Tag Archives: tax

Tax increase for the rich

Government fiscal constraints seem to make the rich bear more and more tax burden. The Wall Street Journal reported interesting arguments about tax on the rich. As the government tries to reduce the government deficit, a simple way to achieve that goal is to raise tax and to decrease expenditure.

As income equalities widen, more people fall into poverty trap, and society gets older, social security related spending keeps increasing and government does not have much discretionary budget. There does not seem to be much room to reduce expenditure. So, the answer for the fiscal problem would be to increase the tax for the rich.

Some economists and politicians are arguing that the rich should bear more tax burden because the income gap keeps widening and the rich can bear more tax. Obama administration seems to favor more tax burden for the rich. When it is not easy to increase tax rate, the government tries to limit tax breaks to collect more tax from the rich.

Other economists and politicians are arguing that the rich already bear too much tax burden. If tax rates for the rich increase further, it will cause negative effects on economic activity and tax revenue. They are referring to the Laffer curve, which explains the relationship between tax rates and tax revenues. According to the Laffer curve, if the tax rate increases above the certain threshold, increase of tax rates actually causes tax revenue to decrease. The Wall Street Journal also reported that, according to the nonpartisan tax policy center, top 1% of income earners comprise 29% of total federal tax revenue whereas their income comprises 17% of total incomes. The rich may want to use this statistics to argue for their unfair heavy tax burden. But, this may not be a strong argument for them. Even though they bear higher share of tax than their share of income, top 1% earners’ disposable income after tax is not compatible with rest of income earners. They have much more ability to bear high tax rates than other people.

I am not sure that the current level of taxation is reaching the threshold rate to actually cause counter effects on the total tax revenues. But, considering the fact that the rich people benefited from tax reduction during the previous republican administrations, the rich can bear more tax. Even some super rich people like Warren Buffett and Bill Gates argue for more tax for the rich.

Anyway, the government is in difficult situation to deal with this highly controversial issue. This fiscal and tax debate has become a hot potato. Every trial to make a deal with this issue consumed a lot of political energy, and sometimes caused economically negative effects as we observe the previous debate on increase of the debt ceiling. As economy recovers from the crisis, I hope this tax issue can be solved more smoothly.

The Japanese Tax Hike on April Fool’s Day is no Joke

On April Fool’s Day, April 1st, Japan will increase its sales tax rate from 5% to 8%. This is the first time Japan has raised sales taxes in about a decade and a half. Interestingly enough, the Japanese economy has responded to this proactively. The Wall Street Journal and Washington Post both published articles about consumers and producers being proactive towards this tax hike. In the month of February, industrial production fell from the last month. This was due to bad weather, which hit the car industry the hardest. Before this, there was a surge in output since firms were trying to take advantage of increases in demand before the tax hike. The car industry is not the only one taking advantage of high pre-tax demand. Retailers used this as their chance to attract customers before sales taxes go up.

In a video interview in the New York Times, reasons why this tax hike is good are discussed. One reason is that Japan’s government is one of the most indebted in the world. The government needs more revenue to pay off pensions and health care, which are experiencing sharp rises in prices. Furthermore, the government needs more tax revenue to help with stimulus spending because the country needs to recover. The central bank also intends to increase its purchase of assets to help the economy recover.

In theory, this tax hike just might work. When the government has more money, it can do more government spending, which is the G component of the GDP equation (C+I+G+NX). This would help increase output for the country, thus helping the recovery. When the central bank buys bonds, interest rates decrease, therefore investment, the I component, will also increase. This could help add to the increase in output.

From a more practical standpoint, all that we can do is play the waiting game. Sure, one can make speculations that could happen. A Japanese super-market general manager believes that sales will decrease in the beginning, but will pick up again in the near future. I would say that this guess is about as good as anyone else’s. There is no way to predict how each person’s consumption patterns will react to this tax hike. As previously mentioned, all we can do it wait. All of that being said, I do think that this is a high-risk-high-reward decision. If consumption does not decrease by too much, or if it bounces back, then Japan can carry on wit its agenda to help its economy recover. If the country falls into a recession, then it could be in even more trouble than it is now. Consumption will decrease, therefore output will decrease. Plus, the government will generate less tax revenue, and it would not be able to help stimulate its economy. Japan would put itself into a recession.

