Monday, February 21, 2011

Better Living Through Tax Credits

Middle class and upper middle class people are always astonished when I tell them that the battle to redistribute income is over, and they lost decades ago. The Federal government does a massive amount of income redistribution, and has for a long time. Nobody is even talking about limiting this.

I’m referring to the Earned Income Credit, and the Additional Child Tax Credit, which are two of the big tools the government uses to hand out money to the lower class. Consider a single mother with two children, making $19350 a year as a nurse’s aide. Assume she pays $1935 in withholding a year.

First, her standard deduction as Head of Household, combined with three personal exemptions, reduces her taxable income to $0. Most people don’t have a problem with this. If you don’t make much money, we’ll give you a pass on paying income tax. After all, everyone else gets those same opportunities to avoid taxes, based on their household scenario. So this woman will get a full refund of the money withheld from her paychecks, $1935.

But we’re not anywhere close to done. She has two kids, which is a tax advantaged situation. If she had owed taxes, she would have been eligible for the Child Tax Credit, a nonrefundable credit of $1000 per child. Since she doesn’t owe taxes, instead she qualifies for the Additional Child Tax Credit, a refundable credit of $1000 per child. This boosts her refund by $2000. Her refund check is now up to $3935.

Now let’s look at the Earned Income Credit. The amount of the credit varies with the number of children (up to three) and the amount of earned income. As income goes up, so does the credit, until it reaches a plateau. As income continues to go up, the credit begins to phase out. In our example, with earned income of $19350 and two children, the amount of EIC will be $4427.

As the piece de resistance, let’s not forget to add in her Making Work Pay Credit. This $400 credit is part of the Obama stimulus package, and will not be part of the tax code next year. It is essentially a refund of the Social Security taxes you pay on the first $6000 of earned income.

Let’s add it all together:
Withholding $1935
Add’l Child Tax Credit $2000
Earned Income Credit $4427
Making Work Pay $ 400
Total Refund $8762

In our example, our hypothetical tax filer got $6427 from the government, in addition to $2335 returned to her from paycheck withholding. That’s a wage increase of 33%. Where does that 33% increase in pay come from? Why, it comes from the taxes that higher income taxpayers put into the system. Or even from the taxes that lower income taxpayers without minor children pay into the system. Or from the taxes that married couples that both work pay.

But however you slice it, the government is taking money away from some individuals, and handing it over to other individuals, without asking anything in return. That is the income redistribution that is at the heart of socialism.

Thursday, February 17, 2011

Adventures in Taxland

True conversation with a tax client:
“How come I’m not getting as big a refund? Last year I got almost $6000, and you’re telling me that this year I only get $1000.”

“Well, sir, last year you claimed your daughter and granddaughter as dependents. The child entitled you to the Additional Child Tax Credit and the Earned Income Credit on your wife’s earnings. That made the difference.”

“Why can’t I claim my daughter and granddaughter this year?”

“Your wife told me that they moved out after living with you for only five months last year. They have to live with you at least half the year to claim them as dependents.”

“I’m just going to make a call to my daughter, and then we’re going to get that changed. She’ll tell you she lived with us all year long.”

“Sir, I’m not going to change this return. Before you got here your wife gave me this information, and you can’t unring a bell. If I knowingly falsify a tax return, I could lose my license.”

“Then I’m just going to get my return done somewhere else.”

Here is where we deviate from what actually happened. What I would have liked to have said:
“Sir, sit your ass back down. I have your social security number, and your wife’s social security number. I also have the 800 number the IRS uses to report tax fraud. Unlike you, I actually pay taxes, and I’m offended by your attempt to defraud the system. Now, we’re going to file your tax return as it stands, and you’re going to sit there and sign it.”

Of course, blackmailing your clients probably isn’t a good business model in the long run. What I actually said:
“It’s your prerogative to get your taxes done anywhere you want. Here is your wife’s W-2 form.”

You can’t always get what you want.

Wednesday, February 16, 2011

Egypt

Watching the events unfold in Egypt over the last couple of weeks puts me in mind of the old saying that the written Chinese character is the same for both “crisis” and “opportunity.” This peaceful revolution, fueled by massive discontent at all levels of Egyptian society, has swept away the Mubarek administration. Whether this is the start of true regime change, or merely a shuffling of faces at the top remains to be seen.

It was interesting to watch the waffling and sail trimming of the Obama administration as events unfolded. If you don’t have any influence on a situation, and you don’t have a clue as to how it is going to turn out, it is probably best if you keep your mouth shut about things, for fear of inserting your own foot. Aside from philosophical support for democracy in general, and the basic human right of peaceable assembly in particular, US policy should have been that this was an internal Egyptian matter, end of comment.

Much of the discontent with the Mubarek regime was driven by economic issues, both of the middle class and of the poor. By some estimates, half of the recent college graduates in the country are unemployed. Among the poor, the desperation and despair are even sharper.

Egypt does not produce enough food to feed its 79 million people. As a food importer, the country has been buffeted rises in commodity prices over the last year. In America, when wheat prices double, a family’s grocery bill goes up five or six dollars a week. In Egypt, when wheat prices double, people who were spending 50% of their income on food are now spending 100% of their income on food. When a large percentage of your population goes to sleep hungry at night, that is a recipe for political instability.

My take on things is that the mandate of the new government will be to create huge numbers of new jobs, while simultaneously lifting incomes and guaranteeing subsidence for the bottom 30% of the populace. And, oh yeah, you’ve got to do this fast, before the euphoria wears off and things turn ugly again.

Sometimes the crisis outweighs the opportunity.

Tuesday, February 8, 2011

Cut and Run

Jane Harmon has just announced that she will be resigning from the US House of Representatives to take over as the head of the Woodrow Wilson Center, a Washington think tank specializing in international relations. Harmon is a nine term Democrat holding the seat for California’s 36th District, a swath of coastal Los Angeles.

Excuse me, but didn’t she just get reelected, like, three months ago? What happened? Did she get to Congress after the last election, realize that the Democrats weren’t in charge of the House anymore, and immediately put her resume on the street?

Hers was apparently a pretty safe district, but she didn’t run unopposed, which meant that she probably spent at least a million bucks on her reelection campaign. That’s a lot of money. Other people’s money. I doubt her conversation with major donors included a line about her needing their cash, because she needed a paycheck while she was searching for a better gig. How about the campaign staff? Not the professionals, but the volunteers. “I need you to give up your time to support me, at least until I hear back from the search committee.” And don’t even get me started about perpetrating a fraud on the voters, who now get to foot the bill for a special election to replace her.

I don’t know all the ins and outs of her situation, but it’s hard not to be contemptuous of someone who runs for office, and then bails out upon receipt of a better offer. Of course, in all fairness, I feel pretty much the same way about Sarah Palin.