There has been another dust up this week regarding a bank that received Federal money not spending their resources as the legislators would wish. Northern Trust Bank, a Chicago based institution, sponsored a golf tournament in Los Angeles last weekend. As part of their sponsorship, they paid for employees and clients (mostly clients) to fly in for the event. The bank paid for the guests to stay in expensive hotels, and sponsored lavish parties, headlined by the artists Chicago, Earth,Wind & Fire, and Sheryl Crow. Suffice it to say that big bucks were spent, and a good time was had by all.
Since Northern Trust was the recipient of $1.6 billion from last year’s Federal bailout package, outraged howls from Congress ensued when details about the swanky soirees hit the media. Representative Barney Franks, chairman of the House Banking Committee, fired off a letter to Northern Trust, castigating the bank for their “arrogance and irresponsibility” and demanding Northern Trust return to the Treasury a sum equal to what was spent on the event. The letter was cosigned by seventeen other Democratic congressmen.
This is the kind of political grandstanding that explains why politicians should not be in charge of the banking system in this country. Among all the screams of “an outrage, simply an outrage,” and “have they no shame,” several facts about the issue have been drowned out.
First, Northern Trust signed the five year sponsorship contract for this golf tournament in 2007, before the whole banking mess started. Furthermore, blocks of hotel rooms, caterers and bands for events like this are usually booked six months or more in advance, with sizable deposits paid. In other words, these expenses were committed to long before any of the Federal bailout package was even thought of, let alone handed out. What was Northern Trust supposed to do, break the contracts and lose all the prepaid expenses?
Even more important, keep in mind that Northern Trust did not ask for money from the Treasury. Northern Trust is a profitable bank. Even after all the prepaid expenses for the golf event, they earned over $600 million in 2008. They accepted the money from the Treasury’s Troubled Asset Relief Program (TARP) because they were asked to take the money.
The Treasury Department wanted all of the twenty largest financial institutions in the country to take money from the bailout fund. The idea was that if only banks in trouble got bailout funds, it would be a red flag to investors and depositors. The Treasury didn’t want to start a run on the very banks that most needed their help. So banks that did not need a capital infusion were arm-twisted into taking the money, right along with the banks that were on the edge of insolvency. In Northern Trust’s case, the TARP money came in the form of a loan, and they are paying almost $80 million a year back to the Treasury.
I borrowed money from a bank to buy my home. I make my mortgage payments on time, and have never been late. As long as I keep making those payments, I don’t think the bank has a right to tell me I can’t serve steak if I have a barbeque in my backyard. The same principle applies here. Congress (or more to the point, individual representatives) doesn’t have the right to tell profitable businesses how they should operate.
And here’s my final point on the Northern Trust story for today: when Northern Trust throws a big party in LA, doesn’t that stimulate the economy? If you are a hotel maid, or a catering server, or even a roadie for Sheryl Crow, aren’t you benefiting from these parties? Those people have jobs, and are probably grateful to be working in today’s economy.
The US government is about to start spending almost $800 billion on a stimulus package to put people to work. Maybe Congressman Franks should not be in such a big hurry to stop private institutions from doing the same thing.
Thursday, February 26, 2009
Monday, February 23, 2009
Sunday, February 22, 2009
Gaming the System
Despite the forest of laws that make up the Federal tax code, on a conceptual level the income tax system is pretty simple.
First, you total up your income. Next, you subtract deductions from income to arrive at your taxable income. Multiply that by the appropriate tax rate, and you arrive at your tax liability. Once you know your tax liability, you apply any applicable tax credits. Credits reduce your tax liability, dollar for dollar. The result of these calculations is the amount of income tax you owe the Federal government.
The last step in the process is to compare the amount of tax you have prepaid (aka withholding) to the amount of income tax you owe. If you had more withheld more than you owe, the IRS sends you a refund. If you withheld less than you owe, you get the pleasure of writing the IRS a check for the difference (cue the wailing and gnashing of teeth).
Clear as mud, right?