 

Japanese consumption-tax rate increase

Today, I would like to a little bit about what some next steps the Japan had taken for its famous Abenomics. Today, Japanese government increased the sales-tax from 5% to 8%. There is no surprise here since this was part of Abenomics plan announcement well back in 2012. But, I want to do a half-time check on how Japan is doing with its plan and see whether it really had a significant effects in many dimensions of economics.

It is hard to talk about Japanese economy without what we call the lost decade–which had continued to reach two decades soon. I already have a blog post on the lost decade, so please go here for more details. Anyhow, the short version is that after 1990’s real estate bubble, Japan has seen very low inflation rates or even deflation–staggering growth and sometimes contracting up until recent years.

The biggest problem with low inflation is that the economy becomes highly vulnerable to any supply shocks. The central bank also loses control over its monetary policy tool. Even with the lowest interest rate of 0%, negative inflation will bring real interest rate to positive side, resulting in net capital inflow and loss in net export. Just a glimpse on the graph below shows very high volatility in inflation.

Screen Shot 2014-03-31 at 6.07.00 PM (Source)

To make up for the big loss in exports and domestic private investments, the government had to spend a lot–and I mean A LOT (see graph below).

Screen Shot 2014-03-31 at 6.11.31 PM

 

The debt-to-gdp ratio was at about 67% and now the owe more than twice of their income.

To be fair, this was part of Abenomics’ goal. In order to raise consumption and investment momentum it had lost two decades ago, Japanese government spent enormous amount in fiscal spending . Japan also used very loose monetary policy, weakened the yen and made it stay there to restore some balance in the trades.

I want to give Abenomics some credit in restoring its economy. Although it went down 9% this year thus far, the Nikkei rose 57% last year. Also, it is on its way to reach the inflation target of 2% (now at 1.3%). On the other side, I think Japan is playing it very close to the line with continuing rise of the debt. Yes, they decided to raise the consumption sales-tax to 8%, but the condition for continued high confidence level of Japan is I think still very unpredictable.

Some pessimists like Gordon Chang is appalled by Japan’s approach and think Japan is undoubtedly going to default, causing massive financial crisis around the world. Other countries that has trading competition with Japan, countries like EU, South Korea, etc. complain that it is very unjust for them to play the beggar thy neighbor measures.

I personally think that what Abe’s government did has no moral culpability. Ignoring the fact that Japan is still number 3 in terms of total nominal GDP, I think they used their last bullet in the gun to comeback to their heydays growth level. They ran out of fiscal instruments for a very high debt level. Monetary policy had been inoperative for many years and now even more so perhaps. Abenomics took the eat-a-lot-now-and-fast-later approach. As we are coming into the fasting part, Japanese should hope that their momentum while they were eating will not lose out.

 

Bitcoin to be Taxed

Yesterday, the Internal Revenue Service issued a formal statement declaring Bitcoin property, as opposed to currency, for taxing purposes. An article in CNN Money explains that the IRS has decided payments worth at least $600 (in Bitcoins) will be taxed in the same way as any other property transaction taxed by the agency. This includes any payment with Bitcoin, gains acquired by investing in it. and income from producing Bitcoins on your computer (known as “mining”). Additionally, “If you pay your employees with bitcoins, that would have to go on your staff’s W-2 forms, and they would have to pay federal income tax on it. Paying an independent contractor? They have to put bitcoin payments on their 1099.” Notably, the IRS acknoledges that Bitcoin surely functions like real currency, but its lack of legal tender status means that there is no jurisdiction over it as such.

The IRS, the and United States in this sense, has joined many countries in the attempt to regulate Bitcoin as it becomes increasingly utilized/traded. The United Kingdom, Germany, and Singapore are among other countries that have put forth this effort as well. In the near future, we should expect to see many other countries joining in the attempt to regulate Bitcoin — assuming it continues to grow in relevance as it has been recently.

In fact, a Wall Street Journal article explains the growth in Bitcoin awareness and confidence. Pollster Harris Interactive outlined the thoughts of 2,039 people around the U.S. It found that 48% have heard of Bitcoin, but most of them don’t trust it enough to invest in it. In fact, only 13% said they would choose bitcoin as an investment over gold. Personally, I am surprised even 13% would choose to invest in it over gold; I figured it would be less. Additionally, results indicate a correlation between increased awareness and decreased trust. It seems that the more people learn what it is, the less they trust it enough to invest in it (hypothetically, of course). Interestingly, respondents in western states proved to be more likely to have heard about Bitcoin, but only 7% of those who knew about it said they would chose it over gold when investing.

