Reader Mailbag: Sick Child

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Upromise
2. Low interest debt payoff strategy
3. Costs of raising a child
4. Lawyers and starting a business
5. Introducing yourself to neighbors
6. Pet health insurance
7. Converting 529s
8. Getting a different car
9. Early retirement question
10. Flat income tax

One of the benefits (and challenges) of being able to do The Simple Dollar full time is that when a child is sick, I just adjust my schedule so that I can take care of that child. For example, as I write this, my youngest child is home sick with some sort of intestinal bug that requires frequent diaper changes. He’s a bit relaxed, though, so he’s spending a lot of time between those diaper changes either resting on the floor or playing on his toy piano.

Of course, with that little child there, I’m tempted to grab him and read him a book or sing him a song or do something to make him laugh, which means that days when children are sick aren’t exactly productive days.

Q1: Upromise
I’m not sure if you covered this before but I would like to get your thoughts on Upromise.

– Tanya

Upromise is a program where you can earn a small amount of money for future educational spending (think college) by shopping at certain stores (my usual grocery store is in the program) or using coupons from the site. You tie it to a 529 college savings plan and whenever you do one of those things, a small percentage of what you spend is deposited into your 529.

It’s a fine program, but don’t expect it to pay for college. The amount you’d earn before your child goes to college is much more likely to cover a few textbooks, not cover tuition.

The only real drawback I can see is that it’s another source of potential identity theft, as you have to give them your personal information to be in the program.

Q2: Low interest debt payoff strategy
Like you, I also accumulated a lot of student loan debt during undergraduate and graduate school. My total student loan debt is around 35,000. My only other debts is my mortgage and 1 credit card that I’ll have paid off completely by December.

Here is the layout of my student loan debt: 3 out of the 4 loans are at fixed interest rates of only 2.5%. The 4th loan is 6.5% and has a balance of around $4500. (I plan to pay the highest interest rate loan in a few months as soon as I’m finished paying off my credit card.) My question to you is, should I be focused on paying the other 3 low interest rate debts in any hurry? The interest is so low, and I owe about 215 dollars each month for those 3 low interest rate loans. What would you recommend in this situation?
– Lacey

The rates on those loans are so low that I would probably pay them off slowly, as you’re doing. This strategy only really applies if the loans are fixed rate (as yours are) and they have an interest rate that’s below 4% or so. At that rate, you can put the money to better use almost anywhere else (besides simply spending it frivolously, of course).

The only issue with having those loans is that they do pinch your cash flow. You’re paying $215 a month, month in and month out, which reduces your breathing room on other bills and constricts your other life choices.

Thus, if you are ever given a windfall of some kind, I would use it to get rid of that debt. It will help with your monthly cash flow for the remainder of your loan, simply making your day-to-day life easier.

Q3: Costs of raising a child
We are planning to have a kid soon but the following article makes me think about having a kid twice. I can never come up with this kind of money to raise a kid.

http://money.cnn.com/2011/09/21/pf/cost_raising_child/index.htm

I will appreciate your thoughts on this in a simple dollar post.
– Andy

The costs of having a child are almost entirely misleading.

For one, such calculations make a ton of assumptions about how you’re going to be spending money with a child. They assume things like buying all new clothes, having a home where each child has their own bedroom, and so on. All three of my children share one bedroom and they often wear clothes bought at consignment shops and secondhand stores.

For another, it assumes that having children will cause no change in your life. In reality, when you have a child, you’re going to go out less. Your entertainment spending will drop. Your “dining out” spending will drop. This isn’t because your money is rerouted to your child. It’s because your time is rerouted. You’re not going to go out every night with a young child at home. Because of that time change, you’re going to be spending your money differently.

Not only that, the amounts they quote cover an eighteen year period. Let’s say you do spend in the frivolous ways mentioned in the article. That’s still $200,000 over eighteen years, barely over $10,000 per year. If you are sensible about your spending at all, it’s less than that. Because of your lifestyle changes due to having a child, you’ll also have more money to put towards it.

Articles like the one you linked to seem to serve no other purpose than to spook potential parents.

Q4: Lawyers and starting a business
I am considering starting a small staffing business (permanent placement of advanced practice healthcare professionals). I have already filed papers with the state to form an LLC and register the business name. Now I am moving on to dealing with the federal government. I don’t plan on having employees or paying wages initially. But I understand I may still need file for an tax ID # etc. My question for you is whether you think it is worth it to use a lawyer or legal site (legalzoom, etc.) when starting your own business. There are certainly government sites that make forms available to business owners, but all these sites have cautions that they are not offering legal advice. I guess I am nervous that, despite being diligent about looking into filing and registering requirements, something falls through the cracks. Is avoiding the cost of legal assistance at the start a case of being “penny wise, pound foolish” or am I just being paranoid. I’d appreciate your thoughts.

– Elizabeth

If you don’t feel confident in setting up the business correctly, it never hurts to contact a lawyer. The expense of a lawyer in this case is negligible compared to the energy and time costs of constantly second-guessing yourself along the way.

LegalZoom can certainly help you with the paperwork, but they’re not really providing legal advice, either. They’re simply expediting some common legal maneuvers that people execute.

If you’re not confident, it’s “penny wise, pound foolish.”

Q5: Introducing yourself to neighbors
I’m a single male (my wife recently passed away) who just bought a house in a new neighborhood. I’d like to get to meet my neighbors but I’m not sure what a good first step is. How did you do this when you moved into the neighborhood?

– Leonard

I went over and introduced myself to all of the neighbors. I knocked on their doors and said hello.

Shortly thereafter, I began to plan a small cookout for my neighbors, but before it was set in stone, there was a small block party. We attended it and met lots of people from our block all at once.

I’d probably say hello to them and invite any of them you’d like to know better over for a dinner sometime.

Q6: Pet health insurance
I have a question about pet health insurance vs. building up a section of the emergency fund for the dog. I have a lhasa apso puppy, and they are a resilient breed with few illnesses. I plan on taking him for yearly checkups/shots regardless (not covered by pet insurance) and I feed him good quality food (royal canine). He requires a lot of grooming that I do myself for the most part and I strive to learn as much as possible from people I meet in my dog club who also groom themselves. He is neutered.

I wonder if, instead of paying for his health insurance monthy, if I put that same amount of money in a savings account to be used if he is ill or gets in an accident, that would be financially wise.

This is the insurance I have heard good things about, and the one I would look into if I were to insure him for illness and accidents, but some banks have a less expensive plan for accident-only.
– Alexandra

The purpose of insurance is to mitigate risk. The vast majority of people who buy pet insurance do not receive an equal value of health care as to what they put into the insurance premiums. The reason people buy it is for the exceptional events. If you happen to be in that small minority that has a significant amount of health care costs, then the insurance will pay off for you.

The vast majority of the time, putting the money in a savings account will be better financially than the pet insurance.

The real question is what lengths you’ll go to continue your pet’s life in the case of a severe illness. I can’t answer that for you. That’s something you have to answer for yourself.

Q7: Converting 529s
Several years ago, I set up 529 plans for my two sons. Each had roughly $5000 each. One son went to community college for about two weeks, another for one year. Neither are interested in going back to school and have recently moved out together. My question is what to do with the 529’s now. Financially, hubby & I are fine and won’t “need” the money in an emergency. How can I convert this money (to Roth or mutual funds?) with the least amount of penalty?

– Alison

There’s no “conversion” with a 529. If you make a withdrawal from a 529 for non-educational purposes, you have to pay income tax on the money gained in that account plus an additional 10% tax penalty on the gains in that account. So, if you put in $5,000 over the years and the balance is $6,000, you’ll pay normal income tax plus a 10% penalty on the additional $1,000 earned in the account.

If you’re sure that they’ll never be using these accounts, then feel free to close them out and keep that money. If you think that they might change their mind in a decade or so and you’d like to help them then, leave the money alone. Another option would be to leave the money in place until grandchildren appear, then change the account to benefit the first child.

While the tax penalties are annoying, it’s likely (since your investment period included 2008) that you don’t have significant gains anyway and your tax penalties would be minimal.

Q8: Getting a different car
I am faced with either getting a car to save gas money or a truck which I would enjoy and benefit from more. I have to drive about 70 miles one way to work and my current car gets about 20 mpg. The road I drive on is a country road with high traffic of large trucks and tractors which lends to requiring a safe vehicle. I often have to move around from rental to rental about once every year or so, which having a truck would make more easy. In this case is frugality worth the cost of giving up the desire for a truck given the cost of gas. From my estimates I would spend about $120 on gas a week with a truck and about $60 with the car. Also I cannot move closer at this time due to a lease agreement.

– Tyler

It honestly sounds like you’ve already decided to buy the truck.

If you haven’t already decided, however, I would simply say that you should ask yourself whether the additional sticker cost and the extra $60 a week in gas is worth it for what you get in a truck over what you get in a car. Obviously, on paper, the car is less expensive, but you feel the truck has extra value in your situation. How much extra value? Would you get more out of the extra $250-300 a month you’d have if you went with the car?

