Thursday, February 26, 2009

Do The Math On Taxes

Math Problem #1: Tax burden increase on Californians. Remembering all the rhetoric from Democrats the past several years about “the working family” and “saving/protecting the middle class” and the “working poor”, remembering their rhetoric let’s see how their huge tax bill they passed in Sacramento last week (with a few Republican accomplices) helped these families. There are tax calculators all over the web for you to put in your own numbers, here’s one to save you the Google search. If you take a reasonable middle class family, Mom and Dad both work—let’s say they are both teachers and while not new not yet at the average salary and make \$45,000 each for a total of \$90,000. They each have a car, let’s say a minivan and a small SUV or crossover worth about \$25,000 each for a total of \$50,000 and they also have two kids. Under the taxes just passed in Sacramento this family’s tax payments will increase by \$1227.

Now let’s say there is a hip young professional with no kids, has his master’s degree and works for the state college system as a senior administrator pulling down \$140,000 annually and drives a sporty BMW X5. With no kids and a higher salary the tax burden on this young man will increase \$966 per year. Making 55% more money that our married family and with no children to support gives a tax advantage of \$261 per year to Californians.

So next time you hear anyone from Sacramento talking about budgets and helping America’s or California’s families ask them if they voted for the tax increases in February 2009—if they are in office and a Democrat they did—and then know they could care less about families and “working people” as they are typically defined.

Math Problem #2: President Obama and the Democrats hit the national campaign trail hot and heavy in 2008 giving speeches about how they were going to also help the middle class and unless you were in the top 5% of income earners in the United States you would not see your taxes go up. This past week Obama began the tax talk and has spoken about increasing the marginal tax rate for America’s highest income earners to help pay down the deficit—including the \$2 trillion they just added to the deficit with the Porkies I stimulus plan.

A few weeks ago Obama and Congress announced that they were going to cap the pay of individuals who are employed by firms who received TARP (Troubled Asset Relief Program—the \$750 billion bank and Wall Street bailout from October 2008) to \$500,000. This was met with widespread applause and happiness from many in America who feel that if the banks have gotten \$350 billion of tax payer money—never mind that it was traded for stock—that those in charge should have their income capped at a “reasonable level.” Given that the former head of Merrill Lynch was seeking a \$10 million bonus for leading his company into an \$11 billion loss and extinction the sentiment is very understandable. But the universe operates on cause and effect and not every plan is perfect.

This plan has a few flaws however and this is where some math will come in. First the caps also apply to commissioned individuals—those on commission get paid based on what they earn for the company. With the new caps after a very successful broker hits his \$500,000 limit with say Chase he can/will quit and go to Citi and earn his next \$500k taking his clients with him. What will occur is a huge merry-go-round of talented sales people through Wall Street brokerages as they maximize their personal income under the TARP compensation limits. But this is just part of the flaw. Let’s get to the math.

Under the current tax tables individuals earning over \$372,950 are in the 35% tax bracket. So capping income at \$500,000 caps the marginal tax amount on earnings over \$372,950 at \$44,500 to use round numbers (\$500,000 – 372,950 = 127,050 x 35% = \$44,500). Given the numbers on Wall Street I am going to use for my math problem the number that 200 individuals have earnings over \$5,000,000 and work(ed) for TARP companies.
If there are 200 individuals with income of \$5 million their marginal tax amount is \$1,619,500 (rounded up \$32.50) per person, or approximately \$324 million collectively. With Obama’s compensation caps these individuals will now pay \$9 million in marginal taxes in the 35% bracket, a loss of approximately \$315 million to the Treasury. Sniffing around the internet my estimates of 200 individuals and \$5 million is very conservative and it is likely the compensation cap imposed by Washington on Wall Street will result in a loss of income tax revenue far greater than \$315 million. But at least we all feel good about capping what those greedy b**stards make! Right?

Bob Schilling said...

You have some very good points. First, you point out the need for us to revisit California's income tax structure to be sure it's as fair as we can make it. As to the increase, I don't like it either, but I don't see any reasonable alternatives. We already compete with Alabama for lowest per capita support for education. Our infrastructure is clearly a mess. And I'm not much in favor of emptying the jails more that we're already going to do. We'd be helped if we could pass National Health Care, but that's at least a year away. It would be nice when the economy recovers, but for State revenues that may be 2 years away. Do you have any thoughts about the alternatives?

As far as the salary cap goes, I thought it was limited to the top corporate officials. Have you seen documentation that it's wider than that? I've heard LOTS of opinion, but have seen precious few facts on the matter.

I do agree that capping sales commissions would be self-defeating. I saw banks do that to some of my friends a few years ago, and your prediction was upheld. They promptly departed, taking as many of their clients with them as they could. Although, from a federal perspective, they might not care where the money comes from -- income tax is income tax.

Overall, I'm hungry for sharply honed proposals from conservatives that directly address the issues before us, and that don't repeat prescriptions that have lost credibility. We've had pure tax cuts. They didn't work. If we're going to cut spending, where can we do that without eliminating necessary government services? Can we talk about the need for more effective and efficient government operations without denigrating government workers? Many of them, as you know, are immensely dedicated public servants who do their very best to provide essential services to an ungrateful public.

I don't think anyone wants unbridled growth of government. What we do need are well-considered alternatives to the proposals on the table. What fun that would be.

Dennis C Smith said...

Bob:

Tax cuts do work and they have been proven to work, the problem is they work so well that the pigs in government start spending all the new revenue that comes in on pork projects. After Reagan's tax cuts revenues soared, after Bush's tax cuts revenues in the Treasury hit record levels. Google Treasury revenue and look at collection per year before and after the cuts. Any one stating that our current economic situation is because of the Bush tax cuts is either a)lying b) ignorant of economics or c) both. The Bush Administration's biggest failure was allowing spending to explode after the revenue increase from his tax cuts. The exact same thing has happened in Sacramento--revenue since 2003 increased 20% and spending increased 40%. From 2002 until 2008 the U.S. economy grew every single quarter--the longest post-war economic expansion. The reason it was so prolonged? Tax cuts allowing investment and expansion of companies and jobs. We had record levels of employment year after year after year. Democrats love to pin the past 12 months on the tax cuts from 2002 and it is intellectually bankrupt to do so.

You want some concrete conservative ideas for government economics? 1) Cap all salaries and benefits immediately. If you lose "high-caliber" people to the private sector, that is probably good let them produce something that helps the economy instead of spending tax money. 2) Renegotiate all labor contracts to pull back benefits and entitlements that are in line with private sector. 3) Make permanent Bush tax cuts for Feds and for Sacramento pull back income tax rates 1.5% for every level. 4) Give companies and corporations tax write offs for monies spent on research and development 5) In California give corporations credit for for every new employee they add to their payrolls equivalent to that employees state income tax (i.e. employee pays 7.5% on \$30k salary company gets credit of \$2250). 6) State budget cannot exceed 90% of the prior years tax revenue until all debts and bonds are paid off, then state budget cannot exceed 95%of prior year revenue. No forward spending on projected revenue.

That is just a start.