My Corner Of The Universe

Since we’re deep into the election rhetoric, and much of it revolves around taxes, I want to take a moment and discuss taxes.  I guess I’m just jumping on the bandwagon.  However, I’d like to depart from all the stuff that passes itself for truth on TV and actually provide some facts.

It’s always amazed me how most people are unaware of the specifics of taxation.  I guess to say it amazes me does, in fact, prove that I’m a geek, but so be it.  I look at my check stub every two weeks and when I look at one of the biggest things that makes the begining balance go down, it’s taxes. 

So, I’d like to provide facts about what the IRS collects ever year and specifically talk about:

• How tax revenues are spread by income levels
• Corporate taxes versus income taxes
• How business tax revenues are spread by business size
• Anything else that might come to mind along the way.

So, without further ado…. let’s dig in!

How about those tax revenues?

To begin, all the data that I used is readily available from the IRS website, i.e. IRS.gov.  The IRS publishes data on its revenue collections.  Some of it is very straight forward, some of it, not so much.  As I was approaching the most recent data, which is generally from 2007, I was particularly interested no only in the general demographics of tax and income level and distribution of returns but also some of the things I’ve heard about from the various candidates.  One of the things I’ve noted is the magic threshold of $250,000.  One of the tax plans is all about individuals and businesses that make more or less than $250,000… at least that’s the current figure

I also have this morbid curiousity about what matters and doesn’t when it comes to taxes.  The notion being that there has to be some point in the tax system where the taxes that someone pays is so low as to make the actually processing irrelevant.  I have no idea what the costs are but it occurs to me that if there were a large number of tax returns that didn’t have much tax against them that could be removed from the system, the IRS could probably make it up in labor costs savings or the GAO (General Accounting Office) and the OMB (Office of Management and Budget) could find incremental cost savings to make that tax uneccessary.  Hard to believe, I know, but I keep thinking.

So let’s start with some basics around IRS tax receipts:

• In 2007, the IRS collected over $2.7 TRILLION dollars from all forms of Taxes
• •  50.7%, or $1.37 Trillion came from individual tax payers of all incomes levels 
  • Business and Employment Tax accounted for 46.2%, or $1.25 Trillion
  • Excise Taxes (tax on alcohol, tobacco and gasoline) was $53 Billion dollars or 1.97%
  • Estate and Gift taxes were $26.98 Billion, or 1% of all tax

When I look at the numbers it makes me stratch my head and wonder what the heck all the talk was about this last summer about gasoline taxes as part of the “high prices of gas”.  Only $53 Billion (yeah, I know “only”) comes from the combo of Alcohol, Tobacco, and Gasoline and that is less than 2% of all receipts, I just have to wonder if there’s entirely too much “majoring on the minors” going on. 

Of course, it’s always good talk about it because gasoline tax touches us all and if we don’t actually know how much tax there is… well, it sounds like a big gesture.  As I looked deeper, the current gasoline tax, Federal, is 18 cents pere gallon, which goes into the highway trust for use to fund road initiatives.  The money is collected by the IRS but the money immediately goes to the trust.  I dug deeper and found that states impose their own taxes such that the national state average is 47 center per gallon.  That means the average state adds at least about 29 cents of tax on top of the federal tax.  Interesting. 

So, while the federal government could probably chuck a good portion of the gasoline tax of 18 cents and pay for it by an incremental reduction in highway spending (Like not fixing all those bridges about to collapse for another year) the states for the most part couldn’t.

Personal income tax and business / employee witholding the two largest areas and, when you add in unemployment insurance proceeds and other incremental taxes of business,  it’s very close to 50/50. 

Similar to gasoline taxes, one must wonder what all the hub bub is about regarding the Estate Taxes.  I tihnk it’s sounds good to talk about taxing the “rich” when one doesn’t consider themselves rich.  Beyond that, there’s not much to gain or lose either way.

Now, moving to Income Tax, I did an analysis of the number of returns filed, the amount of tax collected, and income levels.  After analysis, the good old 80/20 rule (The Pareto Principal for you purists) is king:

In terms of purely the number of returns filed, we find:

• Percent of Total Returns From $0 - $40,000:  41.5%
• Percent of Total Returns From $0 - $50,000:  51.5%
• Percent of All Returns From $100k - >$10M:  17%
• Percent of All Returns From $200k - >$10M:  4%

What’s it mean?  Well, in terms of the number of returns, the bulk of ALL returns are from people that earn less than $50,000 per year (either filing singly or married).  In fact, if you draw the line at $40k, you STILL have over 40% of all returns.

