Saturday, December 29, 2012

Don't laugh--I have a Vegan Restaurant recommendation for you. Those of you who know me know how ridiculous THAT is. However, I believe this very small chain of restaurants will be the next "big thing" in casual dining. Just wish I had the money to invest!!

I am by NO MEANS a foodie, food critic or connoisseur of fine food.  In general, I dislike most vegetables and have an elevated disdain for green vegetables.  I am a meat and potatoes kinda guy.  That last descriptor is not a generalization. It is pretty much a truism that plays out on my plate at just about every meal.  Bad on me, so says my cholesterol level and blood pressure.

My daughter is a vegetarian/vegan.  Has been for several years. Don't understand it, but I respect it.  I just tell her to leave me out of it. Ha! Did not work so well.  Went to a vegan restaurant in Dallas, Texas with her on her birthday once.  Tasteless food prepared and served by, well, equally distasteful people.  Hated every minute of it and stopped for fast food on the way home.  True story.

We moved to Chicago a year ago.  For her birthday, she wanted to go to a dinner and a show. She found a vegan restaurant in the Wicker Park area of Chicago.  I was fooled into trying the "life-style" again. We went to a restaurant called "Native Foods". Attitude changer!!

I have read stories about investors who accidentally came across "the next great thing" in terms of a budding business, got in on the ground floor, and cashed out rich.  I always wondered what it would be like to be "that guy" and be presented with "that idea". I gotta say, this place is THAT THING!  The only thing missing for me is the financial capital to invest, because I believe this will be a hit and it has tremendous growth potential.

I don't know how they do it with the "fake meats", BUT if they can fool and satisfy a confirmed carnivore like me, then I have to think their upside in terms of a cross-over effect to gain market share is huge.  Sell someone like me on vegetarian food/meats and you have a winner.

Another upside---they seem to hire "normal" people (in look and attitude) who don't look like they just came from an Animal Rights Front raid.  Don't ask me to elaborate on that, you know darn well what I mean.

Native Foods has VERY few locations at this time, but they apparently have plans to expand.  If you have a chance to eat at one, I would highly recommend it.  Not sure if it is just this one location that does it well or not. Check out their website, find a location and try it.

Now, if I can just find some money to invest...

Note: I am in no way affiliated with Native Foods and dont know anyone associated with the company. I dont even know if they are looking for outside investors.

I am just a hungry person that occassionally stumbles upon something worthwhile. 

See here the latest level of Household income it takes to be considered a high income earner. You will be surprised at how little it takes to be near the top!

Interesting graphic from the Wall Street Journal.  The article states these figures are "national" and do not completely reflect regional differences in income relative to cost of living.

Numbers at the bottom left indicate what it takes to be in the different percentiles of income.  A key word is "Household"---this could be the income of just one person or multiple people that make up a household.

For instance, you could have two teachers married to each other, both earning $55,000 per year (not unrealistic) and be considered in the TOP 20% of income earners.  Surprised you are that high in the "rankings"??

Curious as to how much (or how little, depending on your perspective) members of the Military earn per month? See the numbers here....

I don't think most people know what members of the military earn on a monthly basis.  Here is the pay schedule for enlisted men/women.  I got this from the latest Executive Order signed by the President to give Federal Employees a raise. Find that HERE. You will also find the Officer pay schedule there as well.

Each branch of the military has different names for the "E" designations.  Go HERE to find the equivalent rank for each branch.

I was in the Marine Corps--E-1 (Private), E-2 (Private First Class), E-3 (Lance Corporal), E-4 (Corporal), E-5 (Sergeant), E-6 (Staff Sgt), E-7 (Gunnery Sgt), E-8 (First Sgt OR Master Sgt--depending on the career track), E-9 (Sgt Major). 

(Click on images to get a clearer view)

Friday, December 28, 2012

The President quietly signed an Executive Order yesterday giving pay raises to Federal Workers, including the Vice President, the Senate, and the House of Representatives. See here the new pay schedule for these deserving ladies and gentlemen...

Seems like bad timing to increase pay for Federal employees now, in the middle of a BUDGET CRISIS, but what do I know.

Yesterday (Dec 27th) President Obama signed an Executive Order authorizing pay increases for all classes of Federal Workers. You can find the whole Executive Order HERE

Here is a clipping of the new pay schedule for your Federal elected politicians and other key Federal positions. 

If you spill milk after January 1st you will want to cry because it might cost as much as $8.00 a gallon. Congress does it to us AGAIN! This is a strange story you have to read to believe.

Caught up in the morass in Congress (House AND Senate) is the fate of the latest Farm Bill.  If it is not renewed on or before January 1st, the price of milk MAY dramatically increase as a result. (See HERE for more on this story).

This is the result of an archaic provision that says if the bill is NOT renewed in a timely manner then the formula for determining the prevailing "Price Floor" paid to dairy farmers will revert to calculating the price floor using 1949 (yes, you read that right) production costs.  Adjusted for inflation, that means the price floor is estimated to DOUBLE, hence doubling the price of milk overnight.

A price floor is used to help reduce individual farmers exposure to market price fluctuations that agricultural commodities are routinely subject to due to factors generally out of control of the farmer.  It guarantees, in advance, the farmer will receive a minimum price for their commodity if the bottom falls out of the market and the market price falls below production costs.  This has been farm policy in the US since the 1930's.

If the market price decreases (demand decreases, supply increases, or some combination of both) then the farmer receives the predetermined Price Floor price. The Price Floor in this case is said to be "Binding" on the market. The Price Floor price will become the de facto market price for everyone else.

If the market price increases (demand increases, supply decreases, or some combination of both) then the farmer receives the market price and not the Price Floor price.  The Price Floor is said to be "Non-Binding"on the market.  Farmers are receiving a market price HIGHER than the Price Floor. They are better off and don't need the Price Floor to fall back on.

The purpose of the Price Floor is to keep farmers from losing money in the short-run so they can stay in business.  It guarantees them a certain amount of income to meet expenses and hopefully break-even, at best, at the end of the harvest.

Here is the kicker: Right now the market price for milk is HIGHER than the Price Floor (dairy farmers are not unhappy at this point). The Price Floor is "Non-Binding". However, if the Farm Bill does not pass in a timely manner, the Price Floor is expected to increase significantly ABOVE the market price and the Federal Govt will pay the Price Floor price to farmers.  The Price Floor will become the new de facto market price everyone else pays.FOR NO OTHER REASON THAN THE INACTION OF THE HOUSE AND SENATE!

Below the fold, is my detailed explanation of how a Price Floor works. Complete with graphs!!! 

This is an important concept in Microeconomics, so I hope it helps with understanding how this particular government action described above affects a market.

Wednesday, December 26, 2012

What do the Economic pie and retail opening on Thanksgiving have in common?

The "economic pie" does not get bigger by shifting the slices around the plate.  Retail sales are not the source of economic growth, but a by-product of it. This does not surprise me at all.

The New Black Friday Strategy Backfired On America's Retailers
"Early store openings for Black Friday only shifted the holiday consumption pool, which was the opposite of the intended effect," he wrote. 

"Retailers wanted early buying to lead to splurge buys towards the end of the season (emphasis mine). The thought they hoped to trigger: 'man, did I REALLY get everyone enough?'”

