Narrow Bridge Finance » Taxes

Tax Time Strikes Again – Preparing for Your 2011 Taxes

Eric — Mon, 09 Jan 2012 14:00:00 +0000

Now that we are a full week into 2012, it is time to start thinking about the dreaded tax season. Taxes don’t have to be difficult. For most of us, they can be a quick and painless process.

Gather Your Tax Forms

This is both the hard and easy part of taxes for me. Most of what I need just shows up in the mail, but I have to be patient and diligent to get everything I need.

Your employer will supply you with a W-2, which is the most important input on an annual tax filing for most people.

Your banks and brokerages will send you 1099 forms for interest and investment income.

Companies that paid you money, such as freelancers and online advertisers, may be required to submit a 1099-MISC or related form.

Schools and student loan servicers provide you with forms for deductions on education expenses. Schools give you a 1098-T and student loan providers give you a 1098-E.

If you have a mortgage, you will get a 1098 to list your mortgage interest deduction.

If you itemize your deductions, gather receipts from donations to eligible charities so you can list those as deductions. You can add those up to be input on one line on your form 1040.

Compile Everything by Category

As my files come together, I throw them in a big manila envelope by my file cabinet, but as it gets thicker, I know it is time to sort.

I organize my forms by income type. I create a bundle with my work income (W-2 forms). I then create a bundle with my banking and investment income and another bundle for 1099s for freelance and online income.

Behind that, I put my deduction information into bundles by category for education, home, and donations.

If you own a small business that has pass through income to your 1040, you have to create a unique income statement for each business with supporting documentation. I put those in separate folders with the income statements on top for easy reference.

Get the Files to Your Accountant, or Do It Yourself

Now that everything is easy to sort through, I fill out a form for my accountant. This summary allows the accountant to quickly move simple totals to my 1040 (saves him time and me money) so he can focus on the more complex parts of my filing.

If you have a simple and easy financial setup with only one job and few deductions, you can easily use an online program to save money. Just make sure that you are very thorough and accurate if you do it yourself.

Submit and Move On

After all those hours of compiling, adding, filing, and filling out your forms, it is time to submit. Double check your return to make sure there are no surprises. If all goes well, you will be able to file online and get a refund directly deposited to your account.

Questions

If you have any questions about organizing your taxes, let me know in the comments. I will make sure to answer everyone.

Image by MoneyBlogNewz.

Tax Time Strikes Again – Preparing for Your 2011 Taxes is a post from: Narrow Bridge

What Is the Best Time of the Year to Sell Stocks

Eric — Wed, 14 Dec 2011 14:00:57 +0000

As we approach the end of the year, some investors are going to try to minimize their taxes by selling stocks. Someone recently asked me when you should sell, and the answer can be complicated depending on your situation.

Offsetting a Loss

If you have sold investments in the past for a loss, the IRS will allow you to sell investments for a gain without paying taxes. For example, if you sold stock for a $1000 loss in January and you have an ETF with a $1200 gain that you want to sell, you can sell it in December and only have a tax liability for the gain on $200.

If you need that $1200 right away, it is probably smarter for you to sell in December than wait until January. Something to keep in mind, however, is that capital losses can be carried over to future years. If you were planning to keep the investment, there is no reason to rush and sell.

Offsetting a Gain

Just like in the situation above, you can offset a gain with a loss. If you sold stock in January for a $1000 gain and are holding onto a stock in the red, you can sell it in December to lower your tax liability.

Unlike capital losses, capital gains cannot be carried over to future years. You can’t defer paying taxes when you make money. If you are holding onto a stock that does not have a bright future, it might be a good idea to get rid of it before year-end.

Make Smart Decisions

In the end, you will always end up paying the net gain on your investments. Whether it is in 2012 or 2052, you will have to pay someday. It is more important to focus on the long-term value of your portfolio than game the system for tax reasons.

Unless you expect capital gains tax rates to significantly increase or decrease in the future, you should focus more on your investment decisions and just pay the taxes as they come. The IRS has complex rules for dealing with capital gains, but you should let your accountant (or TurboTax) worry about that and just focus on making money.

Your Strategy?

What do you do when it comes to capital gains taxes? Do you try to make year-end trades to lower your bill for Uncle Sam? Please share in the comments.

