Relevant and even prescient commentary on news, politics and the economy.

A Couple of Questions for Romney Trustee Brad Malt and Former-IRS-Commissioner-cum-Romney-Testimonial-Provider Fred Goldberg

Between 1990 and 2009, the Romneys’ average annual effective federal tax rate was 20.2 percent, according to [notarized tax return summaries by Romney trustee Brad] Malt. The lowest effective federal personal tax rate they paid in that period was 13.66 percent, he said.

Over the same 20-year period, the couple gave an average of 13.45 percent of their adjusted gross income to charity.

Fred Goldberg, a former commissioner of the Internal Revenue Service, said in a statement released by Romney’s campaign that the couple “fully satisfied their responsibilities as taxpayers.”

“These returns reflect the complexity of our tax laws and the types of investment activity that I would anticipate for persons in their circumstances,” Goldberg said in the statement. “There is no indication or suggestion of any tax-motivated or aggressive tax planning activities.”

Fred Goldberg, a former commissioner of the Internal Revenue Service, said in a statement released by Romney’s campaign that the couple fully satisfied their responsibilities as taxpayers?  That’s good to know, but the question remains: When, exactly, did they satisfy their responsibilities as taxpayers for the years preceding the 2009 IRS amnesty program for anonymous holders of Swiss (and other foreign) bank account holders?  Might it have been retroactively, like, maybe, in 2009?

And, there is no indication or suggestion of any tax-motivated or aggressive tax planning activities?  That’s good to know, too. But is Goldberg limiting his statement to what Romney revealed in summaries?  Or does Goldberg have privy to the records of the $20 million-to-$102 million IRA account held in a Cayman Islands account?  And to the mysterious fund, or bank account, or whatever, in Bermuda?

Just wondering.  

Malt, by the way, was the trustee of the UBS account that was disclosed in the tax return for 2010. The tax return indicated that Malt had closed the account in early 2010.

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Individualism vs. Collectivism: Thanks For the Ammunition, Ann

Ann Romney said in an interview airing Wednesday that her husband has no plans to release additional tax returns, saying “it’ll just give them more ammunition” and insisting that “there’s nothing we’re hiding.”

“We have been very transparent to what’s legally required of us. But the more we release, the more we get attacked, the more we get questioned, the more we get pushed. And so we have done what’s legally required and there’s going to be no more, there’s going to be no more tax releases given,” she said in the interview by NBC News. “And there’s a reason for that, and that’s because of how, what happens as soon as we release anything.”

Romney is releasing two years of his tax returns. Democrats have said what’s he hiding and demanded he make public the last 10 years or more.

Ann Romney also defended Romney’s character and said the “only reason we don’t disclose more is we’ll just become a bigger target.”

“Mitt’s financial disclosures when he was governor are huge if people want to really look and see any question they have,” she said. “The other thing they have to understand is that Mitt is as honest — his integrity is just golden. We pay our taxes, we are absolutely — beyond paying our taxes we also give 10 percent of our income to charity.”

She also said that the couple has had a blind trust since 2002 before Romney was governor and that they don’t know what’s in it.

“There’s nothing we’re hiding,” she said, later adding: “I’ll be curious to see what’s in there too.”

            — Ann Romney: No more tax returns, Tomer Ovadia, Politico, today

An article published recently by James B. Stewart in the New York Times titled In Superrich, Clues to What Might Be in Romney’s Returns, overlooked because it was published on Saturday, the day on which Romney made his Ryan announcement, explains that 2008 and 2009 were banner tax-break years for a large number of very wealthy people whose main or entire source of income comes from stock dividends and the sale of securities. 

The occasion for the article was the IRS’s release last week of “data from the 400 individual income tax returns reporting the highest adjusted gross income, writes Stewart. “This elite ultrarich group,” he says, “earned on average $202 million in 2009, the latest year available.  And buried in the data is the startling disclosure that six of the 400 paid no federal income tax.”

Which suggestions the likelihood that the Romneys paid no, or almost no, income taxes for 2008 and 2009. 

It does not take a math genius or a tax expert to recognize this.  That’s good, because I am neither.  But I am good enough in math (if barely) to know that 2006, the last year of Romney’s term as governor, ended before 2008 began. 

