The Money Chronicles, Volume 7: Reflections on the 47% vs. the 53%

Last week a video surfaced of Governor Romney speaking at a recent private fundraiser. This is what he said:

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what. … These are people who pay no income tax. My job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.

I lifted this quotation from Yahoo; please tell me if it’s not accurate.

Several things trouble me about this quotation, and I’ll list a few here (and perhaps add to it as I think more about it).

  • Governor Romney was speaking at an event where he assumed everyone there supported him and he didn’t think it was being taped. It’s an old adage that character is developed when we think nobody is watching us. This quotation is dramatically different from what he says in public and it tells us a great deal about his character.
  • The 47% draw from a large and diverse group of people, and Governor Romney wants to put them all in one camp: they are dependent on the government, they believe they are victims, they believe someone else is responsible for their care, and they are entitled to health care, food, and housing. The meaning is clear: they are doing nothing productive and expect the 53% (of whom I belong) to care for them.
  • They believe that they only way they can keep this cushy arrangement is to vote for the President and nothing will convince them to take responsibility for their lives.
  • Lastly, it is not his job to to worry about these people.

OK, so who are these 47%? Good question. Governor Romney acquired this number from the Tax Policy Center; there are those who think it has a liberal bias, but Governor Romney must not as he quotes them. They describe the 47% here:

  • The poor: In 2011 if a family of four made $26,400 or less, their income was too low to pay taxes. To be fair, I can’t imagine them putting food on the table, let alone paying taxes. They don’t sound like freeloaders to me, and I’d guess they’d give anything to make enough money to pay taxes. They are half of the 47%: I’m guessing they’re not heartened to learn that Governor Romney’s job is to not worry about them because they are freeloaders.
  • The elderly: If you and your spouse receive less than $32,000 in Social Security benefits ($2666.67 per month) or other income, you don’t pay taxes. If you live on that much money and pay taxes, you have a point. Otherwise, move on because these are people who worked hard for their entire career, paid into Social Security, and don’t have pensions, 401(k)’s, or 403(b)’s and they are not freeloaders.
  • The disabled: Again, if you are disabled and poor, you don’t pay federal taxes. Think this is a free ride? Talk to someone who depends on this. Ask him or her if he or she would rather be able to work and pay taxes. Nearly 100% would like to be productive.

You can’t read this blog without knowing my political views. But let’s face it: Mitt is choosing the path of pandering to the wealthy. Vote for him at your own risk.

The Money Chronicles, Volume 6: An Economics Rap Anthem? Believe It!

For a year or so I’ve been listening to a podcast called Planet Money from National Public Radio. I look forward to listening a few times per week and it’s taught me a great deal about what is happening in the economy.

It’s also become a bit of a political football as President Obama is a follower of the economist John Maynard Keynes (1883-1946) while Governor Romney is a follower to the economist Friedrich A. Hayek (1899-1992).

Keynes believed that in times of dire economic depression the government needs to pour money into the economy to stimulate it and raise itself out of its troubles. Hayek believed that governments can’t do this effectively and it is better in the long run to allow the economy to fix itself. This rap does an excellent job of explaining their positions.

The Money Chronicles, Volume 5: Flat Tax: How Flat, How Fair, and How Feasible?

A few of the candidates for the Republican nomination are proposing a flat tax instead of our current progressive tax.

A progressive tax raises the tax rate as income increases; in other words a wealthy person pays a high percentage of his income in taxes than a poor person. Here are the 2011 tax rates on individuals:

Income Tax Rate
$1 to $8500 10%
$8500 to $34,500 15%
$34,500 to $83,600 25%
$83,600 to $174,400 28%
$174,400 to $379,150 33%
$379,150 and up 35%

We also tax corporations, but at different levels (I got this from Small Business, Taxes, and Management web page):

Profits Tax Rate
$0 to $50,000 15%
$50,000 to $75,000 25%
$75,000 to $100,00 34%
$100,000 to $15,000,000 35%
$15,000,000 to $18,333,333 38%
$18,333,333 and up 35%

OK, so far so good. Now here’s where it gets complicated: there are deductions to income. From the time the government taxed income in 1913, interest on your home mortgage could be deducted from your income. We can also deduct money donated to charities, and lots of other places. Every time the President says: “and I call on Congress to give a tax break to people who…” it creates another deduction. We use tax deductions all the time to change behavior. We deduct mortgage interest rates because we want to encourage people to own homes; we deduct charitable contributions because we want people to donate to places of worship, food banks, and other charities.

We also want people to save money for retirement. If you contribute money to an IRA, a 401(k) or a 403(b), that money isn’t taxed when earned but is taxed years later when withdrawn. It is generally assumed that money will be taxed at a lower rate because income is usually lower in retirement.