Image by Infrogmation.

What Is the Best Time of the Year to Sell Stocks is a post from: Narrow Bridge

Occupying America

Eric — Mon, 24 Oct 2011 15:46:38 +0000

While they are not in all the headlines anymore, the Occupy movement is still going strong around the country. From Occupy Wall Street in New York to Occupy Denver in my neighborhood, the movement has gained media attention and thousands of supporters, but what are they really doing and what are they all about?

Why They Are There

There is a lot of confusion, even among some of the protestors, about what the Occupy movement stands for. As far as I have been able to draw out from the New York, Denver, and Boston websites, they are there because they are mad and frustrated.

Distribution of Wealth – The occupy folks are mad that the top income earners make such a large share of income and hold such a high percentage of wealth. The growing inequality is a primary reason for their anger. The top 10% of Americans hold 80% of all wealth in the United States. The top 20% of Americans earned 49.4% of income in 2010 while the bottom 15% earned only 3.4% of the income in the country. Over the last five years, studies have shown that the United States has one of the top income inequalities of comparably developed countries.

Corporate Greed – The movement has been vocal about corporations gouging the middle class for higher profits. While many banks are making record profits, they are evicting people from their homes. The protestors have gone so far as to ask for the banks to forgive debt to some people that can’t afford their payments.

A Clear Goal?

While we know why they are protesting, the movement has been slow and unclear about clear goals. They are mad at banks and rich people and politicians, but they lack a clear message and direction.

Like the Tea Party protests in 2009, the Occupy movement has potential to make an impact in the United States. In the most divided political time in recent memory, the far right is well represented in the government but the far left is not. To make an incredibly nerdy reference, they have potential to “bring balance to The Force.”

My Opinion

I absolutely hate the Tea Party and I don’t hate the Occupy movement. However, I do not agree with everything they have to say. I do support freedom of speech and both groups’ rights to speak their mind and peacefully assemble. Free speech, a First Amendment right, is a higher law than any municipal ordinance or state law, and these people have a right to be on public land to make their point.

I do support higher taxes on the top 1% (people who make over $550,000 per year can afford it) as a way to help balance our budget. I do support higher taxes, but not as dramatic, on the top 2% (about $200,000 and up).

I do support a simplified corporate tax code that would bring our corporate taxes back in line with the original rates. There are so many deductions and write offs that some of the biggest companies do not pay any taxes at all. We have one of the lowest effective tax rates in the OECD, and you can see what that has done to help our deficit.

I do not support a Robin Hood steal from the rich and give to the poor scenario. Income disparity happens, but life is not fair.

I do not support a debt forgiveness program. People signed the papers to take out a loan. If they signed up for something they could not afford, it is not the bank’s fault. The banks were stupid to give out loans to people who could not afford them and they deserve some losses, but they should not should the cost of stupid people’s homes.

Where It Is Going

I don’t think anyone knows exactly what is going to happen next. I watched live (on TV) as 24 protestors were arrested six blocks from my home for being in a park after hours. These people are not going away without a fight.

If they were smart and really wanted to impact the banks, they would close their accounts and move their money to credit unions or just start a bank of their own. Some are closing their accounts, but unless they act as a whole they are not going to make an impact.

I do expect that the “99%” will press for a unified voice in government. Just as the Tea Party holds a caucus, the Occupy movement will likely see more structure going forward. However, unlike the Tea Party, there are not a ton of millionaire supporters that are going to pay for the campaigns of its members.

I hope this group is able to establish a single voice and make progress toward a more logical tax system for both people and companies. I do not want to see such dramatic change that businesses are wiped out, but the excesses we see today while wealthy Americans and corporations pay such a disproportionate share of the taxes relative to their income needs to come to an end.

What Do You Think?

Do you support Occupy America? Are you part of the 99%? Do you think the 1% should be treated differently? Why? Why not? Please share your thoughts in the comments.

Occupying America is a post from: Narrow Bridge

America, We Have Health Care!