It’s not an easy question and it’s not one that people often really think about with purchases. What would the extra $300 per month get you?

Q9: Early retirement question
I’m looking to retire early, hopefully around the age of 55 (I will be able to retire with 32 years company senority, and my house will be paid off) . I see a lot of information about 401ks and Roth IRAs ( i do love my 401k my employer matches up to 6% of my pay) but both of these options have fees to withdraw money before the age of 60. Could you please tell me what the best way to save for an early retirement would be? I’m great at saving.. I just want to make sure I’m maximizing my funds.

– Jim

If you’re intending to retire that early, a Roth will still work. You can withdraw your contributions without penalty. The penalties come into play when you’re looking at withdrawing the gains on your investments. So, if you have put in $100,000 over the years and you have $150,000 in balances in the account, you can withdraw the first $100,000 without penalty.

Another option is to simply use an ordinary investment account. You’ll be fully taxed on the gains you earn in that account, but there’s never any extra penalties for withdrawal.

Honestly, I would probably use an ordinary account. It gives you the most flexibility. The only drawback is that it will make taxes a bit more tricky in the coming years, but that’s easily mitigated by using TurboTax or a similar package that can easily handle such things.

Q10: Flat income tax
I recently read an article saying that our country is in as bad a financial state as Greece. What would happen if our government eliminated all current income tax laws, loop holes, and deductions, and legislated an across the board % of income tax rate for all? What % would the tax rate have to be for the US to get out of debt in 10 – 20 years? I’m thinking everyone could be required to pay the same percentage of their income over, say $30K for a married couple, or $20K for individuals. The more you earn, the more you have to invest, spend or leave to your children, live at a higher standard of living, etc. Allowing loop hole benefits for the wealthy allows them more money to invest in their and other’s companies, which I understand feeds the economy, but it also allows them special treatment to make more money for themselves. Those who live frugally paycheck to paycheck, able to earn just enough to get by and put food on the table and shoes on their kids, but don’t have spare money to invest to earn the special loop holes that the wealthy do are penalized. Aren’t they already penalized by living at a much lower standard of living? I know that’s life as we live it in the US, but is it really the right way? Is it fair for the government of “WE THE PEOPLE” to give preferential treatment to the wealthy?

– Dorothy

That’s really the fundamental economic question of the day. Should the people who invest their money into businesses (which theoretically create jobs) be rewarded for that investment with a lower tax rate on the income from that investment or not?

There is no easy answer to that question. Anyone who tells you that it’s easy is either far too married to their own political perspective or is feeding you a story.

My answer to that question is actually tied to the financial state of the nation. I think that tax rates should actually be tied to the national debt in some fashion. I would actually lower everyone’s normal tax rates, then have an additional tax that was directly tied to the national debt. That way, cutting spending is directly tied to cutting tax rates, and additional spending directly causes higher tax rates. This makes both political parties responsible for what they actually do rather than the rhetoric they shout to the American people and balancing the budget has a direct economic impact and benefit for all Americans.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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  1. Micayla says:

    There are usually other programs that pay better than upromise, like ebates or shopathome.
    Also, upromise isn’t giving me a credit it owes me but I’m sure every program runs into problems with that.

  2. Johanna says:

    Q9: You can still use a retirement account if you want to retire early, and withdraw your money without penalty, if you set up a series of substantially equal periodic payments. Look it up.

    Also, doing your taxes when you have taxable investment accounts is not that complicated. Your investment company sends you some forms with a bunch of numbers in numbered boxes, you fill in those numbers on the appropriate lines on the tax form, and you chug through the calculations. There’s nothing any more difficult than doing your taxes with just a W2 – you just have to do a bit more of it. You don’t need TurboTax. Or a degree in rocket science.

  3. Johanna says:

    Q10: Ai yi yi. Is all this “Warren Buffett pays a lower tax rate than his secretary” business actually giving people the idea that a flat tax would be an improvement? *facepalm*

  4. Josh says:

    @Q10: From the Tax Policy Center: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.

    So there you have it. The income tax is progressive! Who knew? Aside from everyone pointing out that the Buffett example is hogwash, of course.

  5. Q9: To back up what Johanna said, you specifically want to look up a 72(t) election (same thing as what she said but sometimes easier to find solid information searching that way).

  6. valleycat1 says:

    Q4 – Many attorneys offer a free initial consult, so you could talk with one to see how much legal fees would be & whether you think the attorney’s input would be helpful. You might also want to check out a good CPA, which could be the better choice in your situation.

    Also, the Small Business Administration has a good program to support start-ups – I’d check with them first.

  7. kristine says:

    Any tax credit that asupposedly gives the welthy an incentive to creat emore jobs, should be a reactive next-tax-year reward for each job created IN THIS COUNTRY. Lots of jobs are being created- in other countries, that pay less, lowering the middle class standard so we can compete. And we currently reward this non-patriotic behavior by giving incentives nation-blind.

  8. Andrew says:

    Did Trent even read the linked article about how much it costs to raise a cold? Nowhere does it mention separate bedrooms for each child, nor does it even remotely discuss maintaining pee-child levels of entertainment expenses. It focuses on the costs of food, transportation, college—hardly the frivolous items Trent references.

    Once again, Trent twists things to suit his own preconceived notions.

  9. Becca says:

    Q10. Warren Buffet aside, on average the wealthy pay a far higher percentage of their income to taxes than lower income groups. There an AP story about this a couple days ago.
    Almost half of all Americans pay no Federal income taxes, so it is hard to give them tax loopholes.
    In setting up tax structures the question you have to ask is do you want “fairness” or the most revenues to be collected? Historically, when capital gains taxes were higher, those who had money to invest put it into tax-free municipal bonds and other shelters. The government got less revenue and that money was not invested in ways that would grow businesses. “Fairness” doesn’t mean more taxes are collected. Another point to remember is that invested money is income that was already taxed once. Those people earned it and paid high taxes and then invested what was left over. Also many middle income people have money invested… should they also pay a higher rate?

  10. Andrew says:

    Raising a child, not a cold! And it’s supposed to be “per-child”expenses, not “pee-child”. (although the latter is undoubtedly more interesting!)

    Stupid auto-correct programs and inattentive writers make a bad combo!

  11. Nick says:

    I had a UPromise credit card for a while. In about a year I had earned 60 bucks through regular spending. It gave only marginal extra money over a straight 1% cash back.

    There were two huge drawbacks that made me cancel the card:

    1. UPromise nags you incessantly with emails and other junk advertising their partners. Every time you log on to check your balance it nags you to install a program that “tells you about great deals!” and continues to do so even if you decline. It’s annoying. And if you make any impulse buys from all of that you wouldn’t have otherwise , you’ve offset all the savings you get from rewards.

    2. The savings you get can only be used on Sallie Mae loans. I already had loans and they weren’t Sallie Mae. Oops. (I think you can use them directly for tuition, but it didn’t work out that way for me.) Luckily when you close the card they will pay out your reward balance in cash instead.

  12. Daina says:

    Way to meet the neighbors: we held a yard sale after we moved. We did NOT make much money because apparently our signs were illegal and got taken down (Oops! Check your town ordinances! Ours make it almost impossible to advertise your sale), but that’s okay, because we had an excuse to sit outside our house for a few hours one spring morning and meet our friendlier neighbors.

  13. Other Jonathan says:

    Q8 – Your clear preference for a truck aside, consider that saving $60 a week in gas ($3,000 per year) would cover a whole bunch of truck rentals. You could move 10 times a year, renting the truck each time, and still come out ahead.

    Q10’s question seems all over the board. I’ve never heard anyone argue for a flat income tax as a way to stop coddling the wealthy over the current system of progressive taxation.

  14. Amanda says:

    I used to think that the housing costs for kids were overblown. I mean, I need somewhere to live anyways, right. But they definitely do occur. Right now we are in a small 850 sq ft 2 bedroom apt with the 3rd child due very soon. It is really tight and having a 3rd child basically means we need a bigger place ASAP (i.e. when our lease is done). That will be a lot more expensive (harder to find 3 bedrooms and rent jumps a lot between 2 and 3 bedrooms). That is a very real cost to my checkbook each month. And as my kids get older (oldest is 4, but they’re all boys), food costs are a lot higher, too. When they’re babies, they don’t seem too expensive if you don’t have day care expenses (I stay at home, and yes those are all over kinds of lost income), but they do get expensive fast. Trent downplays this quite a bit.

  15. Riki says:

    The cost of children comes up every once in a while on this site.

    Trent’s financial turn-around coincided fairly closely with the birth of his first child and, from the estimates he has posted previously, it seems that his spending was atypically high before the baby was born. It’s a little bit disingenuous to claim that simply having a baby reduced his costs. Sure, his son was part of the impetus for his “financial turnaround” but to say that having a baby has a small impact on your budget is totally wrong.

