It is truly embarrassing for the businessmen in this country to have a president who makes such economically incompetent statements and gestures. Speaking to the U.S. Chamber of Commerce a couple of months ago, our president effectively rebuked business success. He suggested that “if we’re fighting to reform the tax code and increase exports to help you compete, the benefits can’t just translate into greater profits and bonuses for those at the top. They should be shared by American workers”. This is a blatant example of wealth redistribution.
In a free economy, employee wages are such that an employer willingly pays whatever it takes so that the amount paid to an employee is less than what can be earned from them – i.e. they have to be able to produce. Take, for example, someone who sweeps floors. If you are in need of a floor sweeper and the benefit of sweeping is worth more than the sweeping costs, then you hire the floor sweeper. If not, then you leave the floors dirty.
The same principle has always applied – albeit on a grander scale– in the United States. We see this currently in manufacturing which is at an all time high, but the number of manufacturing employees is a lot less. Workers are so productive with technology and capital, they can be – and it’s worth it for them to be – paid more.
On the other hand, if a company pays its worker more than the worker is actually producing, then the worker will become wholly uncompetitive. It is not better for a worker to be paid more than he is worth, because at some point, he loses the capability to independently support himself. The scenario becomes not what his labor is worth – but instead that he has been given a gift. This takes away the incentive to produce and earn. It goes against what has made our country thrive, which is hard work and an investment of time and talent.
By publicly and strongly suggesting that employers unfairly and extraordinarily compensate their workers in an attempt to level the playing field, Obama has effectively shown his true colors regarding his attitude toward businesses and their operation. Private businesses in the country, unlike the government, do not have the luxury of spending without consequences. Attempting to coerce fairness instead of cultivating a free market, Obama has strongly disadvantaged this country to the rest of the world.
The most misunderstood and misused phrase in economics and politics is that “small businesses are responsible for 2/3 of all new jobs”. This sentiment, uttered by President Obama last August, was gleaned from data produced by the SBA, which reported that small businesses “generated 65 percent of net new jobs over the past 17 years”. Since then scores of pundits, analysts, economists, and politicians have regurgitated the sound bite to meet their own specific agenda.
The problem, however, is that the definition of small business is misunderstood – and has different definitions – to different people. Obama maintains that “small businesses with fewer than 50 employees…are the businesses that usually create most of the jobs in this country”. Unfortunately, he uses this line to justify credits for small business (health care, etc). That makes for good political speech, but those businesses doesn’t make jobs. His assertion is patently untrue.
The SBA is the group who sets the legal definition of a “small business” which is one with fewer than 500 employees . Going back and using the data from them – and cited by Obama – it is clear that his threshold about small businesses – under 50 employees – is incorrect. SBA data shows that “much of the job growth (of the 65% net new jobs) is from fast-growing high-impact firms, which represents about 5-6 percent of all firms and are on average 25 years old”. Clearly then, the majority of these are not businesses with fewer than 50 employees.
Small businesses under Obama’s definition tend to share similar characteristics: they typically have a more localized market, lack of abundant and available credit and capital, and lower volume of sales than their larger small business counterparts. As such, these businesses lack the necessary qualities to create the type of job growth that Obama references.
Even more frustrating is the fact that Obama wants to raise taxes on those earning 250K or more. To the average household, 250K sounds like a high-income threshold. What he doesn’t tell you is that this effectively also raises taxes on small businesses, the very group he purports to want to help. Most small businesses file as sole proprietorships, LLCs, and Scorps, and by doing so, pay taxes at individual rates. In the realm of business, 250K is not a lot. Raising the margin for those earning over that amount will raise tax rates on small business owners, thereby reducing their profit margin to reinvest in their company or create new jobs.
Either Obama is clueless about small businesses and job creation, or he is lying. Either way, one thing that is not misunderstood is his incompetence.
Catching up on articles over at the WSJ, I came across this gem last month from Barbara Martinez. It describes how the teachers unions in NY are suing again to stop the closure of failing schools. This article illustrates the power of the teachers unions and the powerlessness of the taxpayers, who continue to subsidize failure and are asked to continue to shoulder the burden of educational costs. The article is reposted below.
The fate of tens of thousands of students was thrown into question Wednesday after the United Federation of Teachers and the NAACP sued to block the city’s plans to shut down 22 failing schools, a move that threatened to derail a major Bloomberg education initiative for a second year in a row.
