Double Journey

I have written in another blog all the reasons why I hate our taxation system.  Taxing income is perhaps the most sinister way a government can collect taxes.  It is easy to hide the taxes and it can be manipulated it in so many ways to confuse you.  I ran straight into one of those today.

The Marriage Penalty is one of the most obvious ways this is true.  It is just absolutely stupid that your taxes should change whether you get married or if you stay single.  Of course, this is going to be true in any progressive income tax.  There is just no way to make a system that is completely tax neutral.  I tried to figure out what the best course of action for me to take on my taxes now that I am a married man.  I am a pretty smart guy and I’m pretty knowledgeable of finances.  But it seriously hurt my head to try and figure out what was going to happen to my tax situation now that I’m a married.  At the end of it I still didn’t understand what the heck was going to happen and I’m pretty sure I’m going to owe the government more money than if we had not gotten married.  I wish we could just have a nice simple tax system which was anything but a progressive income tax with a myriad of deductions.  Add that to the impending tax increases we are all about to face (which I’ll discuss in my next post) and you can understand how frustrated I am becoming with the whole thing.

Is it any wonder why I, and a few other people I know, are seriously considering moving to a state without income tax.  It is probably the one thing I miss about living in Washington state.  Although when it was 80 and sunny here today and rainy and 50 there, I only miss it so much.

I have been writing often about California lately.  I have done this mostly because there have been many things on my mind, not the least of which has been if it is really worth it to live in California.  For the most part I think it is.  I love most of the things that California has to offer and I have many ties to the area.  My family is here, I went to high school here, and I have a lot of friends in the area.  But I have lived in three of the four corners of the United States and can honestly say that I think I can make it work anywhere I go (with the possible exception of Alaska).

So if I love it here so much why would I consider leaving?  Well, California has been in the news a lot lately, most of it not too good.  There have been several articles wondering if the allure of California is fading.   With the budget crisis the way it is there is little doubt in my mind that a tax hike is around the corner.  Considering how high the tax burden already is, I am in no mood to see even more of my paycheck go out the window.  Unemployment is high and the opportunities for me in the area are somewhat limited.  While I like my current job, I don’t know if I will be there five years from now so I am just planning ahead for what I will do down the road.

Of course one of my biggest problems with California will come to no surprise to my loyal readers.  The cost of housing.  It is still way to high.  Most of the homes in my area are still asking for $500,000.  They are nowhere near worth that.  But even if prices come down another 20%, the housing would still be overpriced.  On the eve of my marriage, I have to look at the situation and ask myself, “Is living in California worth reducing my standard of living?”

I know that I can make just as much salary wise in other parts of the country as I can here.  In fact, in many areas I might even have a distinct advantage given less competition for jobs.  So what is someone like me, a young successful mid-career professional supposed to do?  Do I continue to pay high taxes and live in a small rented apartment?  Or should I consider moving to a state like Texas which has a very low tax burden (no income tax at all) and very affordable housing?  I did a quick search in some of the bigger metropolitan areas like Houston and Austin and there are many houses that I could pay cash for.  For houses in the price range I want to spend, I could easily find a four or five bedroom house for what I could get a condo for here.

Yes, I know what the argument against is.  I would have to live in Texas.  But seriously, I’m sure it is not all that bad.  Most of the people I know from the area speak highly of it and would go back if the right opportunity came along.  I’m not saying I’m going to move there or anywhere in the next year, but it is something I would have to consider.  it is something I would have to consider even sooner if California did something stupid like raise taxes yet again.

California’s budget was finally passed last night.  The thing is nobody is happy about it, and that is probably a good thing.

Budgets are hard.  It is not something that most people understand.  I have to deal with this at work all the time.  I have a budget for the department.  I cannot simply spend more than my budget.  No matter how much work there may be I cannot just go hire a new person to do the work.  I have to to be very sure that the benefit of hiring someone, buying a new computer, or sending someone to training outweighs the problems that breaking the budget brings.  If it is not everyone ends up paying for it as the company will miss profit numbers and that results in budget cuts, i.e. layoffs.

This is a classic economics problem.  Economics deals with how to allocate limited resources against unlimited wants.  Nobody in California thinks they should give up their budget.  But California spends money on three major things.  Education,  health care, and law enforcement.  Of course nobody wants to take money away from teachers, nobody wants to turn sick people away, and nobody wants to free prisoners.  So given that, where do you expect California to cut?  When you have a budget gap like California, you cannot make a dent in it if you do not cut from the biggest ticket items.  And this is what California has done.  What else could they do?

As much as I love living here, I have to admit that things are not so great for some.  Unemployment is over 10% in the state.  Housing is still way too expensive.   Taxes are going to have to rise more than they already have (Sales tax is 9.75% in many areas).  So many great reasons to be here.  But for some, especially those in my age group, the negatives are starting to outweigh the positives.