And, thanks to the Romney tax-returns controversy, I know that in 2009 the Department of Justice entered into an agreement with UBS, Switzerland’s largest bank, and other Swiss banks, in which the banks agreed to disclose to the U.S. government the identities of American holders of Swiss bank accounts, and that approximately 34,000 Americans took advantage of an amnesty program that the IRS and Justice Department offered, by which voluntary payment of back taxes and interest and penalties would remove criminal liability and public disclosure. 

And I have followed the Romney tax story closely enough during the last few months to know that the Romneys’ 2010 tax returns revealed a bank account with UBS, apparently opened in 2003, was closed sometime during that year and had $3 million in it when it was closed.  And that, according to news reports, Romney did not disclose this account on his Massachusetts financial-disclosure forms—although, unless my math ability (such as it is) fails me, 2003 ended before early 2007, when Romney’s term as governor ended. 

And that, also according to news reports, the 2010 returns show that the Romneys have a shell corporation in the tax haven of Bermuda into which they apparently were funneling income from overseas Bain investments, and that one day before Romney was sworn in as governor, the corporation’s shares were transferred to Ann Romney, and the corporation was not disclosed on Romney’s Massachusetts financial-disclosure forms.

So, yes, Ann, you’re hiding something.  You’re hiding whatever it is that would give your opponent ammunition, whatever it is that would make your husband a bigger target.  And that ammunition is that, whether or not you and he failed to disclose that Swiss account and any other Swiss accounts you held that were closed before 2010 until a gun was held to your heads in 2009, you and he employed tax loopholes and special tax rates that your husband and (even more so) his running mate plan to expand so as to eliminate the very need for offshore tax shelters.  They plan to make this country an overt tax shelter for the wealthy and, especially, for the very wealthy—that is, for people like you and your husband. They have made that central to their policy plans, while desperately trying to deflect scrutiny of those proposals. 

Stewart writes in his article, “Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.”  Expressly under Paul Ryan’s plan, there will be no income tax at all on capital gains and on dividends.  Every year will be 2008 and 2009 for the Romneys!  Except, of course, for the need for aggressive use of tax-loss carry-forwards, and the like; no more need for that sort of thing.

A lot of eyebrows were raised on Sunday when Ryan, sitting next to Romney in an interview, told Bob Schieffer that he wants to end the tax breaks that apply only to the wealthy.  That’s nice, but of no effect.  A seminal part of his tax-and-budget plan, passed this year by the House, is the elimination of all income taxes on capital gains and dividends.  And although this would mean that many very wealthy people will pay no income taxes or estate taxes, and many other very wealthy people would pay income taxes at a single-digit rate, the elimination of these taxes would apply as well to the non-wealthy who have a capital gain or receive stock dividends, however small.  And so—voila!—Ryan’s statement, made with such earnestness, does not apply to the issue of taxes on capital gains and dividends.  Nor, for that matter, to estate taxes, which his plan entirely eliminates; some non-wealthy people leave small estates, after all.  And semantics is the name of their game, the objective of which is the enabling of ever more vast accumulations of wealth, utterly unfettered by tax obligations.  Pure and simple.

My big fear about the all-Medicare-all-the-time campaign that began last weekend with Romney’s Ryan announcement is that it allows Romney and Ryan to claim the mantle of straight talkers about what they warn is a Medicare-caused fiscal calamity that awaits.  They have yet to explain why, if they fear such a calamity, they propose to reduce federal revenue by trillions of dollars, through their tax-elimination-on-the-wealthy plan.  And when they stress, as they do again and again, that their destroy-Medicare-in-order-to-save-it plan will not end the current program for its current or relatively-imminent recipients (those who are 55 or older), maybe they’ll deign to reveal what programs will be eliminated in order to pay for Medicare for current recipients and baby boomers andand—the trillions-of-dollars tax cuts for the wealthy.

My suggestion: Hurricane disaster relief for the southern Atlantic and Gulf Coast states, which will vote for this ticket en force, and crop insurance and drought disaster relief for the plains states, which will vote for them and their budget plan in almost as large percentages. 

In 2005, Ryan now-famously advised his audience when he addressed an Ayn Rand fan club that they should make no mistake: current politics is a clash between “individualism” and “collectivism.”  And indeed it is.

