Category Archives: Taxes

Solar Credit – Only the Wealthy need Apply

When most of us talk about income inequality we look at the big things, capital gains tax, treatment of carried interest, etc. But sometimes the little things count too. The Renewable Energy Credit is one of them.

We’re doing a solar project right now and a quick look at the tax credit discloses bias for the wealthy. In our case the cost of our 4kw project is roughly $13,000. As a result of

Here is a look at the Return on Investment. This data is from a more expensive vendor (but they had these nice graphics!) with the same 4kw production. Easy to see the benefits, even if financing in many cases.

that investment we’ll receive a federal tax credit of $3,900 making the final cost to us just $9,100. The payback in ridding ourselves of electric bills for the life of the system (25+ years) is substantial. The investment, while not the coolest thing we’re trying to make happen here, has moved up among our priorities because of it’s long-term payback guarantee. In the end it makes other things more affordable as it pays for itself, then pays us with an offset from electrical bills.

But what f we didn’t already have some money? What if our annual tax bill wasn’t large enough to claim the credit? The project would cost us more, perhaps as much as the full price of $13,000 would come from our pocket.  While the credit is intended to subsidize the development of the alternate energy industry and offset fossil fuel consumption, it is also written with a bias toward the wealthy which can also be called a bias against the poor.

Unlike some tax credits (Earned Income Credit for example) which are refundable credits, the Renewable Energy Credit is not. Instinct may be to downplay this since only tax payers can get a tax credit, but not so fast. The Renewable Energy Credit is a subsidy for the industry, it just passes through the consumer on it’s way to that industry. There is no reason it can’t pass through the poor equally as well as it passes trough the wealthy. In the end the federal tax expenditure is the same, the difference is that the wealthy obtain the long-term cost reduction (investment) for electricity and the poor either cannot or must do so at a greater cost i.e. a greater investment cost thus a much lower return on investment. Coupled with the economy of (investment/consumption) scale and the bias is even greater.  Larger home equals (usually)  larger consumption equals a larger investment which equals a greater tax credit.

Our government at work, creating a plan to help the renewable energy industry which is arguably a good thing, but doing so by offering the wealthy a far greater return on investment than the poor. This is a prime case of where at the same cost to the government, both the industry AND the energy affordability for the poor could be accomplished at the same time, with the same dollars…and not one penny more. A FREE opportunity to aid the poor along with the industry with the re-write of just a couple words.

If the Renewable Energy Credit remains, it should be made a “refundable” credit.

Income Inequality–Even the Right is in Agreement these Days

After all the writing and all the talking but none of the action required to fix this problem, here are some excerpts from Barry Ritholtz–54% of Republicans Say We’ve Got Too Much Inequality

“In fact, there are at least 5 solid conservative reasons – based upon conservative values – for reducing runaway inequality:

(1) It has now finally become widely accepted by economists that inequality drags down the economy. Conservatives like economic growth;

(2) Inequality increases the nation’s debt Conservatives don’t like debt;

(3) Runaway inequality leads to social unrest and violence. Conservatives like stability and order;

(4) Much of the cause of our soaring inequality is bailouts for the big banks and socialism for the buddies of the high-and-mighty at the Federal Reserve, Treasury, and White House.   The government has consistently picked Wall Street over Main Street, and virtually all of the big banks’ profits come from taxpayer bailouts. The Fed is still throwing many tens of billions a month at the big banks in “the greatest backdoor Wall Street bailout of all time”, which sucks the wealth away from the rest of the economy.  Conservatives don’t like bailouts or socialism; and

(5) One of the biggest causes of runaway inequality is that the big banks are manipulating every market, and committing massive crimes.  These actions artificially redistribute wealth from honest, hard-working people to a handful of crooks.  Conservatives hate redistribution … as well as crooks.  In addition, religious leaders have slammed the criminality of the heads of the big banks; and the Bible teaches – and top economists agree – that their crimes must be punished, or else things will get worse. On the other hand, if the crimes of the bankers are punished, inequality will start to decline, because a more lawful, orderly and even playing field will be reestablished.”

“This is an area of agreement between people of good faith on the left and on the right. As Robert Shiller said in 2009:

And it’s not like we want to level income. I’m not saying spread the wealth around, which got Obama in trouble. But I think, I would hope that this would be a time for a national consideration about policies that would focus on restraining any possible further increases in inequality.

If we stop bailing out the fraudsters and financial gamblers, the big banks would focus more on traditional lending and less on speculative plays which only make the rich richer and the poor poorer, and which guarantee future economic crises (which hurt the poor more than the rich).”

What we have is once again politicians not representing their constituents, but representing themselves. Time for action.