Do the people who run these large stores actually read the business section of the paper?

"To increase taxes on the rich, or to decrease deductions available to the rich, that is the question."--- I TRY to answer here...

The "game" of doing your taxes is to minimize the income that is subject to taxation.  People at all income levels do this.  What I would like to do with this post is to do a basic explanation of how taxes work within the framework of potential policy changes coming down the pike---changes in Marginal Tax Rates and/or deductions you can take to reduce your tax liability.  I tried to make this as simple as possible  and dont pretend to know all the issues.  Let me know where I am going wrong.

Marginal Tax Rates are the tax rates, expressed as a percent, assessed on "each additional dollar" of taxable income (wages and/or other sources of taxable income, i.e. interest on savings accounts).  In the US we have what is called a "Progressive Marginal Tax Rate System"--the more you earn, the more you pay in Federal Income Taxes.

It looks like this:
Confusing, isn't it.  Let's keep it simple and look at a Single Person who earns $600,000 per year (a bonified 1%-er) with all sources of taxable income accounted for.  Assume this person has qualified deductions equal to the average of those in his/her income range. This (2009) table shows those average deductions in the major categories that people typically take deductions. This is  the latest data I could find. Wont be completely accurate but we will get the message.
So, if this person was representative of the average in their income bracket, their qualified deductions would total ($38,149 + $48,317 + $25,527 + $18,488) $130,481.
Instead of having a taxable income of $600,000, they would have a taxable income of $469,515. See the difference?
If you look at the first table with the ascending Marginal Tax Rates (10%, 15%, 25%, 28%, 33%, 35%) you will see that our person earns more than $338,351 so this puts them in the 35% tax bracket, so all $469,515 is taxed at 35%, right? right?...Well, no. 
That is their Marginal Tax bracket, meaning ANY income OVER $388,351 is taxed at 35%,  The taxable income earned prior to $338,351 is taxed at (1) different marginal tax rates and (2) on different benchmarks of taxable income. 
Here is the math:
The first $8,700 of this persons taxable income is taxed at 10% ($8,700 minus 0 = $8,700 X 10% = $870).
The taxable income between $8,701 and $35,350 is taxed at 15% ($35,350 minus $8,701 = $26,649 X 15% = $3,997)
The taxable income between $35,351 and $85,650 is taxed at 20% ($85,650 minus $35,351 = $50,299 X 25% = $12,575)
The taxable income between $85,651 and $178,650 is taxed at 28% ($178,650 minus $85,651 = $92,999 X 28% = $26,040)
The taxable income between $178,651 and $388,350 is taxed at 33% ($388,350 minus $178,651 = $209,699 X 33% = $69,201) 
Any taxable income OVER $388,515 is taxed at 35% ($469,515 minus $388,515 = $81,000 X 35% = $28,350).
 If we add up all the numbers in bold we will get the TOTAL Federal taxes this person owes--$141,033.  (Assuming they had NO with holding throughout the year, this is the amount they would write a check for). Remember, this total was the result of taxing different levels of income at different marginal tax rates).
If we want to find the Average Tax Rate on our taxable income we would divide $141,033 by $469,515 = 30.03%. 
While this person is in the 35% marginal tax bracket, he effectively pays 30% of his taxable income in Federal taxes. The average is lower than the marginal because large chunks of his income is taxed at lower rates.
Now that we understand that, let's look at how a policy change on this taxpayer will effect him/her.
I believe it is likely, as a result of compromise, the Marginal Tax Rate for the 35% taxpayer will increase to 39.% ("Clinton era" marginal tax rate on the highest level of taxable income).  You can think of this as a 4.6 percentage point increase OR a 13% increase in the rate (39.6%-35% = 4.6%/35% = 13%).
Assume all the other Marginal Tax Rates stay the same (there is talk of moving the 33% rate to 36% too, but we will ignore that here).  The only new calculation will be on the income OVER $388,515, which was $81,000.  $81,000 X 39.6% = $32,076.  Before the increase it was $28,350, a difference of +$3,726 additional Federal Taxes due  and a new total of taxes due of  $144,759 ($141,033 + $3,726 = $144,759)
Now, our Average Tax Rate will be $144,759/$469,515 = 30.08%.  We raised the marginal tax rate on this person by 4.6% percentage points (or 13%), but increased the average tax rate paid by this person by LESS than 1 percentage point! 
What IF instead we implemented a policy that effectively decreased this person DEDUCTIONS by 13%, as opposed to increasing the marginal tax rate by that much. What effect would that have?
Refer back to the total deductions this person had---$130,481.  Decrease this by 13%, or $16,963, and our total qualified deductions will be $113,518.
Now, his/her taxable income will be $486,482 as opposed to $469,515. 
As before, all the numbers below $388,515 will stay the same.  We want to tax the amount OVER $388,515 at 35% ($486,482 minus 388,515 = $97,967 X 35% = $34,288).  Compare this to the change in taxes paid at the higher rate of 39.6%---$32,076. A difference of +$2,212. 
Our new Average Tax Rate is $146,971/$486,482 = 30.21%
If we do nothing and the Top Rate stays at 35%,  the 1%-er would pay $141,033 in Federal taxes (30.03% average tax rate).
If the Top Rate goes to 39.6% then he/she would pay $144,759 in Federal taxes (30.08% average tax rate).  An increase of $3,726.
If we kept the Top Rate at 35% but decrease (cap?) qualified deductions by 13%, then he/she would pay $146,971 in Federal taxes (30.21% average tax rate). An increase of $5,938This is 59.4% MORE in tax revenue than raising the marginal tax rate to 39.6%.
Seems to me that too much focus is perhaps put on Marginal Tax Rates, especially at the top.  Seems like it would be productive to address loopholes and deductions.  However, that would mean taking on powerful interest/lobbying groups. 
On second thought, never mind...

Monday, December 24, 2012

Cinemark stops discriminating for two days! Oh, you did not know they discriminated against you? They do so to the Third Degree. I took a picture to PROVE IT!!

Went to the movies tonight. This sign was on the door.

In this case, discrimination can  work out for you.  Movie theaters are an example used in Microeconomics to illustrate the concept of Price Discrimination.  If a business can segment its customers by their willingness and ability to pay, then it can capture some "consumer surplus". Some consumers will pay the posted market price, but some will pay less, depending on how the business chooses to efficiently segment their customer base.  Some do it through coupons, by age (Senior Citizen OR children under certain ages), or time of day (matinee pricing).

This strategy is worth it to the business because it fills seats that might go empty. People have lots of alternatives on a normal day (leisure or work).

Not so on Christmas Day.  No need to discount on a day that people will be looking to do something soon after the opening of presents. 

Plus after listening to Uncle Leo tell his same stories for the 20th time, you are willing to pay the going price (and more) for a ticket to escape.  Tell me it isn't true.  :)

Friday, December 21, 2012

Tariffs on Sugar-based Ethanol expire and the amount imported increases dramatically. This calls for some graphing and welfare analysis. Who is with me?!?!