Now, let’s ensure that the public knows the specifics.  

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Defining Rich VI: 1936 tax tables

Today we are continuing to look at the historical tax tables to see how we viewed and possibly defined rich. I introduced this idea with my post: Defining Rich III.
 
I found a source for all sorts of historical data from the Census Bureau. You can down load it or the better way is to click on the PDF file which brings up the Intro and then click on any of the listings of the table of contents which takes you to that set of PDF data.  For this posting regarding income data I am using this section.
 
The average weekly income for all manufacturing was $22.82 per week on 39.1 hours work. The highest paid was printing/publishing newspapers/periodicals at $35.15 per week on 37 hours work. The lowest was cotton goods at $13.80 per week on 37.5 hours of work.
 
In the non-manufacturing sector the I calculated the average weekly income to be $23.76 on 40.28 hours of work. The highest earnings were electric power/lights manufactured gas at $31.70 per week on 40.2 hours work. The lowest was hotels at $13.97 per week on 48.3 hours of work. For the Walmart greeter retail trade-general merchandising it was $17.51 per week on 40.8 hours work.
 
There were regional differences also. The most glaring is the north/south difference. The hourly wage ranges from 12.5 cents to 19 cents less if you worked in the south. The greatest differences being between the East South Central and the Pacific North.

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Competing GOP Tax proposals Graphic

An organization that is called: American Institute of Certified Tax Coaches has put up a summary graphic of the various tax proposals ofthe GOP candidates. It not only notes the major points of their plans, but what their plans would cost.

It is presented in a sort of game board race layout. The Institute introduces it thusly:

The US tax code is so complexeven those who write the law don’t understand all of it. Infact, few members of Congress prepare their annual tax returnsaccording to a survey by the congressional newspaper, “The Hill.” Politicians cite the complexity of the tax code as the primary reasonleading them to turn to professionals for help. Even theCommissioner of the IRS can’t prepare his own tax returns!

Ask most taxpayers and theyagree our current system is too complicated and unfair. So there’sno easier way for a politician to gain approval than to say thecurrent system should be eliminated.

It’s no surprise theRepublican presidential candidates have come out with somewide-ranging tax proposals. Even deciphering the content ofthese plans can be a challenge, so we took it upon ourselves toidentify how the GOP hopefuls’ differ and just what is in them.

Click on the AICTC link to see their take. The image is too big to post here. (Thanks C & L)

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Defining Rich IV: Corporate vs Personal Tax collection patterns 1934 to present

When I left this series in September, I had introduced the idea of looking at past tax tables as a means of understanding how We the People define rich. One specific note from history was a surcharge on top of themarginal tax rates to pay for the Great One (WWII). Obviously, that aspect of our moral character has gone right out the window.

Also for a brief period (1936 to 1943,on 6 occasions) business paid more of the income tax revenue collected than did people. I also noted that 1983 and 2009 the corporate share of income tax revenue was just over 6% of the totalrevenues (FICA included). Its lowest points. Reagan/Bush II. However, interestingly enough, Bush II did manage to get thecorporate tax collections as a percentage of personal collections(excluding FICA) up to 33.9%! Clinton only managed 26.6% in 1995. The last time we saw a ratio where corporate collections were in the30% range was 1979. In 1959 it was 47.1%. 1980 heralded the new standard of the mid to low 20% range. Of course Reagan wins thispersonal verses corporate relationship with a corporate total that is only 12.8% of the personal in 1983.

One other very interesting aspect ofour tax history using the same table is that from 1934 to 1983 when tax revenue from personal collections became less than the year prior, this was only for one year with the exception of 1945/46. Corporate revenue follows the same pattern except for 3 periods where there was a decline for 2 years running: 1946/47, 1958/59 and1961/62. From 1983 until 2001 the personal revenue is more every year than the year prior. It’s like a switch was thrown after 1983. The corporate revenue declines twice for 1 year each in this 1983 –2001 span; 1990 and 1999. Starting in 2001, the decline in revenuecollections for both personal and corporate last for 3 years running;2001 to 2003 and 2008 to 2010. Someone threw a double pole switchhere. We’ll have to wait to see for 2011.

