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!

Are You Ready for Tax Day?

Tax season is drawing to a close, and while many people have already filed and received their returns, IRS statistics show that roughly 20-25% of Americans wait to do their taxes in the last two weeks before the deadline. If you’re one of the folks who have yet to file their taxes, we’ve got some useful last minute tips that will help you get it done the right way.
 
Organize: When it comes to taxes, the three key words are: organize, organize, organize. Even if it’s with a shoebox, having all your tax documentation in once place will save you a ton of time and hassle. A great way to go about this is to pull out the previous year’s tax return and go through it line by line. Chances are that your current year should be pretty similar unless you’ve had some major life changes, in which case it will serve as a timely reminder of the new things you need to account for on this year’s return.
 
Pay Attention to Detail: This is critical, and every year there are countless returns that are delayed or otherwise affected by common errors such as writing down your Social Security incorrectly or sending forms to the wrong address. Make sure you look up where your return is supposed to be filed to (found here). Be sure to double and even triple check your forms and make sure you’ve signed and dated everything properly. You’d be surprised how many tax returns are held up every year by simply a missing signature!
 
File Electronically: Filing electronically actually has two benefits. First, as long as you’ve typed the numbers in correctly, all the calculations are done automatically and the software will prompt you for missing information or other common mistakes to ensure that your return is error-free. Secondly, if you’ve procrastinated, filing online can help you make sure that your return is filed instantly to help you beat the deadline.
 
Extend the Deadline: If you still can’t manage to make the April 15th deadline, the best course of action is file for an extension using IRS Form 4868. This extends the deadline until October 15th, though it doesn’t extend the time to pay any estimated taxes that may be due. If you don’t have all the money at the time, Form 4868 does allow several payment options. Another common misconception associated with filing for extension is that it makes you a more likely candidate for an audit, but the truth is that you’re always better off with a complete and accurate return filed with an extension than you would be by filing a sloppy return on April 15th.

Corporate Privilege

Imagine that a terrorist organization aimed to poison the water supply with dangerous chemicals, blow up a fertilizer plant in a residential area, or dump nearly 5 million barrels of oil into the Gulf of Mexico. The US Government would waste no time smoking said terrorists out of their holes. However, this is not the case for corporations. The events I mentioned were perpetrated by corporations – corporations that have invested in lobbying and political action committees to reduce or eliminate regulations aimed at keeping the public safe. The fertilizer plant that exploded next to schools and homes occurred in West, Texas. We are all perhaps familiar with the BP oil spill and the recent chemical spill in West Virginia that rendered municipal water unusable.

The major tragedy in West Virginia is two-fold. On one hand, regulations on chemical storage for coal suppliers was eliminated. Thus, companies like Freedom Industries had not had a site visit from State or Federal inspectors since 1991 despite being located right along the Elk River, a major water supply. On the other hand, there was very limited knowledge of  the chemical that was spilled. The tragedy goes a bit further when politicians on both the right and the left loudly boasted right after the incident that regulations on the books are sufficient, e.g., Speaker John Boehner and Senator Joe Manchin. West Virginia is a state that is hard-pressed for job growth so this is used as an excuse for lax regulations on coal and coal-related industries. Yet, it seems like profit trumps the safety of citizens.

I founded Spendology because I wanted to bring decision tools used by executives to individuals. I literally wanted to give Decision Power to the People. I am an African-American male. I am very familiar with the concept of white privilege. Dave Chappelle  jokingly highlighted this concpt with one of his stand-up routines. Chappelle was with a white friend who was driving under the influence who got stopped by police. His friend simply told the police officer that “he didn’t know that he couldn’t do that” and was allowed to go about his way. Mr. Chappelle hilariously expressed his shock. Stop and Frisk data shows that blacks and latinos are stopped more often and arrested at higher rates than whites. Yet, white privilege emboldened former Mayor Bloomberg to say that black males are not stopped enough.

