Tuesday, November 30, 2010

Tax Deduction or Tax Credit (Refundable)

I love thinking in terms of “The Most Harm to the Most People” – it introduces an “outside of the box” viewpoint for governmental and political decisions.

Consider a Tax Deduction: You earn money and deduct something against it – paying taxes on whatever is left.  If you pay no taxes, a deduction has no effect.

Who pays no taxes?  Those who don’t earn anything; those who don’t earn enough (reach an arbitrary minimum amount required to trigger tax responsibility); those who are deliberately avoiding taxes by “flying under the radar” and operating within an “underground economy”; those who are outright criminals.  Keep in mind: Filing a false tax return, or failure to file, is a crime.  Also, voluntary participation is the most efficient form of economic redistribution – either: willing participants ensuring the social welfare of their neighbors, or dominant classes finding a covert means to defraud their neighbors.  When originally proposed, Social Security was intended to be an additional tax which (1) people would be happy to pay, and (2) they would never benefit from (get their money back from) – which is why the age was set to 65 at a time when half the world population was dead before they reached the age of 35.

In the matter of Deduction verse Credit, those who pay taxes at the HIGHEST rate gain the greatest benefit from a tax deduction – therefore we can expect the ruling elite to favor tax deductions, and that those deductions will comport with the usual expenses common to the elite.  As the elite have fewer children, they would NOT favor increasing that deduction to reflect real costs.  The elite buy expensive homes and subsidize them through mortgages on which the interest is deductible – a thirty-five percent tax rate reduces a ten percent mortgage rate to 6.5 percent (other taxpayers, the poor and middle-class, pay the difference through an effective increase in their taxes).  If the elite can earn seven percent on the borrowed money (that is, the money they have invested which could have been used, without affecting their lifestyle, to pay cash for the home) they are actually earning a profit while enjoying their home.  Most investors look for a return-on-investment which is three points ABOVE mortgage rates – they seek a return which includes compensation for the historic rate of inflation.

Looking at the example of a ten percent mortgage rate: The rate of return sought would be thirteen percent; they earn $13 on every hundred borrowed, deduct $10, which saves $3.5 (paying net $6.5 from earnings) and get an additional net of $2 from the inflation return adjustment.  Thus, the true interest on the mortgage is 10-2-6.5 or $1.5.  If the investment (stock value, etc) increases at inflation, it yields an unrealized, and compounded, gain of $3 per year – a real profit of $1.5 per year in the first year which is compounded every year thereafter for the life of the mortgage and then,  when the mortgage is paid off, yields an INFLATION ADJUSTED mortgage interest amount as profit thereafter.

If you have no cash reserve to invest in place of using the funds for the outright purchase of your home, or your income is insufficient to require payment of taxes, a tax deduction serves no purpose – yields no economic benefit.  With a graduated income tax, each deduction adds to a cumulative reduction of gross income and therefore has the effect of reducing both the applied tax rate and income to which it is applied.  This introduces a quadratic equation effect into the analysis which escapes easy description – however, the effect is to increase the subsidy to rich along a bell curve at which the peak is the optimum level of compensatory investment.  There is a point at which the benefits granted to the wealthy are counter productive – top down stimulation does not work to generate economic growth, when the wealthy are already at, or have retraced over, the optimal point.

On the other hand, refundable tax credits work from the bottom up.  They subsidize the poor, while  yielding an equal dollar-for-dollar benefit to the wealthy.  Universal Healthcare is a form of credit which only hurts the private insurance companies who benefit from the same demographic effects which motivated the Kaiser to introduce the original Social Security – all insurance is something the majority are not intended to benefit from.  Note that the wealthy oppose Universal Healthcare – the cost of private care is the same for rich & poor therefore the poor pay more of their real income for it ... it is, like tax deductions, regressive – benefitting the rich while increasing the cost to the poor.

NOTE: You will not see this in the media.  At best, there is a passing reference to it.  The members of the mainstream media are in the income brackets which benefit from regressive programs and therefore will not play their proper role of informing the masses of the realities of a situation.  In fact, they will often find secondary excuses to oppose any politician who speaks for credits.  If not for the leverage (borrowing to invest) aspect in the above mortgage example, insurance companies would promote refundable credits for Healthcare and other insurance payments – this would open their customer base.  However, in terms of most non-age based insurance, the poorer the person the more likely it is that they would require payments and therefore reduce insurer profits.

Tax CREDIT – especially refundable ones – are the most socially responsible approach to taxation.  The framers of the constitution determined that those who could afford property should pay taxes – all others should be exempt.  They also determined the tax rate should be fixed and therefore progressive in the amount paid – based upon the voluntary choice of the wealthy to acquire additional taxable property.  We have a system which pays the wealthy to increase their income – by increasing the burden on the less wealthy.  This is the essence of “The Most Harm to the Most People” – the elite few benefit by inflicting hardship on a less fortunate majority.

Those who care about their neighbors; those who honor the Golden Rule; those who will do for others as they would hope others would do for them, if roles were reversed, favor refundable credits and oppose deductions.  The side benefit of this is to make it more costly to partake in criminal activity or an underground economy – because any attempt to collect the credit would expose the filer to an audit, and provide law enforcement with an additional tool in the war on drugs or other criminal activity (through granting access via another enforcement agency).

Friday, November 26, 2010

ALL STATE INSURANCE targets dummies.

I remember a Johnny Carson show … where comments were made about “The Good Hands People” and how they failed their responsibilities to customers.

