Sneak Peak: A Discussion of the Paradise Papers, Taxes, and Millennials

I sat down with finance expert, management consultant, and lecturer, Fazley “Faz” Chowdhury, for a discussion of the Paradise Papers, GOP tax plans, money laundering, and the impact on the Millennial generation. Here are a few segments from the interview. We will be releasing the entire interview (55 minutes) later this week.

What Are the Paradise Papers?

Millennials, Corporations, and Globalizaiton

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Paying for the Right to Work

President-elect Donald Trump made a deal with the CEO of United Technologies to keep some US jobs from moving to Mexico. At stake were 2000 jobs moving from a Carrier plant in Indianapolis, Indiana that manufactures air conditioners down to Mexico where labor is 80% cheaper. The nuts and bolts of the deal where that Indiana Governor and Vice President-elect Mike Pence promised $7 million dollars in tax benefits to Carrier. Carrier promised to keep approximately 800 jobs in the US. Moreover, Carrier also plans to invest $16 million in automation which would eventually eviscerate the remaining jobs at the plant. Additionally, this deal left hundreds of workers at a nearby Carrier plant in Huntington out in the cold.

United Technologies CEO admitted in an interview with Jim Cramer that 10% of his company’s revenue comes from government contracts. Hence, President-elect Trump actually had huge leverage. Yet, this was a sweetheart deal for Carrier including tax breaks , positive press, and increased profits for shareholders..

What about the workers?

The union leader at the plant, Chuck Jones, was not even consulted or invited to the bargaining table. Moreover, Chuck Jones called Donald Trump out for “lying his ass off” regarding the number of jobs saved. President-elect Trump has taken to Twitter to call Chuck Jones out by name and criticize him. Mr. Jones is receiving death threats  – for telling the truth about the deal and expressing concern for the workers who will still be laid off. I think that Mr. Trump has taken union-bashing to a presidential level. Trump’s next tweets went on to claim that unions are the reason why American jobs are being shipped overseas – a blatant lie.

This Deal Doesn’t Scale

Critics like (surprise, surprise) Sarah Palin have come out and said this deal is just “crony capitalism”. Will Trump starting picking up the phone and calling CEOs to offer more deals? Does this deal create a perverse incentive for CEOs to announce moves overseas in search of tax breaks and other government goodies? This deal simply doesn’t scale. Globalization encourages companies to seek out more favorable regulations and low-cost labor. Innovation, cost-cutting initiatives and automation exacerbate the job-crunch from globalization.

Moreover, Trump is promising more benefits to corporations including eliminating environmental regulations, allowing corporations to repatriate money overseas, and lowering the top marginal corporate tax rate from 35% to 15%. The funny thing is that the effective corporate tax rate was 19.4% between 2008 to 2012 and some corporations little or no tax at all.

chart

Source: White House Historical Tables

The reality is that the burden of paying taxes has shifted dramatically  from corporations to individuals. The Revenue Act of 1916 established annual income taxes in the United States. Between the inception of the annual tax to the 1960s, individuals and corporations contributed roughly the same amount in U.S. Federal taxes. The 1:1 ratio of individual and corporate tax burdens ran away in the 70s and 80s. The ratio as of 2014 is 6:1. Yes, individuals contribute 6 times the amount that corporations contribute in U.S. Federal taxes. This does not take into account Social Security, Medicare and Medicaid, state taxes, property taxes, or sales and use taxes. Moreover, this data does not account for the fact that some S Corporations, Limited Liability Companies, and Sole Proprietors allow profits and losses to flow through their personal income taxes. The raw deal for the American people is that we must engage in a race to the bottom with weakened environmental regulations, lower pay, reduced benefits and greater tax benefits to “enable” corporations to compete with globalization and automation. Americans must literally pay for the right to work.

Tax Penalties on Tax Day

Today is Tax Day, April 15th. It’s not a day we tend to think about health insurance, but now we will. The Affordable Care Act (ACA or “Obamacare”) states that most Americans with income exceeding the federal poverty line are required by law to have health insurance as of 2014. If you did not sign up for health insurance last year, you may be forced to pay a fine on your 2014 taxes, either through an additional charge or a reduction in your tax return. The tax was not designed to punish people, but rather, to incentivize everyone to get health insurance. It could bring down insurance costs for everyone if there are more healthy people purchasing insurance. However, the government realizes that you may not be able to afford insurance, so you may be able to qualify for a subsidy to pay for health insurance or an exemption to paying the tax because of hardships. Here we break down how much you can expect to pay in tax penalties, available ACA deadline extensions, and the many exemptions you may qualify for.

How Much Are ACA Tax Penalties For Not Having Health Insurance?

How much you are fined will vary depending on a number of factors, including your income, number of dependents, and amount of time you were uninsured. 2014 is the first year tax penalties for uninsured individuals were mandated, therefore fines are starting out lower and will increase annually.

Penalties in place for the 2014 tax year include:

-1% of your total household income or $95 per uninsured adult-whichever is greater; fines may reach up to $285 per family, and $47.50 per uninsured child.

Penalties in place for the 2015 tax year are expected to increase to:

-2% of your total household income, or $325 per uninsured adult–whichever is greater; the fine per uninsured child may reach up to $162.50.

In 2016, this amount is expected to increase once again, and every year thereafter in accordance with the rate of inflation.

The Tax Policy Center has created a quick input survey you can fill out to find out around how much you will have to pay in fines: click here to fill out the quick questionnaire.

Do You Still Owe A Tax Penalty If You Had Health Insurance For Part Or Most Of 2014?