Buffet and the Great Tax Debate

Eric — Tue, 16 Aug 2011 16:26:28 +0000

It is no secret to Narrow Bridge readers that I am a fan of Warren Buffet. His investing strategies have helped him grow investments from family and friends in Omaha into the company with the seventh largest revenue in the United States. As the debate moves forward on dealing with United States debt, the second richest American has voiced strong opinions on how to fix the problem.

I have long been an advocate of social programs such as social security and universal healthcare. I enjoy driving on freshly paved highways and hate the two lane highway that should be at least double the size that I take to work every day. I enjoy the fresh air and clean water protected by the EPA. I like going to public firework shows on the fourth of July. I am glad impoverished Americans can access Medicaid and can visit a doctor when they are sick. I am thrilled that every young American can access a free education, though I wish many were better and that the education lasted through college.

Of course, many could be managed better. The wasteful spending at some organizations, like the military and IRS, could be fixed. If run more effectively, the military could have the same power and effectiveness at a lower cost. The IRS could require electronic filing and save millions, if not billions, in costs. The US Federal Reserve could stop printing paper dollar bills and replace them with coins, also saving billions.

Overall, I am happy with government programs. I enjoy taking advantage of them. I don’t mind paying for them.

Buffet wrote an op-ed in the New York Times this week accusing our legislators of coddling the super-rich. They are. He uses his own company as an example:

Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

Does that not disgust you? The second wealthiest man in American followed the law to the letter. He paid his taxes, just as I paid mine. However, my effective tax rate was closer to Buffet’s staff than the man himself. Why do the 98% of Americans no revolt at the plutocracy in this country? The government has engineered a structure that protects and helps the wealthiest Americans keep money and power while encouraging the rest of us to finance our Middle Class lifestyles with debt.

Buffet does not get it either. He clearly attacks the ludicrous claims of the far right. I once had a personal discussion on this topic with a blindly conservative friend. He said that if taxes go up for the wealthy that they will not work as hard because they will take home less for earning more. First off, learn math beyond what Rush Limbaugh teaches you. (Hint, it does not add up) Second, that is the most ridiculous thing I have ever heard. Yes, if your income is $2,000,000 a year and the tax rate goes up on rich people, you will take home less if you earn the same $2,000,000 a year. However, my heart does not bleed for you.

The amazing thing about our graduated tax system is that they pay the exact same tax rate on the first $40,000 they make the same as I do. However, as you make incrementally more, you pay incrementally more on that additional income. If you are confused, here is a good explanation at Bargaineering. As you can see, people that make more money still make more money. Buffet goes on to explain how the tax rate does not scare rich people away from trying to make more money:

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.
I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

I will not argue that the current tax system is perfect. I also believe that $200,000 per year is not the right place to start a super-rich tax bracket. Again, I agree with Buffet. Increase taxes at $1 million. Have another bracket at $10 million. I promise you people making over $10 million a year will not starve. If you think that they will donate money to the government out of the goodness of their heart, you are mistaken. But if you think they will give up on making money and being rich because they pay a little more in taxes, you are an idiot.

Image by Ethan Bloch.

Buffet and the Great Tax Debate is a post from: Narrow Bridge

Accounting for Stock Sales: New Rules to Confuse

Eric — Thu, 27 Jan 2011 18:51:28 +0000

photo © 2006 liz westThe IRS has made some changes to the rules for capital gains taxes on the sale of investments. The terms FIFO and LIFO might confuse you, but luckily you have me to explain them to you.

My stock brokerage gave me the ability to adjust my accounting plan starting a few weeks ago. I am given an option between First in-First Out (FIFO), Last in-First Out (LIFO), high cost, low cost, and a tax lot optimizer. Each has a unique tax impact for you.

First in First Out

FIFO records your shares of stock as you buy them, and the oldest priced shares are sold first. Think of this like the milk isle at the grocery store. The first cartons on the shelf move to the front for you to purchase.

When the capital gain of a sale is calculated, the purchase price of the oldest shares is subtracted from the sale price. This is the taxable income or loss from your sale.

Last in First Out

LIFO records your shares as you buy them and uses the most recent shares purchased to calculate your capital gain. There are several possible downsides to this method. The most obvious is that you are favoring short term gain over long term gain. Short term capital gains have a higher tax rate, so this is not the best way to go.

