Wealthy Can Be Stupid

The NY Times has an article on what people with wealth and/or high incomes are doing in anticipation of changes in tax law for 2013.  I found this to be stupid:

Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.

Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.

“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.

There's little logic to the position unless she thinks, incorrectly, that the higher bracket applies to all earnings, not just the incremental gains over $250,000.  I hope they have a tax accountant who can advise them better. 

What Really Really Gripes Me: Tax Cheats

From Brad Delong, quoting a Bloomberg piece by Jesse Drucker:

Mitt Romney ‘I Dig It’ Trust Gives Heirs Triple Benefit: In January 1999, a trust set up by Mitt Romney for his children and grandchildren reaped a 1,000 percent return on the sale of shares in Internet advertising firm DoubleClick Inc. If Romney had given the cash directly, he could have owed a gift tax at a rate as high as 55 percent. He avoided gift and estate taxes by using a type of generation-skipping trust known to tax planners by the nickname: “I Dig It.”…

The Obama administration proposed cracking down on the tax benefits in February…. Romney or his trust received shares in DoubleClick eight months before the company went public in 1998. The trust sold them less than a year after the IPO…. Multimillionaires use such trusts to avoid… taxes… [by] assign[ing] a low value to assets they donate to the trust….

 DeLong thinks this amounts to tax fraud, although IRS doesn't prosecute this, presumably because the valuation of the asset when put in the trust is hard to determine.   

Not that I'm calling Mr. Romney a cheat.  It's just taking logic to an extreme.  My alma mater solicits for donations of assets (or did, before the stock market and real estate tanked) as a good tax strategy. 

Saverin: Why Singapore?

Eduardo Saverin, played by Andrew Garfield in the movie, is receiving lots of attention because he's renounced his U.S. citizenship, presumably to avoid paying some taxes on his money from Facebook.

One thing's not been explained in the news articles I've seen: why Singapore?   Well, as usual Wikipedia has the answer: Singapore's tax rules encourage tax evasion.

Life Mysteries: Procrastination

Why do we wait until almost the last moment to pay taxes.

Government Service from IRS

Recently I had occasion to deal with the IRS (I made a stupid mistake on my 2009 schedule D).  All in all I was pleased with my interactions: one in-person call to the local office, two phone calls.  In all three cases I had to wait, but that's expectable because Congress doesn't fund tax collection as it should.  In all three cases the IRS people were pleasant and competent and the IT systems they had available to them worked well. And, most importantly of course, I finished the series of interactions without owing more taxes.

So, a hat tip to the IRS.

One thing of interest I did note, given the concerns over PPI (Social security number, etc.)  When I went to the office, instead of asking for my SSN I was asked to enter it on a separate keypad--apparently such entry hides the SSN from the employee while authorizing access to one's tax files.  It's an interesting approach.

Why James Stewart's Production Is Down

James B. Stewart, the prize winning author, and NYTimes columnist sat down with a calculator to compute his tax rates and reports here.  The results:

I paid 24 percent of my adjusted gross income in federal taxes and 37 percent in combined federal, state and local income taxes. I paid 49 percent of my taxable income in federal income tax, and 74 percent of my taxable income in combined federal, state and local income taxes. My totals include federal payroll and self-employment taxes.

 No wonder his productivity over recent years has been down--he pays too much in taxes--that's the logic conservative economists would use.  His picture reflects his self-employment and living in NYC.  I'm too lazy to check but I think the usual figure for comparison is the AGI percentage (i.e., Gingrich paying 30+, Obamas 25+, Romney 14+).

This led me to a thought though: Mr. Stewart may well have slowed down some recently, but is that more the effect of incentives/taxes or is it the effect of aging. Much discussion of the impact of taxes on incentives omits any correction for age.

[updated: corrected typo]

Bureaucrats Lose One. So Do Taxpayers

Obama has signed the repeal of mandatory withholding of 3 percent from federal, state, and local government payments to contractors.  The theory is that the withholding aids in the collection of taxes. Of course, that involves the theory that some contractors may be failing to pay their full taxes.

I know Republicans think all taxpayers are honest and IRS bureaucrats are always oppressive. I beg to disagree.  And I've evidence to back it up: when the IRS started requiring SSN's for dependent children, there was an unreported epidemic, some millions of dependents vanished. 