For wage slaves like me, and historically for most of us, it was difficult to beat the system. Your employer reported your wages directly to the IRS. For those of us who didn’t get the free use of a car and driver, there wasn’t much chance to under report income, aside from the odd garage sale now and then. You had to be unusually creative to come up with enough deductions to exceed the standard deductions, so that avenue for chicanery was also closed off to most of us.
So most of us were just resigned to paying taxes. Depending on your withholding you might get a big refund or you might have to pay in a little at the end of the year, but unless you owned a business with a lot of cash income, your opportunities for cheating on your taxes were pretty limited.
But with the Earned Income Credit, the opportunities have gotten much broader based. Remember, tax credits affect your tax liability on a dollar for dollar basis. This makes them six to ten times more powerful than hiding income or making up deductions, depending on your tax bracket. At the 15% tax bracket, you have to come up with $6.67 dollars of deductions to reduce your taxes by $1.00. One dollar of tax credit reduces your tax liability by $1.00.
But it gets better, because tax credits come in two flavors: non-refundable and refundable. With non-refundable credits, you can reduce your taxes to zero, but after that they don’t do much good. Once your tax liability is zero, you get your withholding refunded, but that’s all.
But the Earned Income Credit is a refundable credit. This means that even if you owe no taxes, you get the whole credit added to your refund. As an example, suppose an individual is a single parent with two children, and the individual earns $18500 per year. To make ends meet this person has the children enrolled in Medicaid, lives in government subsidized Section 8 housing, and receives food stamps (all non-taxable).
This person would file as head of household with three personal exemptions. With a standard deduction for head of household at $8000, and $10500 in personal exemptions, the taxable income in this case is $0. The individual gets all of their withholding back in the refund. But he also gets $4056 from the government in EIC.
The thing about these credits is that they provide huge incentives to game the system. So in the example I’ve just laid out, if the taxpayer was living with his girlfriend, and she also had earned income, his EIC would be reduced if they got married. If a single parent is living with a partner who pays more than half the household expenses, the parent is ineligible for the EIC. But all you have to do is fail to mention the partner when you do your taxes, and bang-zoom, you get that fat check of free government money.
Let’s say your niece lives with your mother, who is surviving off social security. For tax purposes, you claim that your mother and niece live with you, which makes you eligible to claim the niece for EIC. So what if you moved out of your mom’s house years ago. She doesn’t have earned income, so she can’t take advantage of the credit. Someone has got to take advantage of the government in that family.
The EIC can provide the equivalent of two or three months worth of wages for some low income earners. That’s a pretty strong incentive to cheat the system.
I used to think it was only the wealthy who cheated on their taxes. But anyone can play at being Tom Daschle these days.
First, you total up your income. Next, you subtract deductions from income to arrive at your taxable income. Multiply that by the appropriate tax rate, and you arrive at your tax liability. Once you know your tax liability, you apply any applicable tax credits. Credits reduce your tax liability, dollar for dollar. The result of these calculations is the amount of income tax you owe the Federal government.
The last step in the process is to compare the amount of tax you have prepaid (aka withholding) to the amount of income tax you owe. If you had more withheld more than you owe, the IRS sends you a refund. If you withheld less than you owe, you get the pleasure of writing the IRS a check for the difference (cue the wailing and gnashing of teeth).
Clear as mud, right?
For wage slaves like me, and historically for most of us, it was difficult to beat the system. Your employer reported your wages directly to the IRS. For those of us who didn’t get the free use of a car and driver, there wasn’t much chance to under report income, aside from the odd garage sale now and then. You had to be unusually creative to come up with enough deductions to exceed the standard deductions, so that avenue for chicanery was also closed off to most of us.
So most of us were just resigned to paying taxes. Depending on your withholding you might get a big refund or you might have to pay in a little at the end of the year, but unless you owned a business with a lot of cash income, your opportunities for cheating on your taxes were pretty limited.
But with the Earned Income Credit, the opportunities have gotten much broader based. Remember, tax credits affect your tax liability on a dollar for dollar basis. This makes them six to ten times more powerful than hiding income or making up deductions, depending on your tax bracket. At the 15% tax bracket, you have to come up with $6.67 dollars of deductions to reduce your taxes by $1.00. One dollar of tax credit reduces your tax liability by $1.00.
