Monthly Archives: July 2011

We have had some great remarks from our recent blog on taxes.  Several asked how a family making $50,000 could pay no federal income tax at all.  I found a website that offered a tax calculator and entered this sample scenario: family of four, $50,000 annual income, filing jointly, both children under the age of 17.  When I added $4,000  in IRA contributions, I came up with $90 in federal income tax – and that’s with no mortgage interest deductions.    I’d like to yield to some experts out there for observations.

Comments were split between different ideas: sales taxes and flat taxes both received support, as did a continued progressive tax.  I’m not against a continued progressive tax, but it seems to me that ten percent of the population paying 73% of the taxes is over weighted, especially when nearly half of those benefiting don’t pay anything at all.  What do you think?  – Stacey Wall

As the deadline for a debt ceiling deal looms before us and Congress debates how we are going to pay for all of the federal spending, I thought I would share a few facts with you on the current tax structure, courtesy of Yahoo finance:

• Nearly half of all U.S. households pay no federal income taxes at all.  A family of four making as much as $50,000 can pay $0 in taxes.
• The top 10 percent of households pay approximately 73% of the income taxes collected by the federal government.
• The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes.  For those people, the government sends them a payment.
• The number of households that don’t pay federal income taxes increased substantially beginning in 2008 with worsening economic conditions.

The fairest solution?  In my opinion, replacing the federal income tax with a national sales tax would be the most equitable.  Taxes would be based on spending, not income.  Those that make more would be taxed more and all households would be incented to save.  Not likely to ever happen though – way too much politics involved.

I’ve been asked when does too much federal debt really become too much?  The bond market will decide when our debt burden has become too big to handle, and it will come in the form of higher interest rates.  Just ask Greece. 

For now, the debate rages on.  - Stacey Wall

In a recent opinion letter in the local paper, a reader chastised President Obama for holding the threat of delayed Social Security checks over Congress as the debt ceiling debate rages on.  In the letter, the reader stated that the Social Security Trust Fund has “$2.5 trillion in it”.  The statement prompted me to research the topic a little more.

The “Social Security Trust Fund” is a little bit of a misnomer.  The fund exists as a means for the federal government to account for monies paid into and out of the Social Security system.  Monies come into the fund in the form of contributions from workers and employers.  They go out to cover payments for retirees,survivors, disabled and for administrative expenses.  But the trust fund has no money.  Since 1981, Uncle Sam has taken in more in Social Security taxes than paid out.  But instead of saving the additional receipts for a rainy day, Sam just put the excess in the general budget and spent it.  In return, the government issued an IOU to itself saying, “I’ll pay myself back whenever I need it.”  The IOU comes in the form of securities issued by the government that can be redeemed for payments.  The problem is that the securities cannot be sold on the open market.  Instead, they can only be redeemed by the government to the government – in effect, an IOU from one branch to another.

Confusing enough?  Here’s an analogy that hopefully simplifies things: Let’s say I decide to save $10,000 each year for my retirement.  Things go just as planned during year one and in December I’ve accumulated $10,000 towards my goal.  I’m doing great until I decide to take a trip to reward myself for my disciplined savings.  I spend my $10,000 in savings on a trip, then deal with the guilt by writing myself an IOU.  When I retire, instead of an investment nest egg all I have is a stack of paper saying I owe myself a lot of money.  At that point I’m just hoping my kids are doing well and love me.

To say their is no Social Security Trust Fund would be inaccurate.  There’s just no money there because the government spent the excess on other programs.  – Stacey Wall

There is plenty of discussion these days about the U.S. defaulting on its debt.  Most don’t realize that it’s actually occurred before – at least technically.

In 1979, Congress also debated raising the debt ceiling until the last minute.  Due to the delay and an unprecedented word processing equipment failure, the U.S. experienced a technical default when it failed to make a $120 million interest payment on April 26, 1979.  The Treasury was also late in redeeming Treasury bills due on May 3 and May 10 of the same year.

Treasury officials characterized the late payments as a “delay”, however, technically the U.S. was in default.  The missed payments, of course, were eventually made – including additional interest for the delay.  However, the real cost of the delay was an immediate increase in interest rates.

A study conducted after the incident concluded that while only a fraction of U.S. debt was affected, the resulting increase in interest rates tagged the government with approximately $6 billion a year in additional borrowing costs.  Want to hear the scary part?  In 1979, the total U.S. debt was only (only?) about $800 billion.  At $14.5 trillion, it’s now roughly 18 times that.

Let’s hope we get a timely resolution of the debt ceiling issue before a default – technical or otherwise – costs us trillions. – Stacey Wall