Tag Archives: Taxes

5 Ways Joe Biden’s Presidency Will Affect Your Money – and How to Act Now

By Farnoosh Torabi – As with any new President, Joe Biden will have his work cut out for him when he takes the oath of office in January. And while his “build back better” plans are already laid out, it’s yet to be seen how much of an impact his administration can actually make on your finances.

The COVID-19 pandemic’s not behind us, so the recovery will be slow, which Biden has been clear about. Not to mention, with a very possible Republican Senate majority, many of the new administration’s initiatives could face serious pushback, if not a total squashing. The outcome will be determined in a couple months when Georgia’s two Senate run-off races happen.

In short, we can’t read far into what Biden is proposing and use it as a playbook for our personal finances today. “I’m not a big fan of people overhauling their finances or making moves on a presumption of something passing, simply because there are just too many unknowns,” Greg McBride, Chief Financial Analyst at Bankrate.com, told me on my podcast.

Here’s a breakdown of some of the major economic initiatives proposed by President-elect Joe Biden and Vice President-elect Kamala Harris, and how to interpret them for the sake of our financial well-being. As always, personal accountability will be just as — if not more — important than matters of policy. more>

Updates from Chicago Booth

The tax that could save the world
Most economists agree on how to tackle climate change. Can politicians make it happen?
By Michael Maiello & Natasha Gural – It was, perhaps, the closest that the economics profession has ever come to a consensus. In January, 43 of the world’s most eminent economists signed a statement published in the Wall Street Journal calling for a US carbon tax. The list included 27 Nobel laureates, four former chairs of the Federal Reserve, and nearly every former chair of the Council of Economic Advisers since the 1970s, both Republican and Democratic.

“By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future,” the economists noted. All revenue from the tax should be paid in equal lump-sum rebates directly to US citizens, they added.

Not all economists agree that the tax should be revenue neutral in this way, but the profession has been coalescing in recent years around the idea of a carbon tax. Most prefer such a tax to the most prominent alternative policy for tackling carbon emissions, cap and trade, according to a recent poll of expert economists.

But a carbon tax seems to be a political nonstarter in the United States. The bipartisan call for action from economists over the years has been echoed by a failure to act by presidents from both parties. President Donald Trump denies the need to confront man-made climate change. But although Barack Obama, his predecessor, in 2015 called a carbon tax “the most elegant way” to fight global warming, he didn’t push strongly for one to be introduced. “One of my very, very few disappointments in Obama when he was president is that he did not come out in favor of carbon tax,” Yale’s William D. Nordhaus told the New York Times last October, days after winning the 2018 Nobel Prize in Economic Sciences for his work on economic modeling and climate change.

US states have shown that they, too, can reject a carbon tax. more>

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Updates from McKinsey

How smart choices on taxation can help close the growing fiscal gap
The growing fiscal gap has policy makers in a difficult position. Swift action in a few areas can help them improve the operational efficiency of fiscal systems.
By Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi – Governments around the world have implemented a range of fiscal and debt measures to fund policy initiatives over recent decades. As a result, tax revenues as a proportion of GDP have risen four percentage points across Organization for Economic Cooperation and Development (OECD) countries since 1980. However, many governments remain inadequately funded. Despite higher tax revenues, spending is rising faster than income, leading to widening budget deficits and higher levels of debt.

Four distinct trends are playing out: increasing automation in the workplace, leading to pressure on employment; the evolution of global trade through the proliferation of e-commerce and digital business, raising questions over cross-border taxation; rising self-employment; and an aging population. Each of these could further widen the fiscal deficit in the years ahead. Moreover, we see all four accelerating, placing policy makers in an ever-tightening fiscal bind.

Basic economics provides two options for balancing the books: either increase revenues or decrease spending.

The bottom line for governments is that there are no easy answers. Whether they seek to increase taxation or boost efficiency, they are likely to face headwinds. Still, decisive and rapid action is essential to optimize tax collections and keep pace with an inevitable rise in demand for services.

Tax revenues in OECD countries have risen slightly over the past 35 years. However, spending has risen more, leading to widening deficits that governments have bridged with debt. OECD tax revenues were 34 percent of GDP in 2017. Because of tax deficits and the effects of the 2008 financial crisis, the average ratio of gross debt to GDP rose from 66 percent of GDP in 1995 to 88 percent in 2017.

Sources of tax revenue have remained stable over time. Over three decades, personal income and consumption together accounted for 82 to 89 percent of revenues. The biggest single contributor was payroll and income tax, accounting for 50 to 55 percent of revenues (even though the contribution of personal income tax declined by nearly 7 percentage points). Consumption and excise duties remain little changed at 32 to 34 percent of revenues.