There has been a dramatic increase in the importation of Sugar-based ethanol from Brazil since a long-standing tariff on this type of ethanol expired in January 2012.
Imports from Brazil, which distills most of its ethanol from sugar cane, have risen nearly nine fold this year through October, compared with the same period in 2011, according to the U.S. Department of Agriculture. U.S. demand for foreign-made ethanol jumped after an import tariff that had been on the books for three decades expired in January. U.S. ethanol imports are expected to surge again next year, with the vast majority coming from Brazil. ---WSJ
The graphic below shows the percentage increase in the quantity of sugar-based ethanol imported in 2012 from Brazil relative to how much imported in 2011---a 750% increase!
Source: Wall Street Journal
In AP Microeconomics, analyzing the effects of tariffs on social welfare is an important concept.  Let's use this real life example and see what happened in the Market for Sugar Based Ethanol (SBE).

The first graph shows the Domestic Market Price and Quantity in equilibrium BEFORE trade.  We are assuming this economy is a "closed economy" and does not trade (a state of "Autarky").
This second graph shows the World Price of SBE and how it would effect the Domestic market IF it were to open up, or come out of the state of Autarky.  For this lesson, we are assuming the World Price is BELOW the domestic, closed market price but it COULD BE higher. We will save that for another day.
Because "P world" is lower than "P domestic" the quantity supplied by domestic producers decreases to "Qs domestic" (Point "B") BUT at the lower "P world" price the quantity demanded by domestic consumers increases to "Qd domestic" (Point "C").  This is an excellent example illustrating the respective Laws of Demand and Supply--When the price of the good changes (inc or dec) the quantity demanded and/or supplied increases and/or decreases. There is movement ALONG the demand and/or supply curves NOT a shift in either curve! We moved from "A" to "C" along the demand curve and from "A" to "B" on the supply curve.

As it stands right now, Quantity Demanded domestically ("Qd domestic") exceeds Quantity Supplied domestically ("Qs domestic").  If we were to open up to trade, the difference would be made up with imports as shown in this next graph.
Domestic producers would supply a quantity from "0 to Qs domestic" and imports would Qd domestic minus Qs domestic.

Happy people are consumers who get to enjoy more of this good at a lower price--Consumer welfare has increased.  Unhappy people are producers who produce LESS of the good at a lower price-- Producer welfare has decreased. 

Producers will not be pleased about this foreign competition. Producers have A LOT to lose! They will possibly/likely lobby for "something to be done" and that something will probably be the levying of a Tariff on this good through the political process.

As shown in the next graph, assume the amount of the tariff increases the price from "P world" to "P world + tariff" BUT not quite enough to go back to the original equilibrium point "A".
Now, at "P world + tariff"quantity supplied domestically is "Qs 1" and quantity demanded domestically is "Qd 2". 

Domestic producers increase their quantity supplied in response to the higher price (Law of Supply) and Domestic consumers decrease their quantity demanded in response to the higer price (Law of Demand).  Imports are now less than what they were before---Qd 2 minus Qs 1.

Who was helped in this scenario and who was hurt?

First to gain was the Federal treasury in terms of tariff revenue.  To calculate the tariff revenue you would multiply whatever the dollar amount of the tariff is times the quantity of imports--"Qd 2 minus Qs 1".  The RED box shows the area of tariff revenue.

A net loser #1 is the consumer.  They get to enjoy LESS of the good at a HIGHER price than they did before--as the price increases from "C" to "E" the quantity demanded decreased from Qd domestic to Qd 2. The graph below shows consumer welfare loss (Dead Weight Loss) equal to the area of the BLUE triangle.

Net loser #2 is Society as a whole. The "Dead Weight Loss to Society" is represented by GOLD box below.
 Why is this area considered DWL to society and not a gain for producer welfare?

It is because, as a result of the tariff, domestic societal resources are now employed to produce more of this good than otherwise would have been produced absent the tariff.  This is the opportunity cost of the tariff.  Resources are use to make a good that is already available to purchase, albeit produced by a "foreigner".  Economists ask: Could those resources have been used in a more efficient way?

Reason number 10,999 why people hate economists.

This story ends better.  The original focus of was the expiration of the tariff. The result?  Everything snaps back to the graph that shows the domestic economy coming out of Autarky.  Consumer welfare restored, tax revenue to the government gone and reduced producer welfare. 

 Hope this helps understanding the effects of a tariff---when assessed and when rescinded.

Thursday, December 20, 2012

"Maple Syrup National Reservoir Dogs"---I hope things end better for these guys..

In $18 Million Theft, Victim Was a Canadian Maple Syrup Cartel
"...On Tuesday, the police in Quebec arrested three men in connection with the theft from the warehouse, which is southwest of Quebec City. The authorities are searching for five others suspected of being involved, and law enforcement agencies in other parts of Canada and the United States are trying to recover some of the stolen syrup..."

Another take-down by me of an important aspect of the "Fiscal Cliff"---Using the Chain-Weighted CPI as opposed to the CPI....Stay Awake!! This is important

One of the latest proposals to rein in the increasing cost of Social Security is to substitute (an appropos word as you will see in a moment) the currently used "Consumer Price Index (CPI)" with a measure called the "Chain-Weighted CPI" (go HERE for an explanation in full of this measure). First, a tiny explanation of the CPI.

The Bureau of Labor Statistics (BLS) measures changes in the price of stuff by pricing a "fixed market basket of goods and services" that are available in the economy. Consider it a shopping list on steriods.  It lists thousands of goods and/or services  that individuals might on a purchase daily, weekly, monthly, or yearly basis. 

The key point with this measure is that it prices ONLY specific, narrowly defined things on "the list" and records the change in price of the good/service with no regard to any change in consumer behavior towards the purchase of that good/service.  If the price of a pound of hamburger increases 10% the CPI will reflect that change---boom, 10% inflation (note--because one good increases in price does not indicate inflation---just keeping it simple for now).

The "Chain-Weighted CPI" is an additional measure that takes into account consumers choices in purchasing a good/service based on "relative prices" and their ability to substitute other less expensive goods/services for the one that increased in price.  If the price of hamburger increased 10% then a price sensitive consumer can subsitute a less expensive chicken or pork or spam (assume the price of these items did not increase in price at all, or something less than 10%). 

In other words, because of the presence of substitutes the consumer may not have lost as much purchasing power as the CPI suggests they did.

When measured over time, the "Chain-Weighted CPI" tends to record a lower level of inflation than does the CPI.  Why is this important?

Congress is required to adjust Social Security benefits every two years and are indexed to (tied to) the inflation rate recorded by the CPI.  If the CPI increases by 5% in the span of two years, then Congress increases Social Security checks by 5%.

However, if they switch and use the Chain-Weighted CPI, it might show that the inflation rate is only, say, 2%.  Checks would increase by only 2% rather than 5%.  A savings of 3 percentage points, which translates into BIG dollars (keep in mind, I TOTALLY made up these numbers for illustration purposes).

The move would save money but here is the biggest criticism.

Both of these market baskets measure items that senior citizens buy and young people dont buy, and vice versa. Young people buy lots of technology and entertainment that have LOTS of subsitutes.  Older people buy lots of healthcare and medicines that don't have lots of viable substitutes.  The Chain-Weighted CPI might be biased IN FAVOR of the choices available to young people in what they buy, but might be biased AGAINST older people in their purchases.

Both of these measures do not take into account the "real life" weight each demographic puts on the the selected goods/services in the measured market basket.  This specific information is not disaggregated from the whole.

