Tag Archives: taxes

Taxes and Widows and Orphans

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Included in President Barack Obama’s demand to raise tax rates on those Americans he hates so much is a raise in tax rates on dividends, unless the Republicans pay Obama’s price.  Obama’s ransom, after all, is simple: raise the rates on the Evil Rich, or the rates will go up for everyone.  Nice economy you got there….

Here’s what happens to dividends if Obama gets either one of his choices.

Presently, qualified dividends (which are most of the dividends about which you and I care) are taxed at a 15% rate for stockholders who are in a 25% or higher income tax bracket, and at a 5% rate for those investors in a lower bracket.  If Obama gets his way on tax rates generally, those rates will rise to ordinary income rates: those in the 39.6% bracket, for instance, will pay 39.6% on their dividend income (not 15%), those in the 15% bracket (which will reappear if Obama holds out for his ransom and the Republicans refuse to fold) will pay 15% on their dividends (not 5%).  Notice that: if Obama gets his way, the poor will get the highest tax bump.

Think the poor don’t invest?  Where are the savings of the retired, and of the stereotypical widows and orphans?  In safe, stable, income-producing vehicles—mutual funds that invest heavily in dividend-paying  stocks funds (or interest-paying bond funds).  These folks—on fixed incomes—are going to see a significant bump in their tax bill because a significant share of their income is dividend income.

Two top dividend mutual funds currently have a yield, courtesy of their dividend-paying stock holdings, of between 2% and 3%.  That’s not a lot of margin on which a retiree—or a widow or an orphan—can afford to see a tripling of his tax bite.

Of course, these folks could switch entirely to funds that pay interest rather than dividends, but with the Fed artificially suppressing interest rates, where’s the value in that?

Republicans need to find some courage.  The House needs to pass, this session, a budget (again) that includes lower rates across the board and spending cuts in the amount necessary to bring Federal spending to less than Federal revenues, with the difference mandated to paying down the debt.  Let the Democrats, led by our President, defend their refusal to pass this bill in the Senate and sign it into law; let them explain why they prefer the catastrophe of the Obama tax increases and sequestration.

And Republicans need to get serious about taking their message to all Americans.

The Obama Ransom

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The Wall Street Journal described the broad reach of President Barack Obama’s tax increases, which are set to occur in six weeks unless Republicans pay the ransom on the 98% of Americans which he’s demanding.  Here’s the effect on lower income Americans.

A married couple making between $20,000 and $30,000 a year would go from receiving, on average, a $15 tax credit to owing $1,408, according to research by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.

The situation of an individual from the higher end of that range makes manifest that impact.

Traci Petty, 42, [is] a single mother…studying for a master’s in business administration in Danville, VA, while earning about $30,000 a year working part-time at a nonprofit.

Ms Petty would be hit by the shrinking of the child credit to $500 from $1,000, the higher payroll taxes and the elimination of the Bush-era 10% tax bracket.  Altogether, she would face at least a $1,500 cut in the $4,000 or so tax refund she gets each year.  She counts on the refund to pay bills.

But then, we’ve seen no evidence Obama even cares about these folks; his rhetoric focuses on “helping” the middle class and abusing those Americans at the upper end of the economic scale whom he hates so much.

Obama’s Economic Policies

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…are actively hurting our economy and our businesses—and so us.  Here are two illustrations.

First, The Wall Street Journal:

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009.  Corporate investment in new buildings has declined.

…

…business investment fell at a seasonally adjusted annual rate of 1.3%, according to a preliminary estimate from the Commerce Department.  The latest drop included a decline in investment in structures, such as buildings, at a 4.4% annual rate.  Investment in equipment and software stalled after growing at a roughly 5% annual pace in the first six months of the year.

It’s not just Big Business, though, the whole article from which the above excerpt came notwithstanding:

Of the four ways government can principally influence the economy for better or worse—fiscal policy, regulation, monetary policy, and trade—it appears that investors will continue to be forced to rely on monetary policy for help. Taxes will undoubtedly rise for some, and the one effective way the federal government could effectively ease more—regulatory policy—seems less likely now than ever before.  The Wall Street law firm Davis Polk has created a new business of simply keeping track of the seemingly infinite number of rules that will need to be written to complete the process of financial regulation put into place by Dodd-Frank.  Sadly, only 33% of the 398 required rulemakings have been finalized.  (Only 265 rules to go!)  Another 33% have yet to have even been proposed.  Is it any wonder the Fed has had trouble turning excess reserves into effective monetary stimulus?

What are we doing as a company in light of this uncertainty?  We’ve put on hold business expenses short of pencils, and any capital spending we were considering, including an update of the men’s bathroom some have begun to call “the latrine.”  Instead of calling clients and focusing on our research, we are scheduling, probably in vain, conference calls (read fees) with our attorneys and accountants to try to create contingencies against potentially bad outcomes for us in the tax code.  It has forced us to ask ourselves questions that seem at odds with economic growth, like, are there any unintended consequences of employing more than 50 people?

