National Debt – What, Me Worry?

If you care about the country going bankrupt, it doesn’t matter who you vote for. Both parties seem to be indifferent to it. There's only a small difference in the size of their trillion-dollar spending bills.

 

Below are two graphs. The first shows, from the best source I could find, the spending and revenue of the United States over the last 30 years. We actually had a small surplus in the last two years of the Clinton Administration. Then things went south. Bush started a couple of unnecessary wars and added Medicare Part D. Obama continued those wars, failed to take ISIS seriously and threw in some stimulus. Trump wanted to build up the military, already the largest in the world, but the democrats would only agree if they got a proportional boost to their favorite domestic programs. The lines clearly show what happened. 

 

 

Just as a thought experiment, suppose the rate of increase of federal government spending had remained the same as it was from 1990 to 2000 under Bush (R) and Clinton (D) – not the same level of spending, but the same rate of increase. Here is what that would have looked like. 

 

Even with the two tax cuts that politicians told us would cause huge problems; many of those years would have run a surplus fed by growth in the economy over the past 8 years or so. 

 

Now this exact scenario would likely not have been possible due to the increased Social Security outlays as the Baby Boomers hit retirement age. But still, if you ask people over the age of 45 how life was during the 1990s, how well needs were being met; the majority would say that things were fine. 

 

The question is: how much of that extra spending went to real improvement, how much was pure waste, and how much went to buying your vote (using your own money to do it)?

 

We hope for responsible leaders; but when it comes to spending, politicians take the attitude of Alfred E. Newman, the fictitious mascot of Mad Magazine.

Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.  

Both Sides of Tax Responsibility

Have you heard that radio ad about the tax relief company starring Louie? A man identifying himself as Louie says that he did not pay his taxes for eight years and now he is in trouble with the IRS. No kidding?

Think of all the people who sweat over their taxes every year for fear of being audited. Actually, few people sweat over their own taxes. Less than half file them themselves, and three-quarters of those self-filers use purchased software. Nonetheless, very few are casual enough (or careless enough) to let it go for eight years. 

To be in this situation is slightly understandable for a small business operating on the edge of solvency with inexperienced entrepreneurs trying to keep up on all the paperwork, but Louie sounds like an ordinary individual who is now terrified that the IRS is coming to confiscate his house, his bank accounts and his car.

It’s a little hard to feel sorry for the guy. Everyone else is trying to be conscientious about the annual chore, motivated either by fear or responsibility. Do people like Louie just assume that the rest of us will take up the slack for him and his fellow scofflaws? 

Regardless of the circumstances, in rides that tax relief firm to the rescue. They will negotiate with the IRS and help reduce what he owes based on their experience and understanding of the various hardship and forgiveness programs. So the people that let it ride, if they qualify, pay the firm a fee and pay the government less than what they would ordinarily owe. What a sweet deal! And all the people harping on the issue of not paying “your fair share” are silent about these sorts of arrangements.

These firms, not just one or two of them but over 100 listed on this review website, are proudly advertising ways to not pay a fair share. And it ‘s not some philosophical fair share. It’s a reduction to “pennies on the dollar” from the actual calculation after taking all the legal deductions and exemptions. Where is the outrage?

On the other hand, part of their message if you find yourself in this situation is, “Don’t go it alone.” Don’t try to take on the IRS without an expert. On that point they are right. The government has unlimited resources. They can use both force of law and delays of the legal system and bureaucracy to take your possessions and bleed you dry on appeal.

IRS tactics can be similar to another program called civil asset forfeiture. (This information comes from a news article from Alabama where they tried unsuccessfully to change the law.) “Under civil forfeiture, the government may take someone’s property as soon as they are accused of a crime, without that person having been convicted or, in some cases, even charged.” Suspected criminals can lose cash and physical assets without due process. “Even when charges are dropped or the accused is found not guilty, those accused often find it difficult to get their property back. Some never do.”

So whereas I can look at Louie and people like him and despair over their lack of responsibility – there must be a healthy number of them to keep 114 tax relief companies on the list in business – I can also see the necessity of such businesses to protect citizens from a likely abuse of their rights anytime they are even accused. If everyone in America was conscientious about filing honestly and on time, it would remove the need for these firms to exist, but it wouldn’t eliminate the threat from a heavy-handed government agency in this and other areas.