    For example, in his calculations he entirely neglected the cost of health care and extra housing. Currently his three children all share one bedroom but there is no way that situation will last forever.

    I don’t have kids and don’t plan to. And there are TONS of ways to reduce costs. But kids are expensive, there’s no doubt about it.

    Also – why on earth would the authors of those articles want “spook potential parents”?

  16. Finance Nerd says:

    @Q10 and several commenters:

    One other point about lower rates for capital-gains taxes is that the gains are often non-existent after accounting for inflation.

    For example, if you buy a stock for $100 in 2000, and sell it for $120 in 2011, but inflation was 30% over that time frame, you LOST money. But the tax code will treat that as a $20 per share gain.

    Having lower rates for capital gains helps to eliminate some of this inappropriate treatment (note that the lower rates ONLY apply to long-term capital gains). Obviously it would be more accurate to simply reflect inflation in the gain, but that would be so complicated that it would probably make things worse. Having lower rates seems like a decent compromise.

    So, there are good reasons for these lower rates that have nothing to do with “giveaways to the wealthy.”

  17. JS says:

    Q3: “The Complete Tightwad Gazette” about the cost of raising children that’s worth reading. It’s a bit out of date (1990s) but it uses specific examples, so you could do the calculations with 2010s numbers.

    Q8: How long is your lease agreement? If you really want the truck and can move close to work soon, I could see biting the bullet on the gas costs for a few months. If you can keep the gas costs down and if you enjoy activities that a truck is useful for (DIY projects, outdoor activities, etc.), it can be a good choice.

  18. JS says:

    Should be ‘“The Complete Tightwad Gazette” has an article about the cost of raising children”. I need caffiene

  19. Finance Nerd says:

    @Becca #9 — actually, it is worse in some ways, because many of the 47% of households who pay no Federal income tax actually get back money back, through the Earned Income Credit. So, they not only pay no taxes, they pay NEGATIVE taxes.

    I do taxes for people as a side job, and I’m always amazed by a tax code that allows people to get back several *thousand* dollars over and beyond what they actually paid in for the year. No, that is NOT a typo!

    To be fair, they generally do pay Social Security premiums (I don’t believe it is correct to call them taxes, but that’s a debate for another day) but even after reflecting Social Security and state taxes, they have a total net NEGATIVE tax burden for the year.

    I find it funny that some of the people I know in that boat are some of the most vocal about “rich people paying their fair share.”

  20. valleycat1 says:

    Q8 – Why does Trent assume the truck’s purchase price would be that much higher than a car? Around here, good used trucks can often be had for a song, and mid-sized or smaller ones get good gas mileage. If you can afford what you say is $60/month more for the truck, go for it.

  21. Johanna says:

    Q3: The CNN article doesn’t appear to be “assuming” anything – from what I can tell, the numbers it presents are the averages of what people actually spend, not numbers pulled out of thin air.

    On the other hand, an average is not a required minimum. Some people will spend more, and some will spend less. There’s nothing necessarily wrong with you if you fall into either group.

    On the third hand, I don’t have children and don’t plan to, but I’ve always found it vaguely unsettling when people talk about how inexpensive it is to raise children, as if you can spend a small amount of your money on your children and go back to spending the rest of it on yourself. Children are not accessories – they’re equal members of your family. If you’re not prepared to treat them as such, maybe you shouldn’t be having them.

    And Trent’s three children (two boys and a girl) may be happy to all share one room when they’re 5, 3, and 1, but I suspect they’ll be less happy with that arrangement when they’re 16, 14, and 12, say.

  22. Tom says:

    I have an almost 1-yr old, and I have to say it was cheaper than I expected. We got a lot of necessities at the baby shower. I think we’ve only purchased ourselves 2 outfits, and it certainly wasn’t out of necessity. Thank God for good health and insurance that covers well-baby care 100%. She’s not in daycare either, Mom stays at home, so that cut down on potential expenses. I’m sure that lack of daycare and less miles driven more than offsets any increase in utilities (although it doesn’t completely offset lost income!).
    I see Trent’s point, as it is much more difficult to go out on a whim whenever we like. We even have family that babysits for free, happily. Still, We purposefully tightened up the budget, learned to say no to invitations, and adapted to going out a lot less.

  23. jackowick says:

    Q5: As you mentioned a house in a neighborhood, I’m going to make some assumptions that these are standalone vs townhouses, but the same ideas work.

    Be seen. This is how it all starts. When I bought my house a few years ago, I would sort/read my mail outside, sometimes in front of the mailbox. Do you get home around the same time as other people? Grab a broom and “sweep” the driveway or sidewalk before going inside. Take your trash out in the morning, not the night before. Get yourself out there visibly and increase the chances for a casual “hi” and wave and possibly small talk.

    I have a new neighbor who is a single mom living across the street with two little girls. While I am in a relationship and by no means hitting on her, I’ve been making attempts to say hi, acknowledge the effort it takes to “get the troops in and out of the car” and the like. Some people don’t want to talk, and sadly this is a commonplace thing in some locations, especially the northeastern US where people are treating the burbs like walled cities where no one mingles unless there is a proctor and guard.

    And finally, @Johanna’s comment about Trent’s kids, you miss the point. The costs of having three kids share one room for ANY period of time is a savings on that “$200,000″ to raise a child. The heating/lighting/cooling cost of having one bedroom instead of three for 2, 3, 5, 10 years is obvious, but also the furniture and decor. His comment is valid, and the future living arrangements/improvements may change. I had a friend who shared a bedroom with his brother until one was about 12, and then the parents rennovated a home office into a bedroom, half-furnished the basement, and instant cheap expansion rooms. The one brother is now 36 and STILL has his twin bed from when he shared his room. Now it’s in the guest room of his house. Lessons learned do rub off on the kids.

  24. Tom says:

    On the third hand, I don’t have children and don’t plan to, but I’ve always found it vaguely unsettling when people talk about how inexpensive it is to raise children
    I don’t want to sound self-contradictory to what I just posted, but I agree. You definitely need to adapt to the changes because obviously there are new expenses that weren’t in your budget 9 months ago. You don’t walk out of the hospital with a bigger paycheck and savings account…
    I’ve told friends (we’re the first couple to have a child) what I’ve learned is have kids when you’re OK with not getting aroung to many of your wants.
    I also make the following correlation to kids and weddings financially (although I would guess raising a child is a little bit more out of your control): You could have a $25,000 wedding, which is the average amount, I believe. Or you could spend $500 buying rings and doing the courthouse thing. In a lot of ways you can do the same thing with children – You could spend $11,000 a year raising them, or you could get secondhand clothes, furniture, toys, make your own food, do cloth diapers, upgrade living space minimally, and not spend as much as the average.

  25. Vicky says:

    I’d have to say – pet insurance is a huge waste of money.

    Your money is much better allocated into a savings account. Insurance doesn’t usually cover most basic things – such as vaccinations or routine teeth cleanings.

    The one time I seriously considered it was when I adopted my Great Dane. She was 8 at the time, and already unqualified for almost everything. A lot of breed specific problems – like bloat, for example, aren’t covered by most pet insurance companies. When she passed away earlier this year, it was due to an osteosarcoma that had developed in her shoulder blade – again, something that would not have been covered by pet insurance, even if she wasn’t as old as she was.

    They find so many ways to exempt you and not pay out, it’s just honestly not worth it. Not to mention, most of the time you must pay up front and be reimbursed.

  26. em says:

    Raising children can be inexpensive if you shop used, accept hand me downs, spend frugally in all aspects of your life, and raise your children not to want needlessly and to earn the things they want. That does not mean they aren’t treated as equal members of the family.

  27. Liz says:

    My parents did all of the “frugal” stuff, and it never occurred to me that maybe we didn’t have much money. My mom made many of our clothes and baby food, our neighborhood passed around clothes and toys, and my sisters (3 of us total) shared a room until 2 of had to get up much, much earlier than the third one. That sister moved in with my brother for several years, then back into the “girls” bedroom until I left for college. The sister closest in age to me and I shared a double bed for years and years.
    On the other hand, all 4 of us went to private and parochial school growing up. The local public schools think that “academics” is a four-letter word, but “athletics (actually football and baseball)” are the only reason to attend school. The kids once tried to do the math to figure out how much all those years of tuition had cost, and we came up with a quarter of a million dollars. We guesstimated wildly, since I have no idea what it cost to send me to kindergarten, but I know 10th-12th grades for me cost $1850/year.
    So I guess I agree with Tom’s (#24) marriage analogy — it’s what matters to you as parents and what you teach your children to value that’s important.
    As my husband and I are expecting our first child (not in time to be a 2011 tax deduction, darn it), we’re really thinking hard about what is important to us as parents. I’m a huge proponent of cloth diapers (I didn’t know there were disposable until my youngest sister was almost out of diapers), but my husband says his mom won’t babysit unless we use disposable. Win-win, I say. On the other hand, we probably won’t use a re-purposed 5-gallon plaster bucket to store dirty diapers in the way my parents did…

  28. Becky says:

    Re the truck vs. the car; Keep in mind that trucks are *not* safer than cars. They can *feel* safer because they are bigger, taller, and heavier; but if you look at the statistics, you’ll see that the feeling is deceptive.

