Monthly Archives: March 2012

Abe Lincoln paid $1,296 in income taxes in 1864


Fact: The average top marginal tax rate in the US since the institution of the Federal Income Tax in 1913 through 2011 is 59.4%.

Fact: The average top marginal tax rate from 1913 through 1989 was 66%.

Fact: The average top marginal tax rate from 1990 though 2011 is 36.3%.1

Already we can start to see a problem.  Let’s look closer at these numbers though.  (The income tax did not, as many believe, actually start in 1913 with the passage of the 16th Amendment.  The first personal income tax in the US was in 1861.)

Abraham Lincoln's Income Tax Record 1861

Yeah, President Abraham Lincoln paid $1,296 in income taxes in 1864.  That’s a copy of the record.  5th line down.

I don’t really care to get into a full history of the personal income tax in America though.  The bottom line is that if we want government services, such as roads, protections, Social Security, Medicare, Veterans services, etc then they have to be paid for.  We long ago left the world where those services can be paid for by tariffs.  A sales tax is a regressive tax that disproportionately impacts the lower income side of the economy.  It cannot be used as the sole funding mechanism for the services that we demand from our shared society.  It could be considered as part of a total taxation system, but even that is not a progressive or fair system.

The income tax rate has varied through the years.  As it should.  When the needs have been higher, the rate has gone up.  With one noticeable exception.  The last 30 years or so, beginning with Reagan, though it really kicked into high gear with Bush the Elder.

From 1913 to 1915, the top rate was 7% then it doubled to 15% in 1916, then jumped up to 67% in 1917 and peaked at 77% in 1918-19.  hmmm … Oh, yeah.  World War I.

It started to come down, slowly as we continued to deal with the debt we had over the next few years until it was back down to 25% in 1925.  Wall Street Crashed in 1929 and eventually, in order to rebuild the economy, the Revenue Act of 1932 raised the top rate to 63%.  With the New Deal, it was raised to 79% to fund the recovery.

Along comes World War II, and the top rate peaks at 94% in 1945!  The Korean war during the 1950s kept it hovering around 91-92%.

It was lowered under Johnson to 77% and then to 70% from 1964 on.  In 1982, the top rate was lowered to 50% where it stayed until ’87.  A brief dip down to 28% from 1988 to 1990 back up to 39.6% under Clinton.  Oh, yeah.  That was when we were projected to have budget surpluses, if you’ll recall.

Now, here’s where the real stupidity hits.  9/11, two wars, and the top marginal tax rate drops!!  It drops to 35%.  Which doesn’t seem like much until you consider that no one is actually paying this top rate.  Mitt Romney, for example, made $21.7 million in 2010 and paid just 13.9% in taxes.  Warren Buffet, in 2010, made $62,855,038 and paid just 17.4% in taxes.  This is largely due to two factors that are not available to most of us.  One, the deductions which are available for charitable giving and so forth make a huge impact.  Two, investment income is taxed at a much lower rate than labor income.

Correlation is not causation, of course, but the economy has tended to do the best when taxes on unearned income were high. Economic growth was great during the 1950s, when dividends were taxed at very high levels and capital gains rates were 25 percent, much higher than they are now. Since 2003, tax rates on unearned income have been at their lowest levels ever, and economic growth has been sluggish.

I am not advocating war here.  I abhor war.  I wish I lived in a world with out it.  I don’t live in that world.  The point though is that in the past we paid for the wars that we were in.  When we needed to rebuild the economy, we paid for it.  We raised taxes.  We didn’t build up the massive and devastating debt that we have now.  We didn’t pretend that higher taxes were devastating to the economy.  Clearly they aren’t.  Look at how we grew through these times.  We didn’t shy away from having the wealthy paying their fair share.  Those who benefited the most from our shared society, our shared growth, have the most to return to our shared recovery, and, in return, will get the most from the shared recovery.  That is how the society works.

So, while there is certainly bloat in the system and efficiency to be found, we need to return to a more reasonable tax rate on the upper end of the income spectrum.  Neither the Democrat nor the Republican wing of the One twoo party is truly arguing for this.  Given our current debt and the bail outs for the wealthy that we recently made, that rate is probably in the neighborhood of 75%.  We need to remove most if not all of the loopholes that have been implemented in the system that allow for the avoidance of taxes by the uberwealthy.  It was the existence of these very loopholes which led to the creation of the Alternative Minimum tax, which was a good idea, but fails to achieve its purpose because it, like so many things, was not updated.

We need to also look at the capital gains rates and other unearned income tax rates.  We’ll tackle that soon.  Suffice it to say for now, that the same holds true.  The periods of most solid growth and lowest debt in our country’s history have not been the periods of lowest taxation.  This is a myth that has the veneer of truth only because the conservative marketing machine has been so effective.  The facts speak for themselves.