The lawsuit echoes another the UFT filed last year that successfully halted the administration’s plans to close 19 schools. Two courts sided with the UFT last year. The lawsuit goes to the heart of a national philosophical divide about failing schools. In general, teachers unions believe that districts have an obligation to fix schools, while others, like Mayor Michael Bloomberg, hold that some schools are so troubled that the only choice is to shut them down and replace them with potentially better schools.
At a press conference, schools Chancellor Dennis Walcott blasted the lawsuit as “outrageous” and said the action will “hold hostage” thousands of students who are set to attend certain schools.
“Students now have to wait and wonder” whether they can attend the school they chose or were assigned to, Mr. Walcott said. “It’s unacceptable, and we’re not going to tolerate that. We’re going to fight. Right now the UFT and the NAACP are denying our students quality options.”
About 70,000 students have already been matched to city high schools, and thousands more have gone through the charter lottery process to determine their schools.
Hours earlier, Michael Mulgrew, the UFT’s president, said at a press conference that the DOE “has not learned its lesson.” He said the lawsuit is based on the DOE’s failure to satisfy an agreement it reached with the UFT to support failing schools before deciding to close them. The suit also charges that charter schools are getting better access to facilities than the traditional schools in the same buildings, which would be contrary to state law that mandates equal treatment among schools.
Those on the side of the teachers union, which includes a number of City Council members who attended the UFT press conference, community advocates and parents, said the city’s process of phasing out schools one grade at a time is disruptive to the students that are left behind. In addition, the lawsuit charges that charter schools that are placed in traditional school buildings get better access to amenities such as libraries, cafeterias and gyms.
Mr. Mulgrew said that after losing the legal fight to close schools last year, the DOE agreed to support the failing schools with more staff and other assistance, but he said that never materialized.
The DOE “is depriving students of tools and resources to achieve academically,” said Ken Cohen, regional director of the New York State Conference of the NAACP. Mr. Cohen said that at Jamaica High School, for instance, the new schools have smart boards while the students at the school being phased out have “broken blackboards.”
Mr. Walcott rejected all of the lawsuit’s allegations, saying the motivation was to protect jobs, not students. He said he was particularly disappointed in the role that the NAACP has played in the new lawsuit and last year’s, saying the group “is defending schools that are failing our children.”
Mr. Walcott cited the performance numbers of the schools on the closure list. For the elementary and middle schools, he said average English-language proficiency is 16%, compared to 42% citywide. In math, it is 19% versus 53%. The average graduation rate of the closing high schools is 49%, compared with the city’s average of 63%, the DOE said.
“These figures are not something to brag about,” Mr. Walcott said. “They should be with us,” he said, referring to the union.
Crains New York had a good piece on the living wage legislation currently being debated in NY. “The Bronx lawmaker said the bill, which would compel employers at projects that receive city subsidies to pay $10 an hour plus benefits, or $11.50 without benefits, is designed to “build a stronger economy,”.
I’ve spoken in earlier posts about the need for economic impact studies in NY with regard to financial legislation — just as construction projects necessitate an environmental impact study in order to assess the pros and cons and to find out the true cost, the same process should be applied to economic legislation. A bill such as this perfect fodder for this type of assessment.
Councilman Oliver Koppell, the primary sponsor of the City Council’s controversial living wage bill, has been writing to its opponents in recent weeks to explain its “core rationale” and to propose ways to narrow its scope.
The Bronx lawmaker said the bill, which would compel employers at projects that receive city subsidies to pay $10 an hour plus benefits, or $11.50 without benefits, is designed to “build a stronger economy,” and that it was never intended to apply to nonprofits, small businesses and residential projects.
He said he’s considering broadening an exemption to carve out small businesses with annual revenues of $1 million or less; raising the subsidy threshold that triggers the bill to above $100,000; clarifying that certain subsidies like the Industrial and Commercial Abatement and J-51 incentives are exempt; and reducing the record-keeping requirement to six years from 30.
A source close to the Council said the subsidy threshold could be bumped up to as high as $1 million and the small business exemption could be raised to as much as $5 million.
In an interview, Mr. Koppell said the proposed amendments stem from testimony provided by opponents at a City Council hearing on the bill last month. “We don’t want to do anything that will discourage economic activity,” he said. “There are some clear issues raised at the hearing that should be taken care of.”
Proponents of the bill say the city should not subsidize projects that create “poverty-wage” jobs. They argue that stores benefit indirectly from subsidies granted to their landlords, and thus it is fair to ask them to pay more than the state minimum wage.
Opponents, however, contend the bill is flawed beyond repair and say amending it will not satisfy them.
