Episode 23: Taxman
Nashville was the center of the political universe last night, hosting the final presidential debate. In terms of etiquette and decorum, the tempo was slower, but the song was the same. The two candidates interrupted each other only occasionally instead of continuously. The moderator did a better job than Chris Wallace, and between the name-calling, the candidates discussed a handful of substantive issues. Despite the improvement, the event still lacked credibility because both candidates told lies. Repeatedly. So many lies were voiced, it’s hard to remember what was truthful. I liked the mute button innovation for this debate, but we might want to require shock collars that activate when a candidate lies. Of course, mainstream media would lead you to believe that only Trump was guilty of lying, but that is also a lie. The vast majority of media is adamant about defeating Trump, so they shape the narrative; it’s hard for the average citizen to get objective information and make an informed decision. USA Today, the nation’s largest print distribution newspaper endorsed Biden as a candidate for the first time in its history. Historically, media outlets have restrained from supporting a candidate, given their journalistic charter. Only a single American newspaper, the Las Vegas Review-Journal, has endorsed Trump, with most publications supporting Biden. What has happened to journalism and unbiased reporting? The entire media industry is broken and turned into an infotainment apparatus that spoon-feeds soundbites to an unsuspecting audience to sell more commercials. Shame on the media.
The reality is most citizens make voting decisions around a handful of issues, and the economy generally tops the list. Accordingly, it would be constructive if the debate spent more time on the economy and probed what each candidate would do around job creation, taxes, and government programs. You have to dig to get this information, and it’s surprising what you find. For fiscal year 2019, the federal government budget for revenue was $3.5 trillion, and our budgeted expenditures $4.4 trillion. For you math scholars, we planned to spend more than we make. However, the story gets worse. The US government’s last fiscal year ended on September 30th, 2020, and the budget deficit a record $ 3.1 trillion! The previous record was $1.4 trillion back in 2009 during the Great Recession. Our total federal debt now stands at $27 trillion. That’s a lot of cheddar, and the interest on that debt consumes 8% of the federal government’s annual budget and is growing.
Let’s dive a level deeper to see what’s under the hood with those figures. On the revenue side, individual income taxes, which include taxes on wages, dividends, and interest earned, are the federal government’s single most significant revenue source, accounting for around 49% of all federal revenue. Payroll taxes generate around 34% of government revenue and fund our social insurance programs, namely Social Security and Medicare. Corporate taxes are taxes on companies’ profits, which generates about 9% of total federal revenue. The rest of the federal government’s income comes from a mix of sources, including excise taxes on alcohol and gasoline, unemployment-insurance taxes, customs duties, and estate taxes. The federal government expenditures break down as follows: Medicare / Medicaid (24%), Social Security (23%), Defense (15%), a basket of items such as transportation, education, veterans benefits, healthcare, and housing assistance (15%) a catch-all called Other (15%), and interest (8%). These buckets add up to $4.4 trillion, but only $1.3 trillion or 30% of the budget items are discretionary. The looming question is, how long can our government continue to spend more than it makes?
It’s popular, especially during election season, for politicians to use taxes as a rallying cry. Expressions such as “tax the rich” and “make corporations pay their fair share” and “I’ll raise taxes on everyone except you” are often cited to thunderous applause. Let’s look at the facts. The first observation is “rich people” pay most of the country’s income taxes. The individual income tax system is progressive—those with higher incomes pay at higher rates. According to a Pew Research analysis of 2018, taxpayers with revenues of $200,000 and above paid 59% of federal income taxes, despite accounting for only 4.5% of all tax returns filed. By contrast, taxpayers with incomes below $50,000 filed over 61% of all returns but paid just 5% of all federal income tax. Furthermore, +40 million tax returns filed by people in the lowest income tier owed no tax at all. Lastly, if you look at income tax trends over the last twenty years, wealthy individuals are increasingly paying more of our taxes. For people making $200,000 - $500,000, which is 3.6% of all returns filed, their total federal income tax contribution rose to 20.6% from 14.9% back in 2000. For individuals making $2 million or more, which is a mere 0.1% of all tax returns filed, their contribution to federal income tax coffers rose from 17.2% to 20.4%. Therefore, wealthy people pay both higher rates, more dollars, and the overwhelming percentage of income taxes in this country. I’m not asking you to walk up to a rich person and shake their hand and say “thank you for your service,” but it’s important to acknowledge who is currently paying the tab for our country’s spending. The “progressive” party would argue high-income earners should pay an even greater percentage of taxes, but that’s a different argument and worth exploring in a future episode.