This means that the money you earn isn’t the money you pay taxes on. The hard work of determining your taxes isn’t figuring out how much you owe; it’s how your taxable income is determined. The hard part of doing your taxes (and the reason most of us have a professional do our taxes) is finding the difference between your gross income and your taxable income. Once that is calculated we can look on a table to see what we owe.

So here’s the rub: the candidates who propose a flat tax argue that it’s fairer than a progressive tax and will make it easier for all of us to do our taxes. I suspect most taxpayers don’t really know what percentage they pay in taxes but have a sense that it’s too much. But I do think that most people think the tax code is way too complicated and don’t like the fact that they either need to pay a professional or spend hours preparing their tax return. Do these proposals do what they promise? I propose to look at the plans of three of the current Republican candidates: Herman Cain, Ron Paul, and Rick Perry.

Herman Cain: Mr. Cain proposes what he calls his 999 Plan for Economic Renewal. It is elegant in its simplicity: Personal and corporate income are both taxed at 9%, and a 9% federal sales tax is imposed. That means that if you earn $50,000 this year, your tax would be $4,500. If your corporation makes $500,000 it pays $45,000. If you buy $100 in groceries your bill will be $109. Right?

Not exactly. According to his web page, individuals will pay 9% of their gross income minus money donated to charity. Also there will be tax breaks for people who live or work in an Empowerment Zone (though he doesn’t explain what an Empowerment Zone is or how its chosen). This begins the process of determining the difference between gross income and adjusted gross income. I have a hard time imagining that once this door is cracked open Congress won’t want to add deductions.

Shortly after he announced the 999 plan last month he came under criticism for making even the poorest pay the same rate as the richest. Even though this is the basic foundation of a flat tax, Mr. Cain tinkered with his plan. You can read about it on Fox News: he amended his plan to make anyone at or below the poverty level exempt from the 9% tax, now called 909. Here’s an interesting question: if you’re marginally above the poverty rate but donate enough money (or live in an Empowerment Zone) to adjust your income below the poverty rate, does your tax bill drop from 9% to 0%?

Perhaps the most controversial part of this is the 9% sales tax. There is currently no federal sales tax on most things (though there is an 18.4% tax on gasoline). Many states and localities do have a variety of sales taxes. Where I live there is a 7.75% sales tax on most items, but not on groceries. It’s not clear that Mr. Cain’s plan would add 9% to current local sales tax, or if it replaces those taxes, how states and localities would replace that money.

Ron Paul: This is hard to decipher, but you can look for yourself at his page on taxes. Ron suggests eliminating income taxes on individuals (and, interestingly enough, taxes on tips. I guess he figures that if you work in the restaurant or the hospitality industry, tips aren’t income). In any case, Ron is running for the Republican nomination, but he’s really a libertarian. He calls for a Constitutional Amendment that repeals the 16th Amendment and also calls for the closing of the IRS. He doesn’t worry so much about raising the money to fund the government as to shrinking the government to fit within the available funds. Government funds would be raised by a 15% flat rate on corporations.

Rick Perry proposes a hybrid plan. Essentially he gives the taxpayers a choice: pay your taxes under the current tax code, or choose his New Flat Tax System. That system uses a form called the 1040EZR. You put in your gross income, claim $12,500 for each exemption, deduct mortgage interest, charitable contributions, state/local taxes, and capital gains/dividends. This gives you a taxable income and you pay 20% of that. Governor Perry thinks this 1040EZR will be appealing enough that many taxpayers will use this form over the standard 1040 even if their taxes will go up.

So where does this leave us? The idea of a flat tax appeals to the fairness in all of us, but proponents of progressive tax argue that those who have more can bear a larger share. Right now if Bill Gates and I purchase the same car we would pay the same sales tax, but since he makes more money than I do, he would pay more in income tax.

These candidates, and others, argue a flat tax is not only fairer but also easier. The problem, at least with Cain and Perry, is they have already abandoned a pure flat tax to the extent that both allow deductions for charitable contributions. I also wonder about the pushback any candidate would get (for example) from the National Association of Realtors for trying to eliminate the deduction for mortgage interest.

The Money Chronichles, Volume 4: And I'm Supposed to Trust These Guys With My Credit?

Today both Nancy and I received offers for a credit card. It’s not unusual, we shred the equivalent of a small forest of these things each year. Today’s had a funny twist.

For the record, both of these offers (in separate envelopes) came from Capital One (they are the “What’s in your wallet” guys). But when I opened the envelope addressed to Nancy, the return card was addressed to me. When I opened my envelope it was addressed to one of my neighbors. Presumably my neighbor has the one addressed to me. Or it could be a massive mix up where dozens of us are getting each others’ offers.