Further, the total number of returns from those earning more than $200k is only about 4% of the total

In terms of taxes paid and using the same income breakouts above, the story is the opposite:

• Percent of Total Returns From $0 - $40,000:  5.2%
• Percent of Total Returns From $0 - $50,000:  8.38%
• Percent of All Returns From $100k - >$10M:  73%
• Percent of All Returns From $200k - >$10M:  53%

Simply Put:

• 8.38% of all taxes are paid by those making less than $50k and 91.62% of all taxes are paid by those making above $50k. 
• More specifically, over half 53% of all taxes are paid by the top 4% of tax payers ($200k+).  Similarly, close to 75% of ALL personal taxes are paid by those making $100k or more.

Given the above, what would happen to the annual tax revenue if we simply eliminated any tax requirement from those making less than $50k per year?  Well, the total volume of tax returns would drop by 50% and the tax receipts would drop by $164B.

$164B is a lot of money, right?  In terms of the 2008 budget, $164B is equivelant to:

• 6.7% reduction in the total revenues of the country
• About 5% of the expected 2009 revenues
• About 20% of the Bailout to financial companies
• About the same amount as the amount added to the defense budget in 2008

Reality is… it wouldn’t be that hard to literally eliminate taxes for everyone below $50,000.  Especially when you run the resulting money back into the economy.  The US GDP stands at about $13.7 Trillion (Yes, that’s Trillion with a “T”).  We are the largest global economy, by a long shot, in the world.  The annual percentage growth is not as high, sitting around 2 - 3% typically, but the absolute numbers are significant.  It’s been a tough year and the general hope is that the US economy will have expanded by 1%, versus contracting, by the end of 2008.  1% GDP growth is about $137 Billion (Yes, Billion with a B… and it’s a very bad year) in annual growth.  In comparison, the total GDP of Finland, the 55th largest econmy in the world) is $188 Billion.  So, if the US grows at about 1.3%…. it increases by an equivelant of the whole country of Finland in a year.  Now, what happens if we reduce the taxes on all returns with an adjusted gross income of $50k or less?  For one, we probably add close to that amount of money to our economy because the likelyhood that spending would increase is very high.  Sure, some would pay off bills, some would save, but generally speaking if most taxpayers knew they wouldn’t be having to pay federal tax anymore, we could well see our economy expand by close an additional 1%.  If, for the sake of the argument, that had happened at the end of 2007 and people had simply used that money in the economy, our economy could have well grown by close to $300B which is equivelant to Switzerland, the 38th largest economy in the world. I find it interesting that our government did a $145B economic stimulus package earlier in the year that gave people money to spend.  Rather than “stimulus”, why not turly stimulate the economy by making that permanent and removing the taxes of all those under $50,000.  If the government was willing to give that money out, surely there’s a way to make it permanent and reduce the annual budget.  What’s so hard about that?

Well, from a political perspective, I’d suggest there are three things hard about that:

• It would actually mean Congress would have to reduce the buget and while there’s lots and lots of opportunities to do it, their desire to be fiscally responsible is about zero
• Most politicians believe they would lose their ‘leverage’ 51.5% of voters.  Taxes are a lightening rod issue come election time and if those earning less than $50,000 didn’t pay tax, how could they get their attention?
• It makes the idea of a tax increase for the ‘rich’ seem unfair.  Similar to the above, if all those making less than $50k didn’t pay taxes then it would be that much harder to accuse “rich” people of dodging the system and not paying their “fair share”.  Especially given the fact that those making $100,000 or more are paying 73% of ALL personal income taxes.

Generally, it’s a shame that politics gets in the way of good fiscal policy and economic growth.  Imagine a world…. where those making under $50,000 got to keep, on average between $3,000 to $5,000 simply by not paying federal income tax. 

Interestingly, Corporate Income Tax follows a similar pattern.  Corporate income tax returns are broken into categories based on the way the business was incorporated.  Below is the breakout in terms of number of returns:

• All Businesses regardless of type:  27,486,691 Returns in 2007
• • “C” Corporations (Typically larger):    7.5% of all returns
  • “S” Corporation (Typically smaller):  12.16% of all returns
  • Partnerships (Typicaly smaller):           8.6% of all returns
  • Sole Proprieterships (small):              71.71% of all returns

When looking specifically at the amount of tax paid and the number of returns across all corporations, we find the distribution of federal tax paid is much more pronounced: 

• 63% of all corporate taxes are paid by 0.12%, or 32,040 out of 27,486,691 companies.
• In fact, 90% of all corporate taxes are paid by only 4.5% of all companies
• Below that, the averages get kind of “hokie” but to say that if “Joe the plumber” is an average sole proprieter making about $53k per year… his tax is $770.00 per year. 

