance and economic policy should be aware of them.

A good video by Christina Sochacki, for the Center for Freedom and Prosperity, about the problems with the capital gains tax, here.