Obviously, from this bit of history we can see a few trends at least. We have been reducing the burden on corporations as paying their share for the use of the commons. From1984 to 2000 the personal collections never declined yet thecorporate did twice. Prior to 2001, our tax tables and all their loop holes produced a fairly stable ever rising stream of revenue. However, after 2001, the stability is less in that any time there isa reduction in revenue collections, it lasts 3 times longer. Finally, except for 2005 to year ending 2007, since 1980 we think that corporations should only pay between 20 to 26% of what We thePeople pay in to our government.
I mention all the above because it isevident that more than just the marginal rates are changing and, as far as my assessment of these changes go, they are leading us to anever less stable adjusted gross income base for then calculating the tax due. That is, the base has been adjusted such that it is moresensitive to down turns in the economy. Prior to the Reagan taxrevolution, both the personal and corporate base were fairly evenlysensitive with the corporate being maybe a little more sensitive.
For 50 years (1934 to 1983) there wereonly 3 periods in which the corporate collections were less for 2years in a row and none of them were the back to back Reaganrecessions. After 1983, the base for personal taxation has changedsuch that it is not effected by any recession. However, thecorporations got relief twice. Considering that from 1934 to 1982there are only 2 recessions listed by NBER as lasting more than a year (1973/75and 1981/82, 16 months each) 1 year of less revenue does not seembad. However, for the last 2 recessions, the revenue collectionshave been less each year for 3 consecutive years for both thepersonal and the corporate collections even though the latestrecession is listed as lasting 18 months.
Withinthis 3 year pattern, we also see that the declines are greater. Fromthe high to the low for 2000 to 2003, by 2003 personal collectionsare 79% of the high and corporations are 63% of their high. For thepresent recession personal became 78.4% of the high and corporationswas 62.9% of their high. Even in 1983, when Reagan wins thepersonal/corporation differential the declines were only 97% personaland 75.2% corporations. For another perspective, that 2 year declineof personal revenue collections for 1945/46 the personal declinedonly to 81.7% of the high. During this period the corporations onlydeclined for 1 year (1947) to 72.5% of the high. In 1947, corporaterevenue collections were 48% of the personal collections. In 2000,the peak corporations revenue was 20.6% and in 2008 it was 26.6% ofthe personal revenue collections.
Obviously we made more than marginalrate changes after 1980. We changed the way the base is calculatedsuch that corporations paid significantly less as a share of thetotal income taxes and was more tied to a change in the economy suchthat corporate taxes due were less during a recession where as thepeople had no reprieve. How’s that for fairness? Then came Bush II. The base changed even more… so such that now the decline inrevenue collected lasted longer than the recession and the declineswere greater.
We do not just need to raise the rates,we need to return to a broader base. That is, when all thedeductions are done, the adjusted gross income needs to be higher. On the other hand, what we are seeing here could be the results ofthe massive shift of income up the line combined with the decreasedrates. Considering this history, the cry to lower rates and get ridof loop holes just will not work. This is a cry for flattening theincome tax, which is what we have been doing since the 60’s which wasaccelerated since Reagan. It will create a tax base that is moreunstable and thus runs even greater deficits during times of economicdecline not to mention the overall decline in total revenue collectedduring good times. And, it totally ignores the issues of equality ofpower along with the concept of the commons. You know, that We thePeople premise.

But before you get to excited aboutthis suggesting or, that I am saying that the poor need to pay moretaxes and the rich are over taxed consider the tax table from 1936,its lowest income tax bracket is 4%. This is on an income up to$4000. Let’s bring that forward to 2010 using my favorite money converter. CPI states that $4000 is now $60,400. Today’s rate for $16,750 to $68,000 is 15% instead of 4%. Of course,I like the unskilled labor and nominal GDP/capita numbers of $145,000and $275,000 respectfully.

Alright, I’ll be fair. The lowest rate in1967 is 14% for up to $1000. That figures to 2010 of $6540 CPI,$6670 unskilled and $11200 nominal GDP/capita. Though, the $4000 in1936 is $9640 in 1967 which puts one in the 22% bracket ofthat year. Using the $12000 for the top of that 1967 bracket brings us to$78,300 CPI adjusted gross income for 2010. $78,300 puts one in the25% bracket for 2010. Obviously another issue we have here when itcomes to setting up marginal rates based on historical records is howmuch the base (adjusted gross income) is effected by how the CPI iscalculated. Any way you figure it, we have been pushing the marginalrate higher and deeper into the lower end of the income pool.

