HE SAYS:

Tax the rich.   I don’t agree with it, I voted against it, and I consistently argued that it would not fix our economy or lower the deficit; however, if the recent election showed us anything it is that the majority of the people in this country want just that.

As a citizen and small business owner, I am watching with great interest the current political wrangling and possible impasse regarding a solution to avoid the so-called “fiscal cliff”.  As much as I had argued against raising anyone’s taxes, I have to concede the point that the re-election of President Obama clearly indicates that the majority of Americans want to impose a tax increase on those families with incomes over $250,000.   As a person who believes in the democratic process, I also must accept that this tax increase should be implemented as part of the sought after resolution of our fiscal crisis provided that any such resolution also includes significant and appropriate spending cuts.

I do not believe that such a tax increase will help the economy or have any meaningful impact on reducing the national deficit; however, I also believe that the people’s will must be fulfilled such that we have to take that plunge and hope that it has the desired effect.   If they are wrong, time can only tell and in that case there is always another election four years from now.

I am also unsure of the long term effects of “Obamacare”; however, with the Supreme Court affirming its constitutionality and a political reversal no longer a possibility, we must accept it as part of our permanent reality.   Even if there may be some business owners who are unable or unwilling to absorb the additional costs with the inevitable layoffs or reduced hiring, we should still try to make it work.   If the outcome proves to be detrimental to our economy and the business community then we can, at least, say that we gave it a fair chance.   For my part, the insurance coverage mandates of “Obamacare” are a non-issue since USFSB has always considered it an important part of its business practices to provide all of our employees with full health, dental and vision coverage and I would not want to conduct my business in any other way.

The policies and political solutions now being devised are not what I wanted, voted for, or believe are, necessarily, what is best for our country but I also understand that nothing is gained by becoming entrenched in a stalemate.   Life is full of compromises and now is the time to put our differences aside and work towards a solution that recognizes the will of the people.

By the way, I recently stated my intention to refrain from writing and posting any more blogs during my self-imposed hiatus so please do not consider this a blog in contravention of that stated intention but more of a business commentary.    Just as in politics I have learned that we can deny the existence of anything by simply giving it another name, for example, an insurance mandate penalty is not really a penalty if we simply call it a tax.

 Happy Holidays!

HE SAYS:

There is an informative video making the rounds from Dick Morris, a former campaign manager for President Clinton.   This is of particular interest since it is a Democrat warning of the tax consequences if President Obama is re-elected.    The examples used in the video mostly pertain to a family with a combined income of $250,000 although the tax increases promised by President Obama will also have an impact on those making less than that amount.   Dick Morris asserts, for example, that a family with an income of $250,000 will pay about $37,000 more in Federal income taxes each year and that a family with an income of $150,000 will pay about $15,000 more in Federal income taxes each year.   Watch the video for the details.

Your first reaction may be that it is a great thing to increase the taxes on those that are perceived to be rich or, perhaps, you are simply indifferent since these taxes may not affect you.   I would suggest that this large increase in taxes should concern not only families making $250,000 a year and families who aspire to make $250,000 a year but everyone since the less expendable income anyone has will affect us all.   Dare I mention that there is also the notion of fairness since households with $200,000 or more in income earn about 26% of all reported income but pay about 47% of all Federal income taxes collected?*   This discrepancy gets lost in the hysteria over the claim that the so called rich do not pay their fair share.

Sure, the government will have more money from these taxes but when was the last time you actually trusted the government to use our money wisely or to directly help its citizens?   This kind of “trickle down” economics never seems to work.   Think about where all of that stimulus money went.   Whereas, people with expendable income spend it in their communities, buy large ticket items like houses or automobiles, buy more discretionary goods and services, go out to restaurants more often and, generally, spend that money for the benefit of small and large businesses.   All of this spending provides the residual benefit of increasing the sales tax revenues for state and local governments.   Also, people earning more than $100,000 a year provide a majority of all of the charitable contributions made in this country.**   Finally, these people are usually the ones who operate successful small businesses and who create a good deal of the private sector jobs in this country.