So, where do the two candidates stand on tax policy? Biden is ahead in the polls, so it’s worth looking at his tax plan. In the last episode, I evaluated the Trump tax cuts of 2017 and showed that most Americans benefited (not just the rich). Biden said that he would repeal the Trump tax cuts, which would imply a tax increase for most people. Biden has since clarified that he would veto the cuts only for people making over $400,000, but that would represent a change from his original plan. The Biden tax plan would raise around $2.4 trillion over ten years if enacted. Biden’s spending plan for the same period would increase the debt by $5.6 trillion Again, more planned deficit.
The big takeaway from the Biden tax plan is that it is highly progressive and high earners in CA and NY could face federal and state tax rates that exceed 65%. Noteworthy elements of the Biden tax are as follows:
The top income tax rate would go back to 39.6% from 37%.
Payroll taxes such as Social Security are currently 12.4% and apply to the first $137,700 of wages or net self-employment income. Employees pay 6.2% via withholding from paychecks, and employers pay the remaining 6.2%. Self-employed individuals pay the full 12.4% via the SE tax. With the Biden plan, the SS and SE tax would restart for income above $400,000.
Net long-term capital gains and qualified dividends are currently 23.8% (20% top rate plus 3.8% for net investment income tax). With Biden’s plan, net long-term gains would increase to 43.4% (39.6% plus 3.8% for net investment income).
Lastly, Biden’s plan eliminates a step-up in tax basis for inherited assets. For example, if someone currently inherits a house from their parents, a new tax basis establishes the asset at the time of transition. The appreciation of such assets can often be hundreds of thousands of dollars of increased value over many years. Currently, heirs only pay capital gains on the post-death appreciation of an asset. Under the Biden plan, those inherited assets would get a $100,000 exclusion but otherwise not get a set-up tax basis and, when liquidated, potentially result in hefty tax liability for heirs.
Corporate income tax would increase from 21% to 28% and establish a new minimum floor for the corporate tax of 15% for any business making over $100 million annual income.
In other news, General Motors (NYSE: GM) announced a $2 billion investment to overhaul and expand its (former Saturn) factory in Spring Hill, Tennessee, to produce its new luxury electric vehicle. The renovations, which begin immediately, nearly equals what GM has invested in Middle Tennessee in the prior decade. The plant has 3,800 employees ranking it GM’s largest factory in North America. These significant investments trigger a ripple effect of other job creation, including suppliers, which is another boost to a red-hot Nashville market. Canadian electric vehicle manufacturer ElectraMeccania Vehicle Corp (NASDAQ: SOLO) selected Nashville as a finalist for their US plant. The facility will house between 200 and 500 new jobs and feature state-of-the-art engineering. The company’s flagship model is the Solo, a three-wheeled, single-seat electric vehicle with a range of 100 miles with a top speed of 80mph. Tesla is rolling out “Full Self-Driving” to a limited cohort of beta users. The software enhancement, priced at $10,000, will support advanced driver-assist on city streets, plus increased stop sign and traffic light perception capabilities. Tesla warns beta testers to proceed with caution: “It may do the wrong thing at the worst time, so you must always keep your hands on the wheel and pay extra attention to the road.” Officials from the National Highway Traffic Safety Administration say they’re keeping a watchful eye over the new release. I’d certainly hope so as this sounds like a disaster waiting to happen.
On the lighter side, the LA Dodgers advanced to the World Series against the Tampa Bay Rays, and the series is tied 1-1 with game three tonight. In the college ranks, Big 10 football starts its season this evening. And on to the bizarre, archaeologists discovered a giant, 2,0000-year-old image of a cat etched onto the hillside in Peru, reinforcing my view that cats are creepy. A NASA spacecraft briefly touched down on an asteroid to collect dust and pebbles from the surface for delivery to Earth in 2023. This well-preserved, ancient asteroid, known as Bennu, is currently more than 200 million miles (321 million kilometers) from Earth. Bennu offers scientists a window into the early solar system as it was first taking shape billions of years ago and access to the particles that could have helped seed life on Earth.
I. Below are the articles I found interesting the past week:
The anticipation of future positive events is important to your brain, health and well-being
America will sacrifice anything for the college experience
US’s China hawks drive hard-line policies
II. Stats that made me go WOW!
- The DOJ estimates that Apple collected up to $12 billion in payments from Google last fiscal year to be the default search engine for Apple products, which would constitute 26% of Apple’s services revenue.
III. Name that Tune!
As I write this email, I am listening to “Taxman" by the Beatles.
The song felt fitting, given the content of this episode. “Taxman” was featured as the opening song on the 1966 album Revolver. Written by guitarist George Harrison, with some assistance from John Lennon, the song protests the United Kingdom’s progressive tax system. At the time, the Beatles were paying over 90% of the earnings to the British Treasury. Harrison lamented that the band’s tax liability would lead to their bankruptcy and complained about tax dollars being used to fund military activities. The Beatles are the best-selling music act of all time, with estimated sales of 600 million units worldwide.
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