It appears that the concept of being privileged has somehow extended to corporations. Actions that would be considered terrorism are reduced to the “cost of business”. Companies like Apple proudly proclaim that they must offshore and minimize taxes in the interest of shareholders. Companies like Walmart and McDonald’s depend on US Government subsidies like welfare, food stamps, and Medicare to subsidize their poverty-level wages. Nonetheless, politicians and some people hardly bat an eye because this is somehow what companies are supposed to do. The extent of the privilege appears extreme when we look at what executives and lobbying efforts are pushing for: weakening the social safety net, eliminating regulations, and lowering taxes. The tax issue is huge. We usually hear that taxes are too damn high. In fact, although the US corporate tax rate is 40%, the Government Accountability Office found that the effective corporate tax rate was 13% in 2010.

Moreover, companies have been shifting the burden of training and taxation to the State and its citizens, respectively. At one point in American history, corporations and individuals paid taxes at roughly a 1:1 ratio. At this point, individuals contribute 6-fold more to taxes than corporations. Corporate executives and Governors are pushing for a Common Core curriculum so that students are ready for work on day one – perhaps because internships, apprenticeships, and on-the-job training is on the decline.

Tax Disparity Chart - Spendology

Moreover, members of the elite 1% are striking back against calls for a living wage or income equality. Multi-millionaire venture capitalist, Tom Perkins, even joked that you should only be allowed to vote if you paid taxes and that the power of your vote should be in proportion to the taxes paid. There was a time in America when you had to be a white male landowner to vote. Comments like that from Mr. Perkins are a reminder that privilege is not about seeing reality. The 1% don’t just want to be wealthy and successful. They also want reverence and respect despite lacking respect for those who work full-time for little pay and no benefits. However, my biggest problem with corporate privilege is that it is robbing workers of dignity and dollars as well as the right to life, liberty and the pursuit of happiness.

The 1% Strikes Back

Tom Perkins and Bud Konheim are 2 of the many rich people who have recently lashed out against the 99%, claiming that the rich are demonized, and unfairly taxed. Are these rich-kid complaints warranted, or are the mega-rich completely out of touch with reality?

Living in the US, one must clock-in about $500,000 in annual income to be considered a part of the 1%. After taxes, and depending on where one lives, this might not leave them feeling as rich as they sound. Individuals in the 0.1% bracket are far wealthier, making millions and billions of dollars each year. The class diversity among the 1% is steep, but it’s nothing compared to the spread between the super rich and the average Joe. Separated by city limits, school systems, and gated communities – most of the 1% has created a reality all their own, in which some believe they play the victim.

I doubt Don Thompson, the CEO of McDonalds, lives near any of his employees, the ones that make his business go-round each day flipping burgers, serving customers, and cleaning bathrooms. While Don Thompson earns around $9,200 dollars an hour, most of his employees make minimum wage, not even a living wage. Still some wealthy citizens feel entitled to large paychecks, even if that means those further down the assembly line make next to nothing.

Harvard Professor, Greg Mankiw routinely speaks out for high-paid executives, stating that they deserve the exuberant money they make. Tom Perkins, the founder of successful venture capital fund Kleiner Perkins, got a bit too cozy during a recent interview with Fortune magazine saying the rich were in danger of Kristallnacht, born from the same scapegoat mentality thrust upon the Jews during Hitler’s reign. The fact Mr. Perkins was booked for an interview and not hiding beneath a less wealthy neighbor’s floorboards indicates the exaggerated nature of his words. During this same interview, Mr. Perkins also divulged his desire for more voting power to compensate for paying more taxes. Needless to say, this earned him serious public backlash, at which point he told the press that his comments were made as a risque joke. Yet, as they say, there is some truth behind every joke, and perhaps the rich are feeling unfairly attacked.

