Sunday, November 21, 2010

Real Environmentalists

My good friend Laurie visited a few days ago. Laurie is the perfect example of an environmentalist who truly could make a difference. She's no extremist, doesn't belong to any environmental organizations to my knowledge and might not even claim the title.

As we were visiting, I showed her some recent home improvements. One was carpeting a sleeping loft. I'd bought a remnant, used what I needed and cut some more to line the dogs' houses for winter. There were three little rolls remaining. We planned to haul them to the dump with some old fencing, a dead water heater and whatever else might fill the pick-up.

Laurie began rattling off half a dozen great uses for the carpet scraps -- crafts, weed control, new car pads, door mats and so on. She was ready to help me adapt to any of these uses but I wasn't enthused. In retrospect, I showed that I'm the earth's problem. Due to a lack of imagination and a tendency to laziness, I was willing to discard and rebuy what I needed later. Fortunately, Laurie took the scraps home and made a small contribution to protecting the earth.

It reminded me of our trip to Tajikistan a few years ago. Brandy and John's home had a single trash can for the family of four. Its size? About equivalent to a half-gallon of milk. Think about that. My garbage can for two of us is huge. How could I live with only a half-gallon of trash?

Part of the answer is in packaging. Go to the bazaar in Dushanbe to buy a pair of pliers or a screw driver and the vendor pulls out a bucket full of all different sizes. Choose the one you want, pay and you're on your way. Here, I walk into the store and look at a similar selection of tools, but all in plastic molds on cardboard backing to ensure optimum presentation. Then buy another tool for opening the damned hard plastic packages. Lots of waste.

In Dushanbe, everything is re-used. Boy did I get in trouble for throwing out a zip lock sandwich bag! Such things are valuable. You wash and re-use. One box should last the rest of your life. And of course, they aren't sold locally. Must be imported by visiting Americans.

You may be a committed garbage sorter and recycler but I doubt it has much impact. All that recycled material still demands processing, transportation and repackaging. Better to buy used items, buy local --or as local as you can -- and reject excessive packaging.

I'm not as imaginative or energetic as my friend Laurie. But I can shop garage sales with the best of 'em. That'll be my new contribution to the earth.

See also:  Top 10 Wastes

Saturday, November 20, 2010

Overheard in Waziristan

This just released: an aid worker in the Waziristan region overheard this conversation in a cafe and recorded it secretly on her cellphone.

"...they've spent over two billion US dollars on the things now."

"But surely they cannot use them."

"Indeed. They are using them. Our friend Umar has achieved what no one in history could. Sheer genius."

"Yes, I was skeptical. It seemed so demeaning to hide explosives in his underwear. Surely the American devils would win the propaganda war over that one."

"And instead, he has accomplished all that we hoped! The American people are degraded and humiliated. Each one must agree either to appear nude or to have their private parts groped by a stranger."

"I don't know why I doubted you. When Richard Reid's little drama caused the Americans to force every flier to remove their shoes, it was clear the direction we should go."

"It's so funny that years ago we thought we actually had to blow something up to destroy America. Don't you think it's so much more fun planning these little dramas and watching the Americans react?"

"Of course. And now, have you heard? Apparently they've discovered that American men have blurry groins. Not really men at all."

"So it's time to plan our next little charade. What shall it be?"

"Omar thinks we should plant something in a body cavity. But I think there's something better."

"Go on."

"The airport shtick is getting old. Let's send a phony underwear bomber to a big church -- a woman this time. Let her be caught and watch the Americans begin groping each other in the pews."

"Excellent! It's really much too easy."

Friday, November 19, 2010

The Truth about Taxes

Lots of talk these days about raising taxes and cutting spending. Republicans say they'll control spending and won't raise your taxes. Democrats won't let social programs be cut but want taxes on the top 2% raised. What's true?

For most people, our Federal Taxes consist of some or all of these:
  • Income Taxes (taxed for working)
  • Payroll Taxes (for Social Security and Medicare)
  • Capital Gains Taxes (gains on the sale of assets like stocks or a home)
  • Dividend Taxes (earnings on stocks)
  • Estate Taxes (only matters if you're an heir or a corpse)
  • Other taxes on miscellaneous income from interest earnings, rents and royalties, pensions, etc.
Let's look at each of these and how they impact your taxes vs. the taxes others are paying. In each case, I've used the averages provided by the IRS for the most recent year available.


