Category Archives: Taxes

New York ruling changes tax law. Get ready for a marginal tax rate of 288%.

New York has decided that owners of property living in another state may still have to pay income taxes in New York. The Wall Street Journal reports:

Connecticut and New Jersey residents with a Hamptons summer cottage or a Manhattan pied-a-terre are about to get a nasty surprise: New York state wants more taxes from them.

A New York court ruled last month that all income earned by a New Canaan, Conn., couple is subject to New York state taxes because they own a summer home on Long Island they used only a few times a year. They have been hit with an additional tax bill of $1.06 million.

Tax experts and real estate brokers say this ruling could boost the tax bill for thousands of business executives who own New York City apartments they use only occasionally. It could also hurt sales in the Hamptons and New York’s other vacation-home communities.

I want to focus on this line:

Under the ruling, if an owner doesn’t spend a single a day in a home it could still count toward a permanent residence.

If every state applied this ruling and federal court does not overturn it, a person could in theory own housing property in every single state and thus owe income tax in every single state and the District of Columbia. By my rough calculation using the top marginal federal income tax rate of 35% and the sum of all the top marginal state income tax rates, a person could theoretically be taxed at a rate of 288%. (Yes, I recognize it is absurd for somebody to have property in all 50 states and DC, but the whole notion of paying income taxes in every state you own property is equally absurd.)

I urge the federal courts to overturn this ruling. A permanent residence should be and must be the state in which the person lives the most. Income should only be taxed by states once, either by residency or by where it is earned. Not both and certainly not in a state where a person is neither a resident nor an income earner.

Isn’t this why we have the interstate commerce clause in the first place? To stop states from conducting commercial and financial warfare against other states or residents of other states?

Bush got things done, Obama takes credit for doing nothing.

Regardless of your opinion of President George W. Bush, there is no denying that he knew how to get things done. Unfortunately for him, much of what he did was vilified by the media. The Bush tax cuts, for instance, were portrayed as “tax cuts for the rich” even though the rich’s share of the tax burden rose and the tax cuts helped spur economic growth. In the words of Rodney Dangerfield, Bush “got no respect.”

Along comes President Barack Obama. As candidate and President, Obama attacked the “tax cuts for the rich” that Bush gave out. But then, suddenly, President Obama compromises with the Republicans and extends the Bush tax cuts. CNN, who heeped no praise on Bush for his tax cuts, is now praising Obama for extending the tax cuts:

Most Americans like the new tax cut law that President Barack Obama signed into law on Friday, according to a new national poll.

And a CNN/Opinion Research Corporation survey released Monday also indicates that while the tax cut compromise the president struck with congressional Republicans didn’t spark Obama’s overall approval rating, it may have given him a boost as “Triangulator in Chief.”

The poll also indicates that 55 percent of the public thinks Obama’s policies will move the country in the right direction, with just over four in ten saying the president’s policies will move the nation in the wrong direction. Obama’s 55 percent is 11 points higher than the 44 percent who say the policies of congressional Republican leaders will move the country in the right direction. Americans are split at 48 percent on whether what congressional Democrats are proposing will move the country along the right path.

“Since the GOP just picked up 63 seats in the House, what’s not to like about their policies? The tax bill may be a good place to start,” says Holland.

According to the poll, 56 percent of the public say that the bill does too much for wealthy Americans and six in ten don’t like extending the tax cuts for families making more than $250,000 or the changes in the estate tax. And less than one in four believe that their personal situation will improve as a result of the tax bill. Only four in ten favor an increase in the federal deficit to pay for tax cut compromise.

But despite those figures, three-quarters of all Americans approve of the tax bill overall, including the extension of jobless benefits for the long term unemployed.

If you are keeping score at home:

  • President Bush and the Republicans were wrong to pass the tax cuts in 2001 and 2003.
  • President Obama was right to extend them in 2010.
  • Republicans were wrong to extend them in 2010.

Government says it’s OK to break social security agreement, but not pension agreements.

Barack Obama’s debt commission proposed several changes to Social Security to help reduce the deficit. The New York Times reports:

The plan would reduce cost-of-living increases for all federal programs, including Social Security. It would reduce projected Social Security benefits to most retirees in later decades, though low-income people would get higher benefits. The retirement age for full benefits would be slowly raised to 69 from 67 by 2075, with a “hardship exemption” for people who physically cannot work past 62. And higher levels of income would be subject to payroll taxes.

