Taxes | Online Savings Blog

How Tax Cuts and Consumption Affect America's Jobs
07.08.08 | Taxes, Work | 0 Comments | by Fred Siegmund

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It has been common in politics to hear that tax cuts in the higher income tax brackets will be good for the economy because the wealthy and the well-to-do will be able to save and provide funds for capital investment spending and jobs.

Americans must have jobs. Large scale unemployment in an urban society guarantees untenable social, economic and political conditions. It is total spending that generates jobs, which includes the investment spending generated by our savings, but also consumption spending including government spending.

In the last two posts I quoted from Alan Greenspan, who told us there are not enough investment opportunities for our savings since the year 2000. Creating hedge funds or other speculative financial investments does not create many jobs: mostly financial advisors and lawyers.

Since financial investment speculation does not create enough jobs, America must rely more on consumption spending to keep ourselves employed.

The consumption spending America needs the most is for domestic services. Consumption spending that goes for luxury products imported from abroad creates foreign jobs, but not American jobs.

The growing importance of consumption spending for creating jobs makes credit card spending a necessity. Given the wages and taxes for millions of Americans, keeping up spending requires credit card borrowing. For those of us who save and read savings blogs, it is sobering that so much of our savings supports credit card spending.

It would be better if it helped pay for long-lived physical assets, but at least we can have an interest return knowing our savings support jobs and the economy.

The growing importance of consumption spending brings us back to the politics and tax cuts I mentioned above. If America is going to have enough jobs, the well-to-do must see to it that all of their income goes back into the spending stream.

They can only save if it helps create jobs, otherwise they must consume.

Washingtonian Magazine published an article over a year ago describing the proper things to buy for the well-to-do lifestyle. They included landscaping, flowers, dog walkers, sports tickets, club memberships, personal trainers, spa memberships, dining out and charity events. For those with kids, include coaches' fees, soccer camp, piano lessons, college consultants and live in nannies.

Perhaps the editors at Washingtonian were celebrating conspicuous consumption or encouraging the wealthy to do their duty and create jobs. That I cannot tell, but tax cuts to the wealthy pose a threat to jobs and economic growth unless they go into consumption. Like it or not; that's a fact.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Should Corporations be Taxed to Avoid Speculation?
06.30.08 | Taxes | 0 Comments | by Fred Siegmund

In the last chapter of his new book, The Age of Turbulence, former Federal Reserve Chairman Alan Greenspan says new technology innovations sometimes slow down so much that new machinery and equipment is not worth the investment for corporations.

For example, the fall off in investments after 2000.

"The slow down in innovation is particularly evident in the dramatic swing in corporations' use of their internal cash flow from fixed investment to buybacks of company common stock and cash disbursed to shareholders in the process of implementing mergers and acquisitions."

After citing some investment data, he concludes, "A corporation returns equity capital to shareholders when it cannot find opportunities for prospective risk-adjusted rates of return superior to the rate of return that the corporation returns from existing assets. Large cash disbursements to shareholders are usually a signal of lowered prospective rates of return on fixed investments available to the corporation, the likely result of a slowed pace of profitable new application of innovation."

Wow! Chairman Greenspan tells us corporations sometimes have profits but few capital investment opportunities, so they turn to speculative buying and selling of stocks for implementing mergers and acquisitions. Buying and selling in mergers and acquisitions creates work for lawyers and securities dealers along with speculative opportunities, but it creates nothing new for Americans.

The federal government could sell bonds to finance public projects like the construction of levees for New Orleans and the Mississippi river. Some of the loanable funds that keep going into assorted mergers, acquisitions and other speculations could be redirected to an important public project.

However, public projects mean new taxes to pay interest and principal. Taxes are already high for millions of Americans who oppose new taxes.

If Mr. Greenspan is correct and corporations have profits for speculation while public projects like New Orleans' levees go unfunded, then higher taxes on corporations and lower income and payroll taxes for individuals would decrease America's savings available for speculation and increase America's savings available for public projects.

Notice I did not say it is fair or unfair to change taxes, only that the distribution of income and taxes will change how America saves and invests. Remember savers, the value of your savings depends on the quality of America's investments.

What should we do about taxes? You decide.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Tax Rates Then and Now
06.03.08 | Taxes | 0 Comments | by Fred Siegmund

Savers usually think saving means saving and investing money. Some people save all sorts of things, which is why I happen to have the complete federal income tax forms and tax schedule for 1975, even though I am not the one who saved it.

