Taxes go up in California again

* Raises California’s sales tax to 7.5% from 7.25%, a 3.45% percentage increase over current law
* Imposes a 10.3% tax rate on taxable income over $250,000 but less than $300,000
* Imposes an 11.3% tax rate on taxable income over $300,000 but less than $500,000
* Imposes a 12.3% tax rate on taxable income over $500,000 up to $1,000,000
* Imposes a 13.3% tax rate on taxable income over $1,000,000

I don’t think people who live there realize just how much they pay for the privilege. When I moved down to Florida I was blown away by the difference in cost of living, and the costs just keep going up. Not my problem! 🙂

Trust Fund

“My solution has always been a means test. If you have $100k in taxable income you don’t get paid. Finished. I’m not sure that is legally possible. But to me it is the only option. The alternative will impoverish those that are/will be dependent on SS benefits. Raising taxes on America’s 90 million workers and their employers is just bad economics. It should not be considered.”

Bruce Kastings – S.S. trust fund year end results

The Dysfunctional State

ON MAY 19th Californians will go to the polls to vote on six ballot measures that are as important as they are confusing. If these measures fail, America’s biggest state will enter a full-blown financial crisis that will require excruciating cuts in public services. If the measures succeed, the crisis will be only a little less acute. Recent polls suggest that voters are planning to vote most of them down.

The occasion has thus become an ugly summary of all that is wrong with California’s governance, and that list is long. This special election, the sixth in 36 years, came about because the state’s elected politicians once again for the system virtually assures as much could not agree on a budget in time and had to cobble together a compromise in February to fill a $42 billion gap between revenue and spending. But that compromise required extending some temporary taxes, shifting spending around and borrowing against future lottery profits. These are among the steps that voters must now approve, thanks to California’s brand of direct democracy, which is unique in extent, complexity and misuse.

A good outcome is no longer possible.

Without bubbles the state of California is fiscally screwed. No doubt some form of drastic change will likely come out of this. I’m glad I won’t have to deal with it. What’s interesting (as the article points out) is that California is a mixture of a representitive and direct democracy, and that system has apparently completly failed to work. I’ve always kind of liked the idea of more direct control by the people over government, but clearly there are flaws, as the mess in California shows.

Economist Link

Doubling the national debt

In 2014, at which point the White House projects a deficit of $570 billion, it’s now expected that CBO will show a number in excess of $700 billion. Five years later, in 2019, Obama’s budget concedes that the deficit will have widened to $712 billion; Democrats expect CBO to put the number over $1 trillion.

The cumulative impact could be substantial. The White House has already conceded that the Obama budget will produce deficits of about $6.9 trillion over 10 years. If the CBO projections were to add in the range of $1.5 trillion more, as some Democrats expect, that would be more than a 20 percent increase and would surely affect debate in Congress.


Lets assume a few things – one, these numbers will be revised upward again as the downturn worsens, two, when it’s all said and done, the cost of Obama’s programs are probably underestimated, and three, there will be unanticipated additional costs during Obama’s tenure. (e.g. another Katrina, Afghanistan, major bank failures, etc..)

In the end, we will likely double our national debt in eight to ten years. (Assuming the world continue to lend to us, which isn’t assured.) Debt payments currently make up around ten percent of the total federal intake. Social Security, Medicare, and Medicaid costs are currently rising. Where does this put us in eight years, and why do Obama supporters think this is grand idea?

Tax Rates

Reagan’s greatest legacy was resetting the bar on taxation in this country, something we can all be thankful for.

On Thursday we find out what Mr. Obama has planned. If he sticks to his campaign promise on personal tax rates, his line should track George Bush’s up to about 175K a year, at which point it’ll jump the rail and track Clinton’s 93 or 99 numbers.