Think of the lumber isle at your local hardware store to visualize LIFO. When the shelves are stocked, the oldest items are moved to the back. Because lumber does not expire like groceries, you grab the first one on the shelf, which is the newest, to make your purchase.

High Cost

This one is self explanatory. Your brokerage calculates capital gain by selling the highest cost first. This is how my account is currently set up. The idea is to minimize your capital gain in the short run and delay paying taxes on the lower cost shares until a later date.

Because of inflation and the time value of money, it is always best to delay taxes. You have to pay them eventually, but you can minimize the short term impact.

Tax Optimizer

My brokerage also allows me to select a tax lot optimizer. It sells shares in a particular order to minimize tax impact in the short run. Schwab uses the priority below to determine the order of sales:

Short-term Losses	Lots reflecting short-term losses are sold first, from greatest short-term loss to least short-term loss.
Long-term Losses	Lots reflecting long-term losses are sold, from greatest long-term loss to least long-term loss.
Short-term, no gains nor losses	Short-term lots that reflect no gain nor loss
Long-term, no gains nor losses	Long-term lots that reflect no gain nor loss
Long-term Gains	Lots reflecting long-term gains from least long-term gain to greatest long-term gain.
Short-term Gains	Lots reflecting short-terms gains from least short-term gain to greatest short-term gain.

Only you know what your best tax situation is. If you expect major changes in capital gains in the future, it is probably best to ask a tax professional what you should do. For most of us, though, a highest cost or tax optimized sale process is ideal. It keeps the money in the bank in the short run and saves us in the long run.

Accounting for Stock Sales: New Rules to Confuse is a post from: Narrow Bridge

The New Tax Deal: What Does it Mean for You?

Guest Author — Fri, 21 Jan 2011 17:35:18 +0000

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was a source of great debate this past year. When it was finally signed on December 17th, Congress signed a bill that barely changed the existing tax codes. This was intentional, since many of its provisions are intended to be temporary. But at the same time, it had some interesting ramifications for a huge number of Americans.

How the bill affects you personally depends on a number of factors. In some ways, many people will hardly notice a difference. Others, however, may see stark changes, though many of them not right away.

Who are the biggest winners?

Some of the biggest winners in the compromise are the high-income earners. Not only did they receive an extension of the Bush-era tax cuts, they will also benefit from the temporary repeal of the PEP and “Pease” limitations. PEP (Personal Exemption phase out.) was a sliding scale that reduced personal exemptions as adjusted gross income increased. The “Pease” provision reduced the amount of itemized deductions for the top brackets. With this deal, the top earning Americans hang onto these helpful deductions for an additional two years.

Individual taxpayers across the income spectrum are winners as the extension of the “Bush Tax Cuts” applies to all brackets. This leaves the bottom bracket at 10% for a tax rate, while the top is capped at 35%. Investors win too. The bill extends the current low rate of 15% on long-term capital gains and dividends for two more years. A 2% reduction in Employee Payroll Taxes for 2011 should also be a boon across the spectrum.

And the bill also extended unemployment benefits for 13 months, to aid those that have found themselves unable to find jobs after months, or even years, of searching.

And who are the biggest losers?

On the other hand, low-income earners will see the Making Work Pay Credit disappear. The absence of this credit will cost people earning less than $20,000 a year, or married couples earning less than $40,000 a year approximately $200 this year in take home pay.

The children of the Baby Boomers, or “Generation Y,” will face indirect burdens from the new bill. While they will see much short-term benefit from the Bush Tax Cut extensions, they will likely bear the brunt of the tax increases that will undoubtedly occur later on in order to pay for the massive spending. Plus the wage earner contributions to Social Security taxes are reduced in 2011 by 2%, which will likely mean lower distribution when the time for retirement comes (if Social Security still exists then).

What do the new rules mean for businesses?

Small business owners got hit particularly hard with the new expanded 1099 reporting requirements that were not repealed. At the moment, payments to corporations are exempted from 1099 reporting rules, but after December 31, 2011, businesses will have to report anyone or any company they do more than $600 a year in business with. This includes every purchase of more than $600. This will make the administrative costs skyrocket in 2011 for small businesses, and certainly give business owners pause before pulling out their credit cards.

Congress is hoping that this impact on small businesses will be mitigated by a provision that also allows them to expense 100 percent of certain investments in 2011.