These offers succeed to the extent that they convince me to use their card. Suffice it to say they didn’t impress me and I have no desire to do business with them.

The Money Chronicles, Volume 3: Great Moments at the Cash Register

I ran a simple errand today: I needed to get a wallet and drove to my local department store. I expected to pay about $30 and get something that will last a few years. As I walked up to the Macy’s at the University Town Center I saw there was a table near the entrance. Fortunately it wasn’t someone looking for my support for a candidate or ballot measure: it was the Susan G. Komen Race for the Cure and they were collecting money to end breast cancer. I cheerfully gave them $5.00 and I was given a coupon that I could use at the store. Here is a copy of the coupon:

Macy's Coupon

I know it’s hard to read, but bear with me (I’m sure there was no intent to make it confusing). The coupon grants discounts of 10%, 20%, or 25% depending on what you buy. I intended to buy a man’s wallet. The discount would be 25% if it was a “single regular, sale or clearance fashion item for the entire family including accessories, plus selections for your home.” The discount would be 20% if I’m buying a “sale & clearance and select regular priced women’s [sic], men’s [sic] and kids’ apparel and accessories, fine and fashion jewelry, frames, bed & bath items, housewares, luggage, and china.” The 10% discount appears to apply only for “all sale & clearance and select regular-priced furniture, mattresses, area rugs, electrics and electronics.” Any idea where my wallet fits? Me neither.

I walked into the store and found the mens’ wallet display. There were three tables: one table announced that everything on the table is on sale for 20% off. The second table had a sign that all wallets there were 30% off. The third table had a sign that was covered up. You make the call. As you might expect, my first question was whether I could combine the two discounts: the sale price on the wallet and the coupon. I found a suitable wallet (manufactured by Geoffrey Beane if that matters to you). The list price was $36, the upper level of what I wanted to pay. But wait: it’s on the 30% off table and I have a coupon for either 20% or 25%. How much is the wallet now? Good question. The first salesperson I asked read the coupon and said that I have to have a Macy’s credit card to use the coupon. I asked where he sees that on the coupon and he called another salesperson over. This person seemed to think I could combine the two, but he wasn’t sure (that’s what the cash register was for). We walked over to the cash register and he suggested that I apply for a Macy’s credit card which would give me an additional 25% off of this purchase. That would have been fun, but I declined. At this point I’m still not sure what I’m going to pay.

OK, drum roll: the 2nd salesperson rang me up and the total price was $21.92. I can’t complain, and I bought the wallet. Now, here’s the question: how did it go from $36 to $21.92? I started writing the Money Chronicles because of experiences like this. We’re often bombarded by offers of discounts and sales, and more often than not we have no idea how much we’re going to pay. The 30% off table looked enticing, and being able to save an additional 10%, 20%, or 25% sounded even better. But neither I nor the cashier knew how much I would be charged until the cash register told us.

One thing I knew right away was that I wouldn’t get 55% off (30% plus 25%). But let’s start with the 30%. The list price of the wallet was $36.00 and 30% of that is $10.80. Subtract the $10.80 and the wallet should be $25.20. So far so good. Now for the second part: it appears that my wallet is catagorized as “sale & clearance and select regular priced women’s [sic], men’s [sic] and kids’ apparel and accessories, fine and fashion jewelry, frames, bed & bath items, housewares, luggage, and china” as I was given the 20% discount. I guess the wallet is an accessory. Too bad it doesn’t qualify as “for the entire family” as I would have gotten 25% off. In any case, I got 20% off the $25.20. That’s $5.04, bringing the total down to $20.16. Add the 8.75% sales tax of $1.76 and it brings the total to $21.92.

In the end, I was discounted $14.08, which was 39%. But I wonder how many people would have thought I’d have gotten 50% off (30% plus 20%). Each discount made the next one less valuable, and I have to wonder this: if I had applied for a Macy’s credit card, where would that discount have come? I’m guessing it would have been after the 30% and before the 20%. That being the case, it would have gone like this: Start with $36.00, minus the 30% ($25.20). Now take the credit card 25% ($6.30) and that gets me down to $18.90. Now the 20% coupon gives me another $3.78 off, bringing the total down to $15.12. Add on sales tax and we’re back up to $16.44. It gives me a new credit card with (likely) a high interest rate, and it would have saved me $5.48. Doing the math makes it seem less valuable.

Money Chronicles, Volume 2: Don't Blink or You'll Miss My Libertarian Moment

Anyone who knows me know that I am an unabashed liberal. I almost always vote Democrat and I support almost all of the financial regulatory reforms that are currently in the news.

