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Friday, September 30, 2011

These taxes are Killing Me!

 The Boston Tea Party sparked the growth of the American Revolution.  The Boston Colonists objected to the Tea Act that had been passed by the British Parliament.  They believed it violated their right to only be taxed by their elected representatives.

Fast-forward 238 years and the contentious relationship between the taxed and those entities who charge taxes and increase tax rates.

The assortment of taxes we pay today – estate tax, FICA, property tax, federal income tax, and others didn’t always exist.

Back in 1909 Congress enacted the corporate income tax. Today corporate taxable income rates vary from 15% to 35%.  In 1913 a system of graduated federal income taxes was implemented by Congress to help finance World War I.  The rates started at 1% and went all the way up to 7%.

Between the years of 1913 and 1915 only 2% of the U.S. population had to pay  federal income taxes because the system taxed mainly those with large incomes.

Sales tax is known as a consumption tax. That means that it is levied at the time a purchase is made. The tax is usually a percentage of the sale price.  The seller, who then remits the tax over to a government agency, usually collects sales tax from the buyer.

Use tax – You would pay this tax if you make a purchase without paying your home state’s sales tax and you use, give away, store or consume that item in your home state.

Payroll tax – A tax that employers are required to ‘withhold’ from an employees’ wages. Employers are required to withhold state and federal income taxes plus social security and Medicare taxes from your employee’s wages.

FICA – Also known as Social Security and Medicare taxes. The current social security tax rate is 6.2%. The Medicare tax rate is 2.9% for both the employee and employer. Employers withhold 1.45% from an employee’s wages and pays a matching amount for Medicare tax.

President Franklin Roosevelt signed the Social Security Act in 1935 and Social Security taxes were first collected in January 1937, although no benefits were paid until January 1940.

Property tax - in the U.S. charged on real estate and is usually levied by local government between about 0.2% and 4% of the home value.

Capital Gains tax – A tax charged on the profit realized on the sale of a non-inventory asset. Capital gains are most commonly realized from the sale of stocks, bonds, precious metals and property.

Progressive tax – Basically the more income one earns, the higher the tax rate.  If your taxable income is between 0 and $8,500 your tax bracket is 10% but if your taxable income is over $379,150 your tax rate would be 35%.

Regressive tax – Under this system a larger percentage is taken from low-income people than those that earn higher incomes.  Examples of regressive taxes would be gas or sin taxes because they take a larger bite of the income of a lower earner.

Where does are tax money go?
Federal income taxes support the U.S. military and assorted federal programs like Social Security and healthcare.  Local taxes support police and fire departments, schools, potholes in streets among others.

I believe that the current tax system is way past out of control. There has to be a simpler way to collect what is owed and eliminate the loopholes and tax havens that are so prevalent.

What do you think? Should an entire industry exist simply so that U.S. citizens can obey the law?

Thursday, September 22, 2011

Tax the Rich…or at least anybody but me!

The nation should have a tax system that looks like someone designed it on purpose. 
                                                           ~William Simon

The Bush tax cuts were enacted in 2001 and 2003. They are also scheduled to expire on December 31st 2011.  A fight has erupted over what to do next. Democrats lean towards letting them expire, Republicans tend to favor that they be extended.

The Bush tax cuts really helped folks in the upper middle class or “lower rich” range because the majority of their money is not derived from investment income.

If the Bush tax cuts were to end, the biggest losers would be individuals who earn over $200,000 and couples who earn $250,000 or more.  In certain parts of the country those sorts of numbers would identify you as rich.  Now, where I live (S.F. Bay Area) not so much.

Did the Bush tax cuts benefit the rich? Why or why not?

Most millionaires don’t get wages / paychecks.  For example, Warren Buffetts’ income as CEO of Berkshire-Hathaway is $100,000.