The 1% are given a lot of tax breaks, but they are also undeniably forced to pay a lot of taxes. Is it fair that they have to give away nearly half of their hard-earned money? Any mega corporation clocking in billions is doing so only with the help of the larger population, and so giving back is the right thing to do. But how much is too much? Many of the 1% believes the astronomical funding they provide the government should earn them favors, some argue it already does. Tom Perkins will take his reward in more voting pull, while Bud Konheim, the CEO of designer clothing brand Nicole Miller, thinks the 99% should stop complaining. Konheim can’t get past the fact America houses the richest ‘poor’ people in the world, and those that make $35,000 a year are a part of the global 1% richest people. While his facts are accurate they are also irrelevant, especially to any single parent working 2 jobs and barely making ends meet. While the average salary in India is far lower than it is in America, the cost of living is unbelievably lower too. It seems exuberant wealth and prestige can cloud an individual’s reality in more ways than one; the Institute for Policy Studies released a dark secret about the top paid CEOs over the last 20 years: 38% of them conducted white-collar criminal activity on the job.

Despite Tom Perkins’ complaints, or the fact rich CEOs are actually bad people 38% of the time, the rich are far from demonized by public society. Shows like Rich Kids of Beverly Hills wouldn’t exist if everyone truly hated the 1%. We can’t lump the entire 1% into one group of identical people either – some high paid CEOs devote more power to the greater good of society than others. The worst and most greedy CEO is one that does not pay their employees enough money to live comfortably and save. CEO’s that earn millions, but have employees making $7.50 an hour are stealing money right out of needy’s hands just to buy another vacation home or yacht. In order for everyone to thrive, those with the bulk of the resources have to relinquish some of their money and power, otherwise CEOs will continue flying jets while their employees struggle to pay basic bills.

A quote from Oliver Stone’s film, Wall Street, comes to mind: “How much is enough? How many yachts can you water ski behind?” . The so-called class war is not about hating the 1% it is about valuing the hard work of all people. If you work full-time you should not be below the poverty line. Most importantly, paying employees a living wage is about the value of the worker and not just the value of work.

Beyond the Cliff and Into the Abyss

Man looks in the abyss and sees there’s nothing staring back at him. At that moment, man finds his character. And that is what keeps him out of the abyss.

Oliver Stone’s Wall Street

The deadline to reach a deal to resolve the fiscal cliff is quickly approaching but there is currently no agreement in Washington on how to avoid it. Going over the cliff and doing nothing will actually reduce the deficit but at the cost of a recession and a further increase in unemployment according to the CBO. However, the real problem lies beyond the fiscal cliff.

Treasury Secretary Geithner wrote Senate Majority Leader Harry Reid a letter stating that on December 31st the US will go over the debt limit, the legal amount the US can borrow to pay for expenses approved by Congress. Secretary Geithner indicated that he can delay default by 2-3 months by using extraordinary measures.  The US is one of the very few countries that approves spending twice. The actions from Tea Party Republicans to take hostages and force deep spending cuts lead to a credit downgrade and a stock market plunge last year (S&P down 6.66% on 8/8/2011). Fitch, another credit rating agency is threatened to downgrade US debt if the shenanigans continue.

The debt ceiling is a greater concern than the fiscal cliff. Republicans control the House,  Democrats control the Senate, and President Obama decisively won back the White House. Republicans run 1/2 of 1/3 of the US Government; yet, they hope to use the debt ceiling to force even deep spending cuts to the Social Safety Net (Medicare, Medicaid, Social Security) to pay for spending that this Congress has already approved. We are truly staring into the Abyss. I certainly hope we find character before we fall in.

Taxes and Growth

Leveraging Empirical Data

A finance professor once told me that in physics you have 3 equations that describe 97% of events while in finance you have 97 equations that describe 3% of events. This is yet another reason that economics is considered that dismal science. As we head full speed towards the fiscal cliff we should be mindful that we do have existing data that can be analyzed to inform policy decisions. What should be done about tax policy? What is the relationship between marginal tax rates and economic growth?