But it gets better, because tax credits come in two flavors: non-refundable and refundable. With non-refundable credits, you can reduce your taxes to zero, but after that they don’t do much good. Once your tax liability is zero, you get your withholding refunded, but that’s all.
But the Earned Income Credit is a refundable credit. This means that even if you owe no taxes, you get the whole credit added to your refund. As an example, suppose an individual is a single parent with two children, and the individual earns $18500 per year. To make ends meet this person has the children enrolled in Medicaid, lives in government subsidized Section 8 housing, and receives food stamps (all non-taxable).
This person would file as head of household with three personal exemptions. With a standard deduction for head of household at $8000, and $10500 in personal exemptions, the taxable income in this case is $0. The individual gets all of their withholding back in the refund. But he also gets $4056 from the government in EIC.
The thing about these credits is that they provide huge incentives to game the system. So in the example I’ve just laid out, if the taxpayer was living with his girlfriend, and she also had earned income, his EIC would be reduced if they got married. If a single parent is living with a partner who pays more than half the household expenses, the parent is ineligible for the EIC. But all you have to do is fail to mention the partner when you do your taxes, and bang-zoom, you get that fat check of free government money.
Let’s say your niece lives with your mother, who is surviving off social security. For tax purposes, you claim that your mother and niece live with you, which makes you eligible to claim the niece for EIC. So what if you moved out of your mom’s house years ago. She doesn’t have earned income, so she can’t take advantage of the credit. Someone has got to take advantage of the government in that family.
The EIC can provide the equivalent of two or three months worth of wages for some low income earners. That’s a pretty strong incentive to cheat the system.
I used to think it was only the wealthy who cheated on their taxes. But anyone can play at being Tom Daschle these days.
Monday, February 9, 2009
A Noun is the Name of a Thing
I signed on with H&R Block to be a tax preparer this year. I did it both for the experience, which I figured would help with my own taxes, and because I hoped to make a little extra money. As a first year preparer, it turns out I was wrong about making any real money, but that is a topic for another post.
So I have been working part time the last two weeks doing taxes, and have done about 20 returns so far. Most of the people who file early are getting big refunds, but I didn’t realize how big until I started processing their taxes. The vast majority of the tax returns I’ve done have gotten way more money back from the IRS then they paid in withholding.
The language we use around taxes is completely misleading. Take someone who pays $2000 in withholding and gets all $2000 back, plus another $3000 in top of that. Should we be calling that a tax refund? Normally a refund is the return of money paid in. The return of withholding counts as a refund, but what about the other $3000? Instead of calling that part of their refund, wouldn’t it be more accurate to call it welfare?
At an even more basic level, why are we calling everybody taxpayers? Half the households in America pay no income tax. A more accurate term would be tax filers. Actually, if you get more tax money out then you pay in, doesn’t that make you a tax receiver?
I'm not done with the subject of taxes, there will be more to come. By the way, my opinions are my own and in no way should be considered to represent H&R Block in any way.
So I have been working part time the last two weeks doing taxes, and have done about 20 returns so far. Most of the people who file early are getting big refunds, but I didn’t realize how big until I started processing their taxes. The vast majority of the tax returns I’ve done have gotten way more money back from the IRS then they paid in withholding.
The language we use around taxes is completely misleading. Take someone who pays $2000 in withholding and gets all $2000 back, plus another $3000 in top of that. Should we be calling that a tax refund? Normally a refund is the return of money paid in. The return of withholding counts as a refund, but what about the other $3000? Instead of calling that part of their refund, wouldn’t it be more accurate to call it welfare?
At an even more basic level, why are we calling everybody taxpayers? Half the households in America pay no income tax. A more accurate term would be tax filers. Actually, if you get more tax money out then you pay in, doesn’t that make you a tax receiver?
I'm not done with the subject of taxes, there will be more to come. By the way, my opinions are my own and in no way should be considered to represent H&R Block in any way.
