Sunday, November 19, 2017

Football in America 2017

The National Football League (NFL) is taking much heat this season because of the protests of some of its black athletes during the playing of the National anthem, the Star Spangled Banner. Rather than stand during the anthem as most players and fans do, these athletes are dropping to one knee in protest against injustice and racism in America.

These protests have drawn a lot of criticism in print and online. More importantly, TV ratings, the lifeblood of the NFL, are down significantly. Viewers are tuning out and some are vowing never to watch again. Sponsors who shell out big bucks to advertise are obviously also taking notice. Some commentators even question whether the NFL can survive.

Personally, I do not object to the protests. I’m not a big NFL fan and rarely watch the games on TV mainly because they have become almost unwatchable because of the constant commercial interruptions. Nevertheless, one of the great things about the USA is that people have a right to protest.

Of course, even if the NFL cannot force its employees to desist, it also has the right to pan away from the protesting athletes and not give them center stage on its broadcasts. For a long time now, it has been squeamish about keeping the cameras on players who drop to their knees and make the sign of the cross after scoring a touchdown. In fact, most the media refuse to cover the annual Right to Life march on Washington every January even though almost a million show up to protest the Supreme Court’s Roe v. Wade decision on abortion.

While I think that the athletes have a right to protest, it does seem ironic that these modern day gladiators feel downtrodden. They all make more money than most of us will ever dream of. Most wear gold chains, drive fancy cars, and seem to attract beautiful women.

Even before they turned pro, they were pampered, fed, and lionized all through high school and college. I know that they were not paid while in college but they did have an opportunity to get a free education. That education was worth in excess of $60000 per year tax-free.  In addition, they lived in special dorms, ate special meals in special dining halls, and got to travel all over the country.

This year at Thanksgiving it would be really fitting if all these protesting athletes got down on both knees and gave thanks for all they owe to living in the USA. The United States has been around for only 228 years but there is no guarantee that it will be around forever.

Shortly after the Nation’s founding, it was engaged in the War of 1812, a war that seems insignificant now but people at the time thought that the very existence of the new nation was at stake. Enemy ships had entered Baltimore harbor and were bombarding Fort Mc Henry. The stubborn resistance of the men in the fort led Francis Scott Key to pen the lyrics of what would become our National anthem.

We usually only sing the first verse but I reproduce it as well as the fourth and concluding verse below.

O say can you see by the dawn's early light
  What so proudly we hailed at the twilight's last gleaming?
Whose broad stripes and bright stars through the perilous fight
 O'er the ramparts we watched, were so gallantly streaming.

O say does that star-spangled banner yet wave
O'er the land of the free and the home of the brave?
 And the rocket's red glare, the bombs bursting in air
 Gave proof through the night that our flag was still there
O thus be it ever, when freemen shall stand
Between their loved home and the war's desolation!
Blest with victory and peace, may the heav'n rescued land
Praise the Power that hath made and preserved us a nation
Then conquer we must, when our cause it is just,
And this be our motto — "In God is our trust"
And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave!

If there ever comes a time when that star-spangled does not wave, then protests of any kind will not be allowed. When people kneel in other parts of the world today, it is only to be driven into slavery or even have their heads cut off.

I don’t want to end on a sour note. Yesterday, Yale won the Ivy League title with a resounding victory over arch-rival Harvard. The newspaper report indicated that the Yale program had made a remarkable turnaround since the hiring of head coach Tony Reno in 2012. It was remarkable not only because of the victory but also because of the way that Reno and his staff did it. Reno said
“he and his staff worked hard since he arrived to change the culture of the program through a set of core values which went beyond football, starting with accountability. From always being on time, to putting others first, to cleaning the space around one’s locker and making sure hotel rooms were cleaner than when the players arrived. But most importantly, believing in each other.
After the game one of the Yale seniors told the coach that he would forever be indebted to him. “He taught me how to live life, how to sacrifice. I thanked him for all he did for me, and not just me, but everyone on Team 145.”

Boola, Boola to Yale, its coach and its team!


Thursday, November 9, 2017

Tax Deductions


Many do not understand the rationale behind some of the proposals in the new Republican tax reform bill. In particular, let’s look at two of the most significant changes: the removal of the deduction for interest paid on home mortgages, and the removal of the deduction for state and local income and property taxes.
Proponents of the reform argue that the removal of the deductions is a matter of fairness and simplicity. One commentator argued that only 5% of taxpayer’s actually use the deductions, and that the rest of the taxpayers just use the “standard” deduction which will be doubled in the proposed plan. In addition, residents of states that do not have a state income tax derive no benefit from the deduction of state income taxes.
Also, these tax deductions are worth a lot more to high income taxpayers than to the majority of the population. A $10000 tax deduction saves a taxpayer in the 35% bracket about $3500, but a taxpayer in the 15% bracket only saves $1500. These deductions mainly benefit the upper middle classes.
But those living in wealthy states like California, New York, and Connecticut are up in arms at the reform proposals. Even though these are “blue” states that usually vote Democratic, their leaders seem not to care that the deductions benefit the well-to-do more than anyone else. Politicians from these states are the most strident critics of income inequality, but they now find themselves supporting tax deductions that primarily benefit their upper middle class constituents.
New home builders, realtors, and others complain that the elimination of the mortgage interest deduction will depress the housing market. Here’s the reasoning. When most people decide to purchase a home, they have to consider what they can afford to pay every month. Most of the bill will be made up of the mortgage payment and the real estate tax that is usually paid by the bank that handles the mortgage.
So, if a potential homeowner with a $100000 annual income can pay 24% of that income ($24000 per year) for housing cost, he could either pay a rent of $2000 per month, or a mortgage payment of $2000 per month. But since the great part of the mortgage payment is currently tax deductible, his after tax cost will be less that $2000 per month. What he saves in taxes could theoretically be spent on home improvement, a car payment, or whatever.
But he could also say that because the mortgage payment is deductible, he could afford a more expensive home to begin with. This is one of the reasons why we see smaller, older homes being knocked down all over, and replaced by mega-mansions. On my own street an old eighteenth century farmhouse with a vacant building lot was recently knocked down and replaced by two very large five bedroom homes that both went on the market for around $900000. One was bought by a single man who apparently moved to Connecticut because his property taxes in New York’s Westchester county were too high.
It is true then that the deductibility of home mortgage interest and property taxes have inflated the cost of homes. But while that has benefited higher income earners, it has also priced many members of the middle class out of the market for new homes. For most people, the increase in the standard deduction, as well as the lower tax rate will offset the loss of the tax deductions.
For example, under the current system a single taxpayer reaches the 25% tax bracket on income over $37950. Under the proposed plan, the 25% bracket is reached on income over $45000. The numbers are doubled for a married couple filing jointly. Again, for most people the increase in the standard deduction to $12000 or $24000 will further obviate the need to itemize deductions on the tax return and make the filing process so much simpler.
Ironically, the elimination of the home interest and local tax deductions will have no impact on the very wealthy. Under the current system these deductions have already been phased out for those making over $400000 per year.