Ok, onto the fondly remembered tax yearof 1936. Next post.

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A Warm Wind At the Backs of Some, Generated Off the Backs of Others

This piece offers an understandable comparison between wages and dividend income and neatly summarizes the cost to wage earners. (h/t Mike Kimel)

by Peter S. Meyers

Myers Urbatsch PC

A Warm Wind At the Backs of Some, Generated Off the Backs of Others Yesterday, I learned in this Mother Jones article that workers have increased their contribution to government revenue disproportionately since 1980.  In other words, payroll tax (paid by workers) is a larger portion of government revenue than it used to be.  That’s a macroeconomic analysis, which still doesn’t answer the question of whether rich people are being treated “unfairly” by the current tax system.

So to elaborate a little, let’s take two people who make exactly the same amount:  $100,000 in taxable income (after the standard deduction – let’s not get complicated).  “Worker Taxpayer” earns her money by working (getting compensation by way of a W2) and “Investor Taxpayer” earns her money from dividends in a $4 million stock portfolio she holds (its about 2.5% in yield – about right).  Let’s say they are both unmarried.  Investor taxpayer does not work and has no compensation income.  They are otherwise “equal,” right? (except that investor taxpayer fits the description of those who vituperate about lazy welfare recipients who sit on the couch all day and watch TV, right?)  I’ll keep the rhetoric down, because the facts are outrageous enough to speak for themselves.

Worker taxpayer will pay $7650 in payroll tax, plus $21,617 in income tax (2011 brackets), for a total tax burden of $29,267.

Let’s look at investor taxpayer.  You would think they would be taxed at the same rate as worker, right?  Wrong.  Because investor taxpayer receives all of her income from qualified dividends, they get a “special” tax treatment.  Bear with me, we’re almost done.  Generally, the maximum tax rate for qualified dividends is 15%, BUT HERE it is actually 0% because investor’s other income (remember she doesn’t work) is taxed at the 10% or 15% rate.

To refresh:  worker making $100K pays about $30K in tax.  Investor making $100K in qualified dividends pays $0 – no – tax.  Huh?  Yup. 

What this means is that rich people – who are incented by tax policy to remain on their couches (too much earned income would otherwise trip them into the 15% dividend tax bracket) – are now getting off their couches and going to tea-party rallies to maintain this unfair redistribution of wealth in their favor.  For if they work, they risk having their dividends taxed at 15% (still half of what, say, worker taxpayer paid in taxes, but confiscatory in their view).  Perverse incentive?  Yup.  Does it sound like the rhetoric of the right wingers about unemployed persons and welfare recipients laying on couches and not incented to work?  Hm. . . .

Now let’s say you didn’t work, or you worked very little, and instead you made all of your income from qualified dividends.  The “magic number” (the income threshold you need to stay under to avoid paying any tax on your dividend income) is $69,000 (married), $34,500 (single or married filing separately) or $46,250 (head of household).  Thus, you can actually work a little, and you have all this extra time – to attend rallies, political functions, cook your food, clean your house or do other things that people who actually earn their income from working have to: (a) pay someone else to do (which is not deductible), (b) do in the evenings or on weekends, or (c) simply let it slide.

I will now illustrate how it is almost impossible for someone who is already rich to not get richer, in fact much richer.  Both working taxpayer and investor taxpayer have identical lifestyles and thus spend the exact same amount of money (not likely, given that worker has to pay for commuting expenses – again NOT deductible).  Let’s assume that’s $70,000 per year.  We know that worker taxpayer already paid $30K in tax, so let’s see what they have left to save:  uh, nothing.  Investor taxpayer paid no tax, so what do they have left over to save: $30K.  Exactly the same amount that worker taxpayer paid in taxes.

The rationale for the tax policy you see illustrated above is George W. Bush’s.  In 2003 he said that “double taxation is bad for our economy and falls especially hard on retired people.” He also argued that while “it’s fair to tax a company’s profits, it’s not fair to double-tax by taxing the shareholder on the same profits.”