Thus, the increase in Bitcoin’s popularity is eminent, though people’s trust in it is still very questionable. However, in pure numbers, it is gaining ground quickly. This decision by the IRS is not necessarily negative for Bitcoin-ers. In fact, I think it’s a positive step for those who want to see it grow in the future. A government attempt to regulate it means that it is being acknowledged as a significant “property” and that the US is taking notice of the increased popularity of Bitcoin. As of now, I find it almost impossible to convince me to invest in it, but all the power to those who do. Regulation may not be an investor’s idea of a positive step, especially when their investments are being taxed, but this move by the IRS is important as it creates a form of acceptance and acknowledgement (as property, though).

Marijuana Tax Revenue

According to the state of Colorado, after legalizing the sale of non medicinal marijuana the state earned a tax revenue of $2 Million in the first month. The state levies just about 30% in taxes on the sale of marijuana, including an excise tax, a special sales tax and a standard sales tax. The taxes levied on recreational marijuana exceed the taxes on medical marijuana by 25%. The combined tax revenue between both medical and recreational marijuana in a month is about $3.5 Million, which is also about $1.5 million less than the tax revenue brought in from the sale of alcohol across the state of colorado in one month. Not only does the tax revenue begin to rival that of alcohol tax revenue, but it also has called for an adjusted annual estimate. The state now predicts that it will bring in $98 Million from the legalization of marijuana, $28 Million more than originally predicted when campaigning for the legalization of the drug.

The tax revenue from the legalization of marijuana is substantial, but is it worth it? Surely there will be some externalities from the legalization that weren’t factored into the sales taxes the government levied. The first externality one would imagine, would be the increased use of the drug. It appears that Colorado planned for this one, with the majority of the funds  to be used to back programs that keep kids away from marijuana in the first place. But I would imagine that such programs lose substantial impact when there message is changes from preventing use of an illegal drug to preventing the use of a legal drug that many view as less harmful as other legal drugs including cigarettes.

A potential positive externality would be the decreased illegal sales of marijuana, as well as crime associated with illegally dealing drug on the streets. One would imagine most who wish to purchase marijuana would switch from the dealer on the street to the legal street corner. And those who aren’t of age will most likely ask an older friend or sibling to purchase it, much like many do to obtain alcohol. I would hypothesize that the state will catch a break, and be able to cut back or reallocate DEA and other narcotic agency funds to other tasks.

I could go on guessing at the potential outcomes of legalizing marijuana both positive and negative but that seems moot. The only way to truly find the cost and benefit of legalizing marijuana is by monitoring the externalities of the legalization for years to come and measuring them against the positive gains coming from the tax revenue.

(Revised) Hopefully Affordable Care Act

In early February, the Congressional Budget Office (CBO) attached an addendum to a decade-long budget projection that sharply raised the decrease in employment due to the ACA.  They write (on page 117):

The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about
2.5 million in 2024.

Before the most recent report, the CBO estimated a decline of about 800,000 jobs due to the ACA.  This threefold increase was in large part due to the CBO revisiting a concept called the implied marginal tax rate.  Large parts of the new healthcare law involve giving people from 1.5 times the Federal Poverty Level (FPL) to 4 times the FPL subsidies to help pay for insurance.  As a person earns more, the amount of the subsidy falls.  Thus, when they earn more money through their job, they also happen to lose some government subsidies.  Thus, for some people, there are more incentives to not work than there are to work, so they reduce the amount out output they produce.  Depending on the state, they are also “coverage gaps” where people are neither eligible for Medicaid nor federal subsidies, and thus earning too much could cause someone to lose the benefits of Medicaid.  The White House responded strangely, saying:

“CBO finds that because of this law, individuals will be empowered to make choices about their own lives and livelihoods, like retiring on time rather than working into their elderly years or choosing to spend more time with their families.”

This is an amazing twist of information; the Obama administration is implicitly praising people for living off government subsidies rather than working.  This is bad both from the perspective that taxpayers have to support people living off the government and they are adding nothing to the output of America.