This was a very simple explanation and there is MUCH more to it. For more detailed info vist the link to the Chain-Weighted CPI.  GOOD READIN'!!!!

Wednesday, December 19, 2012

Nice graph showing a major source of wage stagnation in the US--It is all about healthcare costs...

Well, maybe not all, but...The graph below tells part (don't know if it is a big or small part) of the story regarding income inequality and stagnant wages for workers. 

The orange line (+147% to the right--since year 2000) shows the percentage change in employee contributions to maintain their health insurance policies.  The blue line shows the percentage change in the actual cost of those policies (+114%  since year 2000).  The black line shows the percentage change in wages (36% since 2000). The gray line shows the Consumer Price Index percentage change (27% since 2000).

Source: Kaiser Foundation
The employer paid portion of health insurance is considered a "non-wage" benefit .  You pay some of the cost of your health insurance  (it comes out of your wages/salary) and your employer pays some of it (a non-wage benefit to you).  Example: a policy to cover you and your family has a total cost of $5,000.  You pay $100 per month out of your paycheck for the policy ($1,200 per year total) and your employer pays the remaining $3,800 on your behalf.  $3,800--your non wage benefit BUT a cost to your employer to employ you.

The difference between the orange and blue lines represents "cost shifting" of the total cost of employer provided health insurance.  Employees are paying more for health insurance from their wages (that IS clear) since 2000 and employers are either (1) paying less than they did before or more likely (2) passing the increasing cost of providing health insurance to employees in total or in part.

Two ways of looking at this.

(1) Any discretionary income gains that might have accrued to workers in the form of higher wages since 2000 have been absorbed by overall rising health insurance costs.  Employers are held harmless in this situation.

(2) Corporations have been shifting the cost of insurance onto workers and are not carrying more of the burden.  Paying less in non-wage benefits means more money going to the bottom line.

You tell me.  I can't figure it out.

Saturday, December 15, 2012

Congress wants to "Put a Cap in Yo Deductions"---Yes, it is as threatening as it sounds.

One such deduction (among several) is the "Mortgage Interest Deduction".  Here is a quick explanation and example.

If I get a loan to buy a house my payment consists of two things: Principal and Interest. 

There are potentially other things included in your payment (i.e. State and Local taxes, mortgage insurance, etc--but we are going to ignore those for now to keep it simple).

The principal is the portion of the loan I actually borrowed and interest is the portion of the loan that compensates the lender for lending me that money. Below is an example of someone taking out a loan for $200,000 at an interest rate of 5% and is going to pay back the loan over a 30 year period.

Source: GMAC

Notice in the "Loan Summary" the "Total of Payments" are $386,513.24. Remember, I borrowed only $200,000 so the difference between these two numbers represents the "Total Interest Paid" on the loan in 30 years--$186,513.24.  ALMOST as much as I borrowed in the first place!!

Over time, in each monthly mortgage payment I make, I pay a portion of the principal and a portion of the interest to the lender.  This is reflected in the data below the Loan Summary.

I listed the first year of payments, 1-12.  Each month the borrower made a monthly payment of $1,073.64.  Each month part of that payment is Principal and part is Interest. You can see that in the early stages of a loan, the interest is MUCH higher than the principal you pay back.  This is called a "front loaded" loan where you pay most of the interest up front and as you make payments the payback for principal increases and interest payback decreases.

In the first year you pay a total of approx $9,930.00 (I rounded) interest alone (Principal was only $2,946.00)

As incentive to buy homes, Congress allows homeowners to deduct the amount of interest from their taxable income.

For this homeowner, if they have enough other deductions to qualify to itemize these deductions (like the charitable deduction or deduction for State and Local Taxes), then they can DEDUCT from their total income the amount of interest paid---$9,930.00.

This effectively reduces the income that will be subject to the Federal Income Tax by $9,930.00, hence their tax bill be less as well.  This is a GOOD thing for the homeowner.  However, it reduces the amount of Federal tax revenue received by the Federal Government.  Consider it a "subsidy" for home ownership.  Renters do not get a similar subsidy. Neither do people who pay cash for their houses.

The larger the home loan, the larger the interest paid, the larger the deduction and the more that homeowner "saves" on taxes. 

The mortgage deduction is a popular "middle class" to upper class tax break. 

There is some talk about limiting this deduction to a smaller amount or getting rid of it altogether.  This will increase taxes on people with home loans, especially those in the early stages of a home purchase with a substantial home loan.

I don't think the total elimination will happen.  Probably a "cap" on TOTAL deductions will be put into place (the home mortgage PLUS charitable, state and local taxes, etc). 

Hope it helps you understand this issue a little better.

Friday, December 14, 2012

"Disruption" in the corporate boardroom is a good thing. Especially when the source of the disruption is how to better serve consumers. is not quite ready to surrender!

Stores offer same-day delivery to compete with Amazon
""Tired of competing on price with online retailers, bricks-and-mortar chains are experimenting with same-day delivery. So far, few such services are available in sprawling Southern California....""
Businesses are in existence to serve customers.  At least they are supposed to.  When a business is not faced with significant competition they tend to get "fat and happy" and start to serve their own interests.  Perhaps not on purpose, but inertia seems to push them in that direction.

It usually takes some "disruptive" idea, technology or improvement in efficiency by a competitor to shake them up.

Lots of talk about how is crushing "brick and mortar" retail.  Probably inevitable that they will. 

But I like that storefront retail IS at fighting back.  This takes effort, investment and new thinking regarding resources on the part of management to serve its customers.

Intense competition forces businesses to think about how to get their products into the hands of customers in the least expensive and most expeditious manner possible. 

Disruption in the corporate boardroom because of competitive forces is a GOOD thing for the consumer.  Make them sweat to better serve us.  Works for me.

This seems like another way the Postal Service can improve its situation as well.  They already have the routes, vehicles and people in place to serve this niche (but so does UPS and FedEx!).  If they can move quickly perhaps they can get a large share of this market.  As the article notes, there are companies already lining up that would like to have this business. 
""...Next week, the U.S. Postal Service begins an experiment in San Francisco. It's partnering with about 10 retailers, which have yet to be announced, to offer same-story delivery around the city, said spokesman John Friess....""

Wednesday, December 12, 2012

The number of people turning 65 revisited. How much in Social Security is that going to cost? See the analysis of the 2011 to 2012 bump here...

I am revisiting this graph because it fascinates me.

Just eyeballing it (and inserting two somewhat straight lines) and looking at the change from 2011 to 2012 astounds me. 

There is roughly a daily average change in the number of people turning 65 of 1,500 people. That translates into 547,000 newly minted 65 year olds OVER the number minted in 2011.

If ALL those people filed for and received Social Security checks (the average check SS check for 2012 is $1,230 according to the SSA) that would require a little over $8 billion dollars to be added to the budget in one year on top of what is already paid in Social Security benefits in prior years.

Now, Medicare kicks in too. See how it adds up quickly.

States with large outward migration patterns have the most generous State employee pay and benefits. States that have high inbound migration have less generous State employee pay and benefits. Correlation =Causation??

Correlation is not necessarily causation...but is this a coincidence?

Yesterday I posted the first graphic below showing population losses and gains for US States over the last few years.  California, Illinois, Michigan, Ohio, New York, Massachusetts, and New Jersey and large net losers of population. 