INCOME TAXES and DEDUCTIONS

Long considered the most progressive tax, income taxes are graduated so those with higher income pay a larger share than those with less income. The current rates range from 10% for the lowest wage earners to 35% for those earning over $373,650. In addition to the tax rates though are the obvious and less obvious deductions and credits that reduce the tax you would pay. Let's look at three examples:

Poor Jimmy (PJ) works at a minimum wage job in Oregon ($8.40 per hour). He is lucky and works 40 hours each week for 52 weeks. He is especially lucky that he is paid for 8 holidays too. PJ earns $17,000 (rounded) in a year.

His income taxes are simple. He takes the standard deduction of $5700 and the personal exemption of $3650. That leaves him with $7650 of taxable income. He pays the lowest rate of 10%.

PJ's 2010 Federal Income Tax Paid: $765 or 5% of his year's income

Wage Taker Freddy (WTF) has a comfortable salaried job and earns $63,000 (national average). WTF also takes the standard deduction and the personal exemption (two-thirds of Americans use the standard deduction). He has $53,650 of taxable income and pays 25% in income taxes.

WTF's 2010 Federal Income Tax Paid: $9600 or 15.2% of his year's income

Richie Rich (RR) is doing well and earns $500,000 at his important job. RR itemizes (87% of those earning over $100,000 itemize). The average itemized deduction for those earning over $200,000 is over $110,000 (half of their income). RR claims deductions of $200,000 (low estimate based on IRS figures). He takes the personal exemption also. RR's taxable income is $296,350 and he pays 33% on a small portion of his income.

RR's 2010 Federal Income Tax Paid: $82,938 or 16.6% of his year's income


PAYROLL TAXES (FICA)

But of course, we all pay more than just income tax to the federal government. For most of us, payroll taxes (deducted off the top of our paychecks) are among the highest. Currently, we all pay 6.2% of gross income (no deductions, sorry) for Social Security and 1.45% for Medicare. The Social Security tax is levied only on the first $106,800 of income but Medicare taxes are the same for all.

PJ's 2010 FICA taxes paid: $1300.50 or 7.65% of his year's income

WTF's 2010 FICA taxes paid: $4819.50 or 7.65% of his year's incomeRR's 2010 FICA taxes paid: $13,872 or 2.8% of his year's income


SUMMARY TO THIS POINT:
  • PJ is paying 12.65% of his $17,000 earnings
  • WTF is paying 22.9% of his $63,000 earnings
  • RR is paying 19.36% of his $500,000 earnings

CAPITAL GAINS TAXES


Capital gains are your earnings on investments, such as real estate, stocks and bonds. These are taxed at a much lower rate than wages because, well, we like people who invest their money more than the schmucks who go off to work every day to earn from the sweat of their brow. Oops. A little editorializing there.

The capital gains tax rate on long-term (more than a year) investments is 5% if you earn less than $34,000 per year and 15% if you earn more. Let's have a look.

At $17,000 a year income, PJ has no money to invest. He has no capital gains income and no capital gains taxes.

At $63,000 a year income, WTF earns the average for his tax bracket of $840 in capital gains and pays 15% or $126 in tax on that income.

At $500,000 a year income, RR earns the average in capital gains for his income level of $138,000 and pays 15% or $21,000 in tax on that income.

SUMMARY TO THIS POINT
  • PJ's total income is still $17,000 and his total tax burden is 12.65%
  • WTF's total income is now $63,840 and his total tax burden is 22.8%
  • RR's total income is now $638,000 and his total tax burden is 18.46%

DIVIDEND TAXES


Dividends are earnings on investments you still hold. Again, PJ can't afford to make investments and has zero dividend earnings and zero in dividend taxes. We'll use average figures from the IRS for WTF and RR. The current tax rate for dividends is 15%, also well under the income tax rate. (Side note: some decry this as double taxation since corporations are taxed on their profits and then shareholders again when they receive dividends. However, SS corporations already can "pass through" those profits to shareholders without paying any taxes on them.)
  • PJ earned zero in dividends and paid no dividend taxes
  • WTF earned $4,847 in total dividends and paid $727 in taxes on them
  • RR earned $65,388 in total dividends and paid $9808 in taxes on them
SUMMARY TO THIS POINT
  • PJ's earnings still sit at $17,000 with a tax burden of 12.65%
  • WTF's earnings are now at $68,687 with a federal tax burden of 22.2%
  • RR's earnings are up to $703,388 with a federal tax burden of 18.1%

ESTATE TAXES


Perhaps before venturing into estate taxes, this would be an appropriate time to thank WTF for his sacrifice for his country.

Estate taxes are paid when an individual dies and leaves a substantial inheritance to his or her heirs. Currently, the estate tax is at ZERO. Indeed, our tax policy is encouraging inheritance and discouraging work.

