Here comes the triple whammy

Imagine if your taxes tripled — literally overnight.

The so-called Bush tax cuts are set to expire at the end of the year, Investor's Daily reports.

That means that all of the current income tax rates will rise to pre-2001 levels overnight. The lowest rate will jump from 10% to 15% and the highest from 35% to 39.6%. Although Congress extended all of the cuts at the end of last year, some Democrats have pledged to let the tax cuts expire for the "rich" — individuals making $200,000, and $250,000 for families.

Pre-2001, dividends had been taxed at workers' income tax rate. The Bush tax cuts dropped the rate on dividends and capital gains to 15%. Thus, if the Bush tax cuts expire, the dividend tax for high-income workers will jump to 39.6%. 

But there's more. The health care law imposes a new 3.8% tax on passive income, including dividends and interest. So the effective dividend tax rate for those at the upper end of the income scale would nearly triple, to 43.4%. Happy New Year!

And don't forget that dividends have already been taxed as corporate profits — so they're taxed twice.

Although proponents claim that these tax increases will only affect the wealthy, this looming tax grab will also have a significant impact on middle-class Americans who don't have to pay it directly. And the impact could weaken America's fragile financial markets further and unintentionally erode the value of the savings of millions of Americans.

Companies looking to expand their operations and create jobs, of course, are likely to think twice before doing so in high-tax locales.

Heightened dividend taxes won't just hamstring overall economic growth. They'll also hit individual investors where it hurts — in their pocketbooks. Dividend income for some investors could drop by 33%. And it won't affect only the high-income workers.

For starters, higher dividend taxes will make stocks that pay dividends less attractive to investors. So those who currently hold dividend-paying stocks — everyone from middle-class folks with 401(k)s to union pension funds to non-profit foundations — would see the value of their investments decline substantially.

Further, higher dividend taxes will likely cause companies to cut dividends in favor of deploying their cash in other ways, like re-purchasing their own stock. So individuals counting on their share of a company's profits for their income — which they'd normally receive via cash dividend — could find themselves out of luck.

That would be particularly bad news for retirees, many of whom depend on dividends as a staple of their fixed incomes. 

According to the IRS, more than half of dividend payments go to Americans over age 65 — and almost 75% go to those over age 55. 

"This is the first generation in history to retire depending primarily not on defined benefit plans but rather on contribution plans that are disproportionately comprised of dividend income," notes former New Hampshire Sen. Judd Gregg. 

"It will be a bitter pill to swallow for a lot of people whose only pathway to adjusting to their reduced income will be through a commensurate reduction in their standard of living."

Trust those thugs in Washington to do the right thing? Ha.

Succeed, leave

Buh bye, Simon.

A commentary by Simon Black, international investor, entrepreneur, permanent traveler, on how we treat successful people in the United States:

I’ve been in the US for a little more than 24-hours. And having flipped through the TV channels trying to figure out what useless drivel big media is passing off as ‘news’, I realized that I’m going to vomit if I hear the word “fair” one more time. 

This concept of ‘fair’ seems to be dominating discussion of the US government’s dismal fiscal condition. The talking heads say that it’s ‘fair’ for wealthy Americans to pay higher taxes and bail the country out… or that everyone needs to pay his/her ‘fair’ share. 

The whole logic is absurd: you do not ‘fix’ the country’s fiscal imbalances by giving the idiots in charge even more resources to squander… it’s like dumping gasoline on a forest fire. Somehow the debate seems to have missed this point. 

This ‘fair’ nonsense is also very dangerous. Just ask any three-year old– ‘fair’ is completely arbitrary. It’s like a Wiki version morality… if enough people agree on it, it’s fair. 

In this case, ‘fair’ is defined in the sole discretion of those who are the direct beneficiaries of confiscating other people’s money. But let’s look at the numbers: 

According to the IRS statistical database, the top 1% of income earners in the United States pays roughly 40% of all US individual income tax. They also get audited at least 5-times more than anyone else. Fair? 

The other major complaint seems to be that the wealthy are ‘abusing’ capital gains rules in order to pay a 15% rate instead of a 35% rate. Duh. That’s why they’re wealthy, and stay wealthy… they don’t WORK for a living, they OWN assets which are subject to capital gains. 

It seems so bizarre that a country once regarded as the freest, most economically enviable in the world would treat its productive citizens with such hostility. 