As mentioned earlier, the amount you are fined relates to how long you were uninsured throughout 2014. If you lacked health insurance coverage for two consecutive months or less, this is considered a “short gap” and you will not be fined.

If you were uninsured on and off throughout the year, or have more than one “short gap” on your record, the exemption only applies to the first gap. Every gap in coverage thereafter is eligible to be fined.

ACA Deadline Extension

If you missed the deadline to sign up for health insurance and owe a penalty on your 2014 taxes, the government has granted another ACA deadline extension. The extension period started on March 15 and extends through April 30. This “special enrollment period” is intended to help the estimated 6 million individuals who recently learned of the tax penalty after preparing their taxes.

Health Care Coverage Exemption

According to Healthcare.gov, there are a number of exemptions that may disqualify you from receiving a penalty even if you are uninsured. Each exemption listed below includes a link to the appropriate healthcare.gov page for more information.

Income-related Exemptions:

-If the cheapest coverage offered through the Marketplace or job-based plan exceeds 8% of your total household income.

-You don’t need to file a tax return because your total income is below the legal limit requiring you to file.

Health Coverage-related Exemptions:

-You were not uninsured for more than two consecutive months.

-Even if you had no insurance coverage in January, February, March and April, as long as you purchased coverage by the date May 1, 2014 you may be safe.

-You qualify for Medicaid but live/lived in a state that did not expand its Medicaid program.

-Your child was not insured earlier in the year, but you enrolled them in the Children’s Health Insurance Program during the 2014 Open Enrollment period

-You were covered for limited services through Medicare or TRICARE.

-You did not accept a job-based plan slated to start in 2013 and end in 2014.

-You had healthcare coverage through AmeriCorps, National Civilian Community Corps (NCCC), or VISTA

Group Membership Exemptions:

-You belong to a federally recognized tribe, or you are eligible for services provided by Indian Health Services.

-You belong to a federally approved health care sharing ministry.

-You belong to a federally recognized group with religious objections to insurance.

Other Exemptions:

-You were serving time in jail or prison.

-You were living abroad, or not “lawfully present”.

Hardship Exemptions:

-You were homeless in 2014.

-You were evicted or facing foreclosure within the last 6 months.

-Your utility company has sent you a shut-off notice.

-You are a recent victim of domestic violence.

-You recently lost a loved one due to death.

-You experienced a natural or human-cased disaster, including fire, flood, etc.

-You filed for bankruptcy within the last 6 months.

-You have substantial debt due to unaffordable medical expenses incurred within the last 24 months.

-You have been caring for an ill, disabled or aging family member.

-Someone else is required by law to pay for your child’s insurance coverage.

If you faced any of the above hardships, or a different hardship that may have prevented you from obtaining health insurance throughout 2014, click here to locate the appropriate hardship exemption forms you will need to fill out.

Make sure and sign up for health care coverage as soon as possible to prevent paying even higher tax penalties next year!

Bitcoin Regulation is Inevitable

The cryptocurrency, Bitcoin, is becoming more mainstream. Yesterday, online hotel booking company Expedia announced that it was teaming up with San Francisco-based start-up, Coinbase, to enable customers to book hotels using bitcoins. Digital currencies like bitcoin are quickly becoming an alternative to  traditional currencies because of the process for creating, exchanging, and storing bitcoins with the use of the bitcoin protocol and third-party miners. Bitcoin enthusiasts, economists and politicians have mused over whether bitcoin can actually be considered “money” or “currency”. These initial discussions are just thought exercises, but regulatory action is likely to follow.
 
All Eyes on Bitcoin
 
Federal Government agencies including the SEC and the IRS as well as financial regulatory organizations like FINRA have taken a look at bitcoin. The SEC has issued alerts regarding bitcoin-related Ponzi schemes. FINRA also released an Investor Alert that labels Bitcoin as a “More Than a Bit Risky”. The SEC and FINRA’s perspective on the digital currency is mostly cautious and negative. The IRS provided guidance on the tax implications of bitcoin – it would be treated like property. A complicating factor is that bitcoin transactions would be taxed based on the difference on the USD dollar value of each side of the transaction. So, if someone purchased 1 Bitcoin for $633.1 USD today and then aid 1 Bitcoin for, let’s say $1000 USD, for a product or service in the future they would owe the difference ($1000 – $633.1) in taxes.
 
There is a silver lining. Chicago Fed senior economist, Francois R. Velde, wrote a great primer on Bitcoin. Unlike some economists, Velde considers bitcoin to be a fiduciary currency. He goes into some detail about the genius of bitcoin, mining, and blockchains. However, Velde concludes that it is “unlikely that [bitcoin] will remain free of government intervention”.  Therein lies the rub. The regulators are coming.
 
Getting Ahead of the Regulatory Wave
 
What can be done to get ahead of the regulatory wave? This is a case where perception is reality. Bit coin stories about  failed exchanges, online drug-trafficking sites, and Ponzi schemes cast a very negative light on the digital currency. Moreover, in the rare event that we are headed into a bitcoin bubble, dumb money tends to follow smart money. People are predictably irrational. I have previously advocated that bitcoin exchanges come together to develop minimum standards for security, operations, hedging, and capital requirements. Developing a regulatory organization for exchanges (like FINRA) could reduce the potential for regulatory backlash from US states and the Federal Government. This self-regulating entity could also tackle other issues like consumer education, evaluating proposed legislation, and studying best-practices for hedging and tax-planning. These actions could improve the perception of the US bitcoin exchanges and prevent or lessen regulatory overreach. Government intervention in digital currencies is not possible, it’s inevitable.