Recently in Taxes, Taxes, and More Taxes Category

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Behold the new "Spread The Wealth" pencil sharpener. Every U.S. Taxpayer will receive one along with their 2008 1040 forms.

I've thought long and hard about the bailout bill President Bush signed yesterday, feeling both relieved and disgusted at the same time. I was going to post about it yesterday, but realized I really needed to think about the ramifications of this bloated piece of "crisis legislation".

I've been able to boil down the description of the bill to four words, ably provided by the WP Dad:

"It's a crap sandwich."

Something that was originally three or four pages is now over four hundred pages, most which not a single Congressman has had the time to wade through to find out what it is they were really going to be voting on. One thing quite obvious about the bill sent to the House from the Senate was the amount of pork packaged into it. Hundreds of millions, if not billions of dollars were earmarked for all kinds of projects, none which had anything to do with banking meltdown. I guess too many of our 'representatives' saw this as an opportunity to use even more taxpayer dollars we can ill afford to spend.

A few of the earmarks added by the Senate include:

- $100 million tax breaks for auto racetrack owners.

- $2 million for makers of wooden arrows for children.

- $192 million in rebates for the Puerto Rican and Virgin Islands rum industry.

- $148 million in tax relief for wool fabric producers.

- $49 million in tax benefits for fishermen and other plaintiffs who sued over the 1989 tanker Exxon Valdez spill.

- $48 million a year for film and TV producers who produce their work in the United States.

More earmarks and tax breaks included in the bill can be found here. Read 'em and weep.

Is there any wonder members of the House were not pleased with the bill they ended up passing? More than a few representatives, both Democrats and Republicans, lambasted the Senate earmarks, feeling the bill should have addressed the problem at hand and not been used for more pork barrel spending, particularly at a time when voters are scrutinizing Congress closely.

This bailout bill is going to end up costing taxpayers far more than the $700 billion put forth by the original bill. We're all going to feel the pain of this bill when it comes due.

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How our tax system works ...

Suppose that every day, the same ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.

The tenth man (the richest) would pay $59.
So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers,' he said, 'I'm going to reduce the cost of your daily beer by $20.' Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% saving s).

Each of the s ix was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

'I only got a dollar out of the $20,' declared the sixth man. He pointed to the tenth man, 'but he got $10'.

'Yeah, that's right, exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I got'

'That's true' shouted the seventh man. 'Why should he get $10 back when I got only two? The wealthy get all the breaks!'

'Wait a minute,' yelled the first four men in unison. 'We didn't get anything at all. The system exploits the poor!'

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them for even half of the bill!

And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

This explanation has been attributed to many different scholars and economists, but Snopes wasn't able to pin down the origin of this 'lesson'.

That doesn't make it any less true.

The upcoming budget season for towns and cities here in the Granite State is going to be a tough one. It will be no less difficult for the state, with the governor calling for department heads to draw up two budgets: one tight, the other tighter. I expect it's not much different in other states, many of which are suffering from the same problems being seen here in New Hampshire.

The word is out across New Hampshire: money is tight and it's going to get worse. Town officials know their residents are having a tough time of it, with much higher fuel and food prices. The last thing the people need is to worry about paying higher property taxes or fees. It comes down to a choice of cutting budgets or raising taxes, and towns are looking very hard to hold the line on spending.

But even town officials are feeling the effects of higher oil prices, with the cost of heating fuel, gasoline, diesel, and asphalt going up. Even if the overall town budgets do not increase, the towns will need to change priorities, shifting funds from other programs and departments in order to cover the increased energy costs. Some towns will defer maintenance on roads or other infrastructure for a year, hoping energy prices will fall or that the economy will recover sufficiently to take the strain off of the individual taxpayer's budgets.

One challenge both the state and the towns will have to meet is declining revenues. Revenues from building permits and vehicle registrations have fallen off as the economy has tightened, meaning even more work needed for the budgeting process.

At the state level, revenue projections from the last bloated budget were woefully optimistic, with the revenue shortfall expected to be $200 million by the end of the biennium. (The state of New Hampshire runs under a two-year budget.) With the drop in revenues from the same decrease in vehicle registrations, as well as fuel taxes, cigarette taxes, and a host of other user fees and business taxes, the state must tighten its belt, too. The governor ordered some spending cuts to reduce that shortfall, but more cuts will be needed to erase the rest of the deficit even if those cuts are made for the upcoming two-year budget. At this point raising taxes would be a non-starter, particularly if state legislators want to be re-elected this November.

Some hard choices will need to be made.

At the state level, rolling back the outrageous 17.5% budget increase of the present budget would be a good start. Much of the state revenue shortfall can be blamed on the oversized budget and the unrealistic revenue estimates used to justify the increases. (The revenue projections for 2007-2008 were unrealistic even without the big boost in energy prices and softening economy, so the blame cannot be laid entirely on those two issues.)