 

Debt Ceiling….Really

Mark Thoma breaks out the real reason for the debt ceiling fight, and just in time for the next round of political posturing. Mr. Thoma breaks the battle out for what it is…and it is not about the debt in spite of all the jargon:

“Politicians and the press often make it seem as though the long-run debt is the real issue, but if that were true we’d be hearing a lot more about using tax increases to close the budget gap. After all, our tax burden is not all that high relative to other countries, and there are ways to raise taxes that do not harm economic growth.”

This fight is really about folks who have and make a lot of money not wanting to pay tax at the expense of those less fortunate. Let’s face it, those businesses run by multi-million dollar/year CEO’s function off the national infrastructure just like all the rest of America. This is a great read, well supported.

Unequal Growth

For more on gross income inequity we see today the report, released by the Pew Research Center which found that the mean net worth for the 7 percent of American households at the top of the wealth distribution rose by 28 percent between 2009 and 2011.

Pew-wealth-recovery-0-3

Here’s a look at how the net worth has changed relative to wealth groups

On the other hand wealth for the remaining 93% fell by 4% for the same period.

We don’t have to read too deep into the report to see where the differences are. We talked about the distinct advantage those who simply invest have over those who work within the tax system. In this Pew report we see again where investing (i.e. already having enough not to have to work) verses working resulted in another large bound ahead.

Pew Share of wealth-recovery-0-2

And here is the change in shares from 09 to 2011

 

The American Dream has become less of how hard one works and more of how the tax structure is weighted toward those who already have over the have-nots.

Tax the Poor?

We just finished four days looking at income inequality and how the U.S Tax system favors the rich. Yesterday afternoon we see It’s time to ‘tax’ the ‘poor’, Anthony Mirhaydari saying “even before January’s tax hikes, the rich were carrying a greater and greater share of the burden”  It appears Mirhaydari has not done much reading lately.  While he points out how the upper classes pay a large percent of the overall tax bill, he does not recognize the logarithmic growth of wealth at the top nor acknowledge the very special treatment of income received from investments when those who work and subsequently “earn” their income have to pay heavier taxes. He also overlooks that income tax is but one form of tax, there is the highly regressive  payroll tax, FET, and many more which overwhelmingly impact low/middle class at a  greater degree. It is not surprising Americans don’t understand how the system works and what needs doing when we have a national media, MSM in in this case, perpetuating such drivel.

Effective_Payroll_Tax_rate_for_Different_Income_Percentiles_(2010)

Here’s another data point on how regressive the payroll tax already is. The poor are already paying a huge portion of the bill. Time for MSN to rid of this Mirhaydari.

 

 

Income Inequality—Day Four

If you’re only contribution to the economy is already having enough money you don’t have to work, you are golden per U.S. tax rates. Let’s look at income and taxes of some hypothetical couples to see how truly regressive the U.S Tax system is. Working folks providing a product or service are heavily penalized for having that job and earning the exact same income as those who already have enough they no longer have to work. In short the lowest taxes are paid by folks who don’t have to work.

Dick and Jane LowDick and Jane MiddleDick and Jane BetterDick and Jane HappyDick and Jane Best

Here are five couples all with two kids, no exotic deductions just the basics.

Mortgages around their annual income which is under the U.S. norm, and I’ve used the same rates etc. for comparison.

Again there are no expensive accountants working in my examples…I expect the well off would be even better off if there were. Take a look.

Now let’s compare the Betters with the Bests. The Bests made exactly four times the income but since they didn’t have to “earn” it to use the IRS terminology, they paid only 2.6 times the tax.

Dick and Jane Happy have $194,876 left after taxes in spite of not having jobs while Dick and Jane Better have $183,336.80. Of course the Happys are happy; they brought home the exact same amount as the Better’s but after taxes kept $11,539.20 more, simply because they are financially positioned to not to have to work.

There is my rub; that folks who are working hard to provide a product or service to our country and economic base are being penalized for having that job and earning income. Meanwhile “unearned” income is taxed at a significantly lower rate. Just as in the Hungerford study, we see here how the U.S. tax system is subsidizing the income inequality wedge.

Income Inequality—Day Three

A look at why such inequality of income distribution is occurring. Just why are the rich getting so much richer and the poor getting poorer? Capital gains and dividends. But don’t take my word for it.

