The Santa Claus Syndrome: Where Things Come From

Rich Pay More!!

A key element in President Obama’s plan announced last night is for the top 2% of taxpayers to pay more and for everybody else to get a tax reduction.  It sounds reasonable, to many, that the rich should pay more because they can afford it.  Of course it is always easier to find extra money in someone else’s pocket than in your own. 

The good news is that the rich ALREADY pay more, much more. The top 1% of taxpayers pays nearly 40% and the top 5% pay almost 60% of income taxes paid.  The question is whether there should be a limit to this forced generosity.  I believe there is and this is how I came to that conclusion:

Even the IRS website shows that 40% of filers pay no taxes.  Many, especially those with several children and benefiting from child credits, get money back even without having put any in in the first place. 

I used the tax software that I use for my taxes to examine the case of a couple with three children and a taxable income of $50,000.  They would get a check for over $300 even if they had paid nothing in.  That’s right, they make $50,000 and the IRS is paying them! Well not really, it’s US paying them since that’s where the IRS gets the money.

This creates an increasing pool of people who are demanding benefits and are paying nothing. (They pay Social Security but that has to fund that program.  They also pay assorted state and local taxes but we are talking about the federal income tax.)  Of course politicians see the 40% paying nothing and probably another ten or so who pay little and they have a constituency that vote for them to continue new programs.  For a system to have legitimacy, everybody except possibly the absolutely destitute should be making a contribution. 

Another statistical tidbit from the IRS website:  The bottom 50% of taxpayers only pays 3% of the total taxes while making about 13% of the income.  Yes, that’s right.  Last night the president discussed some improvement in education programs.  You have to look at all this together.  Improved education levels are necessary to increase the income as well as the resulting tax contribution by the lower half of the lineup. The emphasis on education should not only make it available but there should be a strong push to make sure people take advantage of it.  For Obama’s plan to succeed, we need more production from those who contribute little or nothing now.

Old Financial Advice

As I learn more and more about people who are suffering financial disaster during the current upheaval, there is a temptation to wonder if the financial plans we had followed for years were going in the right direction.  Nobody really anticipated the current collapse, at least not the scope of it.  So should we, as individuals, have followed a different course?  This is a lot different from asking if government and the banking industry should have done things differently. 

We have to live with the results of our own actions.  If you are young, you need to plan your financial life over decades and we know that many unexpected things can happen in that period of time.  It isn’t possible to account for each possibility, especially the “unknown unknowns” that Donald Rumsfeld used to talk about.  So you have to have a basic plan to try to get you through your whole life.

I think more and more about why I am not suffering the way so many are.  It is because I have been following my own advice which involves a careful, deliberate approach to financial management.  Some of the key elements are that I have multiple income sources and low cash outflow each month because my house and car have been paid for for years.  If I want to do something extra, I know what I can afford.  But I don’t have a lot of regular payments to deal with.  You can’t get into that situation overnight.  

Twenty years ago I bought a small house with as big a down payment as I could muster.  Then I paid the mortgage off in about eight years.  This allowed me to make more investments for the last ten years before I retired.  I also have a four year old Camry that I paid cash for. 

My plan isn’t completely impervious to the financial tides.  My 401(k) and investment accounts have lost tens of thousands of dollars.  But I’m getting by.  But that is why it is important to have income from pensions, social security as well as investments.

There is nothing magic or mysterious about this.  No tricks.  Just a deliberate plan with persistent execution.  The old financial advice works just fine.

Time to Spend? Or Save?

Last night Nancy Pelosi was glowing when she announced the approval of the stimulus plan and said that she never thought they would be able to do so many things for so many people.  It was as if spending vast sums of money was the most wholesome of things and could lead to nothing but good.

The government, pushed by the leading economists and abetted by endless politicians, anxious to gain the goodwill of their constituents by giving them something and saving the country at the same time are unrestrained.  They want to provide stimulus to the element of the economy who will spend the money right away and generate economic activity.  Get people spending!

But those who advise individuals on financial affairs are saying this is a good time to hold back.  Cut out extra spending.  Economize!  Of course, if you are worried about your job or have already lost it, you probably came up with this idea on your own.  But is it the right thing to do?  Of course if you are down to your last dollar, you probably won’t spend it except on something to eat. 

So the course is that for individuals, it is good to hang on to money we have because we don’t know when we will get more but for the overall economy, we need to encourage everyone to spend.  Should we encourage our neighbors to spend while we save?