But to dig deeper, how much does Warren Buffett actually make?  Different question…different answer.  He makes millions of dollars but it is investment income from capital gains and dividends. That money is taxed at the capital gains rate of 15%. The average accountant pays a higher rate than that.

Last Monday in his White House address, President Obama called on Congress to increase taxes over a 10-year period by $1.5 trillion as part of a deficit reduction package.  He also proposed an overhaul to the tax code and introduced a plan that he referred to as the “Buffett rule” named after billionaire investor Warren Buffett.

This inspiration no doubt stemmed from Warren Buffett’s August 2011 op-ed piece in the New York Times. Since then political think tanks have been pondering whether or not millionaires are actually taxed less than average workers.

According to one Washington think tank (Tax Policy Center, I think) most people making over $1,000,000 pay 29% in federal income taxes but those earning in the $50,000 - $75,000 pay only15%.

The rest of the story is that middle class wage earners also pay payroll taxes that are not applied to those making over $106,800.

When you’re talking about incomes above $1 million, they can range up to several billion dollars and the bulk of that income is usually derived from capital investments. The top tax rate for dividends and capital gains is 15%.

Long story short, if you ended the Bush tax cuts, folks like Buffett wouldn’t feel a thing.

Closing the gap between capital and wage income is the real goal here.

What do you think? Should the Bush tax cuts expire? Be extended? Should the rich pay more in taxes? How do we determine who is really rich?

Saturday, September 17, 2011

THE LIBOR and its’ importance in Economics

London Interbank Offered Rate – LIBOR

With all of the economic stability taking place throughout the world it is not unusual to hear discussions involving something known as LIBOR.  What the heck is a LIBOR and why should I care?

The LIBOR is the world's most widely used benchmark for short-term (one day to five years) interest rates. Think of it as the interest rate that the banks charge each other for loans (usually in Eurodollars).

Why is it important? Because this is the rate at which the world's most preferred borrowers are able to borrow money.  In addition, it’s also the rate upon which rates for less preferred borrowers are based. A good example would be a large multinational corporation with a very solid credit rating having the ability to borrow money for one year at LIBOR plus four or five points.

The LIBOR is officially fixed on a daily basis by a small group of large London banks, known as the British Bankers' Association (BBA) but the rate changes throughout the day.

The LIBOR is also widely used as a reference rate for financial instruments such as forward rate agreements, short-term-interest-rate futures contracts, variable rate mortgages, currencies, especially the US dollar and several other financial instruments.

Back in 1984, an increasing number of banks were trading actively in a variety of fairly new market instruments, such as: interest rate swaps, foreign currency options and forward rate agreements. While such instruments brought more business London Interbank market, bankers were concerned that future growth could be hampered without some measure of uniformity.  In October 1984 the British Bankers' Association (BBA) —working with other parties, -- established various working parties. They eventually produced the BBA standard for interest rate swaps. Part of this standard included fixing BBA interest-settlement rates, which was the predecessor of BBA LIBOR. 

Rate calculations are derived by 16 of the world's most creditworthy banks' across 10 currencies and 15 lending periods ranging from overnight to one full year. These calculations incorporate variables such as time, maturity and currency rates. There are hundreds of LIBOR rates reported each month in numerous currencies. 

BBA LIBOR fixings did not commence officially before 1 January 1986. Before then, some rates were fixed for a trial period beginning in December 1984.

Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.

How Does All of This Affect Me?

Although the LIBOR rates are fixed in the United Kingdom, American consumers can benefit by having a greater understanding of how LIBOR works, since LIBOR is used as an index in the pricing of many kinds of consumer loans in the United States.

Chances are that adjustable rate mortgages and credit card interest rates are based on LIBOR. As rates reset, the high LIBOR will make your monthly payment also higher. It is estimated that 60% of all adjustable loans within the United States are tied to the LIBOR.

If that wasn’t enough consider the fact that student loans are also pegged to the interest rate charged to the LIBOR. If rates go up the loan will become more expensive. As if getting a college education wasn’t financially draining already.

