Tag Archives: taxes

(Revised) Michigan’s Road Problem

One of the sure ways to know that something is important is when politicians actually agree on something.  With the current state of American politics, both conservatives and liberals rarely agree on anything.  Yet, when it comes to the current state of the infrastructure in Michigan, everyone seems to agree: The roads in Michigan are awful.

I grew up thinking that the thump-thump you hear when driving down the highway was normal, but as I’ve grown older, I’ve realized this isn’t true.  Sad as it is to say, I don’t mind when I cross the Ohio border and finally get some peace and quiet while driving.  The data about Michigan’s roads backs this up.  The American Society of Civil Engineers gave Michigan’s infrastructure a D in 2009, 2011 and 2013 (they gave the U.S. a D+ nationally).  According to the ASCE, about 30% of the bridges in Michigan are either “structurally deficient” or “functionally obsolete” and 38% of Michigan’s roads are in either poor or medicare condition.  More importantly, they believe that the poor conditions of the roads in Michigan costs the average motorist an additional $357 dollars per year in car repairs and traffic problems.  Some people fear that poor road conditions could drive both new business investment and tourism away.

The fact is that all roads face some deterioration over time, and will need to be replaced eventually, but Michigan has two key factors that enlarge this problem.  The most obvious factor is the weather.  Driving around in the past few weeks has been an absolute nightmare in Michigan; potholes are everywhere as a result of an extremely cold and snowy winter.  When water seeps into cracks and later freezes, it expands and enlarges the cracks.  This is why the potholes have been especially prevalent and dangerous after this prolific winter season.  The second major factor that causes increased wear and tear on Michigan’s roads is a poor public transportation system.   The most often cited cause for a subpar public transit system in Michigan is the local interests of the major car manufacturers.  Since better public transit means less cars, the major car companies like Ford, GM, and Chrysler all have an interest in opposing public transit.  Over time, this has lead to woeful public options in Michigan (Ann Arbor is probably far better than most areas).

The real question lies in where the money to fund road improvements will come from. In 2013 Michigan governor Rick Snyder proposed a $1.2 billion increase in road funding, funded through either an increase in the gas tax and other fees, or an increase in the state income tax. The Michigan Infrastructure and Transportation Association thinks the true cost of fixing Michigan’s roads is around $2 billion per year in additional funding, far more than the number governor Snyder has proposed (there are some great graphics in the full report here) . However, the proposals in the Michigan legislator fall well short of that funding level, there are new proposals in state Congress to increase road funding by $450 million per year.  The additional funding would come from diverting 1% of our of Michigan’s current 6% sales tax to roadwork andthrough eliminating the flat gas tax and instead taxing it at 6%.  Thus, if prices rise higher than $3.55 per gallon, the tax will be more expensive than the previous 18 cent per gallon tax.  Proponents of this tax are eager to point out that a gas tax makes people who drive more pay more in taxes, which seems smart.

This proposal has two major issues:

  1. No tax increase: Lawmakers have apparently found about $400 million dollars to take from other parts of the budget, because actual revenues are expected to increase by only about $50 million.  This proposal means some other project is losing $400 dollars
  2. Not enough funding: The amount of new funding is still well short of the additional funding governor Snyder pros posed and is well short of what experts think is necessary to solve this problem.

Another option that people frequently talk about is the use of toll roads to generate revenue.  Unfortunately, most of Michigan’s highways aren’t eligible to be used as toll roads.  Since the federal government funded a significant portion of the costs of state highways, those roads cannot be used as toll roads without repaying the government for their original investment.  Although there are some ways around these rules, trying to convert Michigan’s road into toll roads wouldn’t be financially viable.

The problem of poor roads isn’t going away any time soon, and so lawmakers must act to better fund the roads in Michigan; waiting will only make the roads worse.  Although difficult, I believe that residents must accept a slight tax increase in order to improve Michigan’s dilapidated road network.