Its odd to me that the above disparate treatment of otherwise similarly-situated earners is defended on the basis of “fairness.”  Is this 1984?  And I also wonder whether there is a joke in there somewhere – i.e., given that a zero-percent tax bracket would apply to someone who made all of their money from dividends and capital gains, why wouldn’t they retire?  I sure as hell would.  Working too much would bump all of their dividend income into the 15% tax bracket.  Volunteering for the tea-party rally, or perhaps some other Republican cause, would be a far better use of one’s time.

reposted with permission of the author July 23, 2011 post

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This is the reality of a real small business

 By Daniel Becker

This is a bit of an interlude in my writing regarding the income tax of yore. Though, this does involve taxation. This is also a continuation in my postings regarding real world small business experiences. Yes, you are going to get to read about a real situation that involves a real small business and tax policy.
Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I’m not talking personal income. I’m not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I’m not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!
 Oh, just in case you think I’m off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!
Some perspective on small business.

“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “

I know it is soothing to croon over the days when the Dodge Brothers, Ford, Colt, Walton and Gates were small and became major examples for their time of the American Dream of economic power. But really, the truth is most small business were and are people earning a living on their own vs working for Microsoft (the definition of part time abuse) or Walmart or GM, or GE or Boeing… They were huge numbers of small local retail. All gone. Small local banks? Going. Small local agriculture (RI used to have a state fair), forget about it.  Look around.
So lets get to the heart of it. First a bright spot. The flower shop had it’s first month this year that was better than last year. August. No, I’m not assuming this is a trend and here is why.

The city of Woonsocket has lost it’s Walmart to the town of North Smithfield, it’s neighbor. Major tax hit to the city. N. Smithfield got the Walmart because it decided that building a 650K sq ft shopping development would offset their rising taxes. I mean really, when in the last 30 years have we seen big business pay enough in taxes such that they actually were paying for their presence? Cut, cut, cut has been their chant. So, I can expect my property and inventory taxes to rise unless something replaces that Walmart. Say the state stepping up. Which tends to happen via the state giving less to the towns like North Smithfield.
I wrote about this type of tax chasing in one of my first posts.

“You know what is missing in this discussion (a discussion happening in every town USA)? The question: Compared to what? What are we basing the above statements on? Is it simply that we have less money after the bills are paid? Well, from 1955 to 1998, GDP rose by a factor of 20. Tax burden as a percent of income rose by a factor of 26.7. But income for a family of 4, 2 people working (sound familiar) only rose by a factor of 11.5. From 1976 to 2001 the top 1 % share of income went from 8.6 % to 21%. Yes, we have less money at the end of the day. Unfortunately, not benefiting from the national wealth as we had in 1955 (when the tax burden was 18% of your pay and would be today if all was equal) is a national policy issue.”

This is the issue of small business. See, we are all just trying to earn an income. Just like the person who works for the multinational. The income is much less because business sales are down. So, how should I plan for the pending tax rise? Do not just give me an answer that involves further big business moving into the area, because as I showed in the post on property taxes and development, it’s not so simple as welcoming Mr and Mrs. big business into the neighborhood.

“But, for my purposes Smithfield (an abutting town) presented the most interesting data. They had a new retail development go in, but ½ the size of that proposed for my town. It’s citizens have seen since 1999 in sequence a 9.8, 4, re-val, 5.5 and 8.7 percent rise in the tax rate. It’s commercial development has been only 10% industrial. My town only had a 6.4% total rise in the same time span.”