If you live outside of the United States, you may be interested in tax rates by country.

The New Tax Deal: What Does it Mean for You? is a post from: Narrow Bridge

Getting Ready for Tax Time

Eric — Tue, 11 Jan 2011 21:04:06 +0000

photo © 2009 JD Hancock I have written about taxes a lot in the past. We have discussed the merits of doing your own taxes or hiring an accountant. We have also discussed tax forms you need to understand. I printed off my first 1098-E forms for student loan interest today, and I thought it was a good time for a refresher.

To get ready, I always make a full list of what I expect to get and check things off as I go along. Here is a re-visit of a post from last year about preparing for tax time. The first steps involve making lists and gathering documents needed for tax preparation.

1. Make a list of all of your bank accounts (even ones that you do not use). As your forms start to come in the mail (or are available online), check them off of the list. Most bank tax forms start to come around the end of January. These come in the form of IRS tax form 1099.

2. Make a list of all investment accounts. Like banks, you will get forms starting at the end of January. Unlike banks, most investments do not require that you pay taxes until the investment is sold (realized gain or loss). Your investment firm will take care of tracking that for you and send you the detail. These come in different versions of the 1099 and several other forms.

3. Make a list of jobs or income sources that will report income to the IRS. I had two jobs this year, but expect three W-2 forms from an extra income source.

4. If you have a mortgage, add that to the list. Form 1098 shows interest paid for a mortgage, which is tax deductible.

5. Collect any other deduction forms. These can relate to education (direct school expenses and student loan interest) or donations. I keep my school book receipts and get a tax form from my school for tuition. I also make donations (not too big, as I am paying for school) to charities that qualify for a tax deduction. You can also find energy tax credits for home improvements.

I know taxes are not fun, but it is one of the two certainties in life. Since you are reading this, the other one does not apply. You have to pay taxes. Get a jump start on planning and it will make your life a lot easier come April 18^th rolls around.

P.S. Tax day is April 18^th this year because April 15^th is a Federal holiday in Washington, D.C.

Getting Ready for Tax Time is a post from: Narrow Bridge

5 Ways to Use the 2011 Payroll Tax Break

Eric — Mon, 10 Jan 2011 20:45:53 +0000

photo © 2006 Ray TsangMany of us had our first paycheck of 2011 this past Friday. If you did, you might have noticed that your social security deduction is lower than it was in 2010. The reduction, known as the payroll tax, was included in the negotiated tax bill between President Obama and Washington’s Democrats and Republicans.

Government officials hope that the deduction will be spent and help with economic growth. While I love economic growth, I love Narrow Bridge readers even more. Don’t be stupid. Don’t go waste money that you can put to better use. Here are some ideas for using your 2011 tax break.

Cover Your Bills

If you are already in a bad situation, make sure to pay your bills. Pay them on time. If you are having trouble making ends meet, though, it is probably a good idea to start a top down financial overhaul and fix your spending problems. Remember, it is no one else’s fault that you are in debt or can’t make payments. Take responsibility and fix it.

Emergency Fund Savings

We have seen a lot of people come up short over the last couple of years. If you want to avoid the situation above, save up for a bad day. You never know when your income may be disrupted or you will have an unexpected expense. That is why it is called an emergency fund, after all, you can’t plan for when you need it.

Automated Retirement Savings

Your payroll tax is lower by 2%. Why not take that 2% and put it straight into a Roth or 401(k). You are already used to living without that money, so stay used to it. Put it away for your future in a tax advantage account. Automation is key to ensure you don’t spend what you should be saving.

If you think about it, the social security tax is going to “fund your retirement” anyway, so use that part of your budget as it was intended.

Take a Class

People will save up to $2,000 in 2011 from this tax cut. Why not take a class that will pay off in the long run by helping your career or income prospects. Learn a skill that can pay you, like bookkeeping or photography.

Buy a Stock

A lot of investors don’t know where to start, so they are not an investor yet. Put the money into a brokerage account and learn how to invest. Buy a stock, ETF, or other investment. It could pay off in the future. Use it as inspiration to learn more about investing.

What are you going to do with the money?