The graphic below the map is one I found today.  It shows compensation levels, from highest to lowest, for State employees from the 10 most populated States. 

Notice the list I made above of high outward migration States and the top 5 States in the compensation graphic.  Any similarities?  I think so.  Do they matter? Not sure.

Large States with high inbound migration have lower levels of State employee compensation.

States with high level of State employee pay and benefits are losing tax base. States with lower (relatively speaking) levels of State employee pay and benefits are gaining tax base.

Which States are going to be more fiscally sound and attractive places to live and work?

Correlation is not causation, but is this a coincidence? Or is it a lack of prioritizing between private and public policy goals?  Not sure. I am open to suggestions.

Source: Bloomberg

Tuesday, December 11, 2012

Nice graphic on migration patterns in the US among the States. See where people are leaving and going to. All I can say is Texas is doing something right and California is not.

People on the move...Migration patterns in the US in the past few years.  California, New York, Michigan, Ilinois and Louisiana are all net losers in terms of migration.  Texas, Arizona, Georgia, and North Carolina are all gainers.

People go to where there are opportunities and businesses locate to States that have hospitable business climates and responsible government.

Kinda simple...

Two excellent graphs showing the difference in the cost of producing an iPhone in the US and China and the profit margin associated with that difference.

I came across a research paper while reading about Apples announcement that it was going to move some of its production back to the US (article HERE). The paper is HERE. There were two graphs that I thought were interesting.

The first one show the cost of the component parts and labor (inputs) that go into producing an Apple 4G iPhone in China (keep in mind these are JUST the costs associated with these inputs. It does not include many other costs associated with making the phone and getting into your hands) and the second one shows the cost of producing it in the US.

Notice all component costs stay the same BUT the labor cost is the big variable between the countries.

I have no big point to make here. Just something to make you go "Hmmmm".... :)


Nice graph showing the number of people turning 65 on a daily basis. This is important in the discussion of Social Security and Medicare. It is a numbers game---in terms of people and dollars.

Lately I have been talking to students about the fact that everyday there are greater numbers of Baby Boomers turning 65 years old, but I have never seen any actual numbers.  There is lots of talk about the "leading edge" of this generation that is going to put a financial strain on the Social Security and Medicare systems. This is a numbers game--in people and dollars.

I think I see that leading edge in the graph below--the year 2012. 

This graph shows, over time and on a DAILY basis, the number of people turning 65. For instance, in 2000, a little over 5,000 people had their 65th birthday.   In 2007-2008 there was a bump up in the number that was sustained for 4-5 years.  BUT notice what happens in 2012. The daily number leaps up to 8,000 per day and you can see what happens from that point forward. One giant step for the birth of mankind!

So, what year was so special that in 2012 we have so many more people turning 65 at the same time. Well, subtract 65 from 2012 and you get 1947.  Just after "The Big One". 

My cohort is 2025 (I was born in 1960).  We have our own special little bump in the daily retirement rate. Wonder what was going on then??

Source: The Economix

Sunday, December 9, 2012

"Manufacturing is Alive, Manufacturing jobs are Dead". Still hoping some politician somewhere will adopt this honest slogan for a campaign. See graph here on manufacturing employment

Jobs in the manufacturing (specifically, the goods producing sector), relative to other jobs in the economy, have been in decline for a long time. Now, it certainly is possible that there are more jobs in manufacturing overall BUT the number of other jobs has grown at a faster rate--hence manufacturing jobs as a percent of the total is smaller.

Well, I tried to make it look better, but I suspect this is not the case.

Remind me again why politicians spend so much political capital and ACTUAL capital trying to "save" manufacturing jobs?  I don't mean the manufacturing jobs of the future, but they are trying to rescue the jobs of the past, for the most part.

If you need a reminder from the Onion about this, please go HERE (caution---the video contains some inapproriate language!)

Maybe I am missing something. Help me out.

Source: HERE

Why has the price of computers decreased but the price of broadband internet connection increased (or HAS it?). If you need an analysis for a Microeconomics class this will be helpful.

...or a Macroeconomics class as well...

The author of this blog entry (found HERE and also pasted in full below the fold at the bottom of this entry) uses a graph to show how, in the last 5 years, the price of computers (BLACK arrow) has decreased over 40%  but the price of Broadband (RED arrow) has increased (slight, but an increase).

While the blog entry is very short it suggests (explicitly and implicitly) 2 Microeconomic and 1 Macroeconomic concept that are important for students to know.

(1) In Microeconomics, two goods are considered Complements if they are used together. They are separate and distinct goods, each with their own market price and cost of producing. They are largely dependent on each other to function profitably in the market place. 

When the PRICE of one of the complementary goods DECREASES (in this case computers), the DEMAND for the other good used with it INCREASES (Broadband Internet connection).  This makes sense.  People buy more computers so they need more internet access. This could be the reason, but...

(2) The computer market is vast and their are lots of competitors.  With more competition, prices tend to gravitate closer to the actual cost of production (this is a characteristic of a "perfectly competitive firm").  In broadband "production" this is less so:

"The high, fixed costs of broadband means that there hasn’t been a big rise in competition among providers, according to Scott Wallsten, Vice President for Research and Senior Fellow at Technology Policy Institute. Indeed, most Americans don’t have more than two options when it comes to wireline broadband providers...."

High fixed costs serve as a barrier to entry in markets. It takes very large upfront investments that may take years to re-cover.  Hence competition is more limited AND the producer is able to charge a price, dictated by the market demand for the good/service, that is something greater than the cost of producing.  In other words, the producer has pricing power ABOVE the Marginal Cost of producing extra units of the good/service.  This could be the answer, but...

The Macroeconomic concept comes from one the commenter's on the blog entry in regards as to how the Consumer Price Index is calculated and its accommodation for changes in the quality of a good or service over time. 

Is the price consumers paid for broadband in 2007 the SAME broadband they pay for in 2012?

If the price of broadband (consider it just a single good/service) has increased 10% since 2007  BUT the amount of speed, quality of the connection, and places I can access it has increased, say 50% or more, am I not better off per dollar spent?

Has the BLS fully accounted for this quality change and it is built into the price change noted in the chart, so in real terms broadband has increased 10%?  This could be the reason, but...

This is why I love Economics! All three answers COULD be correct!

What do you think?  Which one seems the likely culprit or am I missing a piece of the puzzle? 

Saturday, December 8, 2012

The Self-esteem movement runs through our University system, but it is not from the students. University administrators need to stop patting themselves on the back. This is a MAJOR disconnect.

In a survey employers, providers (fancy way of saying educational institutions) and youth were asked to respond the questions at the bottom of the graphic.
Which entity is the odd-man out? Good Self-esteem runs through the halls of educational institutions throughout the land.

Maybe Denial IS a river and some really bad "stuff" flows through it.

Source: The Business Insider

Short explanation of why the Social Security Tax is a "regressive tax" and negatively impacts lower income people. Kinda important to know when discussing taxes in a larger context...

One of the discussions regarding tax policy pertains to "fairness" in the tax code.  One of the issues is that fact that it is possible for lower income people to have a higher "effective tax" rate on income than someone who makes lot of income.  I will use just one example to show how this works---the Social Security Tax.