On the other hand, I’m finding that I can’t support additional regulation of the payday loan industry. For the uninitiated, it’s a small loan given over a short period of time. Let’s say you’re getting paid in 5 days but need $100 right now. They will loan the money to you and you pay it back with interest when you get paid in 5 days. I heard a story on this recently on NPR’s Planet Money blog. They interviewed a guy who works at one of these places and they charge $1.50 per day per $100. If you borrow $100 today and pay it off in 5 days, you’ll owe $107.50. It’s actually pretty simple.

The problem is that many, if not most, don’t use it this way. When they come back the don’t have the $107.50; they may pay $7.50 and “roll over” the loan. It’s not hard to see how this can go south in a hurry and the payday industry is happy to keep charging you $1.50 per day until you pay it back. Turns out it works out to an annual percentage rate of over 500%. Of course, these loans aren’t supposed to be annual; most are weekly or monthly.

But it’s easy to demonize these lenders. With the current hue and cry to add regulations to banks, brokerage houses, and other institutions, payday lending houses are getting caught up. But there’s a difference: unlike the mortgage lending crisis nobody is lied to. These lenders tell you up front how much they charge and when you need to pay back the loan. There are no hidden fees, variable interest rates, balloon payments, or fine print.

OK, so here’s my libertarian moment: should we ban or regulate them only because some (ok most) people who use them are burying themselves? Do we really need to parent these people by not giving them advances on their allowances?

Those who support regulation point to issues like smoking bans or seatbelts and say this is the same thing. But it’s not. We have smoking bans because nonsmokers like me don’t have to breathe the air. We have seatbelts so people are less likely to be gravely injured where they will be supported in nursing homes but all the taxpayers of the state (motorcycle helmets are in this category too). But people who drive themselves into unmanageable debt don’t hurt anyone but themselves.

True, they hurt loved ones with this debt, but so do addicted gamblers. We don’t protect family members (even children) from gambling or alcohol addiction. Neither should we for this.

The Money Chronicles: Volume I

I recently read a book about everyday finances called Stop Getting Ripped Off: Why Consumers Get Screwed, and How You Can Always Get a Fair Deal by Bob Sullivan that has me thinking. The premise of the book is that many of us don’t know much about simple arithmetic and we get ripped off by people who take advantage of that. I’m calling this series “The Money Chronicles” in the hopes that this will (like the Justice Chronicles) will become a recurring theme.

Virtually everyone I know borrows money in some form, be it a mortgage, a car loan, or a credit card. Very few people are going to let you use their money for free, and it makes sense to charge interest. If you borrow $100.00 at 10% interest and pay it back in a year, you’ll pay $110. Easy, right?

Well… It is, but like most debt it isn’t that clear cut. Because we’ve gotten used to phrases like “annual percentage rate” (APR), “revolving credit,” and “compounding interest,” we tend to sign up for a loan, pay the bill each month, and let somebody else do the math. In a world where everyone is virtuous that would be fine. I’m blogging about this because we don’t live in such a world and there are armies of people out there who are happy to advantage of us, and take our money.

I’m going to start with the place that most people first run into trouble: credit cards. I can’t tell you how many offers I get over the course of a year that promise me all sorts of stuff if I sign up for their card. They do everything they can to tell you that by signing this line you can enter a world of free money. Let’s see what happens with this card.

I’m going to use my current American Express bill as an example. My current balance is $1319.19, the interest rate (annual percentage rate or APR) is 15.24% and the minimum amount due is $28.00. If I pay off the entire balance (as I intend to), I pay no interest. As long as I do this, I’ll never pay a penny of interest.

But if I pay only the $28.00 and continue to pay only the minimum, and never use the card for new purchases it will take 12 years to pay it off and I’ll have ended up paying $2677.00. Better than that, if I make the payment even one day late I’ll be charged an additional $39.00 late fee.

If I spend the next 12 years paying off the card, I’ll be 61 years old when I’m done. In fairness I’ll have gotten the benefit of whatever I bought for the $1319.19, but the rest? The rest of the money ($1357.81) does nothing but make the credit card companies wealthier. And frankly, the 15.24% isn’t too bad. If my interest rate were 20%, I would need 23 years to pay it off and the total payoff amount would be $3722.00. In 23 years I’ll be 72 and will probably have no memory of what I bought in 2010.

There’s lots more, but there’s one thing I encourage you to do: buy Bob Sullivan’s book. One eye opener for me was how the credit cards use average daily balance and how you can save money by making large purchases toward the end of the month. If you do nothing else, read pages 84 to 89.