This is where Eduardo Saverin comes in. The Facebook co-founder, who finds himself a few billion dollars richer this week, recently renounced his US citizenship. And, to the intelligentsia, it’s not ‘fair’. 

‘Saverin needs to pay his fair share! He owes America more,’ they whine, completely ignorant that the 30-year old is already forking over a $500+ million exit tax (which may end up in the billions). 

Apparently it’s not good enough that the company Saverin co-founded has created tens of thousands of jobs, spawned entire industries, and produced oodles of new millionaires. Oh yeah, it’s also made things damn easy for the CIA, NSA, and FBI. You’d think Uncle Sam would pin a medal on his chest. 

But no. Saverin left behind a lot of value and decided to move on to greener pastures in Singapore. Now the do-gooders in Congress are cooking up new legislation (the EX-PATRIOT Act) designed to permanently bar ‘renunciants’ like Saverin from re-entering the United States. 

It’s interesting that, rather than change their ways of doing business and introducing legislation that provides incentives for productive people to come here and stay here, they maintain policies that chase people away, and introduce new ones to lock the door after they’re gone. 

The lesson here (especially for natural-born citizens) is this: simply by accident of birth, you are born with a lifelong obligation that you never signed up for to finance the corrupt misdealings of the political class. And if you choose to abandon this obligation, they will bar you from ever entering your homeland again. 

Regardless of what the propaganda says, this is not how a free society treats people. It might look and feel like a representative democracy on the surface, but under the hood it’s the modern day equivalent of feudal serfdom. 

The land of the free has certainly fallen a long way.

When I make my billions, I'm going somewhere, too.

Where you gonna live?

Californians are increasingly pursuing happiness elsewhere.

Nearly four million more people have left the Golden State in the last two decades than have come from other states. This is a sharp reversal from the 1980s, when 100,000 more Americans were settling in California each year than were leaving. Most of those leaving are between the ages of 5 and 14 or 34 to 45. In other words, young families.

Taxes are harming the private economy. According to the Tax Foundation, California has the 48th-worst business tax climate. Its income tax is steeply progressive. Millionaires pay a top rate of 10.3%, the third-highest in the country. But middle-class workers—those who earn more than $48,000—pay a top rate of 9.3%, which is higher than what millionaires pay in 47 states. And Democrats want to raise taxes even more.

We're going to see a lot more of these people migrations, and would be seeing more now except that so  many people can't move because of the lousy housing market.

My own state, Connecticut, is doing everything it can to encourage me to leave.

Congratulations, Connecticut residents. You're No. 1. 

Unfortunately, it's a distinction most of us don't want. In this case, it means we have to work longer than the residents of any other state, until May 5, to reach Tax Freedom Day.

Tax Freedom Day varies from state to state because the tax burden in each state varies. It's the day when the average American has, theoretically, earned enough to cover his or her tax burden for the entire year. 

According to the Tax Foundation, a nonpartisan educational organization with business links, Connecticut residents have to work the longest -- 125 days -- to cover all taxes at the federal, state and local levels.

The big winners in terms of growth were in the South, with Texas, Florida and North Carolina as the leading in-migration states. 

Virginia, South Carolina, Georgia, Tennessee and Virginia also ranked in the top 10. Overall, the Southern states reaped 95% of the inter-regional net domestic migration (people moving from one state to another). Arizona, another state widely written off, enjoyed an 11th place finish, with a net gain over 13,000.

And the losers:

As has been the case for most of the past few decades, California has once again been the biggest loser, not of pounds, losing 113,000 people. Following close behind are California and Illinois, all of which are once again losing people in large numbers to other places.

People go -- have to go -- where the jobs are, and where they have the best chance of keeping their money out of the politicians' hands.

Follow the jobs. Here's where they're going:

Holy 1040, Batman!

Douglas Shulman says he uses a hired tax preparer because the U.S. tax code is so complex. That's a bad sign. He's the I.R.S. commissioner.

Consider:

• The tax code itself holds about 3.8 million words, nearly five times as many as the King James Bible.
• There's also a much larger body of regulations, which carry the weight of law, written by the IRS.
• There have been more than 4,400 changes to the tax code over the past decade, or more than one a day.