Thursday, February 5, 2009
Another Fine Mess
Another Obama nominee has run into tax problems, this time by proxy. The husband of Hilda Solis, the nominee for Labor Secretary, owns an auto repair business in California. It has now come to light that this business had a number of outstanding state and county tax liens against it. The oldest liens were sixteen years old, and the total value of the liens was $7630. According to news reports, Sam Sayyad, Ms. Solis’ husband, was not even aware of the outstanding liens until asked about them.
There are two ways you can look at this story. One, you can spin this into a partisan attack on the administration. “Look at these guys: first Geithner, then Daschle, then Killefer, and now Solis. These guys are all crooks and tax cheats.”
This dog won’t hunt. Daschle and Killefer have withdrawn. This flap about Solis is much ado about nothing. $7630? Please, get serious. If her husband didn’t get something so penny ante resolved before this, it was because he really didn’t know about the tax liens.
I think a more interesting take on the situation was the point I brought up in my last post. Governmental regulation can be so pervasive, and yet so obscure, that even people who intend to be in compliance may not know they are in violation of one regulation or another.
No, Sam Sayyad is not a crook. He is just an honest businessman trying to run his company and make a little money doing it. But if the people on the pro-regulatory side of the aisle can’t keep even with the current level of regulation and taxes, surely that has to be an argument against adding to the burden.
There are two ways you can look at this story. One, you can spin this into a partisan attack on the administration. “Look at these guys: first Geithner, then Daschle, then Killefer, and now Solis. These guys are all crooks and tax cheats.”
This dog won’t hunt. Daschle and Killefer have withdrawn. This flap about Solis is much ado about nothing. $7630? Please, get serious. If her husband didn’t get something so penny ante resolved before this, it was because he really didn’t know about the tax liens.
I think a more interesting take on the situation was the point I brought up in my last post. Governmental regulation can be so pervasive, and yet so obscure, that even people who intend to be in compliance may not know they are in violation of one regulation or another.
No, Sam Sayyad is not a crook. He is just an honest businessman trying to run his company and make a little money doing it. But if the people on the pro-regulatory side of the aisle can’t keep even with the current level of regulation and taxes, surely that has to be an argument against adding to the burden.
Wednesday, February 4, 2009
Trouble in Paradise
Two of President Obama’s appointees withdrew their nominations yesterday. In both cases the reason for their withdrawal was the exposure of problems with filing and paying taxes. Tom Daschle, the former majority leader of the US Senate, pulled out of consideration to be Secretary of Health and Human Services. His tax faux pas was failing to list the use of a car and driver as compensation when he reported his income. The vehicle was provided to Mr. Daschle by one of the companies he worked for. The rule is pretty simple. If you pay for a car and driver yourself, you can use the milage driven for business purposes as a tax deduction. If you accept a car from someone else, the value of that service is compensation, the same as getting paid.
The other nominee was Nancy Killefer, who had been tapped to become the nation’s Chief Performance Officer. Ms. Killefer, a senior partner at the McKinsey management consulting firm, failed to pay the unemployment insurance premiums on her personal household staff of two assistants and a housekeeper.
This is so rich a situation that one scarcely knows where to begin, but time is short, so I’ll start by venting my spleen on the low hanging fruit.
Chief Performance Officer? What the hell kind of job is that? Apparently someone had the bright idea of creating a new position, based in the White House, tasked with finding and eliminating wasteful spending by the government. ‘Cause having Inspector Generals in every government department wasn’t enough. No, we needed a new government waste czar.
Here’s a little hint for you: the position of Chief Performance Officer is a terrific example of government waste. Criminy, the job title is it’s own punchline.
Now let’s talk about the tax issues, starting with Ms. Killefer’s. This is pretty simple. With household help, such as maids, nannies, drivers, cooks, and personal assistants, the rule is pretty simple: either you pay an independent contractor for services rendered, or you have employees. With independent contractors, they have to deal with the taxes and government paperwork on their own. With employees, you have to deal with those hassles for them. Every small business owner in America has learned that lesson.