And Speaking of Sugar

Last Friday I flashed back to an entry from February 2012 where I showed how eager the media is to help us blame sugar for the obesity and the diabetes epidemics instead of the taking responsibility for our own choices.

Shortly after deciding to feature those comments I came across this related news report. “The Sugar Association is asking the Food and Drug Administration to require more detailed information about artificial sweeteners on packaging.”

The problem as they see it is that, because sweeteners do not provide nutrition or calories, they are not required to be listed on nutrition facts labels. Instead they are listed under ingredients in smaller print on the side of the package.

The industry argument is, “Consumers deserve to know what is in their food so they can make informed decisions for themselves and their families.” By making these changes, the FDA “will bring the complete transparency in sweetener labeling that we know consumers want, deserve and should expect.” 

They innocently portray themselves as merely calling for transparency by putting the information on food labels as “sweetener,” followed by the name. This is similar to the tactics of the anti-GMO crowd. By forcing producers to list an ingredient on the package, they hope that past misinformation will give shoppers the impression that a safe ingredient, because it is highlighted, is really dangerous. It’s a subtle scare tactic dressed up as transparency that they have pulled off elsewhere*, but it’s not based on science!

I referred to information sources I trust like WebMD and the Mayo Clinic rather than believing folks like Global Healing, Nutralegacy or Doctors Jocker and Axe. Here is what the real doctors at Mayo Clinic have to say. 

Under the heading of possible health benefits, they state, “Artificial sweeteners don't contribute to tooth decay and cavities. Artificial sweeteners may also help with: Weight Loss and Diabetes.”

As far as concerns: “according to the National Cancer Institute and other health agencies, there's no sound scientific evidence that any of the artificial sweeteners approved for use in the United States cause cancer or other serious health problems. Numerous studies confirm that artificial sweeteners are generally safe in limited quantities, even for pregnant women.”

So they are safe and sometimes beneficial, but the Sugar Association has for a long time believed, “Consumers Are Confused: Decoding Artificial Sweeteners,” as that headline from ten years ago stated. The article goes on to say, “August marks the five-year anniversary of the Food and Drug Administration’s (FDA) receipt of a petition to help clear up some of the confusion...." So this has been going on for 15 years, and they are taking another run at it. Why? Before you start feeling bad for the Sugar Association, follow the money.

“The U.S. Sugar program is the federal commodity support program that maintains a minimum price for sugar, authorized by the 2002 farm bill....” It was designed to “protect the incomes of the sugar industry-growers of sugarcane and sugar beets, and firms that process each crop into sugar.”

This Reason Magazine article from last year calls it welfare for the rich, saying that it costs Americans as taxpayers and consumers about $4 billion per year. It does this in several ways: 

1. “Subsidies when sugar prices fall below a certain level;
2. Protection from foreign competition (a limit on imports); and
3. A guarantee that prices stay high (the sugar program imposes quotas on how much sugar may be produced in America).”

They are willing to spend a lot of money lobbying to maintain this sweet deal.

This Market Watch story from 2018 confirms the $4 billion cost while pointing out, “On average, U.S. sugar prices are about twice as high as world prices.” 

So, Big Sugar is trying to subtly frighten more people into buying their product at twice the price, based on a false (but popular) notion that the alternatives cause cancer and other problems, while downplaying the truth about the health concerns around sugar itself. They are counting on only a tiny minority of critical thinkers to figure it out.

*Note how successful they have been in giving high fructose corn syrup an undeserved bad rap.

Different Cultures, Different Rules

A story about an incident in 2006 is suddenly getting a lot of attention on social media. An American woman temporarily working in Iceland “went from feeling a lump in her breast to getting checked out and assured that it was benign in the space of a single day, and for $3.” She posted the story of her experience on Twitter.

This gets many people stirred up, asking: Why can’t we do this in the United States? Some politicians think we can and are promising changes, but the comparisons are not as straightforward as we’d like them to be.

Iceland is a small, island nation in the North Atlantic with a population of about 350,000. For comparison, the city of Minneapolis has a population about 425,000. The entire country is smaller than many American cities. 

But it’s not just a matter of scale. Taking it a step further, that population is very homogenous. About 91% of the residents of Iceland are Icelandic citizens and only 16% are foreign-born. Unlike the US, the population is concentrated. Ninety-nine percent live in urban areas and 60% live very close to the capital. Furthermore, about 72% belonged to the same religion, the state Evangelical Lutheran Church of Iceland.