Thomas Hungerford, leader of the Congressional Research Service study Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 has just concluded another study addressing Income Inequality. Changes in Income Inequality Among U.S. Tax Filers between 1991 an 2006: The Role of Wages, Capital Gains, and Taxes, Thomas Hungerford, 23 January 2013 takes a look at the income distribution and elements the of influence. One important note made by Hungerford during his discussion whether it is good or bad to have this growing wedge talks about another very important issue, the potential for upward mobility. Being low/middle class isn’t really a bad thing IF I can work really hard and smart and move up…the American Dream right? Unfortunately research indicates income mobility is not very great and the degree of income mobility has either remained unchanged or decreased since the1970s (Hungerford 2011, and Bradbury 2011). It looks that if we fail to do something different, the American Dream may be on life support at best.(I really recommend a read of the Bradbury paper, she advises the Federal Reserve and her work is extensively documented)

income_inequality_contribution

A graph of the Hungerford study findings

But here are a few key points from the January research The single greatest driver of income inequality over a recent 15 year period was runaway income from capital gains and dividends.”

And direct from the report abstract: “Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.”

Or, as Hungerford put it in an interview with Greg Sargent: “The reason income inequality has been increasing has been the rising income going to the top one percent. Most of that has come in capital gains and dividends.”

In other words, wealthy beneficiaries of low tax rates on capital gains and dividends are doing extremely well — and their runaway wealth is a major driver of income inequality. A lot of that money could and should be taxed as ordinary income — as some folks in Washington want as a way to help resolve the sequester, and many believe is a way to reduce the growth of income inequality.

As a next project I hope to do up a couple tax examples to demonstrate the differences in how our current tax rates and rules affect the tax bills and percent paid by some hypothetical couples in each of low, middle, and high incomes. What I’m most interested in is how differently incomes are taxed dependent on from where the income was received. Do you work for it? Or do you already have so much you don’t need to?

Income Inequity….

Yesterday I promised to explore income inequity further and delve into impacts of tax rates. Here is the first edition but with a disclaimer, there may be some outside reading to do…I’m a little self-conscious repeating what all these really smart folks and thorough studies have already determined. But here goes.

Start with the two previous charts yesterday.  First the growing wedge between productivity and compensation. We claim increasing productivity is a path to a better standard of living. True it will help US competitiveness in the world market. But it does nothing for worker Smith if his productivity grows but he isn’t seeing a share from his increased competitiveness.  The study: The wedges between productivity and median compensation growth [1] is well done and deserves a read. Not tough, best for guys like me it includes few graphs, you know pictures for us slow readers. Anyway Mishel explains:

 “The analysis above has shown that from 1973 to 2011, the largest factor driving the gap between productivity and median compensation has been the growing inequality of wages and compensation, followed by the divergence of consumer and output prices and the shift of income from labor to capital. From 2000 to 2011, when the productivity-median compensation gap grew the fastest, the divergence of prices had only a modest impact, whereas the shift from labor to capital income was the single largest factor, accounting for roughly 45 percent of the gap.”

He goes on to discuss the three factors impacting this wedge. The one I see as most significant when looking at the capital flow relative to tax rates is:

 

“The first is the substantial gap between the growing earnings of the top 1 percent of earners and other high earners within the upper 10 percent: Between 1979 and 2007 the annual earnings of the top 1 percent grew 156 percent, while the remainder of the top 10 percent had earnings grow by 45 percent.”

 

From here lets jump to the depiction from Krugman and his short “No Trickle” blog. Most of us remember the term “Trickle Down Economics”. We believed if we allow the top tax rates to be lowered, that money would be re-invested in American business and we will all share in the wealth as the economy grew. Sure…and the economy did grow (following a huge rise in government spending and deficit growth under Reagan.) But looking back at both of these charts from yesterday, it’s pretty obvious the middle and lower class was left far behind. But let’s check in on the “Trickle Down Theory”

Gains compared to real Investment

Capital Gains Rate Changes…yet Steady Increase in Real Investment

So today’s new entries; first is a chart depicting Capital gains taxes as compared to real investment….exactly what the lower tax rates were claimed to stimulate.  A look from post depression years on shows a steady upward curve in the amount of real investment once through the first few post-depression bumps. But there just aren’t any of the peaks or valleys relative to the capital gains tax rates we’d see if there was actually a relationship between a rate change and additional investment. So like the (lost but now found) Congressional Research Service study, there just is not any direct impact of low capital gains tax rates and real investment. With no real investment, the additional findings of no increase to the GDP and no increase to the GDP are right in line.  In short, “Trickle Down” –Doesn’t.

Maximum_Federal_Tax_Rate_on_Long_Term_Capital_Gains_(1972_-_2012)

Compare this curve to the opposing curve in the “Wedge” Chart from Mishel yesterday.

Lastly today is a tighter focus on Maximum Long Term Gains Rates. I specifically chose this chart because it represents the years from when the wedge between productivity and compensation began to grow. If we overlay these two charts we see a second wedge between productivity/profitability and the lower max capital gains rates. Fall back to the worker compensation line to see where the income inequity comes into play. Don’t forget…that additional income at the top is being taxed at some of the lowest rates in history.Making more and paying less taxes = adding to income inequity.