Many states are finding that they have a revenue shortfall. Like any government, many are jumping to the simple answer. Get tax revenue anywhere you can find! For many states, they have looked at the taxes that they lose from online sales to try and make up the difference. A few weeks ago, New York issued a law that stated that despite the fact Amazon did not have any physical presence in the state, Amazon was obligated to charge New York residents taxes because of Amazon’s affiliate relationship.  I am an Amazon affiliate.  I sometimes link to Amazon when I’m I want to talk about books I like or products I just bought.  New York reasoned that I as an affiliate represent a physical presence for Amazon.  I couldn’t disagree with this more.

In New York, Amazon succumbed.  They now charge taxes to NY state residents even though Amazon has no physical location in the state.  When I originally read this, I was rather disappointed as I was hoping Amazon would not back down from a fight.  (In reality they haven’t.  They are appealing the decision but complying for now).  But Amazon has now drawn a line in the sand.  North Carolina was about to pass similar legislation and rather than just start collecting taxes, Amazon decided to cut ties with all of its North Carolina associates.  They are planning to do the same thing in Hawaii.

This is a perfect example of government doing something extremely dumb that helps absolutely nobody.  The state will collect no additional revenue from taxes.  You could actually argue that they will lose some revenue since they will collect less income taxes from Amazon affiliates. The state might be able to collect some revenue from smaller retailers, but this will be offset by the damage they do to consumers who now have less money to spend at a time where they have less money in the pocket.

I really hope Amazon continues to take a firm stand.  I hate the fact that government often feels like it can dictate how private companies must operate.  While I think this situation is in the slightly gray area, I think the principal remains the same.  Private companies should not take “government mandates” lying down.  I often felt this way with Microsoft and the EU.  Even though I know it would never happen, I would love to see what would happen if Microsoft, rather than comply with all the EU monopoly rulings, just said, “Fine, we will stop selling Windows and Office in Europe”.  I’m not sure who would be hurt more, but it would be something I would love watch unfold.

Yesterday, my fellow Californians defeated a series of ballot measures aimed at “fixing” the budget crisis that California now faces.  Sadly, this is the second budget crisis California has faced in the last several months.  Just a few months ago, our government proclaimed we had a $40 billion budget deficit and enacted a bunch of new measures to close the gap.  This included a 1% increase in the sales tax.  Something I wasn’t too happy with.

But now California supposedly has another crisis on its hands and the only solution this time is going to be to make spending cuts.  What a novel idea.  Gee, we don’t take in as much money as we used to, what should we do?  Seems pretty logical to me but I guess logic is not one of our goverment’s defining characteristics.

I’m not saying budget cuts are easy.  I’m not saying that I want to see large class sizes and less police on the street.  But at the end of the day, you have to face reality.  I’m sure it was pretty painful for your average Joe to have to give their dream home they “worked” so hard for (notice the quotes since I don’t think many American’s worked all that hard for their house) but when the pink slip came and the money was no longer coming in, Joe had to give up the house.  Joe probably had to give up many other things to and I’m sure it hurt.

I’ve never found living within my means to be a hard thing, but that’s probably because I never lived above my means.  I only wish our federal government had to be more like our state government.  I only wish they had to find a way to trim the fat rather than just print money.  I know some people may think that printing money sounds like a nice painless solution but believe me its not.  It just delays the problem until later.  It not only delays it, it actually grows it.   Money only has value if there is real value behind it.  Unfortunately for all of us savers, our dollars are starting to lose their vlaue.

Is it me or is there a little bit of hypocrisy with Tim Geitner announcing Obama’s tax plan to cut down on tax evasion by wealthy individuals and corporations?  I understand he is the treasury secretary and might be the proper person from a protocol perspective to announce this, but still.  On this one, you might have wanted to send Tim Geitner on some important mission  somewhere else and have someone else in governmnet introduce Obama.

Tonight, at midnight, California will hike its tax rate 1%.  I have already written about how California is too expensive for most and this is only going to exacerbate the situation.

This now puts tax in the county of Los Angeles at 9.25%.  In many places in California, you are now flirting with 10%.  This is on top of one of the worst recessions we have seen in our lifetimes.  This will no doubt have an effect on consumer spending.  While it may seem small to some keep in mind you just eliminated 1% of spending power for all of California.  That is going to have a multiplier effect and ripple through all parts of the country.  It is not like people have money saved and can dip into their savings or savings rate and just absorb the 1% hike.

Further, this is getting into the territory where people are going to start to simply avoid the tax.  I expect more Californians to start buying online at places like Amazon where they can avoid paying California sales tax.  I have no plans to move out of the sunshine anytime soon, but they are making it very hard for me to justify living in California.  All I hear on the radio is how L.A. County is about to layoff thousands of teachers.  At the same time we have one of the worse education systems in the country.  But we are about to dramatically raise taxes.  I wrote it before, but I really want to know, where the heck is California spending all of its money?

Today, Congress passed a law basically taxing back the bonuses that AIG gave to people even though they received taxpayer bailout money.   While I understand that Americans want to see some justice, and believe me when I say I agree that these bonuses are completely inappropriate, I am not sure that this was the best way to go about this.

When I first heard about these bonus payments, I was as outraged as any other American.  I could not understand how any company would agree to pay millions in bonus money to peole who basically ran the company into the ground.  How is that fair?  At first, I thought they needed to block the payments.  But when it came out that they needed to pay it due to contractual law (I still question how this got into a contract) I relented since I do believe in the sanctity of contracts.