1 – Calculations made from raw data.  Raw data available from The Tax Foundation.

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Abandon all hope, ye who enter here?


There’s a new report out from the Pew Research Center for the People & the Press.  It is highly detailed with pages of analysis of the voting population and their current and recent historical views.  This report, The Generation Gap and the 2012 Election,   The short version is that there is an ever-widening generation gap between the Silent Generation (ages 66 to 83) and the Millennials (age 18 to 30), with a predictable concentration of Republican identification at the older end of the spectrum and Democratic identification at the younger.  However, that is an over simplification.  For one thing, the younger generations are, thankfully, not as heavily identifying with either party!

There are many really interesting details, comparisons and facts throughout the report.  It is a fascinating and long read.  What really caught my attention and brought me to a screeching halt though was the section on Generations and Civil Liberties which is under Section 8: Domestic and Foreign Policy Views.

 

Honestly, this section makes me want to scream.  I look at this across the board, regardless of age and I think, “We’re lost.”

Only 24% agree that “Torture against suspected terrorists to gain important information can be justified” never?!!  And, when we look across all age groups, that doesn’t vary much, but the highest is in the Silent Generation at only 26%.  To quote, Ric Santorum, it makes me want to throw up.  I find it not even a small comfort that this is a larger percentage than the group who responded with “often” at 19%.  How many of our “leaders” have repeated that we do not torture?  Guess what?  Apparently, an awful lot of you think it really is okay.

Those who would give up Essential Liberty to purchase a little Temporary Safety, deserve neither Liberty nor Safety. – Benjamin Franklin

How interesting that it is only the youngest who remember this truth by such a large majority.  The rest of the age groups are so divided, with roughly half being willing to give up liberties in order to feel safe.  When, in fact, the steps we have taken since 9/11 have not increased our safety, but rather had no effect or actually made us less safe.  Airport security in Israel, whose government has many crimes to answer for, but who does also face many legitimate terrorist threats, for example, is very different than here in the US.  Experts on the Israeli system laugh at the security show that takes place here.  I am not advocating profiling.  I am just pointing out that what we are doing it not accomplishing anything.  Our TSA cannot point to any one, single success.   The PATRIOT Act is a horrible abuse of our rights which has been continued and renewed under Obama.  The NDAA 2012 further expanded the encroachment on our civil liberties in the name of security.  HR 1981.  The list goes on and on.  And, yet, by and large, as long as people have their bread and circuses, their American Idol ….

Are we really willing to allow this to continue unchecked?  I am reminded as I so often am of the Martin Niemöller quote:

First they came for the communists, and I didn’t speak out because I wasn’t a communist.

Then they came for the trade unionists, and I didn’t speak out because I wasn’t a trade unionist.

Then they came for the Jews, and I didn’t speak out because I wasn’t a Jew.

Then they came for me and there was no one left to speak out for me.


P2P Finance FTW


As many will recall, there was a push to move your money from banks to credit unions last November 5th.  What was called Bank Transfer Day.  It was, and is, a good idea for a host of reasons that I am not going to get into here.  Suffice it to say that I supported it, and if you didn’t do so then, it is never too late!  By some accounts Bank Transfer Day was quite successful.  The question is, as with so many in our short attention span culture , one of continued success.

However, another way that we can help ourselves in the financial realm is through microfinancing, and particularly peer-to-peer lending. Make no mistake about it.  Finance and politics are inextricably linked for as long as we are living in a capitalist system.  The only questions we have in that regard is how and to what extent.  Do we continue to maintain the course of the last 40 years until we sink or do we alter course now while we might still save the ship?

You may have heard of the Grameem Bank.  In short, it dates back to 1976 when Professor Muhammad Yunus started a system whereby very small loans were made without collateral to the very poor.  His reasoning was that their skills were under-utilized and under-valued.  Through these loans, they would be able to survive and even lift themselves into better circumstances.  (There is much more, including some criticism to know about the history and theory, of course.  You could read more about it using this as a jumping off point.)

The Grameem Bank was the modern beginning to a system that actually goes back hundreds if not thousands of years.  Since then, a number of other organizations have spread the same concept around the world.  Essentially making credit available to people living in a capital driven society to whom that credit would not otherwise be available.  Professor Yundus is a perfect example of finding a way to use the system against itself.  Instead of seeing the problems and throwing his hands up, then walking away, or only providing support and not also providing rehabilitation, he found a way to tweak the system to provide both.

And, the kicker is that he did so using the social structure he was in so that those borrowers are also committed shareholders.  Just like in the credit union model.