Next look will be at another Hungerford study which clearly lays out various elements contributing to income inequity.

 

Income Inequity

Krugman_No Trickle Down

Worker Compensation Relative to Corporate Profit

After yesterdays blog, I happened on this chart depicting the varying rates of change in business profits and the income of workers. This is a great indication of the growing income diversity I mentioned. For the past years and as this recovery draws slowly on, we see an ever widening gap developing here. In this chart to the right is total workers’ compensation in blue and profits in red, both shown as indexes with the quarter before the recession at 100: Courtesy of Paul Krugman. In some circles this is argued as the way of free enterprise with in this case management/owners/investors deserving more than the workers.

So I took a quick peek at where this divide began and the degree of this wedge. I found some good work already done by Lawrence Mishel identifying some causes including the rising difference between income being earned from owning capital and income

ib330-figureA_png
Wedge Between Productivity and Compensation Growth, Economic Policy Institute

being earned by workers. I’ve touched before on how our tax policies are today influencing this massive redistribution of wealth. Yesterday made the point of allowing the “temporary” tax reductions to expire. Clearly I need to spend time researching and making my point.

Today however is Easter, and after a wonderful brunch with friends (Award winning author Chris Jackson) aboard their boat, it is simply time to play and enjoy a little music and relaxing. I’ll leave you with this chart depicting the growing divide between productivity and hourly wages and my promise to get in depth in the near future.

 

Old Assault Weapons—New Taxes

Are they related? Yes; both the Federal Assault Weapons Ban of 1994 and the Economic Growth and Tax Reconciliation Act of 2001 were passed by the US House and Senate, and signed into temporary laws expiring in 10 years. That was the plan, ten years and both would end barring significant positive impacts and the resulting votes necessary to make them permanent. But that’s pretty much where the relationship dies if we listen to the political banter.

But as the 10 year temporary assault weapons ban came to a close it was quietly allowed to end. No fanfare, no public pronouncements about “new” assault weapons being loosed on the public, few pros—cons kicked about of the impact to the country or the future of Americans. The discussion was so limited it was virtually nonexistent. Today as our House and Senate considers another ban we hear much about “disarming” the public, “infringement of constitutional rights” and much more, some truth and some non-truth. Were there positive or negative outcomes as a result of the temporary ban? I’m not discussing the assault weapons ban except to say it was temporary, and then it expired just as it was intended and passed in 1994 to do.

However as temporary tax reductions came near to end we’ve heard a loud outcry about “new” taxes being livied on businesses and public, claims about the impacts to the country, and how horrible it will be for free enterprise impacting the future of Americans. On allowing the tax (temporary) reductions to expire the discussion points include one-liners like “no new revenue”, “budget cuts”, “shrinking government”, and “hurting the economy”. Really they are just the old taxes, nothing new at all about them.

If we think outcomes should count and we indeed want to look at potential impacts of the temporary law, here are a few talking points: The “old” tax rates (now temporarily reduced) were in effect for the period back when GDP growth was 5%, unemployment was running at 4%, and there were federal revenue excesses of $236.2 Billion, yes actually paying down the national debt verses running an annual deficit.

Since we’ve enacted these temporary tax reductions, we have GDP growth at 2%, 3Q 2012, unemployment at 8%, a $1.3 Trillion (2011) and $1.1 Trillion (2012) annual deficit, and a major migration of wealth from lower and middle class to the top few percent. All that in spite of the Heritage Foundation report predicting the temporary cuts would result in complete elimination of the U.S. national debt by fiscal year 2010.  But hey, the Heritage Foundation has been wrong about inflation for ~5 years now too.

Taxes and the Economy

Do Low Tax Rates Help the Economy?

If we need more let’s couple that experience with the study discussed a few weeks ago analyzing the impacts of tax rates on the GDP, savings rates, and productivity. Now we have our own decade of personal experience as to what happened and a study from 1945 on telling us these past years are indeed NOT an anomaly. 

As I mentioned in Low Taxes verses Economy:

  • Lowering marginal tax rates does not increase economic activity nor impact the GDP.
  • Lowering capital gains rates does not increase economic activity nor impact the GDP.
  • Lowering marginal tax rates and/or capital gains tax rates does not increase saving and investment.
  • Lowering marginal tax rates and/or capital gains tax rates does not increase U.S productivity.
  • Lastly, lowering capital gains and/or marginal tax rates does make the wealthy wealthier and add to the significant and growing U.S income inequality.

I’m starting to like the sound of those “old” tax rates. So let the temporary tax breaks expire just like the temporary assault weapons ban. Or to be credible, we should at least call them “old” taxes. Old as in when the economy was fine, the deficit and talk of austerity nonexistent.