Chemo Now or Surgery Later?

The news today (6/28/10) says that the G-20 rejected the proposal by Obama and some of the G-20 member countries to expand the stimulus program with more borrowed or printed money. Spokespersons in favor of the stimulus plan are arguing that this will result in an extended recession (or worse) and more unemployment.

O.K. Of course it will cause financial pain to stop throwing new money at the problem.

But what's the alternative? More false prosperity for another year or two or even three years? And with each trillion of new money creation or expanded borrowing, the problem gets worse.

Seems to me it's lot like having to decide whether to submit yourself to chemo therapy treatment for cancer now, rather than having to endure severe surgery later on. In a financial context, it's a lot like individuals who have to choose between cutting up their credit cards now or be faced with bankruptcy a few years later.

Most of us prefer to avoid pain as long as possible, but sometimes, the longer we wait, the worse the pain will be. And in some cases, the result is devastating rather than being merely painful.

Just my two cents.

Vern

www.vernonjacobs.com

Average Tax Rates and Marginal Rates

When people complain about high tax rates they are usually objecting to marginal tax rates.

When politicians argue that taxes are low they are usually talking about average income tax rates.

A marginal rate is the rate that determines the amount of tax on some increment of taxable income. Most people refer to this as the top tax bracket, but that generally only refers to federal income taxes. The marginal tax rate includes Social Security taxes and state income taxes. People make financial decisions based on the marginal tax rate that will affect the outcome of a particular decision.

A single self employed taxpayer in 2010 with a total income of $75,000 and who uses the standard deduction will be subject to a marginal federal tax rate of 25%. If s/he lives in a high tax state like California, the marginal state income tax rate might be as much as 10%. The tax rate on self employment income is 15.3%, but there is a deduction that is allowed for 50% of that tax, which reduces the federal income tax. That represents a savings of 25% times 15.3% or 3.825%. So the combined marginal tax rate on an additional $100 of self employment income would be about 46.5%.

However, if you compute the actual tax based on the multiple tax brackets for the federal and state taxes, and then add the net self employment tax, the total Federal income tax might be about $11,200. The Self Employment tax would be $11,475 and the state income tax might be $6,000. The total actual tax would be about $28,675. When you divide that by the total income of $75,000, the average tax rate is 38.23%.

For a single taxpayer who makes $50,000 of interest income and has no other income or deductions, his marginal federal income tax rate would be 25% and his state income tax rate in a high tax state might be 7% -- for a total of 32%. (The self employment tax would not apply.) But if you compute the actual tax for this person, the average tax rate would be about 18% instead of 32%.

In addition to distorting the argument with average tax rates, the politicians include the non-paying taxpayers in their calculations. Roughly half of the families in the U.S. do not pay any federal or state income taxes. If the average rate for those who do pay taxes in 20% and only half the families pay income taxes, the politician will tell us that the average income tax per family is only 10%. But the marginal rate for many of the families that do pay taxes and that are also paying the self employment tax may be closer to 50%.

Vern

www.veronjacobs.com

The Real Price of Freedom

For the past six months, I've been reading a lot more books about the issues of the day. A few of the more recent books include

The Road to Serfdom by F.A. Hayek

To Save America by New Gingrich

What's So Great About America? by Dinesh D'Souza

Glenn Beck's Common Sense by Glenn Beck

Drill Here; Drill Now; Pay Less by Newt Gingrich

Myths, Lies and Downright Stupidity by John Stossel

Partly, I've been reading these books for insight into the motivations of the far left, or the "Secular-Socialist Machine" as Gingrich calls it. In spite of abundant evidence that more government simply creates more problems and that Socialism is a flawed approach to governing, the far left has been bull-dozing the legislative landscape with highly Socialist laws that a substantial majority of Americans have clearly said they don't want. In spite of numerous books and articles that demonstrate serious flaws in these proposed laws, the far left is aggressively moving to impose a much bigger government on us.

They claim to be non-partisan, but can't get the support of a single Republican for many of their bills and ram those bills through Congress with deceit and bribery. They blatantly lie to us about cutting taxes, reducing government, dealing with illegal immigration, protecting the environment and much more. They use offshore tax havens and our multi-national corporations as scapegoats for not being able to collect more taxes when the taxes that are collected are being grossly wasted. They talk about energy independence but refuse to utilize any of the effective sources of energy that we already have.

I have finally come to understand that the far left is not motivated by seeking to solve problems.

Their motivation is simply to secure raw and unlimited power.

