Category: It’s Only Gonna Get Worse

Quiet Changes in Taxation, or the Underhanded Destruction of the Middle Class


During the election, pollsters consistently showed that for the majority of voters “the economy” was a primary concern.  Unfortunately, nobody asks the test contingent what exactly they mean when they blacken a little circle next to “The Economy” and why they believe in new elects having any impact on it. 

In reality, for most people, the economic worries amount to “I don’t have enough money to survive and I hope the President will make sure that I do.”  I can hear the audience laughing.  I’m laughing too – through tears.   

“Economy” is a very broad term.  It includes creation of the new jobs (the best hope for it are the small businesses, which don’t get government subsidies and bailouts); reduction of the national debt (it would result in less of the tax money going into paying interest to the foreign lenders, but the counter keeps ticking upward); the trade deficit (well, that’s an ongoing joke); domestic treasury (the interest rates have been at the record lows for years now, nevertheless the equity and debt markets jump up and down like a rabbit and a frog); foreign monetary policy (the only time the dollar gets stronger is because other currencies tumble), etc.   Oh, politicians of all ranks talk a lot about these issues, but they are like birds: a lot of chirping and wing-flapping, but there is no way they can do anything useful with those feathered extremities.

I’d say that the only part of “the economy,” on which the government has a direct, visible, and tangible impact is TAXATION.  Three months ago I offered my opinion on the pre-election debates around the tax cuts and ridiculous $250K “middle-class” ceiling.  Well, at least those topics were brought into public view, brightly spot-lighted by all respectable publications, both in print and on the web.

But there are IRS changes that quietly undercut the fiscal well-being of millions of middle-class taxpayers, while remaining largely misunderstood and unnoticed.  From time to time they are briefly mentioned in the secondary business media, such as the WSJ blog, or discussed on specific accounting and taxation sites, but I believe everybody should be urgently educated on these financial assault weapons.  We should be screaming about them.

Among these painful tax issues, the Alternative Minimum Tax (AMT) is a biggie.  The general public is very intimidated by the AMT concept because the tax preparers are not willing to divulge their “trade secrets.”  But the majority of financial professionals who don’t make their living in personal taxation, including me, have no problem clarifying that it’s exactly what it sounds like: the other method of calculating your tax liability, different from the conventional method.  Both methods must be applied and the one resulting in the higher taxes must be elected.   

The AMT approach seemingly follows the familiar chain of Gross Income, less adjustments, less exemptions, less deductions, less credits.  However, the structure of the reductions used to arrive at the taxable income and the way the flat AMT rate is applied make a big difference.

First of all, AMT disallows a large portion of the itemized deductions, including 100% of state and local taxes, plus a big chunk of medical expenses as well as of mortgage interest.  Moreover, while maxed at a seemingly lower flat rate (28%) than the top tax bracket (35%), AMT frequently yields higher results, because it’s applied evenly to every dollar, starting with the very first one.  To contrast: regular method uses a progressive scale, wherein the first dollar is taxed at 10%,$8,701-st (for singles) at 15%, etc.; the 28% rate kicks in only after you reach $85,650 and 35% is applied to incomes over $388,850. 

Still, for many years this alternate methodology was kept at bay by the legislature, impacting only the big earners (2.7% of US taxpayers, or 3.8 million households).  The instrument of taming the AMT was the level of exemptions (non-taxable income).  In 2011 they were: $74,450 for married taxpayers filing jointly, $48,450 for singles and the heads of households, $37,225 for married couples filing separately. 

But everything changes now.  33 million will end up paying significantly more money to the federal government, because (unless a sensible decision is passed before the end of the year) the exemptions will drop to, respectively, $45,000, $33,750, and $22,500, bringing the AMT to new heights.

As I said, this is a big one and it’s shocking that people are not talking about it every day at the water fountains.  However, there are even quieter changes in the Internal Revenue Code that lick the butter away from your bread.  For example, I have not seen any articles in newspapers or magazines addressing the fact that all of a sudden over-the-counter (OTC) medications were disallowed from the medical portion of itemized deductions.  And the $2,400 cap on pre-tax contributions into medical flexible spending accounts (FSA) went absolutely unspoken.  It just happened.  

I estimate that between changes in OTC, FSA, and AMT, my tax bill for 2012 will be $10,000 higher than it would be without these alternations.  I cannot help myself feeling violated.  Don’t you?                 

MTA vs. Sandy, or The Frustrated CFO Now Predicts the Future



Slide_260456_1705977_freeEver since the "tempest" of August 2007, the MTA has been trying to assure the City that never sleeps that their bosses are not snoozing either, that they are awake and active, doing everything they can to protect NYC's transit from water disasters: they reported on elevation of ventilation grates and "building of other defenses."  (Isn't it amazing how vague and unspecific the reports of supposed efforts are?)  Anyway, they've spent nearly $100 million "making sure" that they can say to the water, "No Pasaran!" 