“Koppell is trying to change the bill primarily because there has been broad opposition voiced to the legislation from across all five boroughs,” said Nancy Ploeger, president of the Manhattan Chamber of Commerce, a member of the Five Boro Chamber Alliance, which is leading opposition to the bill. “Wage mandates, regardless of amendments from the City Council, are a nonstarter from the perspective of the business community.”
Ms. Ploeger said she has written to Mr. Koppell on behalf of the coalition offering to meet with him to “discuss ways to promote job creation” in the city. “This bill is not one of them,” she said.
Proponents of the bill said they consent to Mr. Koppell’s proposed changes. “We’re trying to get a bill passed,” said a spokesman for the Living Wage NYC coalition, which is led by the Retail, Wholesale and Department Store Union. “These changes actually strengthen the bill while keeping its core focus the same.”
The bill has 30 sponsors in the City Council, four shy of the number needed to overcome a veto by Mayor Michael Bloomberg, who has expressed disdain for wage mandates.
But City Council Speaker Christine Quinn, who decides whether the bill comes to a vote, has yet to take a stance on the measure. She did meet with Mr. Koppell to discuss the revisions and expressed appreciation for his willingness to compromise. But she is focused on crafting a city budget for the fiscal year that begins next month, not on living-wage legislation.
“Basically, I think the speaker’s view on the bill is ‘let’s get the budget done,’ Mr. Koppell said.
(Reuters) – Alan Dlugash is a New York accountant who specializes in high net worth Manhattanites, but lately he’s been fielding a lot of calls from clients in neighboring states — Connecticut and New Jersey.
“The big deal right now is ‘how do I change my residency?'” he said. And the reason is almost always the same: High local taxes.
Given the extension of the Bush era federal tax cuts for two years, a cut in Social Security tax this year, and the rise of anti-tax sentiment evidenced in last November’s election results, tales of tax migrants may seem out of sync. Just last week, a number of ‘we’re undertaxed’ reports surfaced suggesting that Americans were facing their lowest tax burdens since 1958.
That ignores the idea that just as all politics is local and personal a lot of taxes are too – and in recent years the states and cities have been busy offsetting federal tax cuts with local tax hikes, largely aimed at higher income earners.
Since the beginning of 2009, some 31 states have hiked taxes on everything from income, estates, and investment gains to cigarettes and plastic bags, with annual net increases pushing $50 billion, according to data from the National Conference of State Legislatures. City and county governments have been piling on too, raising sales and property taxes in many areas even as home values drop.
For example, with last week’s passage of a two-year, $2.6 billion tax hike, Connecticut – home to much of the hedge fund industry – raised rates on income and investment taxes for the second time in three years.
It had already pushed up the rate for those earning more than $500,000 to 6.5 percent from 5 percent in 2009. Now, it has boosted the top rate to 6.7 percent, raised sales taxes and added an extra luxury tax on items like pricey boats and bracelets.
Earlier this year, Illinois approved a $6.8 billion income tax hike — pushing its flat tax rate to 5 percent from 3 percent. In California, which still doesn’t have a budget for the fiscal year which starts on July 1, Governor Jerry Brown is trying to extend a 0.25 percentage point increase, which took the top rate to 10.55 percent in 2009 but that expired on January 1.
And there could be more local levies to come, as some experts believe states will have to turn to taxes as they face enduring shortfalls and the loss of federal stimulus funds.
All of which means that Dlugash and other accountants are fielding a lot of calls from people who are wondering if there’s anything they can do, from decamping temporarily to low-tax Florida, to buying into money-losing tax shelters, just to cut their local and state tax burdens.
“People are not happy about the direction in which all the state and local taxes are going,” said Charles Barragato, an accountant and financial adviser with offices in Connecticut and New York. “We’re seeing more of a focus on the state tax implications of any plans. More sophisticated clients are looking at trusts.”
In 2000, the average U.S. household was paying 9.4 percent of its income in state and local taxes, according to data from The Tax Foundation, a conservative leaning think tank.
By 2009, the last year for which figures are available, and the year in which the biggest round of recent tax increases were enacted, that had risen to 9.8 percent.
This increase, though significant, isn’t enough to outweigh the Bush tax cuts in 2001. After all, they reduced the top federal income tax rate to 39.6 percent from 35 percent.
But the results of the state and local taxing jag are felt disproportionately in affluent areas that already had comparatively high tax rates, such as Dlugash’s stomping grounds in and around New York.