I can only guess at why Ms. Killefer did not pay the unemployment insurance for her employees. Perhaps she believed that she did not have enough employees to fall under the requirements of the law. The District of Columbia disagreed. The funny thing is that there are employee leasing firms that will handle all of those messy details for you. Heck, any temp agency could have handled the payroll issues, for a markup of the employees’ wages. Why didn’t she just do that?
By the way, did she provide her employees health insurance? That’s a question I’d like to have answered.
Mr. Daschle apparently had the use of the car and driver for three years before he got around to talking to his accountant about it. The value of those services was about $300,000, based on the amount of taxes paid to settle the issue. By the way, this is the same sort of tax issue that fat cat corporate types run into, when they use the company jet to fly their spouses on vacation. If you use the company vehicle for personal purposes, the cost is income to you. Does that make Mr. Daschle a fat cat corporate type?
One Republican has already quipped: “No wonder the Democrats don’t mind raising taxes. They don’t intend to pay them!”
Now, these were probably unintentional violations of local and Federal laws. Both individuals have admitted they made a mistake and made restitution. But these are supposed to be the best and the brightest, and they can’t figure out how to comply with government requirements.
After all, the incoming administration is pro-government regulation. They believe that more government, not less, is the solution to the nation’s problems, yet some of the very people selected to put new programs in place are not in compliance with the existing regulatory scheme.
How will the rest of us cope, after they’ve had more time to put their agenda into place?
The other nominee was Nancy Killefer, who had been tapped to become the nation’s Chief Performance Officer. Ms. Killefer, a senior partner at the McKinsey management consulting firm, failed to pay the unemployment insurance premiums on her personal household staff of two assistants and a housekeeper.
This is so rich a situation that one scarcely knows where to begin, but time is short, so I’ll start by venting my spleen on the low hanging fruit.
Chief Performance Officer? What the hell kind of job is that? Apparently someone had the bright idea of creating a new position, based in the White House, tasked with finding and eliminating wasteful spending by the government. ‘Cause having Inspector Generals in every government department wasn’t enough. No, we needed a new government waste czar.
Here’s a little hint for you: the position of Chief Performance Officer is a terrific example of government waste. Criminy, the job title is it’s own punchline.
Now let’s talk about the tax issues, starting with Ms. Killefer’s. This is pretty simple. With household help, such as maids, nannies, drivers, cooks, and personal assistants, the rule is pretty simple: either you pay an independent contractor for services rendered, or you have employees. With independent contractors, they have to deal with the taxes and government paperwork on their own. With employees, you have to deal with those hassles for them. Every small business owner in America has learned that lesson.
I can only guess at why Ms. Killefer did not pay the unemployment insurance for her employees. Perhaps she believed that she did not have enough employees to fall under the requirements of the law. The District of Columbia disagreed. The funny thing is that there are employee leasing firms that will handle all of those messy details for you. Heck, any temp agency could have handled the payroll issues, for a markup of the employees’ wages. Why didn’t she just do that?
By the way, did she provide her employees health insurance? That’s a question I’d like to have answered.
Mr. Daschle apparently had the use of the car and driver for three years before he got around to talking to his accountant about it. The value of those services was about $300,000, based on the amount of taxes paid to settle the issue. By the way, this is the same sort of tax issue that fat cat corporate types run into, when they use the company jet to fly their spouses on vacation. If you use the company vehicle for personal purposes, the cost is income to you. Does that make Mr. Daschle a fat cat corporate type?
One Republican has already quipped: “No wonder the Democrats don’t mind raising taxes. They don’t intend to pay them!”
Now, these were probably unintentional violations of local and Federal laws. Both individuals have admitted they made a mistake and made restitution. But these are supposed to be the best and the brightest, and they can’t figure out how to comply with government requirements.
After all, the incoming administration is pro-government regulation. They believe that more government, not less, is the solution to the nation’s problems, yet some of the very people selected to put new programs in place are not in compliance with the existing regulatory scheme.
How will the rest of us cope, after they’ve had more time to put their agenda into place?
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