That goes back a ways…. but some things never change.

I’ve been watching an inordinate amount of TV … and seeing a wealth of the  current Alls State commercials … the ones that describe your teenage son as a self-absorbed dimwit who will destroy your property.  Given the apple doesn’t fall far from the tree, their target audience is IDIOT PARENTS … like you.

Then there are the commercials about deep fried turkey … and burning the house down.  Once again, obvious focus on incompetent idiots … which, again, tells us their target client.

The deer hitting the car – hold it, that’s car hitting the deer that’s just standing there … driver too dumb to hi the breaks or swerve out of the way … YEP!  All State is targeting the idiots.  The ones that will need insurance and, because it is clearly their fault, will NOT be able to collect.

There is a good reason NOT to utilize an insurance company whose unwillingness to honor claims dates to the early days of Johnny Carson & the Tonight Show.  Especially one which apparently overcharges for their policies (or they would emphasize low rates and fast claims adjustment – rather than your stupidity and the stupidity of your kids).

Prove you are the idiot All State is targeting … become a client. 

Wednesday, November 10, 2010

It’s Demographics -- STUPID

Politicians have taken credit for demographics, and, as I have mentioned before, they prefer to ignore demographic realities now.  Case in point: the realization that the Bush Tax Cuts did nothing to improve employment and job creation – as shown in these Bureau of Labor Statistics:

Number of Jobs Added [millions]
Bush, Feb. 2001- Jan. 2009: 1.1
Clinton, Feb. 1993- Jan. 2001: 22.7
Reagan/Bush, I Feb. 1981- Jan. 1993: 18.7
Carter, Feb. 1976- Jan. 1981:10.3
Nixon/Ford, Feb. 1969- Jan. 1976: 11.3
Kennedy/Johnson, Feb. 1961- Jan. 1969: 15.7
Source: Bureau of Labor Statistics, Seasonally Adjusted Nonfarm Payrolls

We all know about the baby boom, baby bust and related realities – but when was the last time they were a part of the Political Economic dialogue?

The Baby boom is the post WW2 period defined by the years between 1945 and 1966.  That is, in 2011, those who are between the ages of 45 and 65.  That is, we are discussing the Social Security shock which Bush 43 loved to rant about – the people he wanted to privatize so their savings would be destroyed by the current economic downturn which he caused. It is fortunate that the nation – THE DEMOCRATS didn’t buy into Bush’s stupidity. … But that’s another previously discussed issue.

The current discussion is about those job creation figures.  Let’s express them in terms of Baby Boom ages.

Number of Jobs Added [millions] by age of Baby Boom starting with the Vietnam era:
- Kennedy/Johnson, Boom in Progress and five years to go - 23: 15.7 new jobs added
Those who haven’t been drafted, or who have served, are now entering the job market.  The draft for Viet Nam actually served to slow the necessity for job creation – military aren’t counted, and many headed to college to avoid the draft & hence never entered the job market, thus no pressure for job creation.

- Nixon/Ford, Boomers are 3 - 30: 11.3 new jobs added as the Viet Nam era slows and some returning military transition into college where they join those who already entered, or are prepared to enter.

- Carter, Boomers are 10 - 35: 10.3 new jobs added …with the baby boom employed and starting families, in college or still in grade school.
- Reagan/Bush(41), Boomers are 15 - 47: 18.7 new jobs added … The bulk of the baby boom, the statistical hump, enters the work force and are employed created by the boomers who came before them.
- Clinton, Boomers are 27 - 55: 22.7 new jobs added … NOW we have the baby boom out of college (even those who when for PhD’s are in job market). The baby boomers are working, spending, and a baby bust has begun – with the resulting increase in discretionary income to squander.

- Bush(43), Boomers are 35 – 63 (working and retirement vested) : 1.1 new jobs added … Gee, retirement is a reality for the majority of the Boomers.  Need to put money aside in those last 20 years before Social Security … some have even opted for early SSI retirement at 62, or have retired at 55 (as teachers and others serving the younger Boomers – through choice or having accepted early retirement packages).

NOW REALITY SET IN.  Under Reagan/Bush America turned anti-immigrant.  There are no workers entering the economy seeking employment and those in the system are retiring and the nature of the remaining jobs has changed.  Consumer products are now imported – hence no  need for a domestic work force and therefore job creation is contracting to meet available workforce requirements.

This is where we return to “COLA” Cost of living adjustments for Social Security recipients.  We are seeing a GOP move, being considered by the Obama Whitehouse, to reduce the income needed to feed the economy … which is to say, the income that goes to the Baby Boomers who are now retiring as they turn 65.  This is a process which will continue for the next twenty years and which will peak within the next ten years.  Deprive COLA and surplus money to retirees within that period and the economy will collapse.  Pay attention to giving SSI recipients basic funds for the next twenty years, and a new generation will emerge that will carry the country forward with higher incomes and achievements.

One other reality which you’ve read here before: DO NOT LOOK TO NEW CONSTRUCTION as a measure of economic growth!   That worked until Reagan/Bush and even into Clinton, but there are no people to buy homes – the resale and renovation markets are going to prevail over the next decade.  After that, the Baby Boomers will be dying off and the housing markets will be glutted – housing prices will fall for structures that are not energy efficient and convenient to necessary services.  That house in the country will become very very cheap.  More so because there will be no young families, no schools – because we are in a baby bust.

In case you missed the point: Those born between 1967 and 1987 are NOT going to need to buy retirement homes. They will inherit them!