I have no idea how much these measures will contribute to reducing the deficit or paying off the debt. My complaint is more ideological.

When employees contribute to social security, they are doing so with the understanding that they will receive certain benefits starting at a certain date. Currently, an American expects to pay a certain amount each year into the system, retire at age 67. and receive cost of living adjustments (COLA) each year. The proposals by the debt commission would violate this agreement, forcing people to pay more each year if they earn over a certain amount, retire at a later date than originally agreed to, and receive less in benefits than promised as the COLA is reduced. In effect, the government is unilaterally canceling its contract with each American and replacing it with a less attractive one.

In reality, I am not opposed to these changes, especially the retirement age which will not fully take effect for 65 years, thus having little effect on anybody working today. The reduction in COLA would have a much greater effect on everybody starting in the near future while the removal of the cap on social security taxes would have an even larger effect, but only the wealthy. But while these are necessary changes, contrast this with the government’s stance on pension funds.

In a Q&A titled The pension time bomb, The Week asks:

Can benefits be scaled back?

Only for future employees. New Jersey Gov. Chris Christie recently signed legislation reducing pension benefits for new state employees. In California this month, voters in nine municipalities approved ballot measures to limit benefits for future public employees. And governments are starting to take a harder line in collective bargaining with public unions. “I’ve seen a sea change in the local collective bargaining process,” said Dwight Stenbakken, deputy executive director of the League of California Cities. Some analysts recommend following the lead of Georgia, which requires that prior to being enacted, any changes to retiree benefits be studied for long-term impacts. According to the Pew Center on the States, the policy has helped Georgia avoid “costly and irreversible” mistakes.

These pension liabilities have already been promised to employees and retirees. The government has a contractual obligation to pay the pensions as promised.

So why are the pension obligations sacrosanct while money can be taken from Social Security beneficiaries? Social security is just as much a contractual obligation as public union pensions. If social security benefits are to be reduced for those who have already paid in, public union pension benefits should be as well.

* Though I have not yet read this (too busy writing my next book), Robert Graham discusses this topic in much more detail in his Job Killers: The American Dream in Reverse. How Labor Unions are Destroying American Jobs and the Economy. If you’ve read it, leave a comment here or send me an email, tweet, or facebook message letting me know what you think of it.

Ireland was no bastion of capitalism. Here’s what went wrong!

With Ireland sinking under a huge pile of debt, the socialist liberal left points out that Ireland, with its low taxes and supposedly unregulated banking system, is suffering from the excesses of capitalism. Liberals never waste an opportunity to convince you with pleasant-sounding lies.

I’ll give you a couple of examples of where the Irish and European governments, not capitalism, went wrong.

Minimum Wage

AP reports:

Ireland’s 140-page National Recovery Plan proposes to introduce property and water taxes, raise the sales tax from its current rate of 21 percent to 22 percent in 2013 and to 23 percent in 2014, and cut the minimum wage by euro1 to euro7.65 ($10.20).

So Ireland’s minimum wage was 8.65 Euros or $11.46. The minimum wage in the United States is just $7.25 with some states and cities imposing higher rates (the state of Washington has a $8.55 minimum wage, San Francisco is $9.79, and Santa Fe is $9.85) all of which are much lower than Ireland old $11.46 rate and its new $10.20 rate. With Purchasing Power nearly the same in Ireland as in the United States, the minimum wage there was 58 percent higher than in the US.

While everybody talks about Ireland’s extremely low corporate tax rate, much of that benefit was offset by this too high minimum wage. And the minimum wage did not just affect those at the low end of the wage scale. A minimum wage raises costs throughout the economy forcing employees to demand higher wages even at the higher end of the wage scale.

Liberals may argue that capitalism doomed Ireland to failure, but these high minimum wages are most certainly anti-capitalist.

Low interest rates

For years, the Irish economy was hot, earning the nickname Celtic Tiger. Wikipedia explains:

From 1995 to 2000 GNP rate growth ranged between 6 and 11% through 2001 and early 2002 to 2%. The rate then rose back to an average of about 5%. During that period the Irish GDP rose dramatically to equal then eventually surpass that of all but one state in Western Europe.