In New York City, a particular issue for the financial community and other high net worth taxpayers is the treatment of capital gains as ordinary income, resulting in a 12.85 percent rate on investment profits on top of the existing 15 percent federal rate.
That rate on salaries and investment income rose from 10.5 percent in 2002. Along the way, the state also did away with almost all tax deductions for higher income earners, and also increased state estate taxes.
“RUN OUT OF TOWN”
It means that a Manhattan family earning $400,000 with $50,000 in income from dividends and $150,000 in capital gains would pay $73,669 in state and local taxes in 2010, up 31 percent from the $61,986 bill they would have faced in 2000, according to calculations done for Reuters by TurboTax.
Furthermore, the 2010 state burden would have triggered an additional $4,264 in federal taxes because of the way state and federal taxes interplay at high brackets. On top of that, they now face property tax increases that have added thousands of dollars – or in some cases even tens of thousands – to their total tax burden.
“If Kansas legislators ever did to their farmers, or Texas did to their oilmen, what New York does to its financial community, they would have been run out of town on a rail,” Dlugash said.
It is no wonder that some wealthy New Yorkers find themselves holding on to stocks, bonds and businesses beyond their preferred sell date because they don’t want to pay the associated taxes.
That isn’t confined to New York. Richard Mandy, a lifetime Maryland resident who built a successful office furniture business, moved to Miami in Florida, where there is no state income tax, specifically for the purpose of selling his business when he was ready to retire.
He guesstimates that the move saved him more than $350,000 in capital gains taxes, enough to pay for his cushy new home. “As long as the (Maryland) Comptroller of the Currency doesn’t come after me, I’ll be absolutely delighted,” he says.
PROPERTY TAX SCOURGE
Real estate taxes have added another big burden for many homeowners, even as they saw the market values of their houses fall. Between 2005 and 2009, property taxes across the U.S. rose to an average 3.0 percent of income from 2.8 percent, the Tax Foundation reported. But those wealthier areas showed a disproportionate increase.
During that same period, property taxes went to 8.7 percent of income from 7.9 percent in Essex County, New Jersey, where many bankers and professionals who work in Manhattan live.
That means, a resident owning a $1 million house in Montclair, a popular New Jersey town, would pay $36,400 in property taxes now against $25,800 in 2005. There have been similar steep increases in parts of New York state.
Contrast that with the low taxes in some southern states.
In many counties in Louisiana or Alabama, owners of a $1-million home would owe only about $5,000. And, to rub it in, the house would be enormous by comparison with homes in expensive parts of the northeast.
It all means that middle and upper income earners in the northeast can easily pay tens of thousands more in tax than their equivalents in many other states.
We also shouldn’t forget that higher earners in high-tax states often get hit with a double whammy when their state tax burden grows.
That is because of an almost unique American invention called the Alternative Minimum Tax. Originally conceived as a way to insure that even the wealthiest share in the national tax burden, it now catches many in the middle class because the government hasn’t adjusted the system for inflation.
But it adds insult to injury, hitting those who already pay high state and local taxes hardest by adding those back into the calculation before additional federal tax is imposed.
“It’s a big hurt on the middle level of our clients,” says Wayne Berkowitz, an accountant with Berdon LLP. “The middle tier is getting whacked by the AMT as state and local taxes go up.”
But a lot of this is backward looking you may say. Surely, the anti-tax atmosphere means that there won’t be many more hikes, and that spending cuts will be the key to dealing with budget deficits? Meanwhile, some of the state hikes are already scheduled to expire.
“The trend is going to go down a bit, because states are beginning to realize that people will leave,” says Berkowitz. In fact, the 2010 Census did show a decade-long migration to low-tax havens like Florida and Texas, while high tax states like California and New York barely held their population levels.
But still unresolved budget gaps could lead to more tax hikes in the next few years if budget cuts become so deep as to be unpalatable, suggests Elizabeth McNichol of the Center on Budget and Policy Priorities. Her organization has noted that states will face the added burden of losing some $60 billion in federal stimulus funds beginning on July 1.
The NCLS has pegged fiscal year 2012 shortfalls at $86.1 billion, and says states already expect more than $30 billion in gaps for the following year.
“Certainly we still see states struggling with their budgets and looking for ways they can raise revenues and make their budgets balance,” said Greg Rosica, a tax partner at Ernst & Young.
And many believe that with a federal government currently spending about $1 for every 60 cents it takes in from taxes and other revenue, Washington won’t be able to get the deficit under control through spending cuts alone and will soon by rejoining the tax hike party.