Several years ago there was an economic slowdown in Japan.  The Japanese are reputed to be much more disciplined than we are and held on to their money instead of spending it.  This is credited with extending their slowdown because it stifled economic activity. 

So what is good for the individual is not so good for the economy. This is something that John Maynard Keynes observed many years ago and called the Paradox of Thrift (or Savings). And overheating spending to boost the economy is going to leave some individuals high and dry when the bills show up.   We have a situation where we need some sense of balance.  This is like many situations where small doses of something can be good but unlimited use can lead to disaster.

There is a lot in the media now about what should be done.  Much of the discussion is what government or big business should do.  I’m more interested in what real people like you and I should actually do. 

I know what I’m going to do.  Since I’m normally pretty frugal anyway, I am going to continue spending at the rate I normally do.  It is probably best for most to do this.  Avoid the extremes, but keep an eye on where you are too.  And hope your neighbors take off on a patriotic spending spree!

 

Smoke ‘em for the Kids!

Last week our new President signed the State Children's Health Insurance Program bill to great celebration.  Free healthcare for middle class children!  How could anyone oppose?  Of course hidden in the background is a fat new tax on cigarettes.  How about another $.61 cents to make it an even dollar for the Feds, on top of generous taxes to states, which are also on top of the so-called tobacco settlement.  The tobacco settlement is a swindle in that it is really a tax in disguise.  Although the agreement was between the tobacco companies and the states, every penny will be paid by those who are still addicted to cigarettes.  They weren’t asked for an opinion on the agreement.  The same people who harshly criticized tobacco companies for addicting smokers to tobacco seem to be happy with the situation when they get to spend the proceeds from it.

 As we accountants know, corporations have to pass all these costs on to the customers.  If they don’t, they will run out of money and go out of business.  There is some notion that fewer people will smoke which is a victory for self-righteousness but if that happens, the revenues will fall off and more of the bill will end up hitting the rest of us.  In fact, some suggest it will take hordes of NEW smokers to come close to paying this tab. 

On signing, Obama said that this was a down payment on his commitment to cover everybody so I’m sure he is looking for others to shoulder a monumental health care bill. Eventually the President may notice that when he gives a benefit to some Americans, he has to force other Americans to pay for it.  This may be a signal that we are going to turn up the heat with new taxes and are going to focus on minorities who can’t defend themselves. But I think our new President will soon realize that there are not so many despised minorities to be taxed with impunity.  But right now, the motto is “Smoke ‘em for the kids.”

Celebrate Exxon Mobil Profits!

Why?  Because they generate huge tax revenues.  Exxon Mobil just announced their results for 2008 and the news is great, a record $45 billon in profits.  Unlike the way this is often reported, it is good news for all of us.  I’m sure you and our new President and the Congress will be happy to get the news that this profit figure was after paying about $36 billion in income taxes, a detail usually overlooked in news reports, an increase of nearly $7 billion from last year.

There is more good news for the various taxing organizations around the world.  Exxon Mobil also paid about $35 billion in sales based taxes and about $45 billion in other taxes.  The total contribution in taxes was about $116 billion.  This is an incredible contribution to the public works and one that should be celebrated by all.

Think of it this way:  When Exxon Mobil makes $1 in profit, they have already paid about $.80 in income taxes.  They have also paid about $1.77 in other taxes.  So when you hear of Exxon Mobil making a dollar, think of this as good news because that means another $2.57 went to the public good around the world through various taxes. 

Another way to look at the profits is in relation to gross revenues of $477 billion.  This means that net profit after taxes is less than 10%.  Sounds pretty reasonable from that angle doesn’t it?

Companies that make big profits and pay big taxes are the ones that will help us get out of the economic slump.  You pay taxes on profits, not losses, so all the companies that are so prominent now for losing money are not putting anything into the pot to pay for relief.  They are the ones asking for it.

So why isn’t this tax good news reported?  It’s not because it’s hard to find.  It’s in the same press release as the profit figure.  In fact, anybody can click on exxonmobil.com and look at the press release. 

This is an example of one of my favorite topics:  where things come from.  This is where a big chunk of the money comes from to take care of all the things the government wants to do.  We, and especially President Obama, need to keep that in mind.  And always remember:  This is America, if you think a company is making too much money, buy their stock, don’t tear down the company.