January’s most recent number still indicate  that a smaller than expected number of uninsured young Americans have signed up for health care coverage under the provisions of the new Affordable Care Act (ACA).  They are deemed the “young invincibles” by commentators due to both the lower healthcare costs of younger patients and their own self-acknowledgement of that fact.  Unfortunately for legislators, the new healthcare law is built upon widening the overall pool of those with health insurance, including the healthy “young invincibles” in order to help subsidize the cost of universal healthcare.  If too many young people take the fine for not having insurance rather than buying insurance, the system for financing the new health care law could crumble.  The January report also indicates only 3.3 million people had signed up for insurance, about 1 million short of the goal for the month.

These few facts are just indications of a larger trend in American health care costs.  According to a 2012 piece by the CRS (Congressional Research Service), “CBO current-law projections indicate that federal health spending, including Medicare, Medicaid, and outlays for new health care exchanges and subsidies, could make up nearly 50% of mandatory spending in FY2022.

What are possible explanations for why the Affordable Care Act might not be affordable for America?  One that sticks out is that under the 2010 Affordable Care Act, consumers no longer pay premiums based on their health risks.   The idea behind this idealistic premise seems good; some people with preexisting conditions could not get health care or only get it for astronomical costs because no insurance company wanted to bear the cost (and loss on the bottom line), and that doesn’t seem right.  However, not being able to charge people more based on health risks really undermines the concept of insurance itself; more risk means higher premiums for any other type of insurance.   Simply changing what insurance fundamentally is doesn’t constitute a “better health insurance” system as proponents of the ACA claim.

As with any social policy, the actual costs cannot be realized until well after the program goes into effect.  However, Democrats in Congress clearly seem afraid of the turmoil the law has caused, and are themselves cutting into President Obama’s major policy.  They have begun supporting plans that don’t meet the minimum requirements set out by the law because they don’t want people to lose existing policies.  The President himself has changed the mandate on businesses.  Beyond the fact that the legality of these executive actions is dubious, they reek of politics.  Why would the President cut so heavily into the his trademark law, if not to try and get more people to sign up on the exchange (since less business will provide healthcare due to the new restrictions)?  I personally prefer good policy over good politics.  The evidence is mounting that “Obamacare” is the latter, and not the former.

I Can’t Afford Your Religion

Even if you file your own taxes every year, there’s probably one tax rule that you are not familiar with.  This rule is called the “parsonage allowance”.  The parsonage allowance, which has existed in the United States since 1921, allows clergymen to live in a home owned by his religious organization tax-free or to receive income payments to buy or rent a home tax-free.  Additionally, tax courts now interpret the term “home” to include “homes” just as “child” is interpreted to mean “children” for tax purposes.  As such, clergymen can have multiple estates, and not pay a dime in taxes on them.  Certainly, for some clergymen, not paying taxes on their homes is necessary for them to make a decent living.  But for some, the parsonage allowance is absurd.  For example, Kenneth Copeland, who leads Kenneth Copeland Ministries in Texas, lives on a 25-acre estate valued at over $6 million!  In 2011, because Florida does not tax religious property, the state collected $2.2 billion less in tax revenue than it otherwise would have, which is equivalent to 3% of Florida’s entire state budget! (WSJ: Tax Break for Clergy Questioned).

Furthermore, the parsonage allowance is just one way that religious institutions evade taxes.  Most religious institutions are exempt from paying taxes on personal and corporate donations.  Assuming that religious institutions were taxed just like most corporate businesses, the federal government would collect approximately $35.3 billion more in tax revenue each year and states would collect about $6.18 billion more each year.  And this is in addition to the revenue lost by not taxing religious properties.  Finally, religious institutions are also not required to pay investment taxes (ie: capital gains).  Seeing as many religious institutions manage endowments well over $1 billion (like the Presbyterian Foundation, whose endowment is $1.9 billion), this is another lost source of tax revenue for the US. (“How Secular Humanists [and everybody else] Subsidize Religion in the United States”)