Back to our comparison example – where Iceland has homogeneity, Minneapolis has diversity. Its population is approximately 64% white from various heritages, 19% African American, 10% Hispanic and 7% various other ethnicities. It is the home of more than 50 denominations and religions.

How important is this homogeneity in the smooth operation of a more socially oriented society? Denmark believes it is vital to maintain the order and necessary shared values. “Beginning at the age of 1, [mostly Muslim immigrant] ‘ghetto children’ must be separated from their ‘ghetto parents’ for 25 hours per week for mandatory instruction in so-called ‘Danish values,’ which includes learning about the language and the traditions of Christmas and Easter, The New York Times reported in July 2018.”

(Again for comparison Denmark is about 35% larger than Maryland in area with about 5% fewer people. These are much smaller countries whose people share a common background and history.)

But there is no free lunch and no $3 health service without a huge subsidy. Here is a simplified comparison to make the point.

After a $5,145 deduction, Icelanders pay 36.94% of income up to about $85,000 and 46.24% on income above that. On top of that is a value added tax (VAT) of 24% on most goods and services, but a few categories are subject to a reduced rate of 11% (e.g. food, hotels, newspapers, books, and utilities).

Everyone in Iceland pays at least at the same level as the highest tax bracket in the US, 36.94% compared to 37%. They don’t “soak the rich;” they take it from everyone. On the other hand, their corporate tax rate is among the lowest.

In Minneapolis a single taxpayer owes no more than 17% on the first $85,000 after a standard deduction of $12,200 and pays about 8% sales tax, but not on food. (Sales tax and VAT are not identical, but the economic burden of VAT falls on the final consumer.)

Using those numbers, a single taxpayer earning only $20,000 in the US pays $780, whereas for the same situation in Iceland the tax bill would be roughly $5,500. When the money is spent, it is taxed again at a rate up to 16% more.

On another point, access to doctors is slightly better. Iceland has a physician ratio of 3.62 doctors per 1000. In the US it’s 2.3 doctors per 1000.

These and many other considerations are ignored by those who want to make simplistic comparisons, comparisons that in reality are light-years away from apples to apples. It would be nice to have all the benefits and not have to make any of the sacrifices, not have to adapt to an entire new set of values and expectations, not have to live within a completely different culture. (The US cannot even agree to have one official language!) But there are no simple answers.

Opinions, Opinions…

It happened at the beginning of this week. James Holzhauer broke a 32-game winning streak on Jeopardy after winning nearly $2.5 million. 

Many people were puzzled and suspicious by his totally explainable final wager. Some thought he threw the game. Some neighbors agreed with and passed along an idea being circulated on Facebook that another win would move him into a higher tax bracket.

First, his wager in Final Jeopardy made perfect sense. Since he had not hit any of the Daily Doubles, he was unable to risk large amounts at a time, a tactic that led to insurmountable leads on previous shows. This was a bit of bad luck. His opponent was quick on the button, hit the Daily Doubles and managed to have a small lead going into the final question – 26,600 to 23,400. She only needed to risk enough to finish one dollar ahead of him in case he risked everything, which is what she did. He understood that his only chance to win was for her to get the answer wrong. If they both got it wrong, he needed to risk enough to still be ahead in case the third place contestant got it right and doubled his score of $11,000. That is exactly what he did – 23,400 minus his “conservative” wager of 1, 399 would have been 22,001. The amount he bet, conservative or not, was the best decision.

People who didn’t understand this jumped right to a subject they likewise don’t understand, tax brackets!

The US has a progressive income tax; the tax rate increases as the taxable amount increases. The tax rate on the first taxable dollar is the same for everyone whether you make one dollar or $2.5 million. The tax on the first $100,000 is exactly the same for everyone $13,874. That is about 14%. Anyone making another dollar pays 22% of that additional dollar. Anyone who makes $110,000, for example, pays the same as everyone else on the first $100,000 and then pays 22% on the additional $10,000. That’s how it works as the brackets change. The rate goes to 24% at $165,000, to 32% at $315,000. The highest bracket under the current system is 37% from $600,000 on up. (All examples are for the status of Married Filing Jointly.)

There is no bracket issue in the $2.5 million range. Taxes would be 37% for every additional dollar.