    As someone above pointed out, renting a truck whenever you need one is quite a bit cheaper than the extra cost of buying a truck plus the extra gas cost on your commute, unless you use the truck (qua truck) really frequently.

    Typically, unless you genuinely need a truck for your job (construction, farming, game warden, etc.), you can’t make a financial case for owning one. If you really want a truck because you feel like it’s just cooler than a car, buy one understanding that’s your reason. We can all use a little joy in our lives, and if yours comes from driving a big ol’ truck every day, then suit yourself. As Trent says though, ask yourself if you’re going to get $240/month worth of joy from it every month for as long as you own the vehicle. And how does that fit in with your other financial goals?

    Though FWIW, I think it looks a little silly when people own trucks that they use almost exclusively for commuting to their office job. Kinda “big hat, no cattle.”

  29. Mister E says:

    I am commenting only to say that “big hat, no cattle” is a fantastic expression that I’ve never heard before but will definitely use going forward.

    That is all.

  30. Finance Nerd says:

    @ Mister E # 29 —

    “The Millionaire Next Door” used the phrase “all hat and no cattle” but this variation is good too.

  31. Jessica says:

    Thinking about the costs of raising my own kids who are 4 and 1…
    When I worked:
    Daycare: $185 weekly for infant $145 weekly for preschooler x 52 weeks/year = 17,200 yearly and I’ve paid $47,160 in daycare costs for my two children combined since the oldest was enrolled at 12 weeks of age and the youngest was enrolled at 15 weeks of age. And that is a low cost childcare in Ohio.
    Diapers: $10 weekly (daycare did not accept cloth, which we use at home)
    Breast feeding supplies (milk bags, prorated cost of my pump) $5 per week (use same pump for both kids)
    Clothes and shoes: about $50 per kid per year. We get a few hand me downs and the kids get some clothes from relatives for birthday and Christmas. Otherwise I buy secondhand.
    Equipment: crib mattress $50, twin mattress & boxspring set $200, crib $300, 2 dressers $100 each, 4 bookshelves $30 each, glider & ottoman $80 (used), stroller $75, 2 booster seats $20 each, car seat $80, pack & Play $40 used. We got 2 bouncy seats, an exersaucer, the high chair and more toys than could fit in a toy store from relatives and baby showers.
    Medical: my copay on each child’s birth ended up being around $2000 including prenatal care. Both kids have about 3 sick visits a year and the youngest has asthma and is prone to ear infections.
    Household: we do more laundry due to cloth diapers and messy eaters. Our carpet is trashed due to dropping food, barfs, diaper blowouts, etc. Dishes: had to purchase bottles, nipples, bottle brushes, bowls, sippy cups, plastic cups, plastic forks and spoons and small plates for the kids’ use.
    Extra driving: to doctors, extra visits to relatives who just have to see the baby
    Photography: everyone wants numerous photos of the kids. I otherwise would have no need for a digital camera and would really never print any photos, other than photos of my kids.
    “Extras”: swimming lessons for my oldest. Zoo membership. Science museum membership.
    Waste: kids waste a lot of food and water and electricity- leaving the lights on, wanting an apple, taking a bite, not eating the rest, favorite food one month and hate it the next month but meanwhile you bought 10 because that is all they ate last month and now they won’t eat it…

    Now, I no longer work. So I no longer have daycare costs or the costs associated with work outside the home. However, I now drive around town a little more to the recreation center, to parks for free events and just fun visits, and then there’s the obvious cost of my lost wages and accumulated years of lost benefits, retirement contributions and so forth.

    So what I’m trying to say is, $200000 to raise a kid is not a ridiculous number. Sure, daycare costs go away after kindergarten. But if you have office jobs like we had, you would have to enroll your kid in before & after care if you were lucky enough to get a spot, which costs nearly the same as daycare. And then you have to find someone to cover all those breaks, since no one I know gets 16+ weeks of vacation a year. We do not have nearby family who could help us out.

    For my oldest I’ve spent about $40k in 4 years in obvious direct costs (daycare, furniture, medical, clothing, equipment), not adding in the utilities, housing, transportation. For the youngest I have spent about $11k. And that is not in a high cost of living area.

  32. RazzBari says:

    Re: meeting the neighbors – I found after I got a small dog and started walking her morning & evening, I got *much* better acquainted with my neighbors and neighborhood.

    The garage sale idea is a great one too, but if you’ve just moved, you’ve probably already shed quite a bit of ‘stuff’.

  33. bogart says:

    Hmmm. My son is 4. So far, ignoring “stuff” and incidentals altogether, our big costs have run …

    $2K out-of-pocket for his birth (in hospital, mostly covered by my insurance); $1.2K per year, adding him to our (employer subsized) health insurance; average of about $6K/year childcare (2 days/week); $20K year 1 missed wages, my cutting back to 30 hours/week @ work; $10K year 2 missed wages, my working 35 rather than 40 hours/week. So right there, we’ve got $6.8K in medical costs, $30K in lost wages (ignoring entirely the lost employer retirement contributions and thanking my employer for — generously by US standards — continuing to provide the same health-care subsidy to 30- as 40-hour per week employees, without which our per-month insurance cost would have gone up by about $500 rather than just $100), and $30K in childcare, or about $67K over 5 years.

    And sure, we eat out less than we did pre-kid, but on the other hand, I’ve felt much more strongly about visiting extended family now that I’ve got a kid, which for us has meant a flight across an ocean and for the past 2 years an additional $1K+ ticket (plus more frequent trips than previously — roughly 1/year versus 1 every 2 or 3 years). So instead of $2k per tickets every 2nd or 3rd year, $3k for tickets annually?

    Obviously that’s just my experience and my choices, but $200K on average over 18 years strikes me as entirely plausible — and not at all a function of choices that can (always) be avoided.

  34. jim says:

    Q3
    Q: How much do Children cost?
    A: How much do you want to spend?

    Q6 Pet insurance : Most of the pet insurance out there is not a good deal. They often limit your benefits with a maximum cap that doesn’t even cover half the high cost stuff. Read the documentation very carefully to see exactly what they pay. If they limit the cost of individual procedures then in general I’d say its not likely to be worth buying. The point of pet insurance should be to handle the major bills like a $5000 surgery or something and if your insurance only pays $2000 for that surgery then its not really helping in the way it should. In the US, from what I’ve seen PetPlan USA offers the best deal. They do not cap individual procedures and the total cap is reasonable amount. (I have no affiliation with them.)

    Q8 : Saving $60 a week in gas is definitely enough to justify getting an efficient car. Do you have $240 a month to blow on gas driving a truck just cause you want to? If thats what you want and you have the money to burn then get a truck if you want it its your life and your money. But if you don’t have money to burn then you ought to get an efficient car and stop rationalizing why you think you need a truck. Another incentive is to think about all the oil you’re wasting and your hard earned American dollars that are going to foreigners who hate us to buy that oil and give them power over us.

    Q9 Jim : That 401k match from your employer is a great benefit and you should definitely contribute to the 401k to get that match. So that is your #1 saving priority. Don’t give up that free money 100% instant return cause of fear about tax or 10% penalty. Johanna and Paul are right you can do the 72t substantially equal periodic payments if you retire early to avoid the penalty. You might want to get a CPA help on that though as it can be more complicated than most of us want to handle. Other than getting your 401k match finds its hard to know if you’re better putting money in a Roth or 401k without knowing how much you make, what our tax % is and how much you’ve already saved.

  35. Baley says:

    If you can avoid childcare, then having a baby, at least, is not that bad (assuming you have lots of friends who give good gifts at your shower). My husband and I both work but were lucky enough to have friends and family who watch our baby during the days. We may not be able to do this forever, but I’m hoping to quit in the next 4-5 years to stay at home. So, yeah, with childcare and everything, having babies is expensive. But that’s not how we choose whether or not to have children, is it?

    @#27 Liz: Do cloth diapers. Once you get them and show them to your MIL, she’ll probably be willing to use them, too. Unless of course you don’t want her to babysit. :) We use pockets which, for the babysitters, work just as easily as disposables. And so much cheaper!

  36. Des says:

    RE: Truck

    With those numbers you can do what we do: buy both. We drive a 2001 Prius (bought used for $6k, gets 45 mpg) for the vast majority of the time. However, we have a small homestead and need to have a truck to haul things. We bought a (very) beat up Toyota truck with a salvage title for $1500. It costs $30 a month to insure with just liability, and we use it once or twice a month.

    If you really do just need the truck for utility (and not because you prefer to drive a truck around) this would be much cheaper than spending an extra $60 a week ($240 a month) to drive the truck on your commute, and you would still have all the function you require.

