I’m all for putting money into the pockets of working class folks. And quite frankly I’m less than enthused about the ponzi scheme known as social security. The payroll tax holiday basically proves that social security is a ponzi scheme. For a year now, taxpayers have contributed less FICA tax to their social security accounts. Yet, current recipients continue to receive benefits at the same rate, and those taking advantage have not yet been told that this “holiday” means either that their social security checks will be smaller when they retire, or that social security as it is currently envisions will collapse under its own weight. The Machiavelli in me sees this “holiday” as an opportunity to speed up the social security collapse for those inclined to do away with it in its current form. The realist in me sees this as another blundering move without an eye on the long term effects of such a social security contribution holiday. Note also that the holiday suddenly is from a “tax” instead of a “contribution”. Are democrats adopting republican lingo? I would have preferred that Congress cut the income tax rate, but oops lower middle class people don’t pay income taxes. So, the only way to give them cash is to take it out of their retirement checks. Sooner or later, we’ll all have to pay the piper for this holiday. To put dollars on this. Let’s say a guy makes $40,000 per year and is 30 years old. This “holiday” means that about $2,000 is not contributed to his social security account. That means when he retires he will have $4,160 less in his social security trust fund when he reaches age 65 assuming a 3% interest rate. Thus, 35 years from now, theoretically his benefits will be cut by $23/month. But of course that won’t happen.
5 Common Mistakes by New Businesses- Part 1
Joe starts Barco, a new dog food company. Someone tells him he should incorporate to avoid liability. So, he does that under the laws of his state in January. He makes a profit the first year of $100,000. At that point, he goes to his accountant and says, “gee, you should have been a subchapter S corporation. You could have saved $15,000 in taxes”. “How do I do that?” Joe asks. You had to file a Form 2553 within 75 days of when you started your business with the IRS. I can see if I can get relief for that, but, I’m not certain its going to work. Had he filed that one simple form he would have saved $15,000 that first year and been able to plan other things as well. This is Mistake Number 1 of start-up businesses.
IN HONOR OF LABOR DAY – JOBS
How do you create jobs in America. Perhaps a start would be to look at the tax code. Since we have been legislating behavior for years in the Code, we can use it to stimulate the economy by targeting a specific problem, unemployment. So, how do we do that? First, our manufacturing sector is about down to scraps. Add in a targeted jobs tax credit for manufacturers. That gives companies an incentive to hire employees in the manufacturing arena and to potentially expand operations back in the states. Second, we need new products and we have an R&D credit, but lets put a real bounty on these green technology things. You get a bonus R&D credit for develop an automobile engine that does not run on carbons the fuel source is either renewable, perpetual or easily obtainable. Doing this would give the Fords, Chyslers and GMs a bonus incentive to develop engines which really will remove our dependence on oil and reduce carbon emissions. Stimulating the housing market is important. A quick way to do so is to ditch the passive loss rules. That way, if you buy a rental property and have a negative cash flow, you get to reduce your taxes even if you make a lot of money. This will increase available rental properties, effectively lower rental rates and will soak up the foreclosed homes and bank inventories. It will also give people incentive to develop real estate again and perhaps get the housing sector jump started. Will this work? It worked in 1981 when Reagan took office. He then reigned it in in 1989 causing a recession of sorts, but if there was a known sundown date on the benefits, people could choose what to do. Lastly, if you’re really serious about jobs, you cut the corporate tax rate to 5 percent and raise the dividend rate back to normal levels. If you do this, its revenue neutral and companies will have the incentive to repatriate dollars and perhaps jobs to the United States from tax advantaged places like Ireland. I doubt that our President will go that way. But this would be a recipe to increase jobs in America that has worked. The Great Depression ended pretty much only because World War II broke out and all industry was nationalized for the war effort. I don’t think that is an appropriate option at this time to help the economy. All the CCC projects did nothing to really stop the depression except to put a few dollars in a few pockets. Just to put an asterisk on this, consider that during the Great Depression, we also had the Dust Bowl phenomenon. Our midwest is not far from that these days. If our agricultural sector breaks down our economy could sink much further much faster. So, its time for some bold action.
Sin Taxes
I discovered that its against the law in certain Northern Virginia counties to possess more than six cartons of cigarettes without paying taxes on them. So far so good. But what happens when you pay taxes in one county at purchase equal to the taxes to be collected in the county that you live. What do you do? Stay tuned.
America’s Debt Bomb
Back in the 1950’s social policy became tax policy. Things like mortgage interest deductions and real estate tax deductions crept into the Tax Code as home ownership became a national policy. Over the years, special interest groups carved out perks for themselves. R&D, Railroad capital improvements, rapid amortization, and deficits started cropping up. Because all of these things are in the Code, it became a real tough exercise for Congress to balance the budget. There was no simple formula for raising revenue and no simple formula for cutting spending. As a result, deficits grew and grew. And each perk in the Tax Code and each perk in the spending side became part of society in the United States. Now our credit has been downgraded because the President and Congress did not listen to debt ratings services or as it turns out to the Tea Partiers who were villified for raising the question. So, what needs to be done. First with regard to Tax reform, a part of tax policy needs to be a reduction of deductions and credits with a massive rate reduction. That way, when receipts are down, then increasing income comes from increasing rates and its transparent. County governments have to do that all the time with real estate taxes. You can put in a simple Earned income credit for low income workers to deal with their situation, but not a refundable credit for monies not withheld. That’s welfare via Tax Code. On the expenditure side, we need to look at entitlements and delay benefits to a later age. Social Security was built on the theory that people died at age 67. Medical science and medicare have driven that up to 79.5. That means that 12 extra years of benefits are being paid without a corresponding increase in contributions. Increasing contributions is not going to happen since that tax is a regressive tax (a flat tax). So, delaying benefits or needs testing them is the next alternative.