Keep in mind the corporations do not include social security or medicare. Once again, though, I find it interesting that 90% of the tax is paid by 4.5% of all companies. 

In an age of spin and career politics, it’s important to understand the real numbers.  My intent has not been to form any specific judgements, unless the numbers glare back at me (as some do) but to try and provide some facts you, the reader, can hold onto.  It seems as though everyone involved in media, politics, etc. these days simply use whatever data is convenient rather than actually supporting their views with real facts.  As passive watchers, voters, and disinterested “side-liners”, we don’t hold these people accountable for the facts because, often, we have no idea what they are.

Have a great day!

Sources:  Annual Reports available online at http://www.irs.gov
               GDP economic information available via the World Factbook published at http://www/cia.gov

There are 100 people in the US.  Well, actually there are 6.5 Billion people in the world and 300 million in the US but I can’t do that math.  So, for the sake of this… there are 100 people in the
US. 

80 people will live their life like the following:

      They will get up everyday and go to work or school or wherever and do what’s expected of them.  They will live their life and be law abiding and do all they can do to live a good, normal life. 

        They will get married between the ages of 25 - 32, have 2.3 kids, 2 cars, and steady jobs.  They will be called the “backbone” of our society.  They will likely outlive most everyone else.

         They will tend to be change adverse and be concerned with the pace of society.

         They will tend to think that their generation was good and that things are generally getting bad

 

11 people will live their life like the following:

         They will be born into some level of poverty. 
They will likely have family members who will die before they reach adulthood.  
They will witness death, prostitution, pain and suffering, hopelessness, and will likely have only one parent, typically female.  As a result of this environment:

o       9 will grow up and perpetuate the environment which may include having a child before they are 18, leaving someone pregnant with a child, succumbing to various addictions, and or committing a felony and spending significant time, if not most of their life, in prison

o       2 will grow up and break out of their environment into a different environment.  This could be radically different or simply taking the next step by deciding to no longer be a victim to the environment, working harder than all those around them (probably harder than 95 out of the 100 people) and, although every odd is against them, they will change their environment and begin a cycle in their family of growth.  

 

7 people will live their life like the following:

         They will get up everyday and go to work or school or wherever and attempt to do what’s expected of them.  But they will feel a restlessness they can’t seem to shake that doesn’t quite allow them to conform for the sake of conformity.  

         They will feel compelled to pursue something bigger than themselves and it may take years to find out what that something is.  But they will be driven to find something they can’t quite see but know is there.

         They will tend to want things in their life to change and will be driven to see things change.         Somewhere along the way, they will be confronted with a cross-road in their life.  It will be the first of what will likely be several.  They will have to make a decision and either takes a risk that is bigger than themselves or sacrifice something that is more than they have ever sacrificed.  

         5 of the 7 will not be willing to take the risk or make the sacrifice.  They will find something that is not as risky to risk. To them, it will make sense and that will count for a lot.  The level of risk they chose will become a pattern of other risks they choose to make.  There is a barrier in their life preventing them from risking more.  There are several potential reasons.  They may have insecurity in their life from growing up and they just can’t risk it all because they are afraid.  They are afraid of being found out.  Found out to be a fraud who shouldn’t have been there at all.  It’s whats’ been driving them all these years.  Another reason is they find that the risk they are asking to make just isnt’ as important as they once thought it was.  So, they are more comfortable with what they have today and are no longer willing to give it up.  There are some other reasons too but these two will tend to predominate.  As a result the 5 will become successful and will ultimately settle into that success and be comfortable with it.  Toward the later part of their life they will come to terms with what happened.  Usually the one afraid of being found out comes to understand they are legitimate.  The one that didn’t see the risk as being important enough usually has life events show them that they were right in their thinking.  They will tend to do things that allow them to hold onto their success rather than to risk more.  To them, life will have been a means to an end and they will have achieved the end.  They will live their life, be satisfied and happy, and have experiences most never think about having, and will look back with virtually no regret.  

         The other 2 will take the risk that is the greatest risk they have ever taken.  50% of the time, they will successfully navigate the risk and will achieve something they will see as very special in their life.  It could be an experience (or series of experiences), it could be an accomplishment, or it could even be someone that comes into their life.  The other 50% of the time they will utterly fail.  It wont be a partial failure it, it will be an absolute complete failure.  It will potentially rock their world and has the possibility of destroying their confidence to the point where they recover and become on of the 80. But it almost always won’t do that.  Instead, they will experience the failure. They will come to realize that failure, when true effort has been applied, is nothing to fear.  They will likely come to embrace failure as a critical part of success.  As a result, they will persevere.  They may or may not ultimately reach the highest goals they can set, but they will see sucess as success.  Like the other 5, they too will live their life, be satisfied and happy, and will have experiences beyond what all but the smallest of the population will ever see.  

