Don't Quit Your Day Job: The Intersection of Personal Finance, Economics, and Politics.
Well, glad that Fiscal Cliff thing is over. Seriously – we sweated a crisis that was created by politicians, that politicians are now happy they averted. Consider that! Dividend Cliff… Kind of Averted Since most of you readers are also avid investors (check out our stock picks for 2013, and our solid S&P 500 beating [...]
Have you ever seen an election season so dedicated to the intricacies of taxes? Mitt Romney must be glad he paid accountants to run the numbers, since just 4 years ago I seem to recalls number of issues with TurboTax. So yes, I’ve never heard this much ranting and raving about taxes, even though the last time a very rich person from Massachusetts ran for President there were many similarities. So, let’s talk a little bit about two different things – ‘Marginal’ rates and ‘Effective’ rates.
Subtitle: Until You Read This Article.
I’m not one for hyperbole… I’m more of a “here’s the data, deal with it” person, but I’ll make a vast blanket statement for you today. You see, you may not care too much either way about the whole ‘fiscal cliff’ scenario, where an expiration of the so-called ‘Bush Tax Cuts’ of 2001 and 2003 would reset to their previous levels. Perhaps you make under $200,000 as a single or $250,000 as a couple, so if the cuts expire and President Obama extends them in a second term you wouldn’t worry too much. Fine – I won’t spend this article discussing what the appropriate level of taxation is for the many strata of incomes earned in this country. However, I do want to draw your attention to the insidious effect of rolling back the 2001/3 cuts – namely, how the code characterizes dividends.
It has been mentioned here and elsewhere that the mortgage interest deduction in the tax code is a roundabout way of subsidizing banks. If interest rates are determined by supply and demand then the demand for interest rates is only dependent on what a taxpayer’s “effective interest expense is”. A new study suggests that most of the benefits fall into the hands of lenders.
Our tax visualization last time was interesting, but this one might convey more data. Once again, or source for tax data is the IRS’s publication 2010 Data Book. Just like last time, note these are tax collections, and the IRS annual year ends in September. True revenue is after all refunds and credits are finalized, but this data is interesting to see the amount of tax collected – and how it makes it’s way to Uncle Sam.
Been reading DQYDJ for a while? Good. You know that looking at data from a different angle yields very interesting insights.
Here’s one interesting thing: the federal income tax code benefits 18 to 35 year olds at the expense of 45 to 65 year olds. How do I figure? The IRS helpfully posted data for 2009 (links are xls files) on both the amount of income made by age group and the amount of Federal income taxes paid after credits. So, should the Silent Generation and Baby Boom Generation be mad at Generations X and Y? Partially! Read on.
“In this world nothing can be said to be certain, except death and taxes.” – Benjamin Franklin
What is less certain is what those taxes will be called – the tax code continues to get more and more complex every year. The IRS puts out a data report annually about their fiscal year which includes tax collections by the type of tax (Table 6). These numbers are not the final numbers – those numbers are arrived at once all credits and refunds are complete. However, the chart that results is instructive, and it allows us to visualize how the tax code has change over the years to collect revenue from the country in different ways.
In the chart that follows, you can turn off individual categories so you can see how individual categories stack up. Note the relative size of the estate and gift taxes. For the amount of interest they receive, they are an insignificant portion of total tax collections.
Sorry to miss the news cycle (I bought a house, as I alluded I might in my slightly pessimistic earlier real estate postings), but I wanted to share the perfect example of the incentives and disincentives of tax laws. As predicted a while ago, California finally passed a law which stated that any out of state businesses which had affiliates in California would have to collect taxes when consumers in California purchased goods from the mother company. A few other states have already passed similar laws, nicknamed ‘Amazon Taxes’. Overstock.com and Amazon.com (disclosure: this site was technically an Amazon affiliate) immediately announced plans to cut off California affiliates.
Here at DQYDJ, we like to write about things that have unintended consequences – a perfect example is the Alternative Minimum Tax, which was intended to stop the very rich from having a 0% tax rate. Of course, since that tax was not indexed for inflation, it has creeped its way into the middle class’s check book. Today we’ll link you to an article on another distortion of the AMT – deepening the “Marriage Penalty”, a situation where two singles would be better off, tax-wise, staying single as opposed to marrying.