  37. jim says:

    Q10 : asked :
    “What would happen if our government eliminated all current income tax laws, loop holes, and deductions, and legislated an across the board % of income tax rate for all? What % would the tax rate have to be for the US to get out of debt in 10 – 20 years? I’m thinking everyone could be required to pay the same percentage of their income over, say $30K for a married couple, or $20K for individuals.”

    So you’re asking what flat tax would we need to replace current income tax revenue and pay off the debt within 20 years. OK. Here’s my figuring on that…

    I’m using data from the IRS.

    76.5 million married couples and heads of households had adjusted gross income of ~$5.6 trillion. (AGI is not exactly equivalent to gross income but close enough for ballpark estimate) Subtract $30k per household and that leaves about $3.3T to tax. The 62.8 million single filers had $1.87 trillion income less $20k each leaves about $600 billion. So after those deductions you’ve got $3.9trillion to tax at a flat rate. Our current national debt is about $14T. To pay that off over 20 years would take $700 billion extra per year. So we’re looking at generating $900B plus $700B or $1.6 trillion out of $3.9 trillion income.

    Thats a flat tax rate of 41% if you want to give people the deductions you plan and pay off all the national debt in 20 years. This would be a massive tax hike for the vast majority of Americans.
    Now honestly this is a really rough approximation based on how I did the math but its close enough to point out that such a plan won’t work and won’t help.

    Did people not notice our deficit spending and the national debt growing for the past 70 years?? So why all the outrage about it NOW? Why weren’t all these people crying bloody murder 5 years ago or 10 years ago or 20 years ago when we had the same problem as we do today?? I’m not saying the debt is good but whats new about this? I mean its like if you live in Alaska for 38 years and then up and one day say “hey it sure is cold here!”.

    The USA is not Greece. Not by a long shot.

  38. Laundry Lady says:

    I think the point is that articles like CNN’s make people who really want children believe they can’t afford it. You need to do you own research on the necessities required for child raising and what they cost where you live compared to your income. (This means what is actually needed, or what you would like to have not every item Babiesrus recommends.) Children do get more expensive as they get older, but hopefully your income will also increase over time. When it came time to have children, my husband and I sat down with our budget and calculated which expenses would increase, which ones we would decrease by choice and decrease in income from me staying at home. I firmly believe that if children are a priority in your life, you will find a way to make it work. We don’t have a fully funded 529 for my daughter but we are still having a second child. My husband’s co-worker will probably only have one child because they can’t afford to have fully funded college accounts for more than one child. But we don’t see providing a paid for college experience as a requirement of good parenting. It’s about your priorities as a parent. Nothing wrong with choosing not to have children, but it shouldn’t be a strictly financial decision. Our household income has decreased by 1/3 in the last two years, yet we are now also raising a child and she has everything she needs (food, clothing, healthcare, love and attention). We have had to be more careful about our spending and given up luxuries like vacations, eating out and expensive cell phone plans, but we knew that when we chose to have children.

  39. Courtney20 says:

    @19 Finance Nerd: Do you even know WHY we have an Earned Income Tax Credit? To encourage people to work instead of collect welfare. Because when you work a minimum-wage job and have to put kids in day care to do so, after taxes you end up with LESS money than you would have gotten in welfare benefits. The EITC equalizes that and makes working a more financially attractive option. Wouldn’t you rather these people work and have a negative tax bill than not work and collect government benefits?

  40. jim says:

    Josh said : “From the Tax Policy Center: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.”

    To get that 30.4% rate for individuals The Tax Policy Center somehow added in 10.3% of corporate income taxes. I don’t really know why they add corporate taxes to figure individual tax rates. Individuals do not pay corporate taxes. They seem to be making a broad assumption that corporate taxes are directly passed along to individuals in the form of lower wages or whatever and they also assume for some reason that almost all of that corporate tax cost falls on the top earners. So if you throw out the 10.3% they added from corporate taxes that individuals do NOT pay then the effective rate of income tax alone is 19.4% for the top 0.1% of earners. Thats higher than lower income folks make but its not 30%.

    There is certainly truth to the claim that very very rich people often have lower effective rates than many middle class wage earners. A single person making $75k would be paying effective IRS rate of 16.6% and another 7.6% to social/medicare for total of 24.2%.

  41. Finance Nerd says:

    @ Courtney — yes I do know why we have it, and you are partially correct, but since you can get the EITC without having any children, you are not entirely correct. In addition, the income limits for the EITC are substantially higher than minimum wage — for example a married couple with 3 kids where one spouse works full time at $24 per hour would qualify.

    Anyway, my point was not to debate the validity of the EITC. My point was that, when half of the people pay nothing, and many of them pay less than nothing, it is a little disingenuous to blame the problem on the “rich” not paying “their fair share.”

    It’s very easy for people who don’t pay taxes to vote for Congressional candidates who will raise taxes on “other people” and spend it on them. And when the number of people in that bucket is approaching a majority, that is very dangerous.

  42. lurker carl says:

    I noticed the “no politics allowed here” clause is missing at the bottom of the page. I also noticed political jive generates significantly more comments than frugal tips. More hits equals more income. I wonder why?

  43. Johanna says:

    You know what else is very dangerous? Pretending that “taxes,” “federal taxes,” and “federal income taxes” are all the same thing.

    Everybody pays taxes.

  44. Courtney20 says:

    Someone without kids qualifies for a maximum ANNUAL benefit of $457 – hardly subsidizing a lavish lifestyle. And your $24/hour person would get very little benefit because the cutoff before the credit starts getting reduced is less than $17K.

    It’s also disingenuous to say that “half of the people pay nothing” because that number includes students, the elderly, and people collecting unemployment. Gee, people who don’t work (or barely work) pay no taxes??

  45. jim says:

    #19 finance nerd : “One other point about lower rates for capital-gains taxes is that the gains are often non-existent after accounting for inflation.”

    I see the logic to that point, and failing to keep pace with inflation can happen but thats really cause sometimes investments don’t perform too well. If your investment doesn’t keep pace with inflation long term then that was not a great investment. Not making as large of a profit on your investment as you’d hoped to is not really a good argument against paying taxes on your profits.

    Of course any growth will be undercut by inflation but on the other hand capital gains taxes are also deferred over time. Defering the taxes is a big benefit to capital gains as they can benefit from compounded growth. That benefits you whether your investment grows poorly or not.

  46. jim says:

    “for example a married couple with 3 kids where one spouse works full time at $24 per hour would qualify.”

    Using the EITC calculator at IRS I figure they’d get a credit of $70.

  47. jim says:

    Consider 2 groups of people and tell me which group ought to pay more taxes? :

    a) 99.8% of people making under $10,000 a year who had no income tax liability
    b) 1.5% of the people with cash income over $1 million paid no income taxes

  48. Finance Nerd says:

    @ #43 – I thought I was pretty clear that I was referring to negative FIT, but that even after factoring in Social Security and State, they are still negative in total. If I was not clear, I apologize, typing Federal Income Taxes every time just got repetitious.

    And your statement that everybody pays taxes is demonstrably false, as the people I referenced in my post pay negative TOTAL taxes after accounting for all forms of taxes. FIT may be the only single item that is negative, but is larger than the combined positive numbers for the other categories, including SS, State, property, vehicle, sales, etc.

  49. Finance Nerd says:

    @ #44 — you were the one who stated that EITC existed to make sure minimum wage employees didn’t end up with lower take home after paying childcare. I was merely providing evidence that this is not only reason for its existence. Nowhere did I say this gave them a lavish lifestyle. I simply said that people without children qualify, as do people who get paid way more than minimum wage, so clearly that is not the only reason for the credit. This is a great example of something that may have been a good idea, but has been expanded way beyond its original intentions.

    So what if the half that pays nothing includes students and elderly? Nowhere did I say that the number should be zero. Of course some people, such as students and elderly will not pay anything, that is not the point. The point is that it is one thing for the most disadvantaged 10 or 20% of the population to be in that category and quite another for HALF the population to be there.

  50. Finance Nerd says:

    @ #45, I think you missed my point. Having lower rates for long-term capital gains than for ordinary income is a counterbalance to the fact that the way capital gains are calculated by tax law overstates the true gain. The theory is that the two should exactly offset, although that is obviously not valid.

    Capital gains taxes are not deferred over time, they are simply not due until the gains are realized by selling the investment. That is not a deferral, there is no income until they are sold for profit.

  51. Des says:

    @47 – That is a false dichotomy. Both groups should pay more than they do (and obviously, the latter group should pay more than the first). Everybody who can vote should pay something, even if it is proportionally very small, for the same reason insurance has co-pays – people are more concerned when their own money is on the line.

    I like Trent’s idea of separating the national debt repayment off into its own tax. (I think it is the first political idea of his I have ever agreed with, actually.)