The Social Security tax that an individual pays on earned income is 6.2%(note: RIGHT now that rate is 4.2% as a result of recent "stimulus plans" BUT this reduction is considered temporary, so I will just use the  6.2% for our  purposes here).  Also, keep in mind the individuals employer pays the same 6.2% of income on behalf of the employee, but we will ignore that as well.

This 6.2% tax is levied on all income up to $110,000.  The tax is NOT levied on the income ABOVE that amount, nor is it levied on dividends or capital gains from the sale of assets (physical or financial). This is an important point!

So, the maximum amount an individual would have to pay in Social Security Tax in a given year would be $6,820 ($110,100 X 6.2%).  Read that again. 

Let's do the math for someone who earns $50,000 and $200,000 per year and see the impact on effective tax rates for both of these people.

The person that makes $50,000 per year would pay $3,100 in Social Security taxes.  The "effective tax rate" for this individual (just for THIS tax only) would be 6.2% of income ($3,100/$50,000 X 100). Makes sense, right?

The individual who makes $200,000 would have the FIRST $110,100 of that income subjected to the Social Security tax BUT the remaining $89,900 would NOT be subjected to the tax. 

We already established at the outset, this would result in an maximum tax of $6,820.  As a percent of this individuals income, this would represent 3.4% of income earned ($6,820/$200,000 X 100).

So, while the higher income worker pays more in nominal dollars ($6,820 vs $3,100), the lower income worker pays a higher effective tax on their income (6.2% vs 3.4%).

This tax is termed a "regressive tax". Meaning the lower your income, the higher the impact the tax has on your total income (in percentage terms).

Is this "fair"? Not sure, but it IS the way it is---at least for now.

Now you know. Go dazzle your friends, family and teachers with this new found knowledge

Nice graphic showing where a majority of new jobs have been created in the last year. Is this a "Do you want fries with that?" economic recovery???

The graphic below shows the sectors where a preponderance of job growth has taken place in the last year.  The color key for each job category in along the bottom and the number of jobs created is on the vertical axis. The job categories are stacked to show the total jobs created in each sector.
""Leisure and hospitality, health care and social assistance, retail and temporary jobs — all low wage sectors — have been responsible for over half (51%) of the private sector job growth the last year.""---The Big Picture Blog
I ask my students to "go deeper" when confronted with a published headline statistic (whether it is a govt or private sector stat) reported in media.  It often does not tell the whole story.

It is not only the quantity of jobs created, but the quality of those jobs as well. 

I am not smart enough to know if this a good ratio---51% low wage jobs to 49% everything else. It is good for the workers who get those jobs, but what does it say about the overall health and longer-term outlook for the economy?  I don't really know. What do you think?

Source: The Big Picture Blog

Friday, December 7, 2012

Quick look at today's just release Employment Report. Unemployment rate decreased but probably for the wrong reason...

Basic data from the Employment Report for November that was just released today by the Bureau Labor Statistics (

The first graphic below (clipped from the actual report) shows the overall numbers used to calculate the Unemployment Rate. 

The primary reason the unemployment rate decreased from 7.9% to 7.7% is from a decline in the "Civilian Labor Force" (highlighted in yellow) of 350,000 people.  This means 350,000 people left the labor force for some reason.  It could have been they gave up looking for work altogether, they returned to school full time, or retired.  This last reason is probably a big mover of that number, but that is hard to parse from the avalable data.  It appears the rate is decreasing not because of significant job creation, but because of a smaller labor force as a result of people exiting the work force.

The civilian labor force is the sum of the number of EMPLOYED and UNEMPLOYED in the economy. 

Be careful! When I say "Unemployed" I mean the number of people OFFICIALLY classified as unemployed by the BLS according to their definition. 

This second graphic shows the general categories of jobs and how many (in thousands---add 3 zeroes to the numbers you see below) were created in each category. I higlighted the significant numbers.

Retail, as expected with holiday hiring, led the way.  The perponderance of these jobs are likely part-time jobs to staff stores and will dissappear in January/February.  These jobs accounted for 36% of the jobs created in November. If one is looking at the quality of jobs, it is open to intrepretation as to whether this is a positive sign or not.

Thursday, December 6, 2012

Interesting graphic showing how someone earning $69,000 or $29,000 ends up with the same income (cash and non-cash) after taxes/benefits/subsidies are factored in/out. Enlightening regardless of your politics.

This chart has been bouncing around various blogs. I tried to find something to counter the points made here but could not find anything substantial. I made some edits, just to highlight reference points to make it clearer.

The chart suggests that a single mother (with 2 children and lives in Pennsylvania) earning a gross income of  $69,000 in a year ("D") would have a net income (after taxes and adding in any cash and non-cash benefits) of $57,327 ("C").

IF a different mother earned a gross income of $29,000 ("A") in a year, she would have a net income (after taxes and adding in any cash and non-cash benefits) of $57,045 ("B"). 

Their after tax/after benefits (cash and non-cash) would just about equalize their income.  The mother with the $69,000 income would be a net "loser" of $11,673 and the mother with an income of $29,000 would be a net "gainer" of tax dollars/subsidies of $28,045.

Source: Here
This is interesting BUT there is more!  If this data is correct and this is the system people operate under, there is a GLARING unintentional consequence here.  Can you see it?

Look at the income level and benefit level at point "B", $29,000.  This this mother earns $1.00 more what happens to her level of benefits overall?  Yikes, they decrease by much more than the extra dollar she earned from, perhaps, a raise or a promotion.  This is a significant penalty for someone who is just getting by. 

So, what happens to the incentive to earn more, and by implication to be more productive? Notice the same thing happens to someone when they reach the $45,000 income level. The next dollar earned is VERY costly. 

People trying to get by and do the best they can are going to respond to the real-life, immediate, incentives put in front of them. 

This does not appear to be a system that promotes self-sufficiency as people climb the income ladder. 

Maybe I am looking at it wrong.  What do you think?  Tell me where I am going off the rails.

Saturday, December 1, 2012

See the pictures here of how is going to cause a long and painful death for Walmart and other Brick and Mortar businesses.

I have not seen these pictures before of an's "Product Fulfillment Center".  Fancy name for gigantic warehouses around the country that serve a particular geographic area. 

It seems this should be something Wal-Mart fears long-term. 

Technological change advancement, peoples willingness to use that technology, and new patterns of buying behavior will serve to accelerate "creative destruction" in the retail sector. 

A Tax To Die For...Here I briefly explain another "Fiscal Cliff" tax issue: The Estate ("Death") Tax...

One of the least talked about aspects of the "fiscal cliff" is the Estate Tax, sometimes referred to as the "Death Tax".  It is the Federal Tax owed on the value of a what someone leaves behind to their heirs.  Here is how it works, in its simplest terms.

See the graphic below (the left hand potion of the graphic) for the tax rate as it is now, as it might be if the "Bush Tax Cuts" expire and what the President would like it to be. 

You can see the tax rates expressed as a percentage and the amount that is EXEMPT from the tax in BOLD.  Any estate with an assessed value UNDER these threshold amounts would not be subject to the estate tax at all.

Example: at the "Current Policy" if an estate is valued at $6.12 million the first $5.12 million is exempt from taxation, but the Estate Tax would claim 35% of the remaining $1 million---$350,000 tax due.