On a recent political self-test, my strongest value was fairness, and it's just not fair for some to pay taxes and others to evade. Shame on Obama and both parties in the Congress.

Trusting Small Business

The RSS feed from Government Executive had two adjoining posts: one was "Fraud continues in small business procurement programs", the second was "House votes to repeal contractor withholding tax requirement. The conjunction is educational.

What we're saying is, while we know small businesses are not angels, being subject to the normal human urge to cheat and lie, the House (and the Senate and the President) are willing to let them cheat on their taxes for a while longer.

Maybe the thing I hate most is tax fraud. I realize the Republicans believe small businesses are the fount of all job creation and the embodiment of all virtues.  But I'm conservative enough, or Calvinistic enough, to believe you don't trust anyone.  As the Founders believed, you have checks and balances.

Tell Me What You Really Think (of 9-9-9)

Via Tyler Cowen, Bruce Bartlett assesses Herman Cain's 9-9-9 tax plan rather soberly.  He concludes:

Even allowing for the poorly thought through promises routinely made on the campaign trail, Mr. Cain’s tax plan stands out as exceptionally ill conceived.

A Question of Taxes

From Illinois farmdocdaily, comes this observation, based on their surveys of farmer's accounts, comparing 2001-5 with 2006-10:

It would seem that to add over $100,000 in net farm income while adding just under $6,000 in income and social security taxes doesn’t quite add up! We know that tax rates…even at their lowest…are not at the 6% level. What gives?

 The writer goes on to offer some possibilities, some of which amount to farmers deferring tax liabilities down the road, and warns of a possible day of reckoning (my words, not his). 

I hate to be cynical about the hardworking people in American's heartland, the truest of all Americans, but it might just be that one or two of the farmers is indulging in that oldest of American pastimes, the pursuit of which led directly to our Revolution: fudging on one's taxes.

I'm sure no one in Congress is going to suggest adding one or two auditors to the IRS as a partial fix to the budget.

(To be fair, I should note my understanding of federal tax laws as they apply to farmers is very close to zero.)

One question: if farmers have to pay self-employed SS taxes of 13.3 percent on income less than $102K, shouldn't one expect to see more than $19000 social security and income taxes paid on over $200,000 income? What are the limits to deferring income?

Friedman Scorned in France

Some conservatives blame Milton Friedman for the rise of big government, given his work in developing the income tax withholding system as a bureaucrat during WWII.  So it's a little surprising to read in Dirk Beauregarde's post,the French, those effete socialist-loving big government types, don't have withholding:

"We don’t have « pay as you earn » in France. The majority of French people pay their tax bills in three seperate installments – February, May and September. The last one is the hardest, because you’ve just blown all your money on the family holiday."

Excessive Incentives

Greg Mankiw links to a video by Jeff Miron, an economics professor at Harvard on 3 myths of capitalism.  His third myth is that capitalism caused the Great Recession: no, no, no--it wasn't capitalists, it was the excessive incentives from government policy. 

Now it seems to me that one argument for the Bush tax cuts, particularly on those with higher incomes, was to provide incentives to entrepreneurs.  So the lesson I take away from Prof. Miron is that we ought to allow them to expire immediately

My Taxes Are Too Low (and So Are the Obamas)

I've noted my procrastination, so you'd expect I would file my tax returns today.  I have to say my taxes are too low, we should be paying more.  And so should the Obamas, even though they seem to be paying about 25 percent.  And worst of all IRS doesn't have enough people.

Prohibit Contractors Who Are Delinquent on Taxes

Since I yesterday urged the firing of federal employees if they didn't have an agreement to pay back taxes, it's only fair I should today urge the blacklisting of any Federal contractor who hasn't paid their taxes. POGO has a summary of the problems

A Lone Voice in the Wilderness

I must be one of the very few Americans who saw merit in the 1099 provision.  Sadly, Congress has now repealed it, so tax evasion continues.

Why the Food Movement Should Like High Estate Taxes

A common refrain against the opponents of the death estate tax is it will harm family farms. It will force the sale of farms which have been in the family for generations.  Assume a 1,000 acre in Iowa, valued at $7,000.  If husband and wife are the owners, then the exemption has to be at least $3.5 mill (which I think is what House Dems want).  But of course, some farms these days are larger.  So what happens if the estate tax is applied: presumably the owners sell off some land.  Selling land puts more land on the market and presumably improves the chances for aspiring farmers to break into the business.  That's what the food movement would like, more and smaller farms.   So the food movement should be pushing for lower estate tax exemptions.  And I don't see a free market rationale for preserving the larger farms--if bigger is better, as most commercial farmers think, the new owners will simply assemble land parcels into a new, big farm.