Okay, so, what’s the point?

The point is that this is, I believe, another way that we can and should be helping ourselves for the future as well.  “What?”  Yes.  Through microfinancing as a way of investing for the future.  The individual investments, financially speaking, can be small and the returns can be on par with mutual fund averages.  However, the social investment ratio is higher.

If you have been reading along for a while you may recall that in December I posted about “Empower United” .  I thought that they, too, might be part of the way forward.  However, as I wrote, I believe they are just more of the same.  Their marketing materials are high on promoting social values, but that’s gimmick.

Microinvesting via peer-to-peer lending is a particularly good option for the younger generation to get involved in.  A small amount put in now, and done consistently, even a small return will add up through time.  However, even for those of us in our 30s and 40s with expected lifetimes, if we did this now, it could have a fair return, and with the social investment component, it is well worth it!

In a nutshell, here’s how it works.  You choose to invest small amounts of money, as little as $25, for example.  You select which loan to invest in.  The service you are working through will then actually make that loan and handle all of the collection activities, etc.  There are obviously more complexities, right?  Sure.

So, let’s say someone wants to borrow $10,000.  The facilitator bundles each investor together to reach that level.  However, not every loan will be funded.  Because they are investments, people have to actively choose to invest in that particular loan.  As such, if time runs out, that loan might not be made.

Now, there’s obviously the other side of the coin.  The borrower.  Who is borrowing from these microfinance groups?  Typically in the US the borrowers are people who for one reason or another either cannot qualify for a typical loan from a bank or would rather not go to a bank.  This does not necessarily mean that they are a poor credit risk.  Many of the loans in the US are for debt consolidation, for example.

I am focusing on the US, but know that there are similar options around the world.  One of the reasons I am focusing on the US is because the other options I found around the world, you actually had to live in those countries, and since I don’t, I didn’t fully investigate them.  I am aware of the following 4 options available to residents of the US.

Option 1 Kiva

Kiva is charity only.  There is nothing wrong with this.  In fact, I recommend it.  But, as an investment strategy it has one huge flaw.  There is no financial return on investment.  Still, it is a good system.  It works exactly the same way.  You can select from a variety of loans around the world.  You will have information about the location, person, the need, and the sponsoring organization.  If you are investing a small amount, your loan will likely be used to back fill a loan that has already been made.  As payments come back in, they’re credited to your account.  Eventually, you can choose to be repaid or you can choose to reloan your money out so that it can continue to help others.  Kiva does ask for donations to continue funding their operations.

Option 2LendingClub

We bring you a more efficient model.

By allowing our members to directly invest in and borrow from each other, we avoid the cost and complexity of the banking system and pass the savings on to you. Both sides can win: better rates to borrowers and better returns to investors. It’s that simple.

LendingClub is the oldest peer-to-peer lending.  It first appeared in 2008, and appears to have been going strong since.

Option 3Prosper

Peer-to-Peer Lending Means Everyone Prospers

Prosper is the market leader in peer-to-peer lending—a popular alternative to traditional loans and investing options. We cut out the middleman to connect people who need money with those who have money to invest…so everyone prospers!

Prosper started in 2006 as an Ebay style loan auction site, but in 2010 changed to a peer-to-peer lending and also seems to have gone strong ever since.

Both LendingClub and Prosper list loans only in the US.  There is really very little difference between the two of them.  Both appear to be solid services, as far as they go.  Both report roughly the same returns, financially speaking.

The one thing that I do not like and that for now there is no getting around is that both Prosper and LendingClub are affiliated with Web Bank.  Now, Web Bank is, as far as I know right now, not the worst of the bunch.

Option 4microplace

microplace has the highest social investment ratio, but the lowest financial return.  Still, starting early, and/or including it as part of an overall investment portfolio, it is excellent!  What they say about themselves is:

unleash your portfolio’s potential

Imagine a world in which you couldn’t get cash from an ATM, use a credit card to buy a sandwich or to get insurance to cover medical emergencies. Daily life would become much more difficult without the financial tools most of us take for granted. Unfortunately, 40% of the world lives in poverty with no access to such resources for managing their financial lives.*

You can help change that. Use your portfolio to finance a project that enables the working poor to move from subsistence-level living to managing their money– all it takes is access to basic financial resources. You get to invest in something you believe in while making your money back with interest!

*source: Portfolios of the Poor Jonathan Morduch, Daryl Collins, Stuart Rutherford, Orlanda Ruthven

Again, you invest small amounts, and the payments trickle back in.  Unlike Prosper and LendingClub which boast average returns around 10% and claim riskier possibilities of returns higher than that, microplace returns are projected at 0.5 to 3.5% level.  Also, unlike Prosper and LendingClub, these are all outside of the US.  Again, though, this should not be seen as strikes against microplace.  Only factors to consider in building a balanced approach to a socially responsible and diverse investment approach.