Many may argue that religious institutions should not have to pay these taxes because they are charitable organizations.  Well from a financial standpoint, this statement is absurd.  Between 1985 and 2008, the Mormon Church donated a total of approximately $1 billion, which represents a mere 0.7% of the Mormon Church’s annual income.  Certainly, some religious institutions are more generous.  The United Methodist Church allocated 29% of its 2010 revenue to charitable organizations.  But even this 29% should hardly qualify the United Methodist Church as a charitable organization.  The American Red Cross routinely allocates over 90% of its revenue to charitable organizations. (“How Secular Humanists [and everybody else] Subsidize Religion in the United States”)

I do not mean for this post to be taken as a criticism for religion.  In fact, I consider myself religious, and I pray and attend church on a regular basis.  That said, I think that the special treatment religious institutions receive from the IRS is ridiculous.  Especially during a time when budget deficits are such a huge issue, it seems foolish to place additional tax burden on individuals when religious institutions represent such a large source of untapped income.

The Mexican Avocado Wars – It’s all about the Guac

This Super Bowl Sunday millions of people around the world will crowd around their television sets to watch the Seattle Seahawks battle it out with the Denver Broncos. The tension will be high, viewers will stuff their faces with beer and pizza, and at the end of the night at least a few remotes will be thrown at the T.V. And at nearly every Super Bowl event, hidden amongst the madness and the gluttony will likely be a bowl of green guacamole. Although it may seem innocuous to most Americans, this may actually the most highly contested bowl most will see tomorrow evening.

It’s estimated that more than 4 out of 5 avocados sold in the U.S. are grown in the Mexican state of Michoacán, which is the only Mexican state certified by the U.S. Department of Agriculture to export the “green gold.” Michoacán is a green and fertile place, and typically exports more than $1 billion worth of avocados to the U.S. each year. It is also home to one of Mexico’s most dangerous drug cartels, The Knights Templar, who too have grown a taste for the green fruit and the large revenues it generates. In order to capture some of the profits of the avocado growers, the cartel has enacted a “tax” on growers and packers and reportedly extorts around $150 million from the avocado trade each year. The cartel maintains control of the avocado trade in this region in part through its threats of violence against local governments, with many towns being required to turn over more than 10% of their budgets to the group. According to Cuauhtémoc Montero, a major avocado grower and former federal congressman, “extortion added 10% to the price of avocados consumed in the U.S.”

The drug cartels in the Michoacán, including the Knights Templar, get their strength from terrorism and violence; it’s estimated that there are over 10,000 drug related homicides each year in the region. Last November, the Knights Templar kidnapped, raped, and murdered the daughter of a preacher and local avocado grower in an attempt to extort over U.S. $600,000 in ransom. Even powerful business leaders aren’t safe from the violence, as evidenced by the murder of Virgilio Camacho, a top executive at the global steelmaker ArcelorMittal. Although no organization has been formally charged in the murder, Mexican intelligence officials suspect the Knights Templar’s involvement, since the cartel has clashed with ArcelorMittal over illegal steel mining on company land. Such violence has prompted many officials to question the safety of the safety of conducting commerce in the region. As George W. Grayson, a Mexico expert at the College of William and Mary in Virginia, recently explained, “Michoacán isn’t a problem. It is a nightmare.”

The cartel’s tax on avocados and the violence they bring to the region undoubtedly create a deadweight loss on society that impacts Mexican citizens especially hard, but the government’s attempts to curtail the violence have been ineffective. This has prompted local citizens to form their own vigilante militias to combat the cartels in the region. A number of avocado growers have banded together and staged uprisings against the Knights Templar, notably taking control of the town of Tancítaro and forming sandbag checkpoints to prevent the cartel from entering the town. Some of these vigilante groups have also taken back many of the avocado groves that were stolen by the cartel, and returned them back to their rightful owners. The regional governments, seeing the efficacy of these groups, have often embraced rather than taken actions against the vigilante groups. According to the Wall Street Journal, the federal government signed a treaty on Monday with the vigilante chiefs that would allow the vigilante members to join rural and town police in their fight against the cartels.

Overall, it looks like the only way these local avocado growers will find any relief from the cartel violence and theft will be through taking up arms themselves. I wish I could offer an opinion with a simple solution, but the fact that even the federal government in Mexico has been unable to control the powerful drug cartels makes this situation seem more dire. In the end, I think it’s an important problem to chew on while we munch on our Super Bowl snacks, and hopefully this story will at the very least highlight just how privileged we are in the U.S. to be able to watch violent contests on television rather than have to experience this kind of violence in our everyday lives.