Monday, October 30, 2017

Tax Reform 2017


There is a difference between raising tax rates and raising taxes. An increase in tax rates on the rich or anyone else does not always lead to increased government revenues. Historically, almost the opposite has occurred. Over 50 years ago, President Kennedy lowered tax rates and Federal revenues grew dramatically. President Reagan did the same thing with a similar result after he took office.
Even the much-maligned Bush tax cuts did not reduce Federal revenues. In 2002 the Federal government collected 1 Trillion dollars in income taxes and 1.88 Trillion in total revenues. By 2007 after five years of Bush “tax cuts”, Federal income tax collections went up by 50% to over 1.5 Trillion dollars, and total government receipts exceeded 2.5 Trillion. In 2007 the total federal deficit was a mere 160 Billion dollars, the same it had been in 2002. Only with the recession did income tax revenues go down to 2002 levels although total government receipts stayed higher.
Today, total Federal government revenues are the highest they have ever been. Unfortunately, during the Obama administration massive government spending far outstripped the increased revenues. Even if Congress was to tax those making over $250000 at a rate of 100%, it would not come close to dealing with the massive debt roll accumulated during the Obama administration’s years in office.
Ironically for conservatives, it would appear that reductions in tax rates lead to increased government revenues and only enable more government spending. At the same time, it would appear that raising tax rates would actually lead to less revenue for Washington? Why should this be so?
Lower tax rates would actually grow the economy and produce greater revenues for the Federal government. Most people, including those who should know like politicians and newspaper editors, cannot understand the concept.
But there is another factor. Increasing tax rates only increases tax avoidance strategies both legal and illegal. Increasing tax rates on the rich or anyone else will only encourage more tax avoidance since the potential reward gets greater. If someone’s income is taxed at a 50% rate rather than 25%, the potential reward for deferring, sheltering, or otherwise hiding income has doubled.
No one has ever asked Hillary Clinton or her husband why they felt a need to set up the tax exempt Clinton Foundation for their charitable work in the first place. Many financial planners advise high-end clients to set up foundations for tax purposes. We all know of the Gates foundation and the Buffett foundation. Theoretically, since these foundations pay no taxes, more of their money can be used for the charities they wish to support.
 Even assuming that these people had the best of motives, they must have realized that they could achieve greater results with their money than the Federal government could. Why give the government a third or more of your speaking fees when all the fees could go to the Foundation. Of course, they also could be able to maintain control over the tax exempt funds as opposed to leaving it to government bureaucrats to decide. The funds could go to pet causes.
These foundations also help the ultra-rich to avoid dreaded estate or death taxes. Recently multi-billionaire liberal activist George Soros has transferred about 18 Billion dollars to his own foundation. He will eventually die but no death taxes will be paid since his foundation will live on. When I worked as a financial planner, it was common to refer to the estate tax as a “voluntary” tax, a tax only paid by those too lazy or stupid to take measures to avoid or minimize it. Actually, the estate tax accounts for a very small share of federal revenue since estates under $5 Million are exempt from taxation.
There are other legitimate ways for people to shelter income from taxation. For example, taxable withdrawals from IRAs and other retirement plans can be deferred until age 70, and after that only minimum withdrawals need be taken over one’s lifetime. Raising tax rates only discourages taking money out of IRAs. Lowering tax rates would actually increase taxable withdrawals from IRAs and 401k type plans.
President Trump is also right about lowering the Corporate tax rate. Corporations actually don’t pay taxes. The taxes are figured into the price of what their customers pay in the same way that the real estate taxes paid by landlords come out of the rent paid by tenants. Higher corporate taxes are inevitably passed on to the consumer.
Also, corporate accountants are paid to find ways to create strategies that will minimize corporate tax liability. A higher tax rate will inevitably lead to more and more drastic measures. When states raise corporate tax rates, corporations move to more tax friendly states as General Electric did in Connecticut. We all know that the high Federal Corporate tax rate has led many domestic companies to relocate overseas.
Inevitably, increases in tax rates never produce the expected tax revenues. Just look at the state of Connecticut. Two years after his election Democrat Governor Dannell Malloy, and an overwhelmingly Democrat legislature pushed through the largest tax increase in State history. The expected revenues failed to materialize, and the Governor had to raise taxes again to balance his budget. After this second Malloy tax increase, Connecticut is still billions in debt. No wonder the Governor has declined to run again.