  52. Finance Nerd says:

    @ #47 — Des already provided a good response, and I agree. No one is arguing that millionaires should pay less than people making $10K a year, the question is *how much more* should they pay.

  53. Finance Nerd says:

    @ #37 — something bothered me about your math, and I finally figured out what it was.

    You back out $30K from each family and $20K from each single person, which is an overstatement, because many people make less than that, so you would have to back out the smaller of $30K/$20K and the amount of actual income. I don’t know how much of a difference this would make, but since the average income for singles based on your number is about $27K, the difference could be significant, as that average implies a meaningful percentage are making less than $20K.

    I doubt it moves the number tons, but with no deductions for anyone the rate would be just over 20%, so it is obviously somewhere between 20% and the 40% you calculated. Gut feel is maybe 35%, but not sure.

    And clearly this is a tax increase. Without cutting spending the only way to close the gap is to increase taxes, so by definition this answer will be higher than the current tax burden, at least in total.

  54. jim says:

    No that question is not a false dichotomy. Its a question asking which you prefer between one or the other. Of course you can have both or neither but everyone has an opinion on which is worse.

    I could ask do you like coke or pepsi more. That doesn’t mean you have to like cola and you can’t like both.

  55. jim says:

    #53, Good point. But as I said I was making a really rough approximation. The fact that some people make less than $20k/$30k is one of the things I ignored to simplify it. But you’re right it does impact it. I thought of that initially but didn’t think it would make a ton of difference. But lets figure it out…

    The total income of 25M married couples making under $30k is only around $280 billion. The income of 32M single people making under $20k is $238B.
    If we exclude the people who make less than the deductible then that leaves : the remaining 51M married couples pull in $5.3T and the 30.8M singles make $1.6T. Accounting for their deductions that leaves $3.77T from married and $1T from singles or $4.77T total taxable after the deductions. $1.6T revenue out of $4.77T taxable income would be 33.5%

    So yes I was off. Real figure would be 33.5% not 41%. Your guess of 35% was pretty close. ;)

    33.5% is still a giant tax hike from the current levels.

    However that is based on trying to pay off the $14T debt in 20 years and if you only wanted to replace current $900B in revenue then the % comes out to 19%. 19% is easier to swallow than 33.5% for sure. But it would just be an across the board tax hike for 90% of Americans and a tax cut for the rich.

  56. jim says:

    #51 Des said : “Everybody who can vote should pay something”

    So someones grandmother who has a $1000 social security check and no other income should have an federal income tax hike?

    Currently granny would have no IRS tax bill. Granny is one of the 40-50% of Americans who pay no income taxes since social security isn’t taxable unless you have a certain amount of other income.

  57. jim says:

    #50 : “Capital gains taxes are not deferred over time, they are simply not due until the gains are realized by selling the investment. That is not a deferral, there is no income until they are sold for profit.”

    OK.

    My point is that the asset can grow without tax implications over time and so you really have beneficial tax treatment due to this.

  58. jim says:

    ##46 :

    “So what if the half that pays nothing includes students and elderly? Nowhere did I say that the number should be zero. Of course some people, such as students and elderly will not pay anything, that is not the point. The point is that it is one thing for the most disadvantaged 10 or 20% of the population to be in that category and quite another for HALF the population to be there”

    I think the point is that when people say “half of the people pay nothing” then that sounds pretty bad as if they should all be paying taxes and somehow half the nation is welfare cheats or something. How can that be? Well a lot of those people are college students and elderly and poor poor people and the unemployed etc.

    7% – college students
    9% – senior citizens living on SS alone
    9% – unemployed
    2% – no income or losses

    Add that up and its 27% right there. So a lot of the people who pay nothing do so cause they make next to nothing or simply aren’t expected to.
    70% of the people who pay no taxes make under $30k.

    Des clearly stated that everyone should pay taxes. So Des is arguing that ALL those people should pay income taxes.

    Of course its just matter of opinion if 0% or 50% or something in between is the ‘right’ amount of people who have 0 income tax liability.

    But when people say “half” of us pay nothing then there is more to that story and thats why Courtney pointed that out. I mean if I said that 70% of businesses in our state pay no state taxes then that sounds bad and makes people think we should hike their taxes. But if the fact is that those 70% of the businesses here lost money then … well of course they shouldn’t pay taxes.

  59. Courtney20 says:

    @ 49 – you emphasized people getting *thousands* of dollars in EITC. And the only people getting that large of a benefit are very low income with children.

    Also, the EITC was very limited when it was enacted in 1975. Guess who expanded it? Reagan, Bush, Clinton, and Bush. 75% of those were Republicans.

  60. Johanna says:

    Paul Krugman’s latest column (“The Social Contract”) says much of what I’ve wanted to say here, much better than I ever could have said it.

  61. bogart says:

    Darn, forgot an important one. I’m 98% sure if you end employment (for any reason, yours or your employer’s) after reaching 55, you can draw on your 401K immediately without paying a penalty — basically, the same as what you (otherwise) get to do at 59.5. Worth checking with someone who actually knows, but if the author of Q9 can stick it out to 55 I think drawing on the 401K is not a problem at all, in terms of access and penalties.

  62. Finance Nerd says:

    “Also, the EITC was very limited when it was enacted in 1975. Guess who expanded it? Reagan, Bush, Clinton, and Bush. 75% of those were Republicans.”

    In a related note, prior to Obama, 75% of the last 4 presidents were Republicans. :) EVERYONE has expanded it, that’s exactly my point, and it has nothing to do with party affiliation. Just because something is a good idea does not mean that making it bigger is a better idea.

    P.S. It may surprise you to hear this, but I am not a Republican, I am an independent, and I have voted for both Republicans and Democrats in the last few Presidential elections.

  63. Finance Nerd says:

    @ #53 — thanks for finding the numbers, I guess I should have known they were out there somewhere and did the math myself. So, my 35% was not a bad guess!

    Anyway, I knew you were just doing an approximation, and I’m clearly not arguing that this is a good idea, I just was enjoying the number freaking.

  64. Finance Nerd says:

    @ # 57 — good point, there is a benefit to not paying until you sell. However, that also means you don’t get a deduction until you sell if you have a loss, so it goes both ways. Gains are bigger than losses (on average) so this is a net benefit, but it does cut both ways.

    One of the underlying principles of our tax code is that income is not taxed until it is realized, which happens when you sell. But, you are right, that is not the only conceivable way to structure a tax system, so there are some tax benefits to this structure.

    That said, I think a tax system that forced people to sell winning investments to pay the taxes on them would be a horrible idea. I think the current system is much more appropriate.

  65. Finance Nerd says:

    @ #58 — I have heard the argument that everyone should pay something, and it does sound nice in theory, but I don’t think I agree.

    In my view (and I believe this also correct from the legal perspective) SS withholding is not a tax but an insurance premium. It would follow that benefits are insurance benefits, which is NOT income (IMO). So people relying solely on SS have “revenue” but not “income” and therefore should not pay any income tax.

    People with very low incomes should also not pay, although the issue of what constitutes “very low” is subject to debate.

    There are other categories too, so I think a system with 0% non-payers would be too onerous. But I also think one with close to 50% non-payers is too extreme in the other direction.

  66. Finance Nerd says:

    @ #60 for some reason my local paper sometimes has Krugman and sometimes doesn’t, so I don’t think I’ve read that particular one, but I will look for it.

  67. Tracy says:

    “There are other categories too, so I think a system with 0% non-payers would be too onerous. But I also think one with close to 50% non-payers is too extreme in the other direction.”

    I absolutely agree that 50% people not paying taxes is too extreme. But the problem isn’t that not enough poor people are paying taxes. The problem is how many people in the United States are poor and/or unemployed.

  68. Finance Nerd says:

    @ #58
    7% – college students
    9% – senior citizens living on SS alone
    9% – unemployed
    2% – no income or losses

    Where did you get these numbers? Something seems off with them, and I think there is some double-counting going on.

    For example, if the unemployment rate is 9%, some of those folks have been unemployed for a long time, and some for a short time. Those that are in the long-term bucket still have income, b/c unemployment comp is taxable. If the average benefit is $350 per week, that is $18K per year in unemployment. Not saying it should be taxed, but it is, so at least some of those folks are paying taxes.

    For the short-term bucket, they had other income as well, so likely many of them are taxed.

    In addition, many of the unemployed are part of two-income households, so in some cases the other spouse still has a job, the family has income, and thus may be paying taxes. If both spouses are laid off long-term, unemployment for the two combined would be $36K, so again, they might owe taxes.

    I know your point was not that 27% was the right number, but it does appear that it might be overstated. Even if we just round down and call it 25%, that means that almost half of the non-tax-paying people are NOT in the buckets you described. Of course, as you point out, many of them have low income, which is why they don’t pay, but a lot of them have already been counted in your numbers above.

    So, what’s the right answer? Who knows, and it is a matter of opinion, not fact. But when the non-payers are approaching a majority, and their percentage grows every year, I think we are at least starting to approach the line, if we haven’t already crossed it.