Oh save me great god of the mega corporations from the evils of local taxation. Yeah, I didn’t think praying would work.
Next up involves a CVS move. CVS is headquartered in Woonsocket. It obviously has some new hot shot who has a better way. They are looking to own their stores and not lease. They are consolidating 2 stores into one bigger store on new property. Yes, about ½ the property was zoned commercial, the other ½ was residential (real houses on it) turned commercial. This is important, because the CVS consolidation will leave 2 existing commercial spaces empty. We’ll add them to the Walmart space and potentially the Lowe’s space as it is suppose to be moving to the new North Smithfield development which is built on what was 126 acres of woods.
Sticking with Woonsocket, the location of my flower shop, the city has managed to add to its commercial property stock while turning a good portion of it into none productive commercial property stock. How soon do you think those empty places will fill up? Don’t hold your breath.
Some more good news. I managed to cut a major expense for the shop just this June to the tune of $379/month. We were in a unique position in that they kind of needed us. It’s not going to happen again. $4548 per year. Nice. It’s the heating expense for a year assuming the speculators don’t get active again. Yep, get rid of those government regulations as they sure are doing me harm. NOT!
The plaza that one of the CVS stores is moving out of is a customer of ours. We do seasonal decorating for them. It is about $3900/yr. Well, we’re not decorating with mums this fall and Christmas looks to be out too. How much you wanna bet spring next year and for some years to come is out? Gonna bet enough to do Washington a favor and higher someone?
Are you seeing where all this is going? I saved us some big coin. I’m loosing the same amount. Now, this is not the first hit from a CVS decision. Some other person there decided to make it simple for them to pay for their flower needs by going with Pro Flowers instead of feeding the 4 local florists which they had done for decades. They think they are getting a 20% discount from Pro Flowers. Little 
do they understand the flower business. Not the first time mega corps thought they new more than the little guy. It represented about 2.4% of our business at the time. May not sound like a lot, but when you consider the extra business generated by CVS using one’s shop to send flowers, it becomes significant.
Let’s add a third issue. Refi. Time to take advantage of the low rates. The purpose is to improve, that is reduce your monthly cash outlays. But as any real small businesses owner learns, there is no such thing as a fixed rate. We have paid off 22.2% of the loan that combined the original purchase of the business and property with the rehab that needed to be done in 2004. We have about 36% of the tax appraised value in equity of the property.
Here’s the concern, do you take a 20 yr loan with a rate of between 5 to 5.5% to be reset in 5 years or do you take 6 to 6.5% to be reset in 10 yrs? Do I bet that in 5 years business is better because the economy is better which could also mean all that projected inflation do to the Fed monetary policy and at least protect my self for 10 yrs? Or do I bet that nothing will be much better and try to preserve my cash flow (in a small business it’s always about cash flow, accrual be damn) and go for the 5% figuring the Fed money flood won’t roost for at least another 5 yrs? Oh, the refi cost are going to run you about $4000. There goes that big saving from my hard nosed negotiations again.
Your facing tax increases beyond the usual but, not because the public employees are paid too much. Your running out of area’s to cut. Major corporation moves are working against you just as off shoring is working against the middle class, the very class of your concern as you are in it and draw your income from it. And all the policy talk being pushed has little to do with the issues that you are facing because the number one issue you are facing is a lack of a middle class.
Have you heard of the “hourglass strategy”? Look it up. Ah, no it’s not a strategy you can use, but is one that will work against you.

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The Effect of Individual Income Tax Rates on the Economy, Part 2: The Great Depression and the New Deal, 1929 – 1940

by Mike Kimel

The Effect of Individual Income Tax Rates on the Economy, Part 2: The Great Depression and the New Deal, 1929 – 1940

This post is the second in a series that looks at the relationship between real economic growth and the top individual marginal tax rate.

Last week I had a post looking at the relationship between the state of the economy and the top individual marginal tax rate from 1913, the first year for which there were individual income taxes, to 1928. Because there is no official data on GDP for that period, I used recessions as a proxy for how well (or poorly) the economy was doing. I note that there was no sign whatsoever that the economy did better during periods when income taxes were non-existent (the post also looked back to 1901), or were low, or were falling, than when tax rates were high or were rising between 1901 and 1928.

This post extends the analysis to the period from 1929 to 1940, 1929 being the first year for which official real GDP data is available from the Bureau of Economic Analysis. 1940 is the end of FDR’s first eight years in office, and serves as a decent bookend to the New Deal era given America’s entry into WW2 in 1941. Top individual marginal tax rate figures used in this post come from the IRS.

The following graph shows the growth rate in real GDP from one year to the next (black line) and the top marginal tax rate (gray bars). In case you’re wondering, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate.

Notice that tax rates fell from 77% in 1920 and 1921 to 24% in 1929, the year the Great Depression began. (As noted in the last post, the so called Roaring 20s was a period when the economy was often in recession.)