This economic growth led to speculative excess which led to inflation:

Inflation brushed 5% per annum towards the end of the ‘Tiger’ period, pushing Irish prices up to those of Nordic Europe, even though wage rates are roughly the same as in the UK.

Also:

Rising wages, inflation and excessive public spending led to a loss of competitiveness in the Irish economy. Irish wages are now substantially above the EU average, particularly in the Dublin region. These pressures primarily affect unskilled, semi-skilled, and manufacturing jobs. Outsourcing of professional jobs is also increasing, with Poland in 2008 gaining several hundred former Irish jobs from the accountancy division of Philips and Dell in January 2009 announced the transfer from Ireland, of 1700 manufacturing jobs, to Poland.

Much of this inflation and rising wages can be attributed to the high minimum wage discussed above. But where was the central bank to deal with this rising inflation?

When Ireland joined the Euro, it lost control of its monetary policy. Normally, a central bank would raise rates and decrease the money supply to fight inflation. But while Ireland was growing quickly, the rest of Europe struggled through most of the 1990s and 2000s with low growth rates and high unemployment. Thus, the European Central Bank (ECB) kept rates low in an attempt to promote growth. As a result, through no choice of its own, Ireland had a loose monetary policy at the exact time it needed a monetary tightening. Thus, Ireland’s economy, most notably its property market and banking system, experienced a huge bubble. We are now suffering the consequence of those previous excesses.

In a true free-market capitalist system, interest rates would have risen through investors’ demand and this would have slowed or stopped the Irish bubble. But the artificial government Euro system prevented this important market process from occurring.

Conclusion

Yes, Ireland was more capitalist than most. But errors like the above led the country to excess and then collapse.

Favorite Quotes from Aristotle’s Politics

More than 2000 years ago, Aristotle literally wrote the book on politics. Aristotle’s Politics most certainly rivals and probably exceeds Plato’s Republic and Machiavelli’s Prince in its understanding and explanation of political philosophy, though it seems to be less popular than those other works. Aristotle’s Politics was possibly the most influential political book until Montesquieu wrote his Spirit of the Laws, which our Founding Fathers relied on quite heavily in developing the United States Constitution.

In writing The Path to Tyranny: A History of Free Society’s Descent into Tyranny, I used Aristotle’s Politics as a prime source for information on ancient Greek politics and political philosophy in general. Here, I share some of my favorite quotes.

Aristotle’s principles of liberty:

One principle of liberty is for all to rule and be ruled in turn. [Politics Book 6 Part 2]

The majority must be supreme, and that whatever the majority approve must be the end and the just. Every citizen, it is said, must have equality. [Politics Book 6 Part 2]

A man should live as he likes. This, they say, is the privilege of a freeman, since, on the other hand, not to live as a man likes is the mark of a slave. This is the second characteristic of democracy, whence has arisen the claim of men to be ruled by none, if possible, or, if this is impossible, to rule and be ruled in turns; and so it contributes to the freedom based upon equality. [Politics Book 6 Part 2]

Aristotle’s definition of tyranny:

For tyranny is a kind of monarchy which has in view the interest of the monarch only. [Politics Book 3 Part 7]

Aristotle explains the motivations of tyrants:

A tyrant, as has often been repeated, has no regard to any public interest, except as conducive to his private ends; his aim is pleasure. [Politics Book 5 Part 10]

The idea of a king is to be a protector of the rich against unjust treatment, of the people against insult and oppression. Whereas a tyrant, as has often been repeated, has no regard to any public interest, except as conducive to his private ends; his aim is pleasure, the aim of a king, honor. Wherefore also in their desires they differ; the tyrant is desirous of riches, the king, of what brings honor. And the guards of a king are citizens, but of a tyrant mercenaries. [Politics Book 5 Part 10]

As of oligarchy so of tyranny, the end is wealth; (for by wealth only can the tyrant maintain either his guard or his luxury). [Politics Book 5 Part 10]

Aristotle explains how men became tyrants:

In any of these ways an ambitious man had no difficulty, if he desired, in creating a tyranny, since he had the power in his hands already, either as king or as one of the officers of state. Thus Pheidon at Argos and several others were originally kings, and ended by becoming tyrants; Phalaris, on the other hand, and the Ionian tyrants, acquired the tyranny by holding great offices. [Politics Book 5 Part 10]

Panaetius at Leontini, Cypselus at Corinth, Peisistratus at Athens, Dionysius at Syracuse, and several others who afterwards became tyrants, were at first demagogues. [Politics Book 5 Part 10]

History shows that almost all tyrants have been demagogues who gained the favor of the people by their accusation of the notables. At any rate this was the manner in which the tyrannies arose in the days when cities had increased in power. [Politics Book 5 Part 10]

Aristotle explains the ruthlessness of tyrants:

Another mark of a tyrant is that he likes foreigners better than citizens, and lives with them and invites them to his table; for the one are enemies, but the Others enter into no rivalry with him. [Politics Book 5 Part 11]

From democracy tyrants have borrowed the art of making war upon the notables and destroying them secretly or openly, or of exiling them because they are rivals and stand in the way of their power; and also because plots against them are contrived by men of this class, who either want to rule or to escape subjection. [Politics Book 5 Part 10]

Aristotle explains how tyrants oppress the people:

These are, (1) the humiliation of his subjects; he knows that a mean-spirited man will not conspire against anybody; (2) the creation of mistrust among them; for a tyrant is not overthrown until men begin to have confidence in one another; … (3) the tyrant desires that his subjects shall be incapable of action, for no one attempts what is impossible, and they will not attempt to overthrow a tyranny, if they are powerless. [Politics Book 5 Part 11]

Another practice of tyrants is to multiply taxes, after the manner of Dionysius at Syracuse, who contrived that within five years his subjects should bring into the treasury their whole property. [Politics Book 5 Part 11]

The people, having to keep hard at work, are prevented from conspiring. The Pyramids of Egypt afford an example of this policy; also the offerings of the family of Cypselus, and the building of the temple of Olympian Zeus by the Peisistratidae, and the great Polycratean monuments at Samos; all these works were alike intended to occupy the people and keep them poor. [Politics Book 5 Part 11]

The tyrant is also fond of making war in order that his subjects may have something to do and be always in want of a leader. [Politics Book 5 Part 11]

Adam Smith and Alexander Hamilton on income and sales taxes.

Back in the 1700s, income taxes were rare, yet more countries were adopting such revenue generating schemes. Adam Smith minced no words in attacking such “absurd and destructive” taxes. In a section of The Wealth of Nations titled “Taxes upon the Wages of Labour,” Adam Smith wonders why countries institute such income taxes:

Absurd and destructive as such taxes are, however, they take place in many countries.

Just a decade later, the Founding Fathers recognized that limits needed to be placed on government. One such limit would be to make it more difficult for government to raise our taxes. In Federalist #21, Alexander Hamilton argued that a consumption tax would effectively limit the size of government:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, “in political arithmetic, two and two do not always make four.” If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

We have seen how the income tax has accomplished the growth of government that duties were unable to do previously. I return to this chart of the size of government excluding defense dating back to 1910. Remember, the income tax amendment to the Constitution was ratified in 1913.

Click on image to zoom in:


Seeing the growth of government since the income tax appeared a century ago, Smith and Hamilton were correct in their assessments. Based on the above quotes and their other writings, Adam Smith and Alexander Hamilton would support a switch to a consumption tax, more commonly called a sales tax today or the proposed Fair Tax.

Big Republican win expected. What now?

I fully expect the Republicans to take over the House on Tuesday and possibly the Senate. But what will they do once in power. Here’s my initial suggestion:

The first thing the Republican House should do is repeal 2.3% tax on medical equipment. The whole health-care bill was supposed to make health care more available and more affordable. This tax does the exact opposite.

The second thing Republicans should do is pass a bill permanently extending the Bush tax cuts. All of them! Including the tax cuts on high income taxpayers. They should also eliminate estate taxes. As explained in my previous post, estate taxes hurt Main Street. Additionally, it encourages tax avoidance and evasion while raising very little money for the government, about 0.8% of the federal government’s revenue.