In addition to ARM mortgages, your credit card debt is affected by the LIBOR rate.

A risking LIBOR will make many types of consumer and business loans more expensive.  When this happens, more money is taken out of the economy, slowing growth and increasing unemployment.

Sunday, September 11, 2011

What is a Patriot?

...the true patriotism, the only rational patriotism, is loyalty to the Nation ALL the time, loyalty to the Government when it deserves it.

- "The Czar's Soliloquy"--Mark Twain

You know, patriotism is one of those terms that gets bandied about but I wonder if we  really understand what we mean when we describe someone as a patriot.

Bringing out your U.S. flag on July 4th, Memorial Day or September 11th doesn’t make you a patriot.  Shouting “U-S-A, U-S-A” doesn’t make you a patriot. Knowing the words to the national anthem doesn’t cut it and just because you served in the armed forces doesn’t make you a patriot.

No, I suspect being a true patriot requires a bit more work than that.

Patriotism is defined as the love and support for ones country. I would dare say that the true meaning of patriotism has been both hijacked and denigrated in recent history. Often it gets misused in order to serve a certain person’s agenda.

I want to go to war. If you don’t agree with me, you’re not a patriot.

I want to erect a monument that pays homage to MY hero. You don’t agree with me? No way you’re a patriot.

You’ve never served in the military. You’re no patriot. You don’t love your country.

It kind of reminds me of Archie Bunker. How can you call yourself a patriot when you hate the majority of folks who live in your country?
Who were the original patriots? My guess would be our nation's founding fathers.
You can’t get more original than that.

George Washington, Thomas Jefferson, John Adams, the signers of the Declaration of Independence all would qualify as American patriots. Just by signing the Declaration of Independence they were basically signing their own death warrant.

Women have also put their lives on the line in making this country live up to its’ principles. One of these would be Ida B. Wells, who fought against lynching even as she fought on behalf of women’s rights. Another example is Susan B. Anthony, who was quite prominent in the fight for civil rights and also played a major role in the 19th century struggle for women's rights.

"Patriots" was the term used to describe those who supported resistance to the policies of King George and his ministers and, later, independence from England.
Depending upon what side you were on you could have considered them rebels or traitors.

You might say that a true patriot should be willing to die for his country. I’m obviously not just talking about military service. Consider Dr. Martin Luther King Jr. He died in the attempt of making the United States a better place.  A true patriot? Perhaps.

What about the case of the Reverend Jeremiah Wright? I’m sure you remember Reverend Jeremiah Wright. He is President Obama’s former pastor. Back in 1963 Reverend Wright served two years in the Marines and later volunteered to become a Navy medical serviceman. As a Navy medical man he helped care for President Johnson after his surgery in 1966. Do those actions describe a patriot?

It is not unusual for "being patriotic" to became confused with nationalism and even jingoism.

I prefer to think of patriotism as inclusive of both social responsibility and self-sacrifice.  We can’t make our country better by sitting on our butts watching Monday Night Football or American Idol.

On this 10th anniversary of 9/11 I’d like to ask: How would you define patriotism? What would you consider a patriotic act? Who today best exemplifies a true patriot?

Monday, September 5, 2011

A Matter Of Persective, And The Economic Hyping Of Professional Sports

As a young child I have vague memories of an Ebony magazine cover circa 1970 or 1971.  The subject of that issue’s front cover was the $100,000 club for major league baseball players.

As best as I can recall, the faces on the cover were Willie Mays, Hank Aaron, Pete Rose, Frank Robinson, and others. If you know baseball history I don’t have to tell you that these names were the absolute cream of the crop.