Under Obama's Policy $2.62M ($6.12M - $3.5M) would  be subjected to a 45% tax = $1.18M tax due.

If Bush Taxes Expire $5.12M ($6.12 - $1M) would be subjected to a 55% tax = $2.82M tax due.

Source: Wall Street Journal
The circles on the right show how much in potential revenue each of these policies my bring into the Federal coffers (color coded to the info on the left) over a 10 year period (divide by 10 to get yearly tax revenue). 

One of the difficulties with this tax is that it can place the heirs of the deceased in a awkward and potentially damaging financial situation.

Refer to the  example I used above.  Assume this was your grandparents situation but ALL of the estates value was tied up in land and a nice house that sits on that land. Assume in their last will and testament they bequeathed it to you because they wanted it to stay in the family. 

Because all of the value is in a "non-cash" asset, YOU would have to come up with the $350,000 (OR the tax under the other alternative measures) to pay the Estate tax. OUCH!  If you could not pay the tax, then you would be forced to sell the property to pay the tax (or borrow it, I suppose)

I tend to think most estates in the US are this way---values are tied up in non-cash physical assets like houses and land and heirs struggle to maintain what they have been bequeathed. 

Whether that is right  or wrong, well, I don't know and never will.  I don't have any rich people in my family so this is an issue I can only write about and not actually experience.  :)

Thursday, November 29, 2012

One element of the Fiscal Cliff explained here. This one LIKELY will affect your paycheck in January. Ouch!

One element of the "fiscal cliff" that just about all wage earners, regardless of income, are affected by is the 2 percentage point DECREASE in the Social Security tax that workers have enjoyed since 2010.  (You didn't know you had a tax cut??) .  It is currently at 4.2% from its "normal" longstanding 6.2%.  The tax is applied on your gross pay (wage X hours worked. Or from your salary if you are a salaried worker).

This temporary reduction was implemented as part of a "fiscal stimulus" bill/law. It served as a quick and easy way to get money into the hands of people, and the assumption was that it would likely be spent in the economy and provide a needed jolt for the demand for goods and services.

This reduction seems small for each person, and it is, but in the aggregate it is roughly about $120 billion on an annual basis injected into the economy.

Because it amounts to so little per person the economic thinking is people wont notice it, hence will be more likely to spend it than to give it much thought about saving it.  This is not entirely true for all people, but it does seem a very likely outcome.

The trade-off from this particular tax cut is that the $120 billion is supposed to pay Social Security benefits for current recipients.  Those benefits are going to be paid regardless.  This will necessitate borrowing to compensate for the tax cut.

There is no such thing as a free lunch.

The consensus right now seems to be this tax cut will expire and go back to 6.2%.  But, as with all things political, we will have to wait and see.

Yesterday I showed you how someone with an income of $45,000 can pay NO Federal income tax (47%-er) . Today I use the same household and show you how they are a major tax PAYER. These things are never as easy as they appear...

Yesterday I wrote a blog entry on how a person or household with an income of $45,000 can end up paying no Federal Income tax on that income and can actually be a net recipient of tax dollars (.  See that HERE.

Today, I want to show that this same household DOES pay federal taxes, but not necessarily the Income Tax. The taxes they cannot escape paying are Payroll Taxes,---Social Security and Medicare taxes. These taxes are dedicated to paying benefits for retirees and other eligible recipients.

The Social Security tax is 6.2% of income and it is applied to income earned up to $110,100.  Any income OVER this amount is NOT subject to the Social Security tax.  So the MAXIMUM that can deducted from someones paycheck is $6,826.20 ($110,100 X 6.2%).  For our sample household, they would pay $2,790 ($45,000 X 6.2%) in Social Security taxes.

The Medicare tax is 1.45% of income and it has NO INCOME LIMIT! As with tax policy, it depends of the what the definition of "income" is. Capital gains and dividends are excluded from the Medicare tax (Social Security tax too), which are generally the province of "the wealthy".  So, our household pays $652.50 ($45,000 X 1.45%) in Medicare taxes.

Remember, these are MANDATORY TAXES. 

The total payroll taxes paid by our sample household is ($6,826.20 + $652.50) $7,478.70.

Federal Income taxes AND payroll taxes both go to the same place---the Federal Governments General Budget--the Big Pot o' Money that is spent on all things federally budgeted for. Social Security and Medicare taxes make a stop through their respective Trust Funds, but only for accounting purposes.

If we add this amount to the "negative" income tax  of  $637(refunded) mentioned at the top, then our sample household effectively has a tax rate of 15.2% ($7,478.70 minus $637.00  then divided by $45,000 X 100).

In this light, our household is certainly not a "47%-er" and net recipient/taker of tax dollars, but percent-wise, they are a major contributor. 

These federal taxes are not the only federal taxes paid by our household. There is the Federal gas tax, other excise taxes levied on a variety of goods we consume, and tariffs on imported goods. These other taxes are more difficult to see, but they should be considered in the over all discussion of tax policy, in my opinion.

Wednesday, November 28, 2012

See here how easy it is too have a pretty good paying job (teacher?) and be a member of the "47%" at the same time. Nice graphic and my explanation of why it is so...

It is rather easy, actually, given the aggregated tax policies enacted over time.

There are some basic deductions  that you are allowed to subtract from your total income. These deductions effectively reduce the amount of income that is actually subject to the income tax.  Deductions reduce your income subject to tax dollar for dollar.


There are some basic tax credits that you are allowed to subtract from your total tax bill.  Tax credits reduce your taxes owed dollar for dollar.  Notice the difference between a deduction and a tax credit.  This is important when discussing tax policy.

Both of these are dependent on whether you qualify for them. Some everybody is entitled to and some you get only if you meet certain criteria.

Deductions and tax credits are enacted to further some social, economic, or political goal. Individually,  they are supposed to serve as an incentive to bring about a desired outcome that benefits society.  Collectively, they could serve that purpose OR collectively create problems and/or inefficiencies. 

The following graphic illustrates how a person (or household in this case--a family of 4) earning $45,000 per year in income can owe no Federal Income Tax on that income by using the available income deductions and tax credits.
Source: The Economix

 This assumes the families total income from all sources (wages, interest earned on savings accounts, and "other") is $45,000.

This couples filing status is "Married, filing jointly" (I  assume) and includes both of their incomes combined OR it could be just one of them is the sole income earner.  It does not matter.

Right off the top, they are entitled to take a deduction of $11,900 for just being married. I will keep it at that and do another posting on how your tax bill will be affected by other potential filing statuses.  This deduction ("subsidy") serves to help reduce taxable income in an effort to help defray the cost of running a household with the goal of keeping families together and encourageing couples to stay married. That is/was the intent of the tax policy.

Next, the taxpayer can deduct from taxable income, $3,800 for each person in the household who is legally dependent on the taxpayer. Generally this means children, but it could be a parent, grandparent, or other dependent. You also INCLUDE yourself AND your spouse in the calculation.  This equals ($3,800 X 4)  $15,200.  See how you and your spouse were "double counted" in the calculation, first for being married then as a member of the household.  Assuming no other deductions you are allowed to take, the your income that is ACTUALLY subject to taxation is now ($45,000 - $11,900 - 15,200) $17,900.  This amount is called your "Taxable Income".  It is derived after taking all of your legally available income deductions.