More people are working for themselves, either as a contractor to several companies or a single company. This emerging gig economy accounts for an estimated 28 percent of EU and US employment. The proportion would rise to 46 percent if everyone had their preferred working arrangement, according to MGI research.

However, the gig economy creates challenges for tax authorities. First, independent workers are generally less compliant than their employed peers, and in some countries are required to pay less taxes. Evidence from the US suggests that workers subject to limited information reporting, such as the self-employed, have an around 50 percentage point lower rate of tax compliance than traditional workers. There are also ongoing legal debates in some jurisdictions over whether gig economy workers are employees for the purposes of worker classification and social security contributions.

Governments can close the widening gap between revenues and expenditures in a variety of ways through tax revenues, nontax revenues, and spending optimization. In addition, some governments are either implementing or considering approaches based on monetary finance.

The gap between government revenues and spending has widened and is likely to continue to do so. The onus, then, is on tax authorities to act now. more>

France’s Tech Tax: What to Know

By Andrew Chatzky – French lawmakers just voted for a digital services tax that takes aim at two dozen large tech companies, including several high-profile U.S. brands. The move caused bipartisan dismay in Washington, and the White House has threatened retaliatory tariffs. But more countries could soon follow France’s lead.

On July 11, France’s Senate passed what’s come to be known as the “GAFA tax”—so called because it is seemingly designed to target Google, Apple, Facebook, and Amazon. It slaps a 3 percent tax on revenues earned by digital services firms that have total yearly revenues of more than $845 million and yearly sales in France of more than $28 million.

Few such French companies exist, leading to U.S. complaints of unfair treatment.

U.S. leaders have long complained about the European Union targeting American tech champions. The EU counters that regulation is needed to protect consumers’ privacy, avoid monopolies, and make sure Silicon Valley giants pay their fair share of taxes.

However, the bloc has so far failed to agree to EU-wide rules for taxing them.

The problem is that tech companies can put their offices in low-tax jurisdictions, such as Ireland or Luxembourg, and pay little in taxes, even as their revenues have surged across the EU. Brussels says that these companies end up paying taxes at less than half the rate of traditional businesses. But opponents of an EU tax, including Denmark, Finland, and Sweden, say that taxes on revenues rather than profits are unfair and would make the EU economy less competitive. more>

Updates from Chicago Booth

How sales taxes could boost economic growth
By Dee Gill – The fight against sluggish global economic growth has been expensive, protracted, and unexpectedly vexing, leaving central bankers in developed economies with a laundry list of shared frustrations. Meager economic growth, flagging wages, and low inflation persist, in spite of bankers’ monetary stimuli, and threaten to quash upward mobility for young job seekers and midcareer employees in even the richest countries.

There’s a poster child for what countries do not want to become: Japan. The former economic powerhouse has been stuck in low-growth purgatory since 1991. And yet, as much as they’d like to avoid it, some countries have been sliding in that direction.

Many big economies are stagnating, and economists are running out of options to fix them. The conventional monetary policy for encouraging spending has been to drop short-term interest rates. But with rates already near, at, or below zero, that method is all but exhausted. Some economists have also started to empirically and theoretically question the power of forward guidance, in which central banks publicize plans for future interest-rate policies, at the zero lower bound.

Central banks and governments badly need a new stimulus tool, preferably one that doesn’t cost a lot of money. Some researchers are proposing a fix that might sound unappetizing: raising sales taxes as a means of jump-starting economic growth.

Francesco D’Acunto of the University of Maryland, Daniel Hoang of Germany’s Karlsruhe Institute of Technology, and Chicago Booth’s Michael Weber find evidence that a preannounced tax hike—a 3-percentage-point increase in Germany’s Value Added Tax enacted in 2007—provided just the kind of growth stimulus central banks desperately need today. more>

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Is Silicon Valley’s giant foundation just hoarding money?

By Ben Paynter – In late July, the Institute for Policy Studies warned that one of the fastest growing ways of giving to charity could be manipulated to benefit super-rich donors instead of those most in need.

The charitable vehicle in question is called a donor-advised fund (DAF), which allows donors to give money and non-cash assets, including public stock, to charity to receive an immediate tax benefit, but then wait to distribute the money. It’s a clever incentive that’s particularly en vogue among the 1%, in part because it allows for contributions of non-cash assets, such as stock, private company shares, and real estate, to avoid capital gains tax.

The issue is that there isn’t any formal timetable for that money to flow back out again, or necessary guidance on how particularly large sums might effectively be spent. Both issues appear to affect the Silicon Valley Community Foundation, a $13.5 billion cause fund that has received donations from Mark Zuckerberg, among other tech elite.