Unfortunately, I can find no data on who inherits and how much since the IRS isn't collecting the information through tax returns. Without any hard data, it's still reasonable to assume that most of the top 2% of earners either have or will inherit substantially from their similarly wealthy parents. This is lifetime assets with no tax obligation. Suffice it to say that those inheriting big estates -- valued in excess of $1 million -- are the prime beneficiaries of the tax grace from Uncle Sam.


OTHER SOURCES OF INCOME

There are some other income sources not included here: interest income, rents and royalties, pensions, and so on. If you've read this far, you're probably thankful I'm leaving those off and allowing you to get back to your business.


CONCLUSION

Tax policy is a way of encouraging some kinds of behavior and discouraging other. So far, we can see that gambling in the markets, buying real estate and having rich relatives are encouraged. Earning your keep from a job is discouraged. Yet America's one boast to the rest of the world is the amazing productivity of our workers. Is this the road we want to be traveling?

Social Security and the Boomers

Disclosure first: I am a baby boomer.

The Co-chairs of the President's Commission have released their deficit reduction proposal and understandably there is something there to hate for everyone. In future blogs, I will discuss tax inequities and why what Republicans call Democratic "tax increases" are really just attempts to eliminate the tax bias against working stiffs. Today though, reflect on these interesting facts about Social Security. Perhaps they will put recommendations to cut future benefits in perspective.

The Social Security program began under Franklin Roosevelt in 1937. Initially, the FICA payroll tax was 2% of wages. Gradually over the years (and most remarkably under Eisenhower, Nixon and Reagan), the payroll tax has increased to 12.4% today. Half of this is paid directly by workers and the other half by their employers. If you are self-employed like my husband, you pay the full amount. One could argue that all workers pay the full amount since employers calculate total cost of employment and adjust wages accordingly, but for now we'll just look at the worker's costs and benefits.

Let's look at an American born in 1920 who worked from age 20 until age 65 and then retired and collected Social Security. We'll call him George, Sr. Assume that George, Sr. paid the maximum FICA rate and earned the maximum benefit. During his 45 years of employment, he paid about $20,000. After retiring in 1985, assuming he lived another 20 years, he received the maximum benefit of $172,000. This worker of my parents' generation received more than 8 times what he paid in. Where did that come from?

George, Jr. was born in 1945 and also started working at 20. He worked from 1965 until 2010 and has just retired and begun collecting Social Security. George, Jr. paid $179,000 in Social Security. Over the next 20 years (Both Sr. and Jr. are due to die at age 85), George, Jr. will collect a total of $526,000. George, Jr. will receive almost 3 times what he paid in. Still a good deal, right?

Wrong. If both men had invested their contributions and earned 5% per year in returns, Senior could only have had $60,000 when he retired. He did very well indeed with his $172K return on a $20k investment. Junior however would have had $640k at 5% on his investment. Junior actually lost $115k in the deal.

So what is the most fascinating observation here? Junior's net donation to Social Security of $115,000 is almost exactly what Senior was paid over and above his possible earnings on his investment.

So what is the problem with Social Security? It's not the Boomers. We paid our share. And it's not our children's generation either. With the increases in retirement ages and their even higher contributions, they stand to fare even worse. The problem is what politicians did in the past, buying senior citizens' votes with their children's money.

How to fix it? First, remove the cap on contributions. Right now, you pay 6.2% on your first $106,000 of income. Few of us make more than that. Those who do pay a lower rate. If you earn twice that ($212,000), your FICA tax is 3.1% of all income. If you earn ten times that ($1,060,000), you pay .62%, less than 1% FICA tax. Let's make it fair for everyone. We're not building our own Social Security accounts. We're paying for the previous generation. Everyone should contribute equally.

Interested in a broad range of options for cutting the federal deficit? The New York Times has a do-it-yourself budget balancing tool here.

Want to do the math yourself? Here are the links you need:
http://www.taxpolicycenter.org/taxfacts/Content/PDF/ssrate_historical.pdf
http://www.ssa.gov/history/pdf/t2a4.pdf
http://www.ssa.gov/history/pdf/maxandminbenefits.pdf
http://www.moneychimp.com/calculator/compound_interest_calculator.htm


Calculation details:
  • maximum tax and maximum benefit used in both examples
  • COLA not included in either
  • interest rate calculator assumed a constant contribution level over 45 years
  • both start working at age 20, retire at 65 and die at 85
  • no consideration for the additional private pension income George, Sr. might have earned in his union job or what George, Jr. missed out on with the near disappearance of guaranteed pensions and private sector union jobs
Later: Why the working stiffs pay the highest tax rates and what we can do to make them fairer.

See also Boomers Redux