The Federal Income tax owed on $17,900 is $1,813.  If we stopped right there this is how much the taxpayer would write a check to the IRS for ASSUMING they did NOT have any "Federal Withholding" from their paychecks throughout the year.  We will assume that for this exercise, but is likely they would have had some withheld.  Any withholding would off-set the amount of tax owed, either partially or totally.

This  taxpayer now finds they are entitled to a Child Tax Credit of $2,000 ($1,000 for each child). Taxpayers with an adjusted gross incomes of $110,000 or less are eligible for this credit, so this is not necessarily a "gift" to lower income people, however it benefits them a great deal.  Remember, tax credits reduce your taxes owed dollar for dollar.

Now, we subtract that $2,000 from our taxes owed of $1,813 and we now owe -$187.00 in taxes. Sweet!!  The Child Tax Credit is considered a "refundable tax credit" which means if the credit results in a negative number, the taxpayer owes $0.00 in taxes but they are entitled to the $187.00 too!

We are not done with our tax credits yet.  The next one is called the  "EITC", which stands for Earned Income Tax Credit.  This credit is targeted towards low income people--single, married, with or without children.  It is considered a significant anti-poverty policy and enjoys significant bi-partisan support in Congress and the Presidency.  The EITC is WAY TOO COMPLICATED to explain in a few sentences. Wikipedia has a pretty good summary of it here.

This family qualifies for this tax credit too, to the tune of $450.  Because this credit is 'refundable" as well, we subtract it from our tax bill, which currently is a negative $187.00.  So if you add this credit to the the total, this family will receive a tax REFUND check of $637.000. 

This family effectively pays no federal income tax on their $45,000 AND they get an extra $637 to consume or save.

This is certainly a form of income re-distribution BUT as I mentioned earlier, both of these tax credits in particular enjoy bi-partisan support, historically. 

So, now you know how someone earning $45,000 per year can have no tax liability and receive a refund check as well. 

This is a working person (could be a teacher with THAT salary) who would be considered a member of the 47%.  Working and has a good job,  but the net recipient of tax dollars.

Hope this helps with your understanding of the issue.

Saturday, November 24, 2012

The baby needs new shoes! Do you want to pay 40% of the purchase price in taxes to do so? Probably not, but you DO. See here why...

Going to buy the baby some new shoes!!

Got this idea from Mark Perry.  Go HERE for more on the subject of Tariffs on imported shoes, which is the crux of this posting.

How much in taxes, that we can actually figure out, goes to purchase a $10.00 pair of basic rubber sole canvas sneakers for a child.  We HAVE to assume these are imported from China because there is NO domestic producer of this type of shoe.

Well, I have to earn the money first. So the first taxes I encounter of payroll taxes--Social Security, 6.2% of what I make and Medicare, 1.45% of what I make. So a total of  7.65% of my income.

I calculate I would (roughly) have to earn $10.85 before taxes.

Minus Payroll Taxes (Social Security (6.2%) and Medicare (1.45%) --Total = $.85 cents

I now have my $10.00 to purchase my babies shoes, right? Sort of. I assume I am driving to the store.  Assume I am going to need gas. Gotta pay gas taxes, State and Federal on each gallon of gas I buy.

In Texas the State Gas Tax assessed PER gallon (Texas it is $.20)
Federal Gas Tax assessed PER gallon (18.4 cents---round down to $.18)

Assume I need half a gallon of gas--Total Gas taxes would be =  $.19

Texas State Sales Tax---8% (give or take depending on your locality) =  $.80

Not done yet...Gotta back track a bit.

The shoe was imported.  Imported shoes of the type (cheap!) I want to purchase have a Tariff of 48% (unless it came from Mexico or Canada---NAFTA).  I am going to round to 50% to make the math a little easier.

Assume the shoe had an assessed value of $4.00 at the point of import at Customs.  The Federal Tariff would be $2.00 (50% of $4.00).  The importer of the shoe would now have that shoe for a total cost of $6.00.  They might add a dollar for good measure and sell it to the retailer you are purchasing it from for $7.00. They in turn sell it to you for $10.00.

So, how much in various taxes have you paid on your way to purchasing a $10.00 pair of shoes.

Payroll taxes--$.85
Gas Taxes--$.19
Sales Tax---$.80

Total: $3.84 in taxes that I had to encounter in order to get the shoes.  That is an effective tax rate of 38.4% on the $10.00 purchase.  I did not include any Federal Income Tax on the income.  The purchaser could subject to no income tax or a high tax. I just let that go. I also am missing other taxes embedded in the price of the good, other than the tariff, that the retailer pays too. Never ends, it seems.  The effective rate is probably higher.

I am not a math person. Tell me where I am going wrong. I am a willing learner.  Thanks!

The point of this posting is this tariff of nearly 50% is regressive and hurts the poor. There is no domestic industry to protect from foreign competition. Those are LONG gone, but the tariff remains.  If Congress and the President wanted to help the poor, this is easy pickings for repeal. 

Why don't they do it???

Average hourly wages for large retailers. How accurate are they??

I have not worked retail in quite some time. I would appreciate anyone seeing this and have worked for any of these companies (or in similar one) confirming these numbers are about right or if they are high or low. From the source, it seems these are "average hourly wages", so new-hires to experienced workers wages are included. Just curious as to how accurate these are. Thanks!

Source: Quartz

Wednesday, November 21, 2012

My Black Friday piece of Advice, Dos Equis-Style...

"I don't go to the mall very often, but when I do I know 50% Off might save me money but it is the 50% ON that puts me in debt. Stay solvent, my friends."

I've got too much free time on my hands...

A Thanksgiving Day meal costs 71% more compared to 1986 but it takes the average worker TODAY 45 minutes less to earn the money for that meal. This must mean we are better off, right?

Have to give an economics twist on the holiday. A requirement for an Econ teacher.

Here are a couple of graphics from The Conversable Economist.

The first shows, in inflation adjusted dollars, the change in cost of a shopping basket (literally) of some typical food items needed to prepare a Thanksgiving meal. Not inclusive of everything, but a representation.

Source: The Farm Bureau Federation via The Conversable Economist
Look at the blue line.  Pretty flat over time, with a pretty big dip on the left and an up turn on the right.  This means, after adjusting for inflation, the cost of this basket of goods has remained fairly consistent.  Ok, that is good news, I suppose. 

But what about the average consumers ABILITY to purchase these goods in any given year? 

One measure is to look at how many hours of work, given a persons wage, does it take to purchase this market basket of goodies.

In 1986 the nominal average hourly wage was $8.94 (average for the year--Data HERE--BEFORE TAXES). So in 1986 a worker had to work ($28.74 / $8.94) 3 hours and 15 minutes to pay for the market basket.(the prices for each years market basket are below)

In 2011 the nominal average hourly wage was $19.46 (before taxes).  In 2011 a worker had to work ($49.20 / $19.46) 2 hours and 32 minutes to pay for the same market basket.

The average worker today worked 45 minutes less to earn the money for Thanksgiving dinner than he/she did in 1986. 

Variables to consider: If taxes and/or other deductions are higher today than the nominal wage would certainly be lower, hence take more time to purchase the market basket.  Are the quality of the goods in the basket better, worse, the same?   What else am I missing?  Start a list...

Source: Farm Bureau Federation
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