NYTimes Mag and Zuckerberg

Virginia Heffernan writes about "The Social Network" and Mr. Zuckerberg in today's NY Times Magazine. A paragraph:

The real Mark Zuckerberg has taken measured issue with the way “The Social Network” portrays him. He has disputed, especially, the filmmakers’ suggestion that he built the site as a means to worldly ends. “They frame it as if the whole reason I invented Facebook was that I wanted to get girls or to get into some kind of social institution,” he told an audience at Stanford University in October. “They just can’t wrap their head around the idea that someone might build something because they like building things.”

 I note the alternative motives here: sex or curiosity, not money.  The book, "The Facebook Effect", which I just finished, is consistent with the movie in this respect.  Zuckerberg is depicted almost as an artist with a pure vision of what Facebook could be, a vision which excludes lots of ads and commercialization and includes declining multiple opportunities to cash in for the big bucks.

So what's the role of money as an incentive?  I'd suggest it plays a role in some choices, like an initial choice of occupation.  I'm sure some people choose to work on Wall Street instead of Teach for America because of money. And many people who go into medicine may choose a specialty partially because of money. But I don't think money is that important in the big scheme of things.  So why worry about the impact of taxes on incentives for work? The best answer is because taxes can be changed but you can't change sex or curiosity.

A Liberal Solves the Budget Deficit

The NY Times has an interactive page which permits you to try to solve the budget deficit by choosing among various options to reduce spending and increase revenues.  Here's my solution.  [Updated: here's another try at the solution.]As a good liberal I'm relying on cuts to military spending, returning taxes to Clinton levels, a carbon tax and some tax reforms, and relatively minor tweaks to Social Security and other programs (though I do chop farm programs--sorry  FSA. :-)

As it comes out I'm roughly 60 percent taxes, 40 percent spending cuts.  If it for real, I'd probably phase in the changes gradually.

[Note: When I tried to recreate my solution, thanks to my commentor for pointing out the failure, I probably made different decisions the second time through.]

Mankiw and Taxes, My Touching Faith in the Professor

Greg Mankiw has a column in the NYTimes on his marginal tax rate, as it stands, and if the Bush tax cuts for the over $250K bracket aren't extended. He makes a fairly convincing case that increasing his marginal tax rate would decrease his incentive for added production.  Apparently, in his case, he'd be less apt to accept additional speaking engagements.

But I've some questions: when he's on the road speaking, what is it he's not doing?

• Presumably he's not at Harvard mentoring his graduate students or teaching his undergrads.  (Maybe he will have fewer guest lecturers in Econ 101 and more of the real Mankiw?) Maybe he cuts his office hours?
• Or maybe he's not doing economic research, writing the next great paper which is going to win him a Nobel prize?
• Or maybe he's not home with his family, investing in their social capital and his happiness? (Granted, none of the activities he's not doing would show up in the GDP, but Professor Mankiw is still a sentient human being and he's probably contributing to the good of the society wherever he is and whatever he's doing.

On a broader scale, assuming we need the money for the government, isn't the issue whether it's better to reduce the incentives for someone such as Professor Mankiw, or for the struggling graduate student or the assistant professor without tenure? To some extent it would seem increasing the rates on higher levels of income is age-biased; it is more likely to hit the older, better established person. I'd assume, just as the most jobs are created by start-up businesses, most ideas are created by the young. That would lead me to support increasing the rates on the high brackets, if that's the only choice I'm given.

Our Founding Fathers and the Intrusive Federal Government

We all know the Founding Fathers didn't like government and wanted as little of it as possible.  Right?

It's completely ridiculous for the government to worry about things like energy efficient light bulbs and toilets. Right?

If you agree, you might look at this document from the National Archives. As they say:

List A includes dwellings situated on two acres or less and valued at more than $100. You will find the name of the occupant, the name of the owner, dimensions of the dwelling and any outbuildings, the type of construction, the number of windows and lights, and the value of the dwelling.

No, it's not from 2009, but 210 years earlier.