If we are serious about Bank Transfer Day, and we are serious about taking back our country from the tyranny of wealth that has developed, and we are not yet ready for a radical revolution, then we have to be looking for ways to take control of the system to the masses.  This is, I believe, one step in that direction in terms of the financial system.

Let us not forget it wasn’t just banks, but also investment firms, and specifically the removal of Glass-Stegall allowing the blurring of the line between the two that was perhaps the largest single contributing factor to the financial crisis we found ourselves domestically over the last 5 years.  That was the end result of policies of the last 40 years, of course, but nonetheless, it should not be forgotten.  Peer-to-peer lending takes some of the money out of the hands of these same investment firms from both sides.

Necessary disclaimer:  I am not now, nor have I ever been a financial expert or advisor.  This is my opinion based on my research and my opinion.  I stand by it, however, you must make your own decisions.  Should you choose to act, understand that these ARE investments and therefore come with some risk.  The amount of risk varies depending on the specific investment made.


Just the facts, ma’am


I had intended to write about Microfinancing today.  However, I was instead struck by the combination of a couple of recent discussions and so, today, we’re going to take a slight detour.  This is not a new topic, and I am certainly not the first to write on it, but then, there is really nothing new under the sun, is there?

Simply put, we have reached a point where all too often we are not even willing to discuss facts, much less conclusions.

In an on-line conversation recently with one self-described Libertarian, I repeatedly asked to discuss facts.  Literally, he refused.  He response was really quite telling because it re-confirmed what, on its surface seems like a legitimate point, but in reality is just a way to avoid dealing with the actual issues and continuing to be able to hold on dearly to one’s dogma.  Essentially, his response boiled down to saying that it didn’t matter what facts either of us presented, because then he would just argue about the source of the facts.  No, really.

Okay, so on the surface this has some merit, right?  After all, if the facts that you are going to cite come from, say, The Onion, then they’re, shall we say, questionable?  (Always check your sources!)  However, when we’re talking about the Office of Management & Budget, the Congressional Budget Office, the IRS or the like, then arguing the source is, not a legitimate tactic1.  So, for example, if we want to discuss the effects of raising or lowering effective tax rates on job growth, then we need to look at the data, right? So, if we go to the Bureau of Labor Statistics for the job growth data and you’ll need the historical tax rates, which you might get from the Tax Policy Center.  Then, you might get a chart like this:

Tax rates v Job growth

So, while the Center for American Progress might be the group that did the work and published the chart, and while where may be some argument about their bias, the source of their data, and thus the ability to validate it yourself is also published right there for you.  If you want to discuss the facts or the conclusion, okay.  Let’s do that.  However, to attack the source and ignore either the facts or the conclusion, is simply to admit defeat without being responsible enough to make the corresponding changes in your position.

As they say, you are entitled to your own opinion.  You are not entitled to your own facts.

This problem is pervasive thorough out.  On New Year’s day, Eric Cantor (Republican House Majority leader from Virginia) appeared on 60 minutes.  He, and his off camera press secretary, denied that under that lion of the anti-tax, Tea Party right-wing Ronald Reagan, taxes were raised 11 times.  Including what is widely accepted as the largest peacetime tax increase in American history. (The Tax Equity and Fiscal Responsibility Act of 1982).  Yes, he lowered taxes a few times as well, but the net effect on the budget and deficit was to raise the debt.  And, that is fact.  It is not opinion and it is not open to debate or denial.

So, what do we do?  We have to start dealing with facts.  All of us.  Remember when you were faced with a word problem in math class? The first step was to identify the facts, right?  Once we do that, then we can start working towards solutions.  If Sean Hannity presents facts and cites reliable sources while doing so, then we do not throw out the facts simply because he was the one presenting them.  If Ralph Nader presents facts, and shows us his sources while doing so, then we do not throw out the facts simply because he was the one presenting them.  Or, anyone else.

1 – That is not to say that these agencies are not to be questioned.  Certainly they must.  Oversight must be exercised, and data integrity must be maintained.  However, simply questioning the data without any basis for that distrust is akin to putting on an aluminum hat to protect yourself from the mind control rays.  In the example cited, certainly the BLS has some legitimate questions that can be asked of it.  However, we have no better source at this point.  Unless and until a better source can be provided, then it is the standard.  It is like using the standard units of measurement until we get a better system.  Just because inches and feet might not be the best possible, doesn’t mean we can just throw them out without a replacement.


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