  69. Finance Nerd says:

    “The problem is how many people in the United States are poor and/or unemployed.”

    That is one interpretation. Another possible interpretation is that the cutoff for what is considered too poor to pay taxes *may* be too high.

    We are talking about a country that is in the top 10 in the world for GDP per capita, so if half the people are “poor” it is at least possible that the problem is the definition of poor and not the underlying economics.

    Please don’t misunderstand me, I’m not saying no one is poor, or that everyone is great. But on the other hand, it is also hard to believe that HALF the country is poor.

  70. Courtney20 says:

    My point saying that most of the presidents who expanded the EITC were Republican is due to the fact that nearly all the Republican presidential candidates (and a good deal of Republican congresscritters) are the ones calling for “broadening the tax base.”

  71. Finance Nerd says:

    @ #67 Tracy –

    One other point is that the percentage of non-payers has been steadily climbing for some time now, in both recessions AND expansions.

    That argues that it is more than just more people becoming poor.

  72. Finance Nerd says:

    “My point saying that most of the presidents who expanded the EITC were Republican is due to the fact that nearly all the Republican presidential candidates (and a good deal of Republican congresscritters) are the ones calling for “broadening the tax base.”

    Totally agree with you there. Bush II probably had the biggest impact on increasing the percentage of non-payers. His tax cuts were called “tax cuts for the rich” but another huge impact was that they removed A LOT of people from the tax rolls, so he did more to “narrow the tax base” than any other president. He also vastly expanded the number and impact of “refundable” tax credits, which means he is largely responsible for the increase in the number of people with negative tax bills.

  73. Courtney20 says:

    “But on the other hand, it is also hard to believe that HALF the country is poor.” The Census Bureau reported that over 15% of the population are living below the poverty level ($11K for an individual, $22K for a family of 4). This is the highest level in nearly 20 years. I hope we can at least agree that THOSE people are poor and should not be paying taxes.

    As for some of the rest, standard exemptions and deductions for a family of four (the same exemptions and deductions that you and I enjoy) will exclude $26,400 of income from being taxed, and the child tax credit (Bush) will reduce a family’s tax bill another $2000. Thus, through absolutely no chicanery or loopholes, a family of four can earn $46,400 and have a federal tax bill of zero. Is that fair? I don’t know. But given the article in Q3, *I* personally wouldn’t want to try to raise two kids on less than $50K a year.

  74. Finance Nerd says:

    “Thus, through absolutely no chicanery or loopholes, a family of four can earn $46,400 and have a federal tax bill of zero. Is that fair? I don’t know. But given the article in Q3, *I* personally wouldn’t want to try to raise two kids on less than $50K a year.”

    Now we’re getting to the crux of it. I do agree with you that those 15% are poor and should not be paying. I think in an earlier post I mentioned the “most disadvantaged 15-20% of the population” and that fits right in the middle of there.

    But as for families of 4 that are pushing $50K, that is where the debate comes in. While I wouldn’t want to try to do it either, that’s not the same as being poor. Should they pay something? I think so, you may not. But those people are VERY different from people making $20K a year and living in poverty.

    Everyone would draw the line at a different point, and at the end of the day that is very subjective. I just think we have passed a reasonable line when we are approaching 50%. I don’t know if the right number is 15%, or 25% or 33%, but I do think it is well-south of 50%.

  75. Courtney20 says:

    Also, 759,000 households with over $100K in income also have no federal income tax liability. CNN Money breaks the percentages out as 3.2% of households earning $100-500K, 2% earning $500K-1M, and 1.5% earning over $1M. Maybe we should ask what’s going on there before getting upset about some poor schmoe getting an extra $400 from Uncle Sam.

  76. Finance Nerd says:

    “Maybe we should ask what’s going on there before getting upset about some poor schmoe getting an extra $400 from Uncle Sam.”

    Or maybe we should worry about BOTH! :)

    There are probably some legitimate reasons for that, and some bad ones (obviously legitimacy is in the eye of the beholder).

    For example, someone could have had significant capital losses in prior years, which they were unable to deduct, and now have significant gains. By carrying the losses forward and offsetting the gains, they would owe no taxes. That doesn’t strike me as nefarious, but I also have no idea how many of the people you mention are in that boat. They may also have a foreign tax credit if they have paid taxes to other countries on the same income. Or they may have an AMT credit for AMT paid in prior years.

    I don’t think those numbers ever will be zero, and they probably shouldn’t be, for the reasons I mentioned above (I’m sure there may be other “good” reasons too). But on the other hand, the percentages do seem to be too high. But it’s hard to say without knowing the circumstances of how they are able to avoid any tax liability.

  77. Johanna says:

    “But as for families of 4 that are pushing $50K, that is where the debate comes in. While I wouldn’t want to try to do it either, that’s not the same as being poor. Should they pay something?”

    They DO pay something. They pay payroll taxes. They probably pay state income taxes. They pay sales taxes. They pay property taxes – either directly or indirectly through their rent.

    There may be a small number of people out there who have a zero or lower total tax burden. But that number IS well south of 50%, and I’m pretty sure it doesn’t include any families of four making $50K.

    This is my point: Shifting back and forth between talking about “taxes” and “federal income taxes” is shifting the goalposts, and makes it sound like there are huge numbers of middle-class people getting totally free rides, when that’s not true at all.

  78. Finance Nerd says:

    “This is my point: Shifting back and forth between talking about “taxes” and “federal income taxes” is shifting the goalposts, and makes it sound like there are huge numbers of middle-class people getting totally free rides, when that’s not true at all.”

    Fair point, which highlights the need for a more well-thought and comprehensive tax “policy” rather than the patchwork we currently have.

    In addition, the only one of those Congress can impact is FIT (and payroll, although I don’t view them as taxes so much as mandatory insurance premiums). So, focusing on FIT is relevant in the case of national politics.

  79. Johanna says:

    “Fair point, which highlights the need for a more well-thought and comprehensive tax “policy” rather than the patchwork we currently have.”

    I don’t know that we really “need” it. It would be some help, since it would prevent people like you from making false or misleading statements about how many people are “paying nothing.” But as long as there are others to call those people out on their BS, I don’t see that as a huge problem.

    “In addition, the only one of those Congress can impact is FIT (and payroll, although I don’t view them as taxes so much as mandatory insurance premiums). So, focusing on FIT is relevant in the case of national politics.”

    First, viewing the payroll TAX as not a tax doesn’t mean it’s not one. Second, if you’re paying “mandatory insurance premiums” to an insurance company that’s loudly talking about cutting the level of benefits you receive, you have skin in that game. Third, when you’re deciding how progressive the federal income tax should be, you can’t just ignore the existence of regressive state, local, and payroll taxes.

  80. Courtney20 says:

    So, someone earning a million dollars and taking perfectly legal credits (AMT, foreign tax, capital losses etc) is a-okay, but someone earning $45K and taking perfectly legal credits (child credit) is pushing the line?

  81. Tracy says:

    “One other point is that the percentage of non-payers has been steadily climbing for some time now, in both recessions AND expansions.

    That argues that it is more than just more people becoming poor.”

    I don’t see how that logic follows. That’s exactly what’s happening. What do you think ‘the shrinking middle class’ is referring to? Because here’s the thing – during the times of economic expansions you’re referring to, the bulk of the money by an overwhelming, overwhelming amount was in the wealthiest Americans – NOT in America-across-the-board.

    I highly recommend reading the article Johanna mentioned yesterday. While it isn’t directly related to ‘more people are becoming poor’ it does talk about the extremely slow growth in the middle class in income (not the numbers of people)

  82. Finance Nerd says:

    “I don’t know that we really “need” it. It would be some help, since it would prevent people like you from making false or misleading statements about how many people are “paying nothing.”” “Third, when you’re deciding how progressive the federal income tax should be, you can’t just ignore the existence of regressive state, local, and payroll taxes.” — So, which is it? We don’t “need” a comprehensive policy, or we do? Not sure which way you are arguing here.

    The OP was specifically asking about FIT (or at least that’s how I understood their question), and all of my comments were about FIT, unless I specifically said otherwise. That is not misleading in any way. I was simply too lazy too write out Federal Income Taxes every time, and did not know if FIT would be understood by everyone.

    You do know that FICA stands for Federal INSURANCE Contributions Act, right? And that OASDI stands for Old Age, Survivors and Disability INSURANCE. It is insurance, not a tax, and benefits are directly proportional to premium paid. Yes, it is in danger of insolvency, and that’s a huge issue, but that is not what the OP asked about.

    P.S. Each taxing authority is responsible for various things, according to the Constitution. FIT pays for certain things, excise taxes (e.g. fuel) are designated for others, and states use their revenue (income, property and sales) for state activities. So, just because someone pays state taxes that pay for state activities does not mean that the fact that the pay no FIT, which is used for DIFFERENT things is irrelevant.