I think 1975 taxes have relevance today because I saw an article in The Washington Post on May 15th entitled "Democrats War-Funding Bill Adds Surtax on Wealthy." Someone in Congress called it the "Patriots Premium."

The Patriots Premium would tax couples earning $1 million dollars or more at a new tax rate which is one half percent higher than the current rate. For single people, the half percent applied to income over $500,000.

Current tax rates call for couples earning over $349,000 to pay a top tax rate of 35 percent so the new tax rate must be 35.5 percent on wage and salary income. If we take a couple earning $1 million and we apply a new 35.5 percent rate to gross income of $1 million, they will pay $31,980 dollars more than they are liable for now.

The calculation uses two exemptions, the standard deduction and also assumes the couple earns all their income as wages and salaries and therefore without dividends taxed at lower rates.

In 1975, couples paid a 70 percent tax rate on every dollar of taxable earnings over $200,000. Today's top tax rate is just half of what it was in 1975.

Now we all know there has been lots of inflation since 1975 so that $1 million today is not the same as $1 million in 1975. Actually, the Bureau of Labor Statistics consumer price index (CPI-U_RS) shows a 342 percent increase since 1975.

If we adjust the $1 million today to compare with 1975, the result is $292,397.66. We could also say $292,397.66 of income in 1975 is the equivalent to $1 million of income in 2007.

Compare the 2007 income tax for a couple who earns $1 million with the income tax for a couple earning $292,397.66 in 1975. Today's couple above would pay $318,461.00 of taxes. That is 31.85 percent of $1 million gross income.

Apply the 1975 taxes to the 1975 equivalent of $292,397.66. The 1975 tax comes to $173,838.36. The amount is 59.3 percent of gross income. Apparently Congress and the country had much different ideas about the duties and tax responsibilities of the well-to-do in 1975.

The proposal to raise the rate from 35 to 35.5 percent is to fund educational benefits for returning Iraq veterans, but it has outspoken opposition and it is not expected to pass. The times they are a changing.

What about that, savers?

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Economic Stimulus Payment Arrives
04.28.08 | Money Management, Taxes | 3 Comments | by junger

Our economic stimulus payment has arrived!

Even though the original pay days were supposed to start next week, they began going out today. As you can see, we've already received ours.

For a married couple of two with no kids, that's a $1200 direct deposit into our checking account. Add in the returns we got for our taxes (both have arrived), we've got a bit more money for our trip to California.

Did you get your economic stimulus payment yet? Let us know in the comments.
Taxes and Your Love Life: Why it Matters
04.25.08 | Taxes | 2 Comments | by Fred Siegmund

The federal income tax used to have what came to be known as the marriage tax. If two single people earned $25,000 each and then got married, they paid more tax on $50,000 of combined income than they paid as two single people.

Quite a few years ago, Congress began tinkering with the tax rate schedules to eliminate the marriage tax. In 2007, a couple with two $25,000 incomes and the standard deduction will pay $4,092.50 in tax by filing jointly as a married couple with $50,000 of joint income. If they file separately as a married couple, they will each pay $2,046.25, which combined also equals $4,092.25. If they were both single they still pay the same combined tax.

The numbers tell the story. Congress decided that two single people who get married should pay the same tax on their combined income. But should a single person pay the same tax as a married couple with the same income?

If a single person earns the same $50,000 dollars as the couple above, he or she pays $6,736.25. The single person pays $2,643.75 more tax than the married couple with the same income.

Congress seems to be telling us that it is right that married couples keep more income since they have more expenses for food, medicine and so on. One difference of the tax comes with the personal exemption and the size of the standard deduction. The single person gets $3,400 exemption and $5,350 deduction for $8,750, but a married couple gets double that at $17,500. The single person has taxable income of $41,250 compared to $32,500 for the couple.

However, if we eliminate the difference in exemptions and deductions for the single person so that both have taxable incomes of $32,500, the single person still pays more: $456.25 more. The single person pays additional tax because they encounter the 25% tax rate much sooner than the married couple.

The difference gets more important at more modest incomes. A single person earning $25,000 pays $2,046.25 in federal tax while a couple filing jointly would pay only $750.00.

Those are critical dollars that might take the rent money, especially when both have $1,912.50 social security taxes on top of their income taxes. Now Congress seems to be telling us that people of modest incomes must scrimp and save: maybe double up and share living quarters.

Maybe now there is a single person tax? You be the judge.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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