(With additional reporting from Lisa Lambert; Editing by Martin Howell)
Corrects change in top federal tax rate in paragraph 14.
There is a basic concept that when someone works for somebody, they get paid. If part of the pay is eligible for retirement benefits, then that becomes an immediate obligation of the payer. Even though the payments to the employee will not be made until after his retirement, expenses incurred – and funding for that payment originates – at the time it is earned.
Retirement plans are of two types: defined contribution and defined benefit. Both have the same goal; the difference is in the mechanics. Examples of a defined contribution plan are 401Ks and profit sharing. With these, you put the money aside and the money will grow and be there later. Defined benefit plans include Social Security, most state and local pensions, and union plans like GM. These are plans in which people get retirement from some formula related to their salary. But whether it is a defined contribution or defined benefit plan, in both cases, the obligation to pay those benefits originates at the time it is earned by the employee and it must be funded at that time. In the world of business, lack of appropriate funding of those promises of retirement benefits can land someone in jail.
What would you think about someone who promised to put retirement funds aside and didn’t? They would be crooks. And not only that, when they issued their financial reports, they hid the fact that they were obligated to make all of these payments in the future.
We need to hold these legislators that continue to perpetrate this fraud accountable.
With all the pressing issues of the day, it is outrageous that the moderator of Meet the Press, Mr. David Gregory, spent so much time last week badgering House Speaker John Boehner about President Obama’s religious beliefs and citizenship status. Even though Boehner continuously stated he believed the President was a Christian and a citizen, Mr. Gregory was clearly disturbed with the fact that Boehner had not used his position as Speaker of the House to issue or enforce some sort of official statement. When Boehner replied that it was not his job to tell Americans what to think or believe, Gregory question his leadership capabilities.
Contrast Mr. Gregory’s attitude toward Senate Majority LeaderHarry Reid during an interview a few weeks ago and the bias is quite apparent. Harry Reid actually proclaimed on Meet the Press that we are not in a crisis in Social Security, that the Social Security system is “arithmetically sound”and that the problem of Social Security was merely fiction — perpetuated by people who do not like government! Yet, on an issue of such monumental factual error, Mr. Gregory left the Senate Majority Leader’s gross distortion of facts completely unchallenged.
The bias and misinformation continuing to be disseminated by weekend political talk shows is deeply infuriating.
As I’ve mentioned before on this blog, my friend Don Boudreaux has a great website with a fellow economist, Russ Roberts: www.cafehayek.com. Roberts was recently thinking aloud about the correlation between government spending and job creation. He does a nice job taking to task some of the Keynesian ideas on the topic. Toward the end of his piece, Roberts rightly identifies one of the main reasons for our current sluggish economy:
“The simplest answer is that businesses are not investing. Investment is still very low. I’d like to hear the case of how government spending lots of borrowed money encourages business to invest. It would be a hard case to make. It seems to me that government spending of borrowed money, especially on unproductive stuff, discourages business investment.”
And with the current state of uncertainty in the business world due to Congress’s gross negligence of the tax margins, we can expect that businesses will continue to refrain from real investment for awhile.
Everyone knows about withholding—it’s the money taken out of our paycheck. It is an attempt bythe government, on a pay-as-you-go basis, to collect from you over the course of the year, the amount of tax you would owe for that year.
The various taxing authorities provide specific rules to employers as to how to withhold on regularpaychecks. There are special rules or withholding on bonuses, and other forms of pay (stock option exercises, taxable fringe benefits, etc.) that are over and above regular pay. Commonly, withholding on bonuses are at a fixed statutory rate, normally near the maximum tax bracket of the jurisdiction.
But during the Cuomo years, NY State decided that they could ease their annual budget problems by requiring withholding on bonuses and special payments at a rate approximately 1/2% higher thanthat maximum tax bracket. For those with large bonusesthis could commonly lead to large refunds at tax filing time, but in general amounts tended to be small and no major aberration results.
For those employers paying very large bonuses and/or special payments, it is not uncommon foremployers to reduce the withholding so that withholding actually approximates the employees realtax obligation. After all, the objective of withholding is to have your liability paid on an ongoingbasis.
But apparently NY State has lost sight of this. It is spending our tax dollars to send examiners into the field in order to go after those who are trying to withhold the correct amount of tax.
In a case with which I am familiar, the State Department of Taxation is attempting to fine an employee for not withholding taxes at levels that would have caused the taxpayer to have a $300,000 overpayment. This is not pay-as-you-go, this is extortion pure and simple.