While it defies common sense, they are intentionally destroying the economy of the U.S. so that all but a tiny fraction of the populace will come meekly like cows and pigs to the government feeding trough. Why? Because that's the only way they can sustain their positions of power. They prefer to be masters of a devastated economy than to be free members of a society of merit and ability. Many of them can't or won't compete in a free market and seek to establish an alternative universe of idealistic equality for all -- except for the leaders of course.

They are supported by a diverse collection of special interest groups, each of which participates in the plunder of the income and property of the people in order to secure political support for narrow and self-serving purposes. The unions seek government help to pass laws that give the unions more power over the workers and employers. The environmentalists want the government to pass laws that devastate the principle of private property and deceive us with false science about global warming. Some farmers support the far left in order to continue their generous farm subsidies. Nonprofit organizations support the far left because of generous grants and tax laws that virtually mandate that wealthy persons leave a large part of their estates to charity. They are supported by academia in exchange for subsidies, influence and even power. And the national media supports them because they seem to believe the Utopian fairy tales about the great benefits of economic equality. Also, the media owners generate a huge amount of ad revenue every two years and many of the largest media are owned by persons of far left persuasion. Even large businesses support the agenda of the far left in exchange for laws that make it extremely difficult for smaller businesses to compete.

And a lot of the people who advocate policies of the far left are highly idealistic and have little interest in such mundane subjects as economics or taxes. In fact, many of them openly disdain the merits of discussing such topics. They simply refuse to discuss why Keynes' theories are false, why lower tax rates produce more tax revenue, how the government causes inflation with the help of the Federal Reserve or why a free market provides the greatest benefit to the poor.

Then there are the younger voters who have limited experience with life and have been supported for 25 or more years by their parents. Despite protests of wanting to be independent, they have a basic belief in the nanny state. Finally, there are the people who truly believe that they know what is best for everyone else and are entirely willing to support laws that impose their views on everyone else.

That's just a sampling of the varied special interest groups that provide financial and political support for the far left.

The prospect of resisting the supporters of the far left seems nearly impossible.

Advocates of freedom are vilified by the far left and get little sympathy from family or even from some friends.

Those who like the status quo are generally those who are getting a substantial benefit of some kind from government. And there are a lot of us who would encounter financial difficulty if there was a dramatic change toward less government. Employees of the federal and state government and their families worry about how they will be able to live if their government agency is closed or drastically reduced in size. Retirees worry about how they will be able to afford health care and whether they can get by without Social Security, Medicare or Medicaid. Union members worry about losing the power of the government to give them leverage over large employers. Contractors who do work for the government worry about their livelihood. Farmers worry about their subsidies. Academia worries about their government research grants. And the large number of people who get some kind of subsidy like low income housing, food stamps, school lunches and a host of other benefits worry about whether they can really afford a smaller government.

So it seems that the real price of freedom is the willingness to give up our respective government subsidies based on a faith that freedom is worth it and that greater prosperity will come from a much smaller government.

Either we have faith in the false promise of equality for all or we have faith in the benefits of a free market, private property, honest money and limited government.

What sort of government funded financial aid do you receive or expect to receive?

Can you live without that support? Is freedom worth it for you?

Before you say "No", read Newt Gingrich's book, "To Save America" and get a copy of The Road to Serfdom by F.S. Hayek.

If we are not willing to be independent of the government, we will soon be little more than the tame pigs and the cows that are used as meat for the owners.

Vern

http://www.offshorepress.com/liberty/

Do T.I.P.S. Really Make Sense?

One of the solutions that is often offered for those who are concerned about inflation is to invest in Treasury Inflation Protected Securities or TIPS.

But for those who accept the logic of the Austrian School of economics, inflation is caused by an expansion of the money supply by the Fed's purchase of otherwise unmarketable U.S. debt securities.

So if we are concerned about inflation arising from recent legislation that will require a huge amount of deficit spending, does it really make sense to invest in government debt that promises to keep up with the inflation that is caused by that same government?

Also, there is a lot of plausible information to support the view that the inflation index that is managed by the government is about 50% of the real rate of inflation. For more about that subject see Shadow Stats.

What kind of investments do keep up with inflation? Think about a combination of precious metals, commodities, short term debt, a paid off residence, tangible things like guns, ammunition and generators.

Can you make a profit by building up a lot of debt during the current recession and then paying off that debt with cheaper (inflated) dollars? Perhaps, but the lenders are also aware of possible future inflation and will be raising rates in anticipation of future inflation. So the question is, can you outsmart the bankers on the timing of future inflation? And can you invest that borrowed money to make an after tax return in excess of the inflation rate?

Vern

www.vernonjacobs.com

Are Taxes a Moral Obligation?