 

h/t for the second for The Spirit of Enterprise

Progressives and Taxes

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Not only do they still not get it, they’re already operating in bad faith.  Here’s more, via Damien Paletta of The Wall Street Journal.

Treasury Secretary Timothy Geithner on Tuesday said higher tax rates on upper-income Americans were a central part of the White House’s deficit-reduction proposal because there was no way to raise enough revenue by only limiting tax breaks.

No doubt.  But that just means it’s a bad proposal.  Notice that this plan proceeds from a couple of false premises.  One is that the Federal government needs more money.  Another is that the only way to cut the deficit is to raise taxes.  (Putting on my best cheesy-ad voice) but wait—there’s more!

Mr. Geithner said there was a lot of “magical thinking” about the amount of revenue that could be raised by capping or eliminating tax deductions and exemptions.  He said this approach wouldn’t come near the roughly $1.5 trillion in revenue the Obama administration believes is necessary as part of a broad deficit-reduction package.

There he goes again, and with his own “magical thinking.”  Geithner’s magic is to repeat the fantasy that the Feds need $1.5 trillion in revenue in order to reduce the deficit.  In the first place, taking that much money out of the private sector will reduce economic output, which will continue, if not increase, the current unemployment rate.  In the second place, taking that much money out of the private sector will lower the amount of tax revenue flowing to the Feds, both directly and through that continued/increased high unemployment rate.  If the government wants to increase revenue, it must support a vibrant, growing economy—which it cannot do when it starves that economy of its fuel, which is money.

Then Geithner says, without a trace of irony,

When you take a cold hard look at the amount of resources you can raise from that top 2% of Americans from limiting deductions you will find yourself disappointed to the relative magnitude of the revenues we need[.]

I won’t repeat myself on his underlying false premise; I’ll just point out the equal truth of his statement from substituting “raising tax rates” for “limiting deductions.”

In the end, the only way to eliminate the deficit (and so to begin paying down the national debt) is to spend less than is collected in revenue, as any third-grader on an allowance understands.  The only way to do this is to spend less.  Only that third-grader would insist on an increase in his allowance.

Tax Rate Cuts and Economic Prosperity

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Stephen Moore, writing in The Wall Street Journal, makes anew a number of points about the effect of taxes on a free market economy.

1920s: the Coolidge administration reduced income tax rates across the board, including cutting Woodrow Wilson’s WWI top rate of 73% to a peacetime rate of 25%.

  • Tax revenue to the Federal government doubled: the share of taxes paid those making more than $100,000/year ($1 million in today’s terms) rose from 28% to 51%.
  • Minor point: the economy boomed into 1928, raising the income and standard of living for all Americans.

1930s: the Franklin Roosevelt administration raised the top income tax rate to 63%, then to 79%, during the Great Depression.

  • This extended the Depression.
  • Post-war, those continued high rates (with the top rate now at 90%, a level reached during the war) slowed down the recovery and conversion from a war economy to a peace economy.

1960s: the original supply-sider, John F Kennedy, cut tax rates across the board by 30%, saying the lower rates would “boost the economy, produce revenues, and achieve a future budget surplus,” and be “an investment in the future.”

  • Tax revenue to the Federal government rose by 8.6%/year.
  • Unemployment fell to an historical low of 3.4%.
  • Those making $50,000/year (Obama’s $250,000-ers) saw their share of those tax revenues rise to 15% of the total from 12% prior to the rate cuts.
  • Those making $50,000/year also saw their tax payments, in absolute terms, rise 40%.
  • Those especially evil Americans making more than $1 million/year saw their tax payments in absolute terms rise from $311 million to more than $600 million.

1980s: the Reagan administration cut tax rates across the board, lowering the top rate first to 50%, then to 28%.

  • The economy roared.
  • Unemployment fell from the Carter administration’s historic highs to 5.3%.
  • Inflation fell from the Carter administration’s peak of 13.5% to 4.8%.
  • Tax revenue to the Federal government doubled from $517 billion to above $1 trillion.
  • The share of total income taxes paid by the evil top 1% of Americans rose from 18% to 25%.
  • The share of total income taxes paid by the evil top 5% of Americans rose from 35% to 44%.

2000s: the Bush the Younger administration (re)lowered tax rates across the board, this time, for instance, from 39.5% to 35% at the top.  The administration also lowered taxes on capital gains and dividends significantly.

  • Tax revenue to the Federal government rose by $780 billion.
  • Tax payments by millionaires generally doubled: the booming economy both created more millionaires and sharply increased their incomes.
  • The share of total income taxes paid by the evil top 1% of Americans rose from 35% to 41%.

The problem is, though, that President Obama and his fellow Progressives are fully aware of these data.  One has to wonder at Obama’s motives for demanding to raise tax rates.