Questioning the Dismal Science

Should we let the Bush tax cuts expire for everyone? A recent study by the Congressional Research Services group, a non-partisan research arm of Congress, did a study that indicated that lowering taxes at the top rate did not encourage growth. The study was withdrawn because it was considered too partisan. Economics is considered the dismal science because its laws and theories cannot be proven using repeatable experiments in the same manner as the laws of physics. However, we do have empirical data (observations) that can be analyzed to reach a logical conclusion.

Correlation is not Causality

We want to know what impact tax rates have on economic growth. We can estimate the correlation between the tax rate and economic growth (the change in the Gross Domestic Product). A positive percent change in GDP indicates that the economy is expanding.

Correlation Matrix

This table lists correlations between macroeconomic figures.

The data were collected from the IRS, BEA, and BLS websites. Links to the raw data are available below. The correlation between the top tax rate and GDP is -.7317 while the top tax rate and economic growth (change in GDP) have a correlation of + 0.3493. This data indicates that there is a moderate relationship between higher top tax rates and higher economic growth. There is also a very strong relationship between higher top tax rates and lower GDP. A possible explanation would be that higher tax rates discourage short-term consumption and encourage tax avoidance. Correlation certainly is not causality so we cannot  conclude that higher tax rates encourage economic growth. However, In a recent post I discussed some macro economic growth models that should be referenced at this point.

Macroeconomic GDP Model

Y = C + I + G + NX

Y=Gross Domestic Product (GDP)
C= Consumer Spending
I = Investment/Savings
G = Government Spending
NX = Net Exports

So, based on the analysis, Government Spending is reduced but businesses and wealthy individuals may be shifting from consumption that gets taxed at a higher rate to saving & investment. Savings in banks increases the lending capabilities of banks. Investment in real estate, business, etc. goes back into the economy. Hence, it may seem logical; albeit, counterintuitive that higher tax rates may decrease GDP in the short-term while encourage economic growth in the long run by spurring investment and saving rather than short-term consumption.

Marginal Propensity to Consume

The question at the heart of the fiscal cliff debate is: “Who should bear the burden of deficit reduction?”. This is obviously a touchy subject that can lead to claims of class warfare on both sides. The reality is that changes to the social safety net, defense spending, or tax policy will impact people of various socioeconomic levels differently. Take someone living paycheck to paycheck who is behind on a few bills. If they received a surprise check in the mail, the money would immediately be spent and go back into the economy. However, a wealthy individual may not be as compelled to immediately spend surplus income. This concept is called the marginal propensity to consume (MPC). Wealthy individuals have a lower MPC than the poor individuals because most of their basic (and advanced) needs have already been met. We can allow working and middle class individuals to bear the burden of deficit reduction; however, this may have a more negative effect on long-term economic growth.

The Eye of the Storm

My thoughts and prayers go out to those who have been impacted by Hurricane Sandy. Please stay safe folks! In the wake of the super storm, another storm threatens the entire US: The Fiscal Cliff. The Fiscal Cliff includes the end of payroll tax cuts, extended jobless benefits, the Bush tax cuts, and the implementation of Sequestration. Sequestration was the deal made to end the Debt Ceiling Debacle which would cut $500 Billion from Defense and  $500 Billion from domestic spending over a 10 year period. Republicans suggested Sequestration as a means to force negotiation in a “Super Committee”; but, it didn’t work.

Citigroup predicts that the stock market will contract by 20% as a result of failing to reach a deal on the Fiscal Cliff. How will this affect US citizens? US workers will see smaller paychecks from increased payroll taxes and taxes being reset to the Clinton era. Moreover, retirement accounts may see a temporary dip ( I think 20% is excessive). I don’t expect much to happen in the lame duck session; however, whoever wins the US election will be under intense pressure to solve the Fiscal Cliff problem.