Moreover:

• The costs of complying with the individual and corporate income tax requirements for 2008 amounted to $163 billion – or a staggering 11 percent of aggregate income tax receipts.
• Individual taxpayers find return preparation so overwhelming that about 60 percent now pay preparers to do it for them.
• U.S. taxpayers and businesses spend about 6.1 billion hours a year complying with the filing requirements of the Internal Revenue Code.
• The monetary compliance burden of the median individual taxpayer (as measured by income) rose from $220 in 2000 to $258 in 2007, an increase of 17 percent.

Good luck!

A blow in the stomach for small businesses

So let's tax the estates of the wealthy. What could go wrong?

The return of the estate tax starting on January 1st will force many families to divert resources into measures to minimize the tax, rather than grow their businesses, according to a new report by Duquesne University Economist Antony Davies.

The report finds that up to 67 percent of estates subject to the estate tax in 2011 would own small business assets, with more than 22,000 farms, 29,000 private corporations and 14,000 real estate partnerships likely to be affected if the owner dies. 

“The more assets small business owners need to redirect toward preparing for the impact of the estate tax,” Davies stressed, “the fewer assets they have to create jobs.”

Indeed, he said, the historical data show that the size of small businesses increases as the size of the estate tax exemption increases – meaning that “higher exemptions encourage entrepreneurs to shift assets into small businesses rather than reserving the assets to protect against estate tax liabilities.”

Aren't we sticking it to the rich and ending concentrations of wealth? Davies writes elsewhere:

Proponents of estate, inheritance, and gift (EIG) taxes claim that the taxes prevent wealth from becoming concentrated in the hands of “generational dynasties” and so help to promote economic equality. This paper presents evidence that EIG taxes can have the reverse effect – encouraging the concentration of wealth – via a greater propensity for small (versus large) businesses to be liquidated for the purpose of paying the EIG tax. 

Never let common sense get in the way of good demagoguery.

(TaxProf Blog)

What do rich people do with their tax cuts?

The big debate over continuing the Bush tax cuts has been about the very wealthy, those making more than $250,000. Should they get a break?

Well, what would they do with it?

There's evidence that they will save a good part of it.

Tax cuts in 2001 and 2003 under President George W. Bush were followed by increases in the saving rate among the rich, according to data from Moody’s Analytics Inc. When taxes were raised under Bill Clinton, the saving rate fell.

The Moody’s economists examined saving rates by income groups back to 1989. Their study uses statistics from the Federal Reserve’s quarterly Flow of Funds report, which gauges the net worth of households, and the Fed’s triennial Survey of Consumer Finances, a measure of balance sheets, pensions and incomes of U.S. families.

When tax legislation was signed by Clinton in 1993 -- raising the top tax rate to 39.6 percent from 31 percent -- the saving rate fell from 12.1 percent in the second quarter to 9.5 percent in the first quarter of 1994. The Standard & Poor’s 500 Index rose 1.9 percent from July through September, after little change the previous three months.

When the first Bush tax cuts were signed into law in June 2001, pushing the top rate down to 35 percent, the wealthy boosted savings. The saving rate climbed to 2.8 percent in the first quarter of 2002 from minus 2 percent in the second quarter of 2001. The increased savings coincided with a 1.1 percent decline in the S&P 500 index.

After the second round of Bush tax cuts in May 2003, the rich also increased their saving, with the rate climbing to 7.6 percent in the first quarter of 2004 from 2.2 percent in the second quarter of 2003, the Moody’s data show.

So if they save, they aren't stuffing the money in a mattress. They're buying stocks and bonds and real estate, all of which keep the money circulating in the economy. (See below.) Good. I'd rather they make the decisions on where the money goes than the government. The politicians, of course, would rather have the money to spend it on their constituents, those they think will vote for them next time.

One thing you and I have in common with rich people is how we spend our money. For all of us, housing is the biggie. A recent study from the U.S. Bureau of Labor Statistics found that, regardless of income-level, Americans' single biggest expense is housing, across all income levels. 

Poorest 20%: 37.9% of total spending
Middle 20%: 32.8%
Richest 20%: 30.4%

What else can we say about the rich and their money? Liz Pulliam Weston, a personal finance columnist for MSN Money and author of the question-and-answer column "Money Talk," which appears in newspapers throughout the country, has compiled some numbers.

They give away more. Charitable giving dropped sharply among the wealthy after the 2000-2001 bear market, according to Spectrem Group. Still, households with $500,000 or more in investible assets gave away 6% of their incomes in 2004, and those with net worth of $5 million, excluding primary residences, contributed 6.1% of their incomes. That compares to an average of about 2% for all American households and 4% for households with incomes under $25,000, according to American Demographics.