  • Ordinary Income: The top two income tax brackets would return to their 1990’s levels of 36% and 39.6%. All other tax brackets would remain as they are today. Obama would also restore the 1990’s levels for the personal exemption and itemized deduction phaseouts (known as PEP and Pease). Obama would work with the Treasury Department to adjust the thresholds of these rates slightly to ensure that no married couple making less than $250,000 (or single making less than $200,000) was affected by these changes.
  • Capital Gains: Families with incomes below $250,000 will continue to pay the capital gains rates that they pay today. For those in the top two income tax brackets – likewise adjusted to affect only families over $250,000 – Obama will create a new top capital gains rate of 20 percent. Obama’s 20% rate is equal is the lowest rate that existed in the 1990s and the rate that President Bush proposed in 2001. It is almost a third lower than the rate that President Reagan signed into law in 1986.
  • Dividends: The top dividends rate for people making over $250,000 would be set at 20 percent. Dividends will not return to being taxed at ordinary income tax rates. Obama’s 20 percent rate on dividends will be 39 percent lower than the rate President Bush proposed in 2001, and would be lower than all but 5 of the last 92 years we have been taxing dividends.
  • Estate Tax: The estate tax would be effectively repealed for 99.7 percent of estates. For the remaining 0.3% of estates over $7 million per couple, Obama will retain a rate of 45%. This policy would cut the number of estates covered by the tax by 84 percent relative to 2000.
  • Average Tax Rates Below the 1990s: Overall, the top 1 percent of households – people with an average income of $1.6 million per year – would see their average federal income and payroll tax rate increase from 21 percent today to 24 percent, less than the 25 percent these households would have paid under the tax laws of the late 1990s.


I’ll be looking forward to the announcement.

No Free Lunch

“California running out of money”

“Because California does have a perennial budget crisis, it’s very easy to fall into the ‘boy who cried wolf’ syndrome,” says Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California. “This time the sky is really falling.”

The state faces a $28 billion budget shortfall over the next two years. If nothing is done, nearly $5 billion in public-works projects could be halted in little more than a week for lack of bond sales – everything from bridge replacements to a new highway tunnel and billions of dollars’ worth of school construction, according to state Treasurer Bill Lockyer.

Already, the state failed to attract enough buyers three weeks ago to sell all of the bonds it had floated, he told state lawmakers Monday. “Expecting investors to purchase our bonds now, when we can’t agree on a budget that lenders can rely on, is like expecting someone to buy a stock when they know it’s losing value,” said Mr. Lockyer.

He and three other state finance officials testified Monday in a rare joint session of the legislature.

The picture worsens next spring if legislators don’t pass some plan to increase revenues or cut spending or both. California will run out of operating cash in March, state controller John Chiang told the lawmakers. The recession has severely squeezed state tax revenues.

Normally, the state would borrow to cover any shortfall. But internal revenue sources have already been depleted and outside lenders are less accommodating.

“It’s not because of [California’s] economy, because it’s deep and diverse,” says David Hitchcock, primary credit analyst for California with Standard & Poor’s. “It’s because, financially, they’ve had budgets that have not proved realistic. They’ve had large deficits and they’ve only been able to pay for their budgets through borrowing for the last couple years.”

California needs to learn there is no such thing as a free lunch, if you want all those government programs and spending, you have to pay for it. Raise taxes or cut spends, or both. But living in a dream world where you can have relatively low income and sales taxes with massive government spending doesn’t balance out.

Bringing the budget back in line will require drastic cuts, significant tax raises, or both. Those options will harm the economy in the short run and cost the state jobs – but so would any delay in taking action, said legislative analyst Mac Taylor.

If I were in Arnold’s shoes, I’d just let the dems jack personal income rates. If you really want to convert a bunch of moderate Democrats to Republicans, jack their taxes up. The tax increases would have to be very high –

In earlier drafts of the budget, majority Democrats presented plans that called for as much as $11 billion in added revenues. Tuesday’s proposals amount to $8.2 billion, plus another $1.5 billion from a proposed tax amnesty plan.

Democrats have proposed before — a 2005 move failed to receive a single GOP vote — the creation of 10 percent and 11 percent tax brackets for high earners. The highest tax bracket now is 9.3 percent.