At the town and city level, the choices will be harder. The effects of budget cuts and tax increases are felt and seen in very shortly after they take effect. When budgets are cut oft times they lead to lay offs of town employees, reduction in overtime, reduction of office hours, cutbacks in extracurricular activities at the schools, loss of tutors and teaching assistants, and so on. Tax increases, particularly during troublesome economic times, leads to loss of homes by taxpayers unable to pay their property taxes. Businesses will defer paying their property taxes in order to offset increase costs and decreasing income in other areas. This leaves the towns in the lurch because revenues fall off even more. It's a Catch-22, with everyone in town caught in between. The town budgeting process will have to balance the two needs, perhaps erring on the side of caution and making painful cuts to town spending. But it's something everyone can understand, something most of us have had to do with our own budgets when money is tight. Non-essentials, the want-to-haves, are put aside to meet needs. And so it must go with town spending. It's going to be interesting times around here for the next few months.

Now if we could only get the federal government to do the same thing.

It seems to be the season of tax revolts around the nation, with one taxpayer group working hard to repeal the Massachusetts income tax. Now another tax revolt is brewing in neighboring Connecticut, where education costs are eating up more tax dollars at a rate far above that of inflation.

Both states are as blue as can be, yet the taxpayers have had just about enough of the profligate spending in each state, with little sign the respective legislatures or governors will curb spending and lessen the tax burden on the residents.

In Connecticut, a state with one of the highest overall tax burdens, education costs are rising far too fast and the taxpayers aren't getting their money's worth. In the past 25 years the student population in the Nutmeg State has grown about 10%, but costs have almost tripled during that time. A state income tax was imposed to help lessen the burden of local property taxes and the state sales tax, which at one point was over 8%. While the sales tax dropped, property taxes continued to rise.

It was the triple whammy of quickly rising property taxes and the double hit of state income and sales taxes that forced the WP Parents sell off their retirement home in Connecticut and relocate to New Hampshire. Too much of their retirement income was being eaten up by the taxes they were paying and it no longer made sense for them to remain there. A home that had been in our family for over three generations was lost because local and state spending was out of control. My parents weren't the only ones forced into taking such actions, nor will they be the last.

A look at the West Coast, specifically California, shows a similar situation, where state and local spending is outstripping the ability of the taxpayers to fund it all. State spending is seriously out of balance, with a deficit of $15 billion and no state budget as of yet, and a proposal by Governor Schwarzenegger to boost the state sales tax. One thing California can least afford is raising taxes at a time when everyone is struggling with making ends meet. This can only fuel a tax revolt.

There are tax cap referendums in Nevada and Florida, where the people have also had enough of the endless tax increases with little to show for all the money those states are collecting.

Even here in New Hampshire the taxpayers have watched the state legislature boost spending by 17.5% while failing to fund the budget increase, seriously inflating revenue estimates to justify the increased spending. The taxpayers aren't in the mood to fund such a bloated budget when they're still dealing with tax increases in their own towns and cities.

The conditions for a tax revolt are ripe. And it's about time the tax-and-spend politicians from both parties realize that...or they may need to start looking for new jobs after November.

Over the past few years I've come to loath the term "fair share", particularly when it comes to income taxes. Both Democrats and Republicans have used this term, though it means different things to each party. Partisan kind of guy I am, I'm going to focus more the Democrat's definition of the term.

We've been hearing more and more Democratic rhetoric claiming they're going to make sure "the rich" pay their fair share of income taxes. That's all well and good. But what exactly does "fair share" mean? For that fact, what does "the rich" mean? First, let's take a look at what the rich are paying in income taxes.

...the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.

So the top 10% earners pay 71% of all income taxes collected and those making less than the median income level only pay 2.9%. The only way taxes on "the rich" could be increased without having an adverse effect on the economy is to redefine "the rich" as anyone with a job. Or maybe the plan is to create a confiscatory tax plan to soak even more capital out of the economy. That will work, right?

It's been tried in other countries before and all it managed to do was cause a flight of capital and a major downturn in their economies. Just ask the British what their economy was like in the late 70's into the late 80's. Top tax rates were 98% and everyone with money found ways to move it out of the UK in order to prevent the government from confiscating their wealth. The economy collapsed, the jobless rate rose to levels not seen since the Great Depression, factories closed, and countless people were forced onto welfare.

One of the biggest problems I've found most Democrats wishing higher tax rates tend to have is that they believe the myth that wealth is a zero sum condition, that wealth is finite. If someone got richer it must be because someone else became poorer, as if the rich stole it from the poor. That may have been true when wealth was based upon the possession of precious metals and other limited specie. However, those days are long gone. That still doesn't stop them from wanting to "take it back" and return it to the people from whom the rich supposedly stole it.

Wealth is something that can expand to include more and more people, lifting everyone out of poverty. Or it is something that can be taken away by the state, reducing everyone to a state of poverty. (At times I wonder if that's exactly what the Democrats want. If nothing else it gives the government total control over everyone's lives. Their philosophy seems to be that government is the answer to all problems, even the ones that government cause. It's a shame that government is so clueless and stupid, incapable of running anyone's life better than people can run their own. We've seen enough examples of that throughout history.)

In any case, the claim that the rich aren't paying their fair share is correct. I won't disagree with that statement because it's true. That's because the rich are paying more than their fair share. Even the IRS says so. They shouldn't be penalized by being forced to pay even more based upon the ignorance of those in Congress and those seeking even higher office.

Note: I actually wrote this Monday night, saved it, but never posted it. I guess I could blame a mind half-asleep.