 

 

2 people will live their life like the following:

         They will be born into virtually any circumstance.  In fact, they will look like any other of the 98 people around them

         They will grow up feeling restless like they don’t quite belong wherever they happen to be.  They may move a lot, or they may spend the bulk of their time in one place.  No matter, they will never quite belong; even if they are ultra popular.

         They may have hundreds of friends or no friends but no matter what, they will never feel like they are accepted.  Along the way, they may find the other that is a kindred and this could be the closest friend they will ever have although they will just a likely lose touch with that person if the dreams don’t coincide.

         They will have something inside them that will gnaw at them some purpose they are supposed to accomplish.  Something they are supposed to be. 

         They will have an unusual level of talent but almost always will NOT be the most talented in the bunch

         They will tend to have tunnel vision as they get older and others will be surprised at how focused, even obsessed, they tend to be about whatever that one thing is they are trying to become.

         They will make sacrifices.  They will make virtually ANY sacrifice they need to make to move closer to the elusive thing that they are supposed to be.

         They will pursue their dream with abandon.  They will not give up.  They don’t know how or why. 

         One day, they will either achieve their dream or, with each passing day, realize they will not achieve their dream.  If they will not achieve it, they will likely settle into a life that allows them to still keep trying; whatever that means. 
If they achieve it, they will reach a level that may make them known in society.  They could be some kind of star at something.  There’s a 30% chance they will have their run, enjoy it, and then mold back into society successfully.  There is a 10% chance that the achievement will, in fact, consume them and they crash.  There is a 55% chance that they will have their run, enjoy what they enjoy, and will then spend the bulk of their life trying to find the life that comes after the life they dreamed of finding.  The challenge for them is that they are like the dog that chases after cars.  What happens when it actually catches one?

 

So, whats good and whats bad in all this?  Well, other than the tragedy of poverty and the fact that we live in a society where we often simply accept that 11 people will be born into circumstances that are stacked in a way that makes it extremely difficult to change their situation (even in a free country).. nothing.

 

There is no good or bad.  If you are reading this and feel some level of disdain for one group or another; its probably a good indication youre not in that group

 

The question for you to wrestle with is this: 

Which group are you in?  Can you tell?  Do you believe it?  Are you happy about it?  There is nothing wrong with any group here.  It is a feeble attempt, at best, to provide a view of society many people will recognize but not be able to articulate.  

 

The main difference between the groups are:

         The risks you’re willing to take in life for rewards (based on how you define rewards)

        
Your commitment to actually achieving what is in your mind that you want to accomplish.   In contrast to your comfort with accepting circumstances and going with the flow to achieve things in your life.  Some people there is one road for their life.  Some believe there is one person for them, or one job for them.  For others, they believe that the circumstances and situations of their life will dictate who they find, or what they do, or where they do it.  It doesn’t matter which you choose to be provide YOU choose to be one or the other.  I would suggest to you that it is very difficult to slide between these two behaviors.  You’re either chasing something or youre letting something unfold.  I can’t see how someone can chase something that is unfolding!

Your personal willingness to persevere regardless of the circumstance to actually achieve what you set out to achieve without settling for something that you would feel is less.  Notice, I’m not saying that people don’t settle for things and I don’t believe theres anything wrong with settling for something.  The difference between just settling and settling is huge.  If you go to an ice cream parlor with your mind set on double chocolate chip ice cream and the place doesn’t have any, you have a couple of settling options.  You can settle to decide to try somewhere else.  You can also settle for the brownie fudge twist because you know you like that as much as the other.  Thats SETTLING.  If you just settle and choose the chocolate chip because, well, it would be a big hassle to go somewhere else and besides, chocolate chip is still chocolate.  To me, that is just settling.  You know you let yourself down. You know you weren’t willing to persevere and you compromised what was important for what was convenient.  The danger in just settling in your life is that bitterness can creep in.  Settling, i.e. deciding to become satisfied with something you feel is a fantastic option; even if it isn’t exactly what you had in mind is liberating.  Simply settling for what is convenient sews great seeds of discontent that can come back to haunt you later.

 

So, there it is.  Another observation on life.  Did it strike a chord?  If so What will decide to do about it? 

 

Cheers,

 

Jim