Morality has been defined as "a system of conduct and ethics that is virtuous." It has also been described as being good or doing right. Because rights can not exist without a commensurate duty, morality could also be described as accepting a duty to satisfy the rights of others to "life, liberty and the pursuit of happiness". From a Judea/Christian perspective, it could be described as striving to satisfy the laws of the "Ten Commandments".

So in this context, is it immoral to avoid taxes by using loopholes within the law?

There is clearly an obligation of a voluntary citizen or resident of a country to either accept the duties imposed by that country or to find another country with duties that are more tolerable.

So one way to address the question of whether paying taxes is a moral obligation is to decide if there is a contract of sorts. Some people might call it a "social contract:". But a social contract implies that there is freedom to choose. However, the U.S. tax system does not offer a choice; which is in contrast to the tax systems of most other major countries.

Unlike most countries of the world, the U.S. imposes an income tax on its citizens or permanent residents regardless of where they reside or for how long. A person can become a U.S. citizen by the accident of birth and can be subject to the U.S. tax laws even if they reside outside the U.S. for most of their adult lifetimes.

If citizens or long term residents could simply move and thereby avoid the burden of U.S. taxes, there could be an implied social contract. So long as someone chooses to reside in the U.S. and so long as they are free to leave without penalty, there is an implied contract.

But since June, 2009 it is not possible for everyone to leave without having to pay some kind of "exit tax". This is a tax on what the tax law determines to be unrealized gains and deferred income. It's as if a citizen were required to sell every asset, compute any gain (or loss) and to compute the income tax on that gain. In addition to paying a tax on any assets as if they were sold at a gain, the person who wants to leave is required to pay taxes on any deferred income -- such as retirement savings accounts or section 529 education savings plans. (This commentary intentionally avoids delving into the arcane details of the exit tax.)

Admittedly, the exit tax does permit citizens or residents with a net worth of less than $2 million, who comply with some time consuming reporting requirements, to give up their citizenship or resident status without owing any exit tax. But the $2 million is not indexed for inflation and as time goes on, this limit will apply to more and more people who might prefer to leave.

And the often stated argument that the U.S. income tax system is voluntary is clearly "b.s." as every citizen and resident is aware. We are required by the law to file income tax returns and if we do not, there are increasingly harsh penalties for different degrees of non-compliance. In a few extreme cases where someone simply refuses to pay income taxes they can be incarcerated. If they resist with force, they could be severely injured or even killed by the authorities.

So there is little justification to argue that the income tax is a moral obligation arising from a social contract.

Instead, it is an extraction of the earnings of the citizens and residents that is enforced by any necessary means.

Also, a moral obligation implies that there is a clear and simple way to satisfy the duty -- usually by simply refraining from some conduct that is injurious to others. There is nothing simple or clear about the U.S. income tax. And it's not about refraining from causing harm to others. It's about causing harm to ourselves and our dependents without any real limit except for the terms of the law at any given point in time.

Thus, it comes down to the law.

We obey the law because there are always significant consequences for failing to do so. The income tax laws include a mind-boggling assortment of penalties for non-compliance and some of the penalties are out of all proportion to the failure to comply. So we pay the amount of taxes that the law requires in order to avoid painful sanctions.

And to the extent that the law permits or even encourages us to engage in politically favored behavior, we can often reduce our tax burden. We can get an $8,000 tax credit for buying a new home. We can get up to $250,000 of tax free gain from the sale of a home. The interest on state and municipal bonds is exempt from the federal income tax. Retirement savings are tax deferred. There are a huge assortment of tax incentives to produce or to purchase various energy saving products. Some expenditures are deductible. Others are not. The tax law is reputed to include nearly 3.5 million words, which would equal 10,000 pages of a normal sized letter. The IRS regulations are estimated to be about 3 to 4 times as long.

Complete compliance is virtually impossible even for the most co-operative taxpayers.

Those who argue that paying taxes is a moral duty never explain how much taxes are moral. Should we pay 10% of our income or 25% or 50% or more? How do we measure income? Should we ignore the legal tax incentives, deductions and credits in the law? Is is it immoral to deduct interest on a home mortgage or the fees paid for child support by a working parent?

There is no way to answer the question of how much is a "fair tax" or a moral tax. The only way to determine how much taxes we should pay is to look to the tax law. Our tax liability is determined based on our income and individual circumstances. Hardly any two citizens will ever pay exactly the same amount of income tax. If the law permits the use of a deduction, exclusion, credit or deferral, using it must be regarded as "moral" or at least legal. There is simply no way to determine how much we should each pay as part of the social contract without reference to the monstrous U.S. income tax law.

Vern Jacobs