Note how this misunderstanding lets politicians get away with something that is not quite a lie, but is at least a misrepresentation. As the system works, if they lower the rate for the middle class, it lowers the rate for everyone who makes under $100,000, but it also lowers the rate on the first $100,000 for everyone else who makes more than that – even those evil rich people. Fiddling with the lower tax rates to help the middle class, helps everybody, the rich too. It can’t be helped. It’s how the system is set up! 

Now those same politicians have the power to change the system and make it work differently, but they don’t, they just propagandize.

But the biggest takeaway from the Jeopardy story is not the wager or the tax implications. The biggest take away is how inclined people are to form an opinion, defend that opinion, post it on line and spread the word on subjects they don’t understand and apparently are too lazy to do a little bit of research to find the truth. They are so confident that their opinions are right, because they have been constantly reinforced by others with the same degree of ignorance. Bad information spreads like the plague.

Everyone pretends to understand taxes, but they are too complicated for most people to do themselves, which allows politicians to demonize opponents and tax preparation companies to stay in business. But many other more important and complex subjects fall into this same category of confidently held opinions grounded in a woeful lack of understanding: Social Security, Medicare, the healthcare system, economics in general – such as minimum wage and the comparative virtues of socialism vs. capitalism, government spending and the National Debt and the proliferation of deceptive advertising and junk science.

Many Americans can’t even figure out Jeopardy wagers, yet on issues vital to their personal and to the national success they participate in protests and demonstrations, post nasty comments and cartoons on social media and go to the polls to vote for politicians who are often equally mistaken about how the world works.

Is Social Security Doomed?

This CNN article tells how Social Security is in big trouble – “Social Security won't be able to pay full benefits by 2035,” but there is more to learn here than the woes of the government-run retirement program.

It goes on to say that according to the latest annual report from trustees of the program, Social Security's trust funds will be empty by 2035. “The new projection doesn't mean retirees will no longer get checks in 16 years. But [unless Congress acts] the program will at that point only have enough revenue coming in to pay three-quarters of promised benefits through the end of 2093.” 

CNN rightly points out that “lawmakers have long punted on addressing Social Security problems, which would likely entail raising payroll taxes, curtailing benefits or some combination of both.” That is very true. There were articles and op-eds dating back to the mid-80s making this point only to be ignored by Congress. When anyone hints at changing Social Security, instead of working together to fix it, the opposite party tries, usually successfully, to use misinformation to terrorize voters with images of themselves or their parents starving on the streets.

This political "third rail" that is Social Security is not mentioned in the article, and here is where the story begins to go astray. The next two paragraphs read: 

“During the 2016 campaign, President Donald Trump said he wouldn't touch Social Security. He didn't believe he'd need to since his plan to boost economic growth to at least 4% would take care of Social Security's long-term solvency.

"The strong economy has not mitigated the entitlement's fiscal issues. And the federal government's deficit has grown, in part because of the 2017 Republican tax cuts.”

With no reference to the political sensitivity, they seem to blame the President for not taking a stronger stance. That he has a lot of company was omitted.

Earlier in the story they admit that the 2035 date is “one year later than last year's report projected.” So the strong economy may have had some impact on the situation. In fact, I wrote in 2016 that the trust fund projection was 15 years at that time. Now, 3 years later, it’s projected at 16 years. That’s a 4-year difference.

The strong economy has not solved the problem, but "mitigate" means to reduce or diminish. There is some strong evidence of such mitigation.

Why, in the same paragraph, jump from a discussion of Social Security problems to a critique of tax cuts? Those two are not related. Social Security is funded by a portion of the FICA tax that was not changed. 

They then return to the subject with, “Social Security's total cost is expected to exceed its total income in 2020…. This is two years later than projected in last year's report.” Again, in their own words, this sounds like some degree of mitigation.

The story then digresses to Medicare, which has even a worse funding problem. That change probably explains why a big picture of Senator Sanders is placed right below the headline about Social Security. There can be no other explanation. Senator Sanders has been mute on Social Security.

On the other hand, this MarketWatch story gives a much more objective treatment of the Social Security trustee report. It also says that “there would be sufficient income coming in to pay 80% of scheduled benefits” rather than three-quarters and does not try to associate the President or tax cuts with the problem.