How much of that money was used for actual work and how much was appropriated to service MTA's $31 billion debt (i.e. to pay interest) or cover $900 million gap of its annual operating budget (including executive salaries) - that we will never know.  Yet, the City, even though fed up with MTA's bullshit, had no choice but to stick to "positive thinking" and hope that "everything will be Ok" (there is a reason the subway riders still clutch The Secret to their embattled chests, keeping it at a #1 spot on Mental and Spiritual Healing bestsellers list).  

And then, Sandy, the wild child of the thoroughly raped Mother Nature, rowed in on a high tide.  Her rage wasn't even that hard core.  She wasn't planning on avenging all human sins against the poor planet.  At no point she's raised her fists above 42 mph.  But the relatively moderate amount of liquid she spat out choked the MTA to a total standstill.  New York's ancient and pretty much dysfunctional drainage system couldn't absorb the incoming water and it went in straight through those elevated ventilation grates and whatever other openings it could find.     

Newspapers and bloggers write that MTA's workers heroically battled the consequences of Sandy's anger.  And that is absolutely right.  Individual employees on and under the ground toiled around the clock in harsh conditions.  As one comedian said many years ago, "We need to create disasters, so that we can have heroes."  However, I imagine that while they were struggling,  their bosses were singing hosanna to the storm for giving them stronger justifications to ask the public for more money, for much-much more money.

Liberals laud governor Cuomo for declaring in his post-Sandy speeches that we now live in a new climate reality, that people should get used to storms and hurricanes.  (Big Fucking News! Some people have been screaming about it for years, for decades, and nobody wanted to listen!).  The gratitude for stating the obvious makes the confused people hot for Andrew to the point that their urine boils inside.  They overlook a simple truth that no politician does anything without a politically-motivated reason. 

Yes, environmental policy, including eco-friendly transportation and energy efficiency, have always been a part of Andrew Cuomo's platform, but I don't remember him ever saying before that New York has become a target of continuous hurricanes.  It's not that he is wrong – we have pushed the climate conditions into the dangerous territory.  It's the timing of these "revelations" that bother me.  Call me a cynic, but I hear an already familiar pattern here: the dark clouds are gathering over us, so the sacrifices for the sake of protection must be made.      

And now, I will try to foretell the future events that will materialize out of this predicament.  First – the rise of the transportation costs.  The MTA already announced the impending hike (yet another one) of the tolls and fares to go into effect in March 2013.  I predict that the Authority will use Sandy to justify much higher increases than usual.  Originally they said that new city transit rates may go up to anywhere between 5% and 25%.  I am sure that it will be at least 25%, most likely even more. 

Then, the NYC government will be called into action to pitch in and, as a result, some sort of an additional levy will be imposed on NYC residents, both individual and commercial.   Eventually, the State will do the same.

And you know what, we will not even complain.  We will accept it as inevitable necessity.  It's like with all "security" issues.  Do you want another 09/11?  Of course, not.  So, submit yourself to surveillance cameras and telecommunications monitoring; take off your shoes and get a shot of X-rays in the airport.  Do you want to be paralyzed by the absence of transportation and electricity next time the City is hit by the storm (and remember – it's going to happen soon)?  No?  Then, pay up and shut up.

Newsflash: GOP Begs Obama for Tax Cuts via Radio? Seriously?


ImagesDear readers!  We interrupt our previously scheduled postings for a series of very special announcements:

Radio waves are the last political resort. 

Apparently all other political channels are either broken or backed up by "more important" problems.  This passed Saturday, frustrated by the House/Senate stalemate, GOP asked Obama to keep Bush tax cuts intact via their radio address.   Is that what's going to work?  What is this the 1920s and everyone is glued to their Radiolas?    

Clearly, the issue that affects not just the monetary policies of this country, but also "minor" sociopolitical concerns such as, for example, the economic principles of true capitalism and definitions of social classes, cannot be successfully discussed in the policy-making branches of our government – the partisanism overpowers the reason.  So, the republicans decide to address the President directly… on the radio.  Moreover, on Saturday.  Don't they know that radio is primarily a weekday medium?  Most listeners tune in either on their way to and from work, or online in their offices.      

On the other hand, who the fuck cares? It's just an empty, check-mark step.  In reality, everyone is resigned to wait until November elections for the resolution anyway, because it's not the fiscal reasoning or survival logic that will dictate the decision.  The only thing that matters for the outcome of the tax-cut issue is which party prevails.  Meanwhile, GOP is trying to impress on their constituents that they are "doing something about it."   Just don't call it "pressing Obama" – that's way too blatant even for politicians.

Proof-positive: politicians are not real people.

Nearly 18 months ago, when President Barack Obama first threw the number $250,000 into the tax-cuts discussions, at least some financial publications, including MSN Money, questioned the suitability of that number as a middle-class ceiling.  Now, overwhelmed by the barrage of bad news, nobody talks about the number itself anymore.   

But I was always interested in understanding how the fuck they came up with that number?  What made "them" (whoever they are)  think that $250,000 salary qualifies someone as "wealthy?"  What kind of perverse minds decided that a small-business CEO, a senior financial executive, an adman, an average doctor, a sales person who spends 300 days a year on the road, don't belong in the middle class?  Are they an upper-crust?  Is it correct to bunch them up together with the private-equity billionaires or public companies' CEOs and make them pay taxes at the same rates? 