Figure 1

In 1932, tax rates rose to 63%, and by 1933, the economy was growing quickly. That doesn’t match with what people believe, I know. It seems these days its commonly accepted that FDR, who took office in 1933, created the Great Depression or at least made it worse, and that only WW2 saved us. In part to address that issue, the graph below shows growth only during the New Deal era, 1933 – 1940 (no WW2!!!). To put the growth in perspective, I’ve added two lines. One represents the fastest single year growth during the Reagan administration, and the other shows the average of the single year growth rates during the Reagan administration. I figured it would be a good comparison, the Reagan administration being today’s gold standard for all that is good and pure.

Figure 2.

As the graph shows, in all but two years from 1933 to 1940, the t to t+1 growth rate was faster than in every single year of the Reagan administration. In fact, the average of the yearly growth rates during this period was about a percent and a half faster than Reagan’s best year.

And yes, there was a sharp downturn shortly after the tax hike in 1935, but its hard to credit that tax hike with the downturn when immediately after the economy continued on a rocket trajectory.

Now, whenever I point something like this out, I get told the same thing (at least by folks who are smart enough not to argue with the data): the rapid growth in the New Deal era occurred simply because the economy was slingshotting back from the Great Depression, and if anything the New Deal policies slowed the recovery. The problem with that argument, of course, is that because the unfortunate events of 2007-2009 witnessed the biggest economic decline since the end of WW2, the economy should be primed for the fastest spurt of growth in the past 60 years. After all, the policies we’ve been following before, during and since that decline have not been very New Dealish at all: top marginal tax rates are 35%, not 63% or 79%, there are no work relief programs, and Glass Steagal Act, passed as part of the New Deal, borders on irrelevant. Yet I think its safe to say just about everyone is in agreement that sort of growth isn’t going to happen anytime soon.

It is also safe to say that for the first two periods covered in this series (i.e., 1901 – 1928 and 1929 – 1940), we once again haven’t seen any sign of the purported relationship between higher lower marginal tax rates and faster economic growth. No doubt that relationship shows up later on. Next post in the series: WW2 and the immediate post-War era.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel at gmail period com.

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The Effect of Individual Income Tax Rates on the Economy, Part 1: 1901 – 1928

by Mike Kimel

The Effect of Individual Income Tax Rates on the Economy, Part 1: 1901 – 1928

In 1913, the 16th Amendment to the Constitution led to the income tax system we know and don’t love today. Since that time, in fact, since way before that time, people have been arguing about the effect of taxes on the economy. Over the next few posts, I will take a systematic look at the relationship between individual tax rates and the economy going as far back as the data allows in the United States.

In most of these posts, I will measure the effect of the economy using growth in real GDP per capita. However, that series only dates back to 1929. So in today’s post, which will focus on the period up to December 1928, I will look at the recessions (using official dates from the NBER and compare that to top individual marginal tax rates as published in the IRS’ statistics of income historical table 23.

The graph below shows the top marginal tax rate (black line) and periods in which the economy was in recession (gray bars) going back to January 1901. (Note – the economy was in a recession from June of 1899 to December 1900, so January 1901 is a nice “clean slate” date at which to start.)

Figure 1.

I think the graph above lends itself to be division into three more or less discrete periods. The first is the pre-tax period from 1901 until 1912. The second is the “rising tax” period from 1913 through 1918, and the third is the “falling tax” period from 1919 to 1928.

Now, if you asked the typical economics professor or politician or conservative to rank three periods – no individual income taxes, rising individual income tax rates, and falling individual income tax rates – in terms of time spent in recession, you’d probably hear this back, “The economy will spend less time in recession when there are no income taxes, and the most time in recession when tax rates are rising.”

But that isn’t what the data shows. The time spent in recession is pretty comparable. The percentage of months under recession in the pre-tax period is 43.8%. The percentage of months under recession in the rising tax period is 40.3%. The percentage of months under recession in the falling tax period is 42.5%.

Now let’s talk some nuance. A recession is not a recession is not a recession. For instance, the recession that began in 1907 was pretty severe, and is often referred to as the Panic of 1907. The recession of 1918 was caused by the end of WW2. And then there’s one more detail worth mentioning, the elephant not in the room so to speak. The graph doesn’t show what happened in 1929, following just over a decade of tax cuts (in which time the top marginal rate fell from 77% to 24%), we had the Great Depression.

Next post in the series: The Great Depression and the New Deal

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