 

“Why Rich People Feel Poor”

A controversial and highly debated topic, especially between the left- and right-wing, is the taxing system in this country. Generally, the left wants to see the top-earners taxed a higher percentage of their income than low-earners. This idea is already in place in the current American system, where tax brackets designate the percentage of taxes to be payed based on the amount of income. Right-wingers argue that this redistribution of wealth is unfair and hurtful to the economy. A recent article in Bloomberg “Why Rich People Feel Poor,” essentially explains why the rich are right to complain about being taxed so highly. The author makes no effort to hide his position, which is fine, but it also makes for an interesting discussion.

The author argues that the rich get less out of the government than do low-earners, which might be true. Wealthy people do not qualify for Medicaid, which covers nursing home care for low-income individuals. However, they can receive Medicare at age 65. Besides this, however, the article points to no other examples of how the rich benefit less from tax-dollars. A hypothetical couple is presented, which earns $450,000 a year and has twins. The author draws out a savings plan that leaves much to be desired. First, savings for college are estimated to be $1,000,000; even if we are considering the most expensive university for both children, this is a cruel exaggeration. Sure, the author notes that college prices are increasing, but it is a bit unrealistic to think real prices will be so high. As it is right now, higher education in this country is ridiculously expensive. Also, he notes that long-term health care costs, outside of Medicare, are estimated to be around $220,000. Thus, this is another chunk of their paycheck that they must save.

The author suggests other reasons why we should pity the rich, but leaves out the most obvious argument to be made here: the flaw in federal spending. Below is a graph of the proposed US discretionary federal budget’s allocation for 2014.Screenshot (21)

Clearly, military spending is overwhelmingly high. In fact, the United States spends more on defense than the next 10 top-spender combined. Without getting into too much politics, it is not necessary for this country to spend so much on defense. If even a part of this was spent on education or health care, the country would be on its way to following the good example of Western Europe. If this were the case, the rich would benefit more from tax-dollars since they wouldn’t have to save so much for education and health care. So before we go feeling bad for the rich, it’s important to look at the big picture here.

Recovery on hold with profits overseas

The United States’ recovery from the recession of 2008 has been painfully slow. It has been a period characterized by persistent unemployment that has weighed on the economy.  Companies are not adding the jobs they shed during the recession.  During this same period American companies have made healthy profits.  However, what modest growth there has been has not translated into jobs.  Below is the labor participation rate, which is a measure of what portion of the population is working.  The shaded areas are recessions, and coincide with drops in the participation rate.  The recoveries that follow show sharp increases in the rate.  After this most recent recession is clear that this recovery is different.

Civilian employment to population 16 years or older ratio.

 

One thing that is different now then in the past was that companies like Apple, Google, and Exxon Mobile weren’t  hoarding their profits overseas (an estimated 1.9 trillion as of May 2013). All this “cash on the sidelines” could stimulate the economy and create jobs if it was just put to use.

When multinational companies bring their profits back from over seas, the government takes what is called a repatriation tax. This tax rate is currently 35% of what ever is left after the company pays taxes in whatever country it earned them.  This is one of the highest in the world.  Since the money is taxed as soon as it is brought into the country, then there is going to be over a third less of it when it gets here.  Further eroding these mountains of cash is the debt that is taken out to do share buy backs and pay dividends to shareholders.  Investors want some of the profits if the company isn’t going to use them, and borrowing is cheaper then moving the money and paying taxes.  If the government is serious about stimulating the economy, it may have to get out of its own way.

The repatriation tax is preventing corporations from bring these profits back to the United States.   In order to stimulate the growth that the United States needs, the federal government should provide a tax holiday for corporations to bring their profits home.  This could amount to almost a trillion dollars returning to the United States.  Opponents to this may see it as only helping the rich; that there is not guarantee the companies won’t just pay lavish dividends to shareholders and boost their share price.  Some of that probably will happen, but at least those profits are being distributed, and most likely to a great deal of Americans.  With almost 2 trillion, companies will also invest some of the money in mergers and research for the future.  This is prosperity that has already been earned, it is just held back because no rationally operated company would pay a 35% tax unless it absolutely had to, they do owe that much to their shareholders. The federal government may hate the idea of letting that much money in with such a little slice going in its coffers, but how much of this cash do companies even need to bring back?