Passing these bills will be both good policy and good politics. Maybe, hopefully, a Democratic Senate (if they hold on) will pass the House’s bills and President Obama will sign them, but I doubt it. But that makes these bills good politics as well. Republicans can claim they worked to make health care more affordable and help the American people. But the Democrats were more interested in government control and not helping the people make ends meet and health care more affordable.

These two bills would not only be a test of the Democrats’ resolve, but also of the Republicans’. I want to see these bills passed by the House without any of the crazy amendments or earmarks that too often get attached to bills. Let’s see if these Republicans really do believe in the Constitution and good governance.

These bills are not the end-all-be-all, but they will be a good start.

Estate tax destroys small business, encourages corporatism.

The estate tax returns on January 1, 2011. While liberals, anti-capitalists, and haters of the wealthy applaud this development, they do not realize that the tax they favor encourages the corporatism they despise so much.

When the owner of a successful small business or small farm passes away, he would love to leave his profitable business to his children, if they want it. However, with the return of the estate tax, the inheritors of the business will have to turn over to the government 55 percent of the value of the business over one million dollars. Not many business owners have 55 percent of their wealth sitting in cash available to cover the estate tax. The heirs are now left with few choices. The easiest solution for the business owner before his death or the heirs after they inherit the business is to sell the business and the most likely buyer would be a large corporation. Another option would be to close the business entirely, also benefiting the corporation competing with it. Other options include selling part of the business or taking a loan, though these are just short-term solutions that add nothing to the business’s ability to succeed.

As a result, many small businesses are shut down or sold to corporations upon the death of its founder because of estate taxes. Furthermore, this discourages many individuals from starting their own businesses because they know it will be very difficult to pass it on to their children and all their success will end up in the hands of some large faceless corporation.

If we want a nation of entrepreneurs, small business, and a thriving Main Street, we need to permanently eliminate estate taxes. If you want a world where those with brains, energy, and drive are discouraged from developing their ideas and talents, big businesses dominate, and Wall Street is more important than Main Street, we should let the estate tax return as is currently planned. The choice is yours.

Tax and intervention uncertainty killing the economy.

Everybody is talking about the impending largest tax increase in history due on January 1, 2011. In addition to the cost this imposes on the economy, there is the uncertainty this creates. The Giant Wakes writes:

The Bottom Line: Until the uncertainty surrounding the future Federal tax rates is resolved, it will remain yet another factor conspiring to keep businesses sitting in the economic sidelines, waiting for clear signals before committing capital to growth – and, the uncertainty had better be resolved in favor of sustaining the current rates rather than increasing them, if we hope to see an end to the ‘jobless recovery’ and any kind of broad-based improvement in consumer economic circumstances any time soon.

While The Giant Wakes may write about government intervention in a future post within his ten-part series called “Ten Tyrants of Uncertainty,” I thought I’ll jump ahead and add to the discussion.

Which is a bigger deterrent to economic activity: tax uncertainty or the uncertainty of government intervention? When government steps in to bail out one company at the expense of another, economic calculation is thrown out the window. And this does not just apply to corporations where our government may bail out GM thus hurting Ford or give billions to large banks while letting small banks fail. It also applies to each of us an individual. Those of us who are responsible, paying our mortgages each month or not buying a house knowing we cannot afford one, are now paying for those who irresponsibly bought more house than they could afford but whose mortgages have been “modified” by the government.

As a result, we now have a bipolar economy. We have those who have abandoned all risk taking, not knowing what the government will do. And we have those who take extreme risks, believing the government will bail them out if they fail. In the mean time, nobody is taking the reasonable calculated risks that are essential to a productive and profitable economy.

Enumerated Powers Amendment for the Constitution

In addition to repealing the 16th and 17th Amendments and getting rid of the Federal Reserve (all of which began in 1913), I propose this new Amendment:

The federal government shall have no powers beyond those specifically enumerated in the Constitution or absolutely required for the enforcement of those enumerated powers.

The general welfare and commerce clauses do not give the federal government any powers beyond those specifically expressed elsewhere in the Constitution.

All commitments and liabilities of the United States must be honored and paid out either immediately or in their due course. No new commitments or liabilities from unconstitutional programs may be added after the ratification of this amendment.

If anybody has suggestions to improve this amendment, feel free to comment below or email me from the contact page.