I have a lot of sweet ideas, but crowd-sourced ideas are often better than individual ideas. What are you going to do with the money? Are you going to blow it on something fun or put it towards a long term goal? Please share in the comments.

Also, a quick thanks to Well Heeled for including Narrow Bridge in this week’s Yakezie Carnival: The Fortune Cookie Edition and thanks to John at WalletBlog for including Narrow Bridge in this week’s Carnival of Personal Finace: The 2011 New Year’s Resolution Edition. And thanks to Crystal at Budgeting in the Fun Stuff for including me in the first Total Money Blog Carnival.

5 Ways to Use the 2011 Payroll Tax Break is a post from: Narrow Bridge

Using Flex Spend to Save on Taxes

Eric — Thu, 06 Jan 2011 23:32:09 +0000

photo © 2007 Jacob DaviesTax season is approaching, and I have looked at ways to save on my taxes. It is too late to sign up for 2011 unless you change jobs, but Flexible Spending accounts can save you big money on medical, commuter, and childcare through tax incentives.

What is Flexible Spending?

Flex spending accounts (FSAs) are a government approved method to pay for certain expenses before tax. For commuters, parking and monthly public transit costs are allowed. For parents, day care is allowed. For all people, certain medical expenses are permitted.

In my last job, I took the Light Rail to work every day. I ordered a monthly pass through a flex spend account and was able to pay for it pre-tax. I am preparing for PRK laser eye surgery, and will be paying for that from a health care flex spend account.

How Do You Fund It?

FSAs are funded through payroll deductions from your employer. When I was buying a $60 monthly pass, I had thirty dollars deducted from my account every paycheck to cover the cost. The deduction was pre-tax, so I had a lower taxable income.

I knew in December that I would be getting eye surgery this year, so I did research to find the average cost. I put in a conservative estimate ($3,500) to be deducted from my paychecks in 2011. That means about $135 will be deducted from each paycheck pre-tax. This will lower my taxes by about $1,000 this year, so the incremental cost for the surgery is only $2,500.

Commuter flex spend accounts can be enrolled or dropped at any time. If you have a fixed monthly parking cost or transit pass, just add it through your company’s HR department. It is that simple.

Health and dependent care accounts are set during your annual enrollment period or right after you are hired as a new employee. Some life events, such as marriage or the birth of a child, allow you to make mid-year changes. You are required to make a selection for your account before you need the money, so you have to estimate. Guess conservatively; keep reading to find out why.

How Do You Spend the Money?

IRS publication 969 gives you the details of what is considered an eligible expense. For the most part, any doctor appointments, hospital visits, prescription medication, medical devices, eye care needs, and medical operations are eligible. Over the counter medications are not eligible as of 2011.

If You Don’t Use It, You Lose It

That’s right. If you don’t use it, you lose it. If you make an election for $1,000 and only have $500 in medical expenses, you lose the $500 you didn’t use. Bummer, right? So estimate very conservatively. This is not a method for tax dodging, it is a tool to make certain expenses more affordable.

If you are a single twenty-something, you probably don’t need a health care FSA. I had a very specific need for the account, so I was able to accurately estimate the amount. However, I am healthy and rarely go to the doctor, so I will probably skip it in 2012.

Using Flex Spend to Save on Taxes is a post from: Narrow Bridge

The National Debt and Taxes – A Solution

Eric — Thu, 16 Dec 2010 18:42:47 +0000

photo © 2010 takomabibelot | more info
I like to think of the government as a giant, non-profit business. Every single American is a customer. As customers, the government’s job is to keep us happy. As a business it is responsible for keeping itself “profitable” and viable for the future.

Government Profitability?

I am sure many of you would be disturbed at that idea. When I say government profitability, I mean the government should have to run like a business. If you run a giant deficit in the corporate world, you go bankrupt and out of business. Obviously most of us (sorry Libertarians and uber Republicans) don’t want the government to go out of business.

So, what does the government need to do? Like in the Clinton era and many Presidents before him, the government needs to run without a deficit. There are three ways to turn around from the terrible deficit situation we are in.