The obvious lesson is that Social Security continues to be in trouble with little hope of a short-term fix but is a little better off than it was a few years ago. The second is that the various media outlets manage to blend in their political biases by tone, by choice of what to report and what to leave out, by adding unrelated side comments and by shading the facts. This is just a single example of a single media outlet, but it is no wonder so many people, including those collecting Social Security, have such a poor understanding of the program (and of so many other issues). Skepticism and critical thinking are our only defense.

To get the full story, enter Social Security in the search box in the upper right to read all previous posts with Social Security in the title.

Another Tax Day

With the beginning of a new election cycle there has been much talk about another change to what politicians refer to as the healthcare system. It is really just another modification to health insurance. It may improve access to healthcare as more people can afford the insurance, and it may restrict access as more doctors and medical students decide it’s not worth the hassle. Some critics complain that a government-run system will put most of the health insurance industry out of business. As usual the two sides have opposite opinions.

Since today is “tax day,” the deadline for filing personal income tax, I would like to make an alternative proposal. If the government is going to put any industry out of business, it should be the tax preparation business. Think about it; what value does it add to our lives or to society?

Now I have nothing personal against paid tax preparers. Some of my friends and relatives are in that business. And as one site that solicits tax preparers points out: “Tax preparation is BIG business employing hundreds of thousands of people, mostly small business, but with [total] estimated revenues last year of $11 billion. They are also recession resistant as every American is legally required to submit an income tax return.”

Do we get anything tangible and worthwhile from that $11 billion we spend each year? No. We get someone to follow complex rules and add up numbers for us to keep us out of trouble. That complexity is imposed by a government that refuses to simplify the system to a point where everyone could do it for themselves. (We are also required to pay sales tax in most states, but they don’t ask us to stand in the checkout line and calculate it ourselves – and then penalize us if we get it wrong!)

Some will recall back in 2009 several appointees to the Obama cabinet were found to have had tax problems. “Kathleen Sebelius, President Obama's nominee to become Health and Human Services secretary, said in a letter obtained by the Associated Press that she made ‘unintentional errors’ on her taxes and has corrected her returns from three different years.” Obama’s original nominees for HHS secretary and for chief performance officer “withdrew from consideration over tax issues.” Timothy Geithner, who became Treasury secretary, had to pay $42,702 in additional taxes and interest for tax years 2001 to 2004 around the time of his nomination. How user-friendly is a system that can trip up a potential Treasury secretary? 

The whole setup is flawed. It would be like having to hire someone to ride in your car and warn you to slow down because the speed limit signs were too complicated for someone without special training to understand. If that were the case, people would scream until the DOT fixed the problem so we could use our money for something more productive or enjoyable.  But when it comes to taxes, everyone likes their special little benefit, and the complexity persists.

Meanwhile the $11-billion industry adds about as much value to society as being forced by law to hire someone to shovel snow off your sidewalk in the summer. The money buys you a service to unload an unpleasant chore. But that chore is made necessary only by a totally fabricated set of regulations driven by a multitude of diverse special interests, most of which could easily be eliminated if lawmakers had the guts to do it.

Lower Tax Refunds, Not Bad News

Despite what CBS and others tell us, the report from the IRS that “tax refunds are about $170 lower than last year” is not bad news. The fact that “the average refund so far this year is $1,865, down from $2,035 in 2018” is only a timing issue. People who think otherwise are forgetting how income taxes work.

Employers are required to withhold taxes from each paycheck. These are sent to the federal and state governments. It is better to have them withhold a little more to avoid being hit with penalties and interest for not paying enough up front. But traditionally, taxpayers have jacked up their withholding on each paycheck to ensure a large refund. It makes up for lacking the discipline to voluntarily put aside a little each pay period. 

At the beginning of each year they experience what seems to be a windfall. But it’s not some gift from Uncle Sam; it’s really just a matter of getting their own money back after it has been withheld from them throughout the year. Withholding and the refund are not separate, unrelated pieces. They are each part of the whole. Changes in one lead to changes in the other, but the total paid in taxes is exactly the same whether you get it today or next March.

Getting a smaller refund leads some to believe that the tax cut was not real. (See the CBS piece for examples.) But they have only themselves to blame. “According to payroll processing firm ADP, only a small fraction of workers bothered to change their withholding” as the IRS urged them to do after their employers adjusted their withholding. They were happy to get more in their paychecks, but want to complain later about a smaller refund.