                      Salary in 1970                    Inflation adjusted salary
Hank Aaron            $125,000                                             $696,939
Harmon Killebrew     $95,000                                             $529,673
Frank Howard         $125,000                                             $696,939
Roberto Clemente   $100,000                                             $557,551
Carl Yastremski       $125,000                                             $696,939
Bob Gibson             $125,000                                             $696,939
Frank Robinson       $125,000                                             $696,939
Pete Rose               $105,000                                             $585,429

The average baseball salary back then (1970) was $29,303.  The minimum salary was $12,000.

As best as I can determine from research the average person’s salary back in 1970 was $6,186. The average median household income at the time was $8,730.

According to the U.S. Census Bureau the median household income for 2010 was about $51,425, and median income per person for 2010 was $27,041.

By contrast the average salary in the NBA is at $4.9 million; the average salary in the NFL is $1.3 million.  The NHL average is slightly higher at $1.8 million.  The average in the MLB is at about $2.5 million per player.

Today of course, almost no one even bats an eyelash with regards to pro athletes and their salaries. We’ve become accustomed to it.  Some would argue that we have also become accustomed to the average working person’s salary stagnating.

The Rise To Mega Bucks
So exactly what drove the salary explosion in pro sports?  Back in 1975, the "reserve clause" was eliminated.  Under the reserve clause, when a player’s contract expired, his team retained the rights to that same So, even though both the player's obligation to play for the team as well as the team's obligation to pay the player were terminated, the player wasn’t free to enter into another contract with another team. The player had two options: (A) negotiate a new contract to continue playing for the same team or (B) ask to be released or traded.

The reserve clause system has, for the most part, been replaced by free agency.

From this point forward the players were allowed to collectively bargain for higher salaries. In 1920, the average baseball salary was $5,000 a year. It took 50 years for salaries to reach $30,000, but with the reserve clause removed the average salary soared to $143,000 by 1980.

Elimination of the reserve clause, coupled with the rise of televised sports and the advertising revenues that began to flow, has led to the meteoric rise in players’ incomes.

The business of professional sports has also changed a lot over the years, allowing teams to spend big bucks on their players. Games have been televised as far back as the late 1930s, and by 1966 games were being sold as a national television package.  Businesses used commercial time during sports games to advertise their products and sports teams have become ever more valuable. Professional athletes went from heroes to super-heroes with Hollywood style production commercials featuring their exploits.

I remember watching sports(including championship boxing matches) for free. Now, much of what you’d like to view is offered via pay per view or a premium entertainment channel such as HBO. Many of today’s fans have been “trained” to accept high-ticket prices and millionaire athletes. They haven’t known anything else. Especially the fans younger than 45. 

Along with the escalating salaries, the cost of heading out to see a professional sporting event live has climbed as well:

New York Yankees
Average Ticket Price $72.97
Parking: $23
Beer: $6

Tampa Bay Buccaneers
Average Ticket Price: $74.25 
Parking: $25
Beer: $5.75

Los Angeles Lakers
Average Ticket Price: $93.25 
Parking: $15
Beer: $7.75

Boy, this is a far cry from my days as a kid paying a $1.00 for bleacher tickets at the Oakland Coliseum and munching on hot dogs for $1.00 each!

For the most part I won’t pay for televised sporting events. It’s nothing against sports. I love sports and the athletes are amazing. I just have a hard time wrapping my head around spending what little money I have to watch athletes whose salaries dwarf mine. I mean it’s not like these guys are curing cancer.

And that, my friends is the magic of hype. Consider the Super Bowl. When the first Super Bowl was played, almost no one paid attention. Now, it’s practically a national holiday. What happened? Hype. I mean it’s still just a football game, right?

My question is, how can professional sports continue to enjoy such a huge growth in income during a time when much of their target market can barely afford to purchase what they are selling? Once again, the answer is hype.

I realize that many of the tickets are being purchased by corporations as no ordinary family could afford to attend very many games at these prices. But that only underscores the disconnect between the fan base and the sporting events that they love.

Do you agree that the professional sports machine has used “hype” to get millions of dollars from today’s fan?