Option one: increase revenue (raise taxes)
Option two: cut costs
Option three: print money

This is a fairly simple concept. I once had someone argue with me that this is not true. That person obviously has no understanding of economics. Just like a business, the way to keep from having deficits is to increase income or decrease spending. That’s it. The government, unlike businesses, can also print money to pay for things, but that would be worse than having a deficit.

How to do it

A giant increase in taxes would shatter our now weak, but improving, economy. Similarly, a major cut in vital services would devastate millions of families. We need, as a country, to find a middle ground. In Washington, this is proving very difficult. While I definitely support one party over the other, we can safely place the blame on everyone that has run our country for the last ten years for what is going on now.

The national debt as it is today did not begin to rapidly grow until the Regan administration. “Reganomics” led to skyrocketing debt. For someone who believed in small government, he sure used the government to spend our way to greater economic growth. That spending is unsustainable in the long run, and all Presidents since Regan, except for Clinton, have helped build on our enormous deficit.

This country is going to have to go through a painful change to fix the problem. Unfortunately for all of us, as a whole we are stupid. We vote for our checkbooks and not for our long-term well-being and future of the country. If any congress were to make the necessary changes to our system to fix the problem, they would most likely be voted out of office in the next round of elections. This leaves us in a “catch 22” situation where no one is willing to fix the problem.

My ideas for what could really work

Raise Taxes on the Super Rich

The two richest people in the United States, Bill Gates and Warren Buffet said we should raise taxes on the top two percent. Buffet had this to say:

“If anything, taxes for the lower and middle class and maybe even the upper middle class should even probably be cut further,” Buffett said in an interview with ABC’s “This Week With Christiane Amanpour” that is scheduled to air on Nov. 28. “But I think that people at the high end — people like myself — should be paying a lot more in taxes. We have it better than we’ve ever had it.”

This would not impact 98% of Americans. Billionaires and multi-millionaires are not creating jobs for the average American. Raising taxes on super rich people would not impact job growth and would not kill the economy. Period.

I am personally against increases in the estate tax, as that is double taxation on the same income. I think they should drop the estate tax and raise the rich income tax level. People would not earn less for making more money, as a friend once told me. If you don’t understand how the US income tax system works, here is a good primer.

Cut Spending on Waste

President Thomas Whitmore: I don’t understand, where does all this come from? How do you get funding for something like this?
Julius Levinson: You don’t actually think they spend $20,000.00 on a hammer, $30,000.00 on a toilet seat do you?

That quote from Independence Day hits the nail right on the head. The government doesn’t actually spend $20,000 on a hammer. So why do they charge the tax payers that much? The government needs to put very strict measures in place to ensure the lowest price is accepted on projects. No bid contracts should be a thing of the past.

The IRS should require electronic filing. The army should not spend billions of dollars a month on unnecessary bases around the world. Administrative costs at all major government agencies should be cut. The TSA should waste less time on “touching my junk” and spend more time on what really works.

Some jobs will have to be cut too, which is not good for the short-term economy, but I don’t want to have the country worrying about their paycheck for the next four generations.

Overhaul Social Security

Allan Sloan at Fortune wrote one of the best articles I have ever read on the Social Security problem. I am not going to re-write the entire article here, but I will summarize the important parts.

We are going to be paying for people’s retirement by borrowing money for foreign governments in about five years. This is a serious problem.
The average life expectancy in the United States has risen dramatically since Social Security was implemented but the benefit has remained about the same.
The government will have to resort to inflation or increased borrowing to pay for this if something does not change very soon.

I suggest we do something here that will not be good for me, but we have to think as a country if we are going to have long-term economic success. We have to raise the retirement age to qualify for social security (slowly over time allowing people in or near retirement to be “grandfathered” in to current expectations), increase the cap on payroll taxes that fund Social Security, and decrease the benefit. That will suck for all of us, but it is the only way I can come up with for this to work.

This is gonna suck

Our country is going to go through dramatic changes either way. We can have our currency and economy collapse or we can be pre-emptive and fix the problem before we end up like Greece, Ireland, and Spain.

I know this is controversial and many people will not like my ideas, so please keep comments constructive and civil. You can critique my ideas and other people’s comments, but I don’t tolerate mean people.

Please give your thoughts, ideas, comments, and solutions in the comments.

The National Debt and Taxes – A Solution is a post from: Narrow Bridge