If they looked at total taxes paid, it would be obvious. When someone else files the tax forms and people only sign at the bottom, it’s so easy to ignore the total tax and only care about the size of the refund check. 

Then the news media stir things up by airing the complaints and making a big deal of it while only explaining the details in the last part of the report (if at all). And Bloomberg predicts that Democrats will intentionally promote this misunderstanding to their political advantage. 

As one expert told CBS, "I think taxpayers generally will try to avoid thinking about taxes, even after a major overhaul." The story is the same with taxes, tax refunds and other related issues, such as Social Security and Medicare. Many Americans don’t want to take the time to understand the details. They just want to complain. The frightening part about democracy is that someone who doesn't pay attention has the same number of votes as someone who does.

Who Pays On-line Tax?

This time it’s about sales tax.  Late last week President Trump tweeted about Amazon.  One of his objections was that Amazon does not pay state and local taxes.  Whoops!

That should have set off alarm bells in the minds of anyone who really understands economics.  A couple of weeks ago I quoted a well-known French economist reminding everyone that “no taxes are paid by businesses: ultimately, every euro of tax is always paid by households…there is unfortunately nobody except physical, flesh and blood people who can pay taxes.”  He was writing about corporate income taxes at the time, but the same rationale applies to sales taxes.

This becomes clear when looking at any receipt from an on-line retailer.  Most have a subtotal line right on the form labeled “sales tax” or “estimated sales tax.”  Sometimes it’s filled in, and sometimes it says $0.00.  Legally, when a product is brought into the state “consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it.”  Normally this only happens in the case of big-ticket items like cars and boats.

What happens otherwise depends on the laws of the state you live in and where the retailer is located.  Some states require taxpayers to keep track of their on-line spending and report it on their state income tax, adding it in as use tax. 

How many people pay that use tax?  The best numbers I could find agreed with other estimates I have heard – about 1.6% overall, with some variation between states.  Either through ignorance or calculation, that their state doesn’t have the resources to come after anyone for such small amounts, the vast majority skips it.

Ruling out ignorance because almost everyone has their taxes done by a tax preparer or by using the software, this becomes a responsibility issue.

The fact is that Amazon will never actually pay state and local taxes.  Today Amazon collects sales tax for most of the 45 states that have a sales tax.  They may at some point be required to collect the taxes and reimburse them to all states, but they will never directly pay them.  All taxes are passed through to us, the physical, flesh and blood people.  

So far the Supreme Court has refused to review cases to set a nationwide precedent on charging sales tax to on-line customers.  But if that happens, it will be to Amazon's advantage, since their size makes it more efficient to do, whereas their smaller on-line competitors will see a relatively large impact on their operations.  The big guys will once again come out ahead. And shoppers will lose the ability to sidestep sales tax, which was for them an added benefit to shopping on line.

Only People Have Money

A key to economic understanding is the concept that only people have money.  Other entities pass around the money and may hold it for a while, but when you “follow the money,” as the expression goes, it always eventually comes back to individual wallets and bank accounts.

Thomas Piketty, a well-respected French economist, professor and author of several books on income inequality, made the point clearly in a 2009 essay.  He wrote, “Let’s also recall that no taxes are paid by businesses: ultimately, every euro of tax is always paid by households…there is unfortunately nobody except physical, flesh and blood people who can pay taxes.”

He goes on to say, “Inevitably, firms pass on everything they pay to their workers (by reducing their wages), or to their shareholders (by reducing dividends or accumulating less capital in their name) or to consumers (by raising prices).”  Higher (or lower) corporate taxes means one or more of these entities is going to be affected.

In fact, this economic principle is not limited to taxes.  Any action that affects every company in the US or all companies in a particular industry – whether it be regulations, union bargaining, tariffs, or external events such as weather – feeds back to the end consumer.  This is true because when a cost affects every company, it takes competition out of the equation.  In this case each company can pass along those costs directly without fear of falling behind.  

It works in both directions: companies pass along costs to the three categories of people but their revenue also comes from people.  After they make sales and pay expenses, they must decide how much of the difference to reinvest in the business, making shareholders happy; how much to lower the price, hoping to get more customers and grow the business; or how much to increase wages, hoping to attract and retain the best workers.