Yes, the majority of the general population will never make over $250,000.  But the same majority do not possess talents, perseverance, and drive of people who apply themselves to the best of their abilities and work 16 hours a day in order to make 6, 10, or even 15 times more than an average schmuck, who doesn't really try too hard and spends his workday surfing the Internet for TMZ news and shopping bargains.   

In fact, people who make $100,000 – $750,000 a year are usually the hardest-working sector of the middle class.  Most of them have built their careers or businesses from scratch.  And guess what?  They are not really that reach.  I know CFOs, doctors, lawyers, who make $300-$350K a year and worry that they will not be able to afford $245,000 a head in tuition, room, and board to send their children through a good college.   

And here lies the truth: the reason a random number is picked to determine who belongs to the middle class and who doesn't is because politicians are not real people.  Just like the super-rich, they are far removed from the reality of the every-day life.  Many of them are actually wealthy people.  And even those who are theoretically "middle-class" enjoy a lot of paid perks.  How can you possibly formulate the idea of social classes if most of your meals are paid by lobbyists and their clients?   

Administration doesn't care about the economic recovery of this country.

In principle, I would be very reluctant to agree with any official political statement.  But, whoever is actually behind the text of the GOP radio address got one thing right: small-business owners will be the first to suffer from increased taxes imposed on the earnings above $250,000.  Maybe the plastic people in Washington don't know this, but the majority of privately-held businesses are S-Corporations and transfer their incomes to owners' individual tax returns.

So, let's imagine such small business ran by two single partners, who work very hard to keep their business going, retain their 15 employees, and maybe even create new jobs.  If they are very good at what they do and also lucky, they may overcome all the difficulties of today's economic conditions and make $1,000,000 in net income. Good for them! 

Now comes the tax season.  Even though they left the entire million in the business, they have to split it and report $500K each  on their individual tax returns.  If the proposed tax rates are applied, together they will have to pay $335K to the federal government.  Add to that, state and local taxes – about $150K more, and the hard-earned $1,000,000 is immediately reduced to $515,000.  The $485K is taken away from the struggling business.

So, where is the incentive for the entrepreneurs to go on or go into the business?  What about the "middle-class" employees of these small businesses, those who make under $250K?  What will happened to them, when their employers go out of business squashed by these additional fiscal burdens on top of all other difficulties?  Do you think that the government cares about them, or the "economic recovery" altogether?  Or do they care about having enough money to bail out the next banking giant or a failing automaker?

Newsflash: Even NBC’s Economy Watch Finally (Somewhat) Wakes Up


Stuck in the Mud

Wow!  Like a fucking parrot I have been repeating the same thing for years now.  But it's okay, I can do it again:

People (not just the economists and market analysts, EVERYONE!), stop applying old concepts to current economic situation!  This was not a recession and we are not experiencing recovery!  This is our new reality.  Get used to it! 

Look at the graph above.  That historical +15.6% gain after severe recessions of the past – it's never going to happen again.  Moreover, even the 1.7% reptilian movement upward, we supposedly experience right now, seems to me miraculous.  And it is definitely not assured – we may start rolling down at any given moment.

The picture is so undeniably obvious, even the politically-controlled outlets, such as NBCNews.com, have no choice but to talk about it.  They are the ones, who published this morning the Credit Suisse's chart above in their Economy Watch blog's post cautiously named "Economy may be permanently stuck in slow-growth mode."  The more appropriate title would be "Economy May Be Permanently Stuck." Period. 

The article is basically a compilation of data and quotes obtained from various resources, including a number of "prominent economists" and the Federal Reserve Chairman Ben Bernake.  The blogger, John Schoen doesn't express his own opinion or adds any commentary.  Nevertheless, the piece as a whole leaves an impression that all cited contributors and the policy-makers are also stuck in a perpetual state of having no clue, of not knowing what to do. 

This doesn't surprise me at all.  These people have been in denial far too long, but they cannot hide from reality anymore.  And now fear seizes their beings, because they start realizing that it's only going to get worse.  It's beyond depressing, it's funereal.

Invariably, one particular tidbit of information puts me into a vile mood, whenever it catches my eye.  In this assortment of bad news Mr. Shoen mentions in passing that 70% of US economic activity comes from consumers.  To me this is a reminder of terrifying fact that our country predominately retails (largely imported goods) and creates services for end users instead of producing industrial products for domestic commercial market or export.  

And it's astonishing that not a single of the quoted "dignitaries," not even for shits and giggles, raises a voice of reason and demands that the politicians stop sticking crutches into the armpits of clay giants and let them fall; that the Feds stop buying long-term bonds with our social security contributions; that the Supreme Justices stop passing laws guaranteeing highest ever compensations for CEOs of health-management companies.  Is Lynn Tilton and I are the only people who understand that only by supporting smaller privately-held DOMESTIC businesses we may be able to revive the economy?  That if "the powers that be" don't start this process right away, the country will become more and more restless?