I then thought about this tax solution, and I liked it at first.  Strange I know considering how much I hate the tax code but I really did want to see some fairness.  But after I thought about it, I just do not like it.  The precedence it sets is completely wrong.  I do not like punitive tax laws.  While I do believe it is justified here, I believe it can be used as one of those things that is extended to other, less warranted, situations.

So after thinking about it a little bit, I think the best way would be to just let it “slip” what the names are of the people who accepted the bonus.  Give all of them a chance to pay it back (and some already have) and those that do not, simply reveal their name.  Given the outrage that exists in America, I think the public could put a lot of pressure on these individuals to do the right thing.  The stigma that would follow these people would be enormous.  Any company that hired them would get tremendous negative press.  Basically you shame these people into doing what they ought to do.  It gets done what you want, and it does not do something that in my mind is just dangerous to do, fix problems through the tax code.

Has the world gone mad?  Today, several Democratic leaders seem ready to oppose the President on his proposed tax hikes on the wealthy.  What the heck is the world coming to.

Most people who read this blog can probably guess I’m not in favor of raising taxes on the wealthy to support more government programs.  I would prefer we get back to a place where we have smaller government and less taxes for EVERYONE.  But yet in one of these ironic twists, this part of Obama’s plans probably bothers me the least.  Now how on earth can someone with my views write this?

Well if you know me, you know I HATE the tax system.  I seriously think it may be the evilest tax system in the world.   I prefer any plan which makes the tax code simpler and more fair.  While I do not think this makes the tax code simpler, it makes it more complex, it does make it more fair. But it is not more fair in the way most people think of it.  I honestly do not care to tax the rich more than the poor.  What I do not like is when there are deductions in the tax code.  The more deductions you have in the tax code, the more loopholes you have.  The more deductions you have, the more you distort economic behavior.

By essentially giving rich people less deductions, you are distorting their behavior less.  If housing prices and charitable giving drop because rich people can no longer deduct these things I have absolutely no problem with that.  If people need a deduction to be charitable then we have some other problems.    If housing is only high because government subsidizes it at the expense of non-landowners and it falls, oh well.   What I would actually prefer is to get rid of these deductions for EVERYONE.  While there are other tax systems I prefer over the flat tax, I would at least concede that a flat tax would be better than the current system we have today which just does not make any sense.

Last week Barack Obama announced pay caps to executive compensation for any firm receiving money from the TARP.  This was in response to public outrage over executives and high-level managers receiving billions of dollars in bonuses last year despite the fact that their firms were losing billions of dollars.

However, this plan is, like almost all government plans, going to be completely ineffective.   The very minute that it was announced, I assure you there were people at every company that might be affected looking of loopholes.  The plan calls for the top five executives at any company needing “exceptional” assistance to be limited to $500,000 in pay.  There is no limit to the amount of stock compensation an executive can get.  However, the stock cannot vest until the money from the TARP is paid back.  Do you see all the problems with the plan?  Let me just point a few of them out.

It only applies to those needing “exceptional” assistance - Further, it is not retroactive, so it only applies to companies needing new aid.  This can only be a handful of companies.  I would be surprised if this applies to more than a dozen or so.

It only applies to the top 5 executives -This provision is bound to get manipulated in many many ways.  People will take “demotions” so as not to be in the top five.  Since there is no rules about paying external agencies, you could just spin off a separate company and use them as “consultants”.  This is much like what happened when there was an outrage over high salaries to those who ran Harvard’s endowment.  They simply outsourced the work to the same people who used to run it inhouse. What’s worse, this might have some really awful unintended consequences.  You want top talent fixing the toughest problems at the highest levels of an organization.  If I am top talent and my firm wanted to give me a promotion that put me in the top five, you could see how someone would turn down the job.

Stock grants are unlimited - Remember the backdating scandals just a few years ago?  Want to know what caused that?  It was caused by the $1 million cap that was put in place in the mid 90’s.  What on earth makes you think something else like that will not happen again?  What is worse, there are some serious tax consequences to the company to pay out this way.  This ends up being really bad for shareholders which are some of the very people the government should be looking to protect.

Grants vest when the government is paid back - This one is a doozy and seemingly innocuous.  But boy can it have some bad side-effects.  Think about this one carefully.  If I am an executive, and I do not get paid until I pay back my loan, what am I going to do?  I am going to pay back that loan as fast as I can.  Is that a good thing?  Probably not!  This is how we got into the mess in the first place.  Executives traded off short term profits for long term financial stability.  This does not align the executives with the interest of the public or the shareholders of the company.

Income, how do you define it? - This one will fail for some reason I cannot even conceive of.  Why?  Because someone is going to come up with a very creative way to pay without paying.  That is because income is notoriously difficult to define and can come in so many creative ways.  This is why I hate the income tax and believe it should be abolished.  There are just way too many ways around it.

For all these reasons, the Obama Executive Pay plan is nothing more than some political theater.  It sounds good, but it just really does not do very much.