The United States government should provide corporations with the incentive they need to bring their profits back to the United States by providing a tax holiday for the profits they are currently keeping over seas.  They should also modify existing policies to make America competitive again with regard to corporate taxes.  It is only driving money away (IBM, Chrysler are examples). This money and these policies could be the missing ingredient for the United States recovery.  The wealth can’t trickle down through a border.

Increase in U.S. Capital Gains Tax on Wealthy: Incentive to Donate?

It’s that time of the year when American earners start to fret about their personal wealth. The IRS began accepting returns for 2013 income tax season on January 31st yet again in the U.S., and the WSJ has made sure that its readers are aware of many of the upcoming changes to the tax code that have come this year. Since many of the new provisions only affect high-income taxpayers, most of us in Econ 411 will likely be unaffected (unless you have your own lucrative hedge fund or startup on the side). However, since we have progressive income tax rates, the tax code has a significant effect on the distribution of wealth in our country, so these changes are useful to consider when analyzing inequality (at least in terms of taxable income). Furthermore, there are a few loopholes that allow some high earners to maintain their advantages.

One of the biggest changes for those in the top income bracket (singles making more than $400,000 a year, or married couples making more than $450,000 a year combined) is the increase in the top tax rate for long-term capital gains and qualified dividends (on assets held for more than a year) from 15% to 20%. In addition, there is also a new “net investment income” tax, in which those that earn more than $125,000 (if they’re single, $250,000 for couples) in investment income will pay an additional 3.8% on their investment income. This essentially acts as an additional tax on capital gains and dividends.  On paper, these new taxes may appear to some politicians to be a step towards evening out the inequality in this country, but there are also a few loopholes that may prevent this from being a successful strategy.

One important loophole was illustrated in different Wall Street Journal article. The article suggested to the average taxpayer to donate stock or other financial assets to charity rather than give a monetary gift. It’s widely known that charitable donations can be deducted from a filer’s tax return, but there is an added advantage to donating your financial assets. If you donate stock to a charity, not only do you receive a tax deduction at the fair value of the assets, but you won’t have to pay the capital gains tax on that asset. Individuals can deduct contributions of capital gains assets up to 20% of their adjusted gross income. This means a wealthy taxpayer that typically gives away a large portion of their salary to charity could simultaneously avoid paying taxes on their investment gains by simply donating a portion of their financial assets to a qualified charity.

For example, say a wealthy bachelorette in the top income bracket with a salary of $1MM per year gives away $50k in cash to her favorite charity annually and, after saving steadily, she has an investment portfolio of $500k that generates 10% dividend return annually (assume this is in a high-yield ETF, with reinvesting dividends), so she normally gets $50k worth of investment income annually. This year, she wants to take her annual capital gains and dividends out of the fund and spend it on a vacation with her partner. These gains would be taxed at 20%, given the 2013 capital gains tax increase. This would mean that she would only get to keep $40k of this year’s $50k capital gains ($500k * 10% interest * (100-20% capital gains tax) = $40k). Between her charitable contributions and her capital gains after tax, she would have spent $10k this year (simplified to only these two items for illustration). If she instead decides to donate $50k of her ETF portfolio to her favorite charity, she escapes the capital gains taxes on this stock and her gains from her portfolio ($50k) cancel out her charitable donation ($50k). So far, she’s left with $10,000 worth of extra cash flow this year. Furthermore, since charitable contributions are tax-deductible, she gets to write $50k off her annual income when she pays her income tax. This means she’ll get to keep an additional $50k*39.6% (for the top tax bracket) ~ $20k, instead of paying this in tax. The overall effect is that she pays 20k ($50k – $20k income tax savings -$10k capital gains tax savings) in order to donate $50k to charity; it’s a strong incentive to donate!       – Keep in mind this strategy only works for philanthropists that would have originally donated to charity anyways.

Overall, while this part of the tax code is likely to have some sort of an effect on income inequality in the U.S. directly, the higher tax may also incentivize wealthy people to donate to qualified charities. In the end this might have a positive redistribution effect, assuming the money donated to these charities is used appropriately and responsibly. This would make an interesting topic to research, to investigate whether there was an impact on the capital gains tax rates and charitable giving.