  83. Finance Nerd says:

    “So, someone earning a million dollars and taking perfectly legal credits (AMT, foreign tax, capital losses etc) is a-okay, but someone earning $45K and taking perfectly legal credits (child credit) is pushing the line?”

    Never said that. I said BOTH should be reformed.

    And you need to understand how the AMT works to understand why this is a legitimate example. Let’s say someone exercises employee stock options, but does not sell the stock. The option lets them buy the stock at $50, but the stock is now worth $150. Pretend they make $1M from this. For ordinary tax purposes, this is not income (yet) until they sell. So, they owe no regular tax on this. But because of the AMT, they will owe “tax” on it. Their AGI is zero (or whatever other income they have), but they owe tax on $1M.

    Now next year, they sell the stock for $150, i.e. no gain from when they exercised. They now have a capital gain of $1M and owe regular taxes on that gain. But they already paid those taxes last year when they paid the AMT. So, they get a credit for the amount THE ALREADY PAID.

    This person would show up as $1M of income and no tax liability. But it would be very misleading to say that person did not pay taxes on that income. Year 1 AGI 0, Tax $280K. Year 2 AGI 1M, tax O. When you look at the two years combined, the answer makes sense, but if you look at just one year the answer is distorted.

    Or let’s say that an employee of a US company is sent to work in their plant in the UK for a year. While there, they owe UK taxes on their income, as “residents” of the UK. The US tax code rightly allows them to offset the taxes owed to the US with taxes paid to the UK. Otherwise, they would be doubly taxed on the same income. Again, this is not a “loophole” in the traditional sense.

    So, there may be legitimate reasons why it looks like someone with a lot of income is not paying taxers, but in fact they often (not always) are. The trick is to figure out which ones are legit and which ones aren’t.

  84. Finance Nerd says:

    “I don’t see how that logic follows. That’s exactly what’s happening.”

    Someone else posted that the income limits for the EITC have been expanded by every president since 1980 (except Obama) — and it was more than just inflationary increases. So, if the income limits for these things are going up that is an example of broadening the policy rather than a reaction to more people being “poor”.

    Bush II added several refundable credits to the arsenal. That increased the number of non-FIT-payers and also reduced the amounts that pretty much everyone paid (or didn’t pay). Some of those credits did not exist before, and others were expansions of existing credits. By definition these go to people who didn’t get them before, which means that the “bar” for who qualified was lowered. Again, that argues that at least some of it is due to changes in tax policy, not underlying economics.

  85. Courtney20 says:

    I wasn’t saying that the person making $1M didn’t have legitimate deductions. Just saying that you were awfully quick to point out multiple reasons why that person would have no federal tax liability and would have an awful lot of money to spend left over after other tax responsibilities, while the person making $45K and having significantly less money left over after FICA, state taxes, etc should be paying something because they’re “not poor.”

  86. Josh says:

    Jim,

    I don’t know how you make the assumption that individuals do not pay corporate income taxes. There are two ways to look at this, but they both lead to the same conclusion. The first way is that corporate taxes are part of the cost of doing business. This is money going out the door. If it were not going out the door, costs would be lower. Corporations derive their revenue from consumers. There is no special tax money pot. Consumers pay corporate income taxes, and wealthy consumers consume more.

    Another way of looking at this is that corporate income taxes are paid by the owners or shareholders of a company. Rich people own companies. They either privately own companies or they are shareholders. Anyone who is a shareholder pays corporate income taxes. Since rich people own a huge majority of the stock equity, they pay more.

    No matter how you slice it, corporate income taxes are paid by people, and the rich pay much more.

  87. Finance Nerd says:

    The reason I pointed out those examples was because I was trying to figure out for myself how such a thing was possible, and once I did I thought it was worth sharing. It did not seem to make sense, so I wanted to figure it out. And I have no way of knowing how many people in those income classes are in those buckets versus more nefarious ones, since I just figured them out myself, rather than having access to some official source. I know my examples are accurate in that they would lead to the outcome I stated, but I don’t know how many (if any) are actually using them.

    That is not the same thing as saying that nothing is wrong. Something does have to be done, but it should be done based on a detailed analysis of the problems, not a sound-bite like “x% of people who make more than $y pay nothing.”

  88. Tracy says:

    See, again, I agree with you on needing a detailed analysis of the problem.

    However, again – and I am sure this isn’t your intention, particularly with your last statement – you really seem to be coming across with a belief that the problem is that poor people aren’t paying enough taxes.

    Although I’m extremely puzzled as how to parse this statement “Again, that argues that at least some of it is due to changes in tax policy, not underlying economics.”

    How do you even separate the two? I’m genuinely curious as to what you’re thinking here. I mean, this might just be a chicken and the egg scenario here, but it seems like you are saying the tax policy exists separate from the underlying economics that it both influences and reacts to.

  89. Tracy says:

    “No matter how you slice it, corporate income taxes are paid by people, and the rich pay much more”

    Much more only in terms of actual dollars, though, not as a percentage of income – thus not contributing their ‘fair share’. Which was Buffet’s whole point.

  90. Josh says:

    Tracy,

    I was talking about corporate income taxes, not individual. The rich pay more corporate income taxes because they consume more. They are also the owners of companies. However you choose to look at how corporate income taxes are paid, the rich pay more both in terms of dollars and percentages.

    As far as the Buffett point, it’s completely invalid. His salary is $100k and most of his income is taxed at the lower long term capital gains rate. The top 1/10th of 1% of the population has a tax rate of over 30%.

  91. Tracy says:

    Also, in #84, you seem to be implying that lowering the bar for EIC – people qualifying that didn’t qualify before – means that those people don’t deserve the credit by definition.

    Which just assumes that the original qualifying amount was perfect and should be static and only adjusted for inflation. Which is just weird to me.

  92. Josh says:

    Johanna suggested reading Paul Krugman’s latest article entitled “The Social Contract.” I did because I often read Krugman to get the leftist argument.

    Second to last sentence in the column: “Well, that amounts to a demand that a small number of very lucky people be exempted from the social contract that applies to everyone else.” When he says “very lucky people” he is referring to the wealthy.

    Apparently, Krugman believes no one who has wealth has earned it by working hard in the free market system. It’s completely based on luck. Therefore, it’s okay to confiscate much more of their income even though they already pay so much. “Spreading the wealth around” is the term the President used.

    The real trouble here is that Krugman let the cat out of the bag. The left wing of the Democratic party believes that it is the role of government to determine how much of your hard earned money you deserve to keep.

  93. Finance Nerd says:

    “Also, in #84, you seem to be implying that lowering the bar for EIC – people qualifying that didn’t qualify before – means that those people don’t deserve the credit by definition.

    Which just assumes that the original qualifying amount was perfect and should be static and only adjusted for inflation. Which is just weird to me.”

    Not implying that at all. I’m simply implying (or stating) that the trend is to exempt a higher percentage of the population from FIT over time. It seems unlikely that this monotonically increasing trend is solely the result of more people becoming poor, rather than the result of an intentional shift in our tax policy. If it was the result of underlying economics, you would expect more variability, not a straight line over a 20+ year time period.

    P.S. I did respond to your other comment, but it is stuck in moderation. I will see if I can reword it so it will be posted.

  94. Tracy says:

    @Josh

    You can’t say:

    “Another way of looking at this is that corporate income taxes are paid by the owners or shareholders of a company. Rich people own companies. They either privately own companies or they are shareholders. Anyone who is a shareholder pays corporate income taxes. Since rich people own a huge majority of the stock equity, they pay more.”

    and

    “However you choose to look at how corporate income taxes are paid, the rich pay more both in terms of dollars and percentages.”

    If I own 1 share of stock in a company that pays 30% corporate taxes, the percent of corporate taxes I pay on that stock is EXACTLY THE SAME as the person who owns 100,000 shares.

    Also, you say “I was talking about corporate income taxes, not individual.”

    Err, no you weren’t. This is what it was originally in response to.

    “Josh said : “From the Tax Policy Center: The middle class (middle quintile) pays 14.1 percent of its income in federal taxes, while the rich (top tenth of one percent of the population) pay 30.4 percent.”

    To get that 30.4% rate for individuals The Tax Policy Center somehow added in 10.3% of corporate income taxes. I don’t really know why they add corporate taxes to figure individual tax rates. Individuals do not pay corporate taxes.”

  95. Finance Nerd says:

    @ Tracy #88 –

    You are right, I don’t think the problem is that poor people don’t pay enough, but I also don’t think the (only) problem is that right people don’t pay enough. I think the problem is that the entire system is so convoluted, Rube Goldbergian and illogical, that the band-aids that regularly get applied do more harm than good. It has been 25 years since Reagan reformed the tax code, and it is time for another one. Not a patch, but a complete reform.

    “it seems like you are saying the tax policy exists separate from the underlying economics that it both influences and reacts to.”

    That’s exactly what I’m saying. Tax policy is written by politicians