Among the 80% of charities that have tried to expand in recent years, half have exceeded their sustainable budgets, a precarious position for any organization that relies on (hard to access) grant money to remain afloat. Per Open Impact’s report, the region’s tech elite may be giving billions to philanthropy annually, but community groups have historically received next to nothing. more>

To stop endless war, raise taxes

BOOK REVIEW

Taxing Wars: The American Way of War Finance and the Decline of Democracy, Author: Sarah Kreps.

By Sarah Kreps – What explains the American tolerance for such open-ended, seemingly never-ending wars?

One view is that the light footprint of modern warfare — drones, small numbers of special forces, and cyber, as opposed to large deployments of troops — is a chief culprit. This approach to conflict removes a barrier to war because it does not inflict casualties on American troops that would draw attention to and drain support for the enterprise.

This is surely a contributing factor. But I argue that the most crucial difference between these wars and those of the past is how they have been financed.

Contemporary wars are all put on the nation’s credit card, and that eliminates a critical accountability link between the populace and the conduct of war.

But without war taxes, the country is left with mounting debt — and left, too, with wars without accountability. If the public fails to experience the “inconvenience” of taxes, paraphrasing Adam Smith, there is no incentive for voters to push for a course correction.

When no citizen feels a financial pinch during wartime, open-ended wars like those in Afghanistan and Iraq are likely to become the norm, not the exception. more>

Source: To stop endless war, raise taxes – Vox

updates from Chicago Booth

Why it’s so hard to simplify the tax code
By Dee Gill – Simplifying the tax code ostensibly has bipartisan backing. Both the Bush and Obama administrations advocated for simplification, in reports, as have House Speaker Paul Ryan (Republican of Wisconsin) and Senator Elizabeth Warren (Democrat of Massachusetts). But when the Senate passed a tax bill this past December, there was no postcard.

What happened? The same thing that always does, suggest researchers. While simplicity is a stated goal, complexity wins the day. Hence companies and individuals will hire accountants to wade through the latest bill, interpret the new rules, offer guidance, and help work through the inevitable corrections and amendments.

And this comes at an economic cost. Research by James Mahon and Chicago Booth’s Eric Zwick, and others, collectively indicates that the complexity leads individuals and companies to fail to take advantage of billions of dollars in offered breaks, many of them presumably intended to stimulate the economy. In this way, complexity undermines what tax incentives are purported to accomplish. more>

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Updates from Chicago Booth

Why we should teach people how to lie
By Chana R. Schoenberger – Could you handle being honest—totally, brutally truthful, without even a well-intentioned falsehood to smooth over a social situation—for three days?

Most people don’t think they could, at least not without ruining their family, social, and work lives. Fibs, white lies, and half-truths (along with, perhaps, more egregious whoppers) are such an important part of our interpersonal tool kit that going without them seems next to impossible.

But Chicago Booth’s Emma Levine, along with Carnegie Mellon’s Taya R. Cohen, asked exactly that of a group of research subjects and came away with a surprising conclusion: it’s not as bad as it sounds.

The researchers asked some participants to be completely honest in every interaction, with every person in their lives, for three days, while other participants were asked simply to be kind or conscious of their words. The participants predicted that being forced into honesty would make them unhappier than if they had to be kind or just aware of what they were saying to others. They anticipated frayed relationships as a result of abandoning the lies they typically use to cover up awkward or uncomfortable situations.

But being honest didn’t torpedo subjects’ friendships, family connections, or jobs.

“The experience of being honest is far more pleasurable, leads to greater levels of social connection, and does less relational harm than individuals expect,” Levine and Cohen write. more>

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An Economic Sugar High


By Andrew Soergel – As recently as Wednesday, President Donald Trump was quoted during a Cabinet meeting as saying he sees “no reason why we don’t go to 4 percent, 5 percent and even 6 percent” gross domestic product expansion in the months and years ahead.

Economists have broadly doubted these claims – though few quibble with the idea that the GOP-constructed tax plan would have a modestly positive impact on markets and the economy over the near term. Analyses from the Joint Committee on Taxation, the Tax Policy Center and the University of Pennsylvania’s Wharton Budget Model have all predicted a final bill, in a best case scenario, would add a few fractions of a percentage point to the country’s GDP growth rate over the course of the next 10 years.

A growing number of experts are using the term “sugar high” to describe what the tax bill is likely to do to the U.S. economy – provide some short-term energy for growth before petering out or, even worse, pushing the country toward a crash. more>