So when CBS reports, as they did early last month, that Apple, Amazon and Google made a load of money in the last quarter of 2017, we must understand that those billions came from our wallets. And no one forced anyone to buy an iPhone or order items on line.  Facebook had similar positive results, but they forced no one to log in or click on the ads.  All these companies got their money from individuals (households) by providing goods and services that they valued.  Unlike the case of corporate taxes where every company gets to pass along added costs, all these companies, and any other company that wants to stay in business, must compete every day to provide the best service or product at the best price. When they do, they attract customers. That’s where their money comes from.

Some politicians want you to hate the rich.  But, barring those who inherited their wealth, it was people who made them wealthy by willingly giving them money in return for something of value, either directly (Jeff Bezos at Amazon) or indirectly (Warren Buffett investing in successful companies).

This dynamic works very well unless the government gets involved.  When certain companies are favored due to their relationships rather than their ability to provide the best for the least, their incentive shifts from satisfying customers to influencing politicians.  They no longer compete for our business where we voluntarily trade our money for their products.  Instead they compete for money that was taken from us involuntarily by the government (in taxes) and paid out in grants and subsidies.  It’s easy to see how this can skew the system, replacing an emphasis on added value with efforts to influence politicians.  This shift ends up costing the entire economy in the long run as less efficient companies stay in business through government favors.

Economic understanding helps voters to step back and look objectively at some of the actions and promises of elected officials, sorting through fact and fiction by following the logical path to and from households – wallets and bank accounts.  As a current example, when all the cities and states sue drug companies over the opioid epidemic, the money they (and their lawyers) collect will ultimately be an indirect tax levied on households through higher drug prices just as tobacco lawsuits translated into higher cigarette prices.

Taxes, Taxes, Taxes

With only a month until the deadline, it’s time to start thinking about taxes for those who haven’t already begun.  When I think about taxes in general, two things come to mind.  First is that the tax system is too complicated, and for all the talk in Washington late last year not much was done to make it simpler. 

The second stems from the first.  Because it is so complicated and intimidating, most people have given up preparing their own taxes, turning to professional organizations, accountants or those many on-line systems guaranteeing your maximum return.  A result of no one doing taxes or even bothering to become familiar with the process is a general misunderstanding by both citizens and politicians of how it works and the impact of proposed tax changes.

Addressing the complexity first, I ran across this website called 1040.com listing all the IRS tax forms someone might need with a link to each.  As I scrolled down, eliminating duplicates and Spanish language versions, I counted over 240 unique IRS forms, 9 schedules and over 140 worksheets!  That tells a complicated and intimidating story without even going into the details.

It is no wonder people pay someone else or buy a computer program to help them through the maze of regulations and calculations, the purpose of which is to get back their own money, money that they didn't need to pay in the first place.  They paid too much and are due a refund.  But if you don’t do it correctly, you may still be subject to penalties and interest.

This complexity leads to a misunderstanding of the fact that lowering tax rates automatically favors the rich.  But this fact becomes a source of outrage to some and easily becomes a political rallying cry.  I even heard one politician say that he wants to lower taxes on the middle class without lowering taxes on the rich.  Well, good luck with that!  The system doesn’t work that way, and it would have to be completely redone – perhaps not a bad thing, but totally unrealistic.  Let me explain.

Page 90 of the Form 1040 Instructions is headed “2017 Tax Computation Worksheet – Line 44.”  This is where the rich calculate their taxes because the tax tables go up only to $100, 000.  I have reproduced the top line of Section B, the one used for the filing status of Married Filing Jointly, just to use as an example.  It may look a little scary, but the explanation is simple.

Someone making between $100,000 and $153,100 enters the amount under (a), multiplies by 25% and enters the result under (c). Next they subtract $8,522.50 to get their total tax. But where does that $8,522.50 come from?

Here’s the catch.  The first $100,000 is not taxed at 25%. Rich people are taxed the same amount on their first dollar or their first $100,000 as anyone else would be! That $8,522.50 is the difference between paying 25% on all of it and paying middle class taxes on the first $100,000 and then paying 25% on the rest.  (It’s exactly the same for higher brackets.  Oprah pays the same amount of tax on her first $200,000 as someone making exactly $200,000.)

Therefore, lowering taxes on the middle class by lowering rates automatically lowers taxes on everyone.  It’s built into the system.  It’s easy for politicians to appeal to a stoked-up sense of unfairness, but those making claims like the one above are either not leveling with us or don’t understand the very system they are in charge of fixing.  And all it takes to detect their error is a little critical thinking.