On a different but related note let’s look at the flak being generated over the news that Mitt Romney paid an effective tax rate of 15% on $20 Million of income.   First, let’s be clear that we are talking about $3,000,000 in taxes.   Just to put this in perspective, Romney’s taxes represent about the same amount of taxes paid by 400 middle class households assuming a median income of $50,000 also at an effective tax rate of 15%.   More importantly and what is never mentioned in the debate is that the 15% tax rate paid by Romney was on investment income at the Capital Gains rate and not on wages.

This is significant in that the money Romney used to invest and generate that income would be money previously earned and already taxed.   To compare his tax rate paid on investment income to that paid by a wage earner as if Romney is getting an unfair tax break is deceptive and dishonest.   There are valid reasons to impose a lower tax rate on investment income so as to encourage investments that help our economy, as an incentive to take the risks involved in any investment, to reward investors for holding the investment for a year or more in order to be entitled to the lower tax rate and in recognition of the fact that the money used to make those investments has already been taxed.

Do the math and decide if it really adds up to a better country.   Regardless of where you stand on the upcoming Presidential election, you should, at least, look past the hype, know the facts and understand the consequences of your choice.

*IRS data from 2009 the most recent year calculated on the IRS web site.   Also to be noted is that households making $1 Million or more have on average an effective Federal tax rate of 29.1% whereas households making $50,000 to $75,000 have on average an effective Federal tax rate of 15%.  (IRS data according to the Tax Policy Center as reported by Fox News)

**2005 Google study for the Center on Philanthropy, page 19

On Monday, Joe ponders the legalization of marijuana in “Hazy Dazes”.

WHAT DO YOU SAY?

This is the second part of a two part series. Click here to read Tax Free, Part 1.

HE SAYS:

Your employer can also be of help in lowering your tax burden.   Instead of a raise, your employer can compensate you in ways that are tax free.

Health insurance premiums paid by your employer are tax free to you and deductible as a business expense for your employer.   In addition, you are both free of the 7.65% payroll tax on this income.

Group term life insurance coverage of $50,000 or less paid by your employer is tax free income to you and deductible by your employer.

Your employer can pay, and deduct, as much as $5,250 per year in education assistance for either undergraduate or graduate course all tax free to you.  The courses do not even need to be job related.

Your employer can provide you with up to $230 per month in discounted passes or tokens for public transportation tax free to you and deductible by your employer.

Under a written plan (Flexible Spending Accounts), your employer can make deductible contributions for such benefits as group life insurance, disability benefits, dependent care and/or accident and health benefits all tax free to you.

As you can see, it is a good idea to consult with a knowledgeable Accountant to fully understand your income tax obligations.

WHAT DO YOU SAY?

HE SAYS:

They say that the only things for sure in this world are death and taxes.  Well, you may be surprised to find out that there are certain types of income that are not subject to Federal Income Tax.

Interest earned on bonds issued by a state, territory, municipality or any political subdivision is free from federal taxes.   These municipal bonds are more valuable the higher your tax bracket.    If you were in the top tax bracket of 35%, an interest rate of 5% that is tax free is equivalent to earning 7.69% interest.   Some municipal bonds are even tax free on the state level.

The cost of commuting to and from work is usually not deductible.   If you form a car pool, any money you receive from your passengers is not subject to federal tax.  In this way you can convert personal nondeductible expenses into tax free income.

Under current law, if your house was your principal residence for two of the last five years, you can exclude as much as $250,000 in gain (or $500,000 on a joint return) when you sell your house.  You do not have to reinvest the money and you can claim this exclusion every two years.

Now for some bad news.    There are certain taxing events that can also surprise you.   If you serve on the board of a nonprofit organization, you may find that you are personally responsible, under the “responsible party rule” for the taxes that need to be withheld from the compensation paid to the organization’s employees.    If you arrange for a creditor to forgive all or part of a debt you owe, the amount that you saved is considered income and subject to federal income tax.   Both Social Security and Unemployment benefits you receive are subject to federal income tax.

In Part 2 we will explore some ways in which your employer can help ease your tax burden.

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