They are much more likely to own businesses. Overall, about 12% of American families own all or part of a privately held business, according to the Federal Reserve, compared to 41% of those whose net worth puts them in the top 10% of households. Business assets comprise 21% of the total net worth of households who have $500,000 or more in investible assets.

Maybe one of them will have your next job.

Most of their wealth is investments:

• 46% in stocks and bonds, managed accounts, IRAs, mutual funds, deposits and alternative investments
• 10% in pensions and defined-contribution plans like 401(k)s
• 6% in insurance and annuities

All of those houses and businesses and investments will be taxed. Demagogue about the rich all you like, but I'm wishing them good luck.

States with the highest income tax rates

Pay attention to the economies of individual states. If push comes to shove, and there will be pushing and shoving to come, you'll want to track the winners and losers.

Here from Forbes are the highest state income tax rates for 2011.

1. Hawaii:  11% ($200,000 single/$400,000 married)
2. Oregon:  11% ($250,000 single/$500,000 married)
3. California:  10.3% ($1,000,000 single & married)
4. Iowa:  8.98% ($64,755 single & married)
5. New Jersey:  8.97% ($500,000 single & married)
6. New York:  8.97% ($500,000 single & married)
7. Vermont:  8.97% ($379,150 single & married)
8. Maine:  8.5% ($19,750 single, $39,550 married)
9. Washington, D.C.:  8.5% ($40,000 single & married)
10. Minnesota:  7.85% ($74,780 single, $132,220 married)

(TaxProf Blog)

An idiot's guide to taxes

From British television:



(Maggie's Farm)

The tax increase everyone forgot

The Congress and administration have argued endlessly over extending the Bush tax cuts and in the end went home to try to retain their power in the election and did nothing. The argument was about whether to continue the tax cuts for the very rich. That would cost roughly $68 billion: the cost of covering the last 1.7 percent vs. the government pulling that much money out of the private sector and squelching economic recovery.

But nobody is talking about the nearly $80 billion hit that expiration of the 2009 stimulus bill will inflict, Bob Williams writes at the Tax Policy Center.

The stimulus bill (the American Recovery and Reinvestment Tax Act of 2009) provided $287 billion in tax cuts for 2009 and 2010 but most provisions expire at the end of this year. (Congress extended some of the business tax cuts during the summer.) The big kahuna is the Making Work Pay credit—nearly $60 billion a year going to most workers—but partial exemption of unemployment compensation, expansion of EITC and education credits, and greater refundability of the child credit deliver nearly $20 billion more. Taxes will jump for more than 95 percent of Americans when those cuts evaporate come January.

Why does a $68 billion tax increase on wealthy taxpayers throw Congress into total gridlock but no one mentions a tax hike almost 20 percent bigger?

Why? We've got the best Congress our taxes can buy.

What happens if the estate tax goes up?

The American Family Business Foundation has released "Growth Consequences of Estate Tax Reform: Impacts on Small and Family Businesses." It finds:

This paper examines the impacts of a higher estate tax rate on asset accumulation, small and family businesses’ cost of capital, investment outlays, desire to hire, size of payrolls and jobs. In each instance, raising the estate tax has significant negative impacts. In particular, letting the tax rate rise to 60% will cost as much as 1.5 million jobs, and even a more modest rate of 15% could diminish hiring by over 350,000 jobs.

Here's a picture.

Which states levy the highest taxes?

Here is the total tax burden (per capita) by state from StateMaster using 2004 Census data. The weighted average is $2,049.20.

The ten highest:

# 1	Hawaii:	$3,050.03
# 2	Wyoming:	$2,973.87
# 3	Connecticut:	$2,941.21
# 4	Minnesota:	$2,890.90
# 5	Delaware:	$2,862.03
# 6	Vermont:	$2,844.96
# 7	Massachusetts:	$2,628.26
# 8	New Jersey:	$2,415.82
# 9	California:	$2,391.65

And the ten lowest.

# 41	Arizona:	$1,673.57
# 42	Georgia:	$1,633.84
# 43	South Carolina:	$1,620.67
# 44	Tennessee:	$1,617.03
# 45	Missouri:	$1,583.28
# 46	Alabama:	$1,550.99
# 47	New Hampshire:	$1,543.79
# 48	Colorado:	$1,532.26
# 49	South Dakota:	$1,378.37
# 50	Texas:	$1,368.45