The plan unveiled Tuesday would impose a 10 percent rate on the portion of couples’ incomes above $321,000 a year and an 11 percent rate on the portion of income above $642,000.

It would raise about $5.6 billion a year.

Big business would lose its net operating loss deduction for three years, bringing the state another $1.1 billion, according to the Senate plan. And the plan would restore the franchise tax rate for businesses from 8.4 percent to 9.3 percent, raising $470 million.

The state currently faces a shortfall of about 30 billion of a 103 billion budget which includes very large debt payments. The 5.6 billion estimate from July is now lower due to falling incomes. Why not jack the 9.3% top rate up to around 20%? That should net about 30 billion in new revenue for a little while, until it starts killing investment. Problem solved, until next time.

Hidden Gems In The Dodd (D) Foreclosure Bill

The proposal requires information reporting on payment card and third party network transactions. Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee.

Closing down the eBay / PayPal loop hole and hey, lets throw in a little credit card transaction monitoring too.

Do you spend more than $10,000.00 a year on your credit card? Well if this goes through, after 2010, the I.R.S. will be watching you.

Hat tip to Steve for the info –

Senate Housing Bill Requires eBay, Amazon, Google, and All Credit Card Companies to Report Transactions to the Government

Edit – I think it also does away with the home ownership capital gains exemption, although I can’t tell for sure.

Complete and Total Failure

Under either Senator Obama’s or Senator McCain’s plan, however, the debt would likely continue to rise as it has over the past eight years, even under the CBO’s relatively optimistic assumptions about spending. Senator Obama’s plan would add $3.3 trillion to the national debt (including additional interest costs) while Senator McCain’s plan would add $4.5 trillion. This does not include the cost of expanding health insurance coverage and assumes that Senator McCain’s proposals phase in and phase out on schedule. It also assumes that all of the candidates’ optimistic revenue offsets materialize. If any of these assumptions turned out to be unwarranted, the national debt would grow even more.

Read the whole thing from Brookings Institute. Have some Tums at the ready. No balanced budget for you!

Prepping For The Tax Man

I’ve always taken the position that doing your tax return really isn’t that hard and can be accomplished on your own. Today though I sat down with a tax professional to go over all the information I’m going to need to complete my 2007 return. When I was younger taxes were easy, the old 1040EZ got the job done. But for the last few years I’ve been going to a professional “just to be safe” and today’s meeting convinced me I’ll never go back to doing it on my own. We ended up working up a large laundry list of information I’ll need to collect before filing, including a big list of costs I can deduct related to my home office and equipment I currently use in getting my job done. All combined I should get a really excellent deduction – none of which I would have been able to figure out on my own. It’ll cost me to have this done professionally, but in the end I’m sure I’ll save far more. Lessons learned.

The Big Change

Interesting post by Paul Krugman on his new New York Times blog which sums up income inequality in the United States over the last century. On the subject of his ‘great divergence’, I’m surprised he doesn’t lay “blame” at the feet at which it belongs – Ronald Reagan and the Congress at that time, which in two tax cut packages successfully lowered the top marginal tax rate for the richest Americans from around 75% to about 45%. The top rate was, I believe around 90% back during FDR’s days and had dropped only slightly up until the 60’s.


About the only thing I’ll say about his much hoped for ‘big chance’ is, IMHO, I don’t think it’s likely. Considering how ugly the FDR legacy looks today, and how cynical we’ve become about government since Watergate, I don’t think this country is ready to go back to a 50’s style system. People simply don’t trust the government anymore, they perceive it as wasteful (which it is) poorly managed (which it is) and overreaching (which it is). I think this country is currently, and will be for some time, staunchly opposed to giving government more control.

There are concerns of course, something Libertarians and Conservatives have to watch for. Heavy swings in the inequality can swing political affiliations, but only if those swings drop a large percentage of the population into the poor house. Current polls show that while middle class America is unhappy with the current direction of the country, they are by in large, happy with their own direction and opportunities. That spells doom for people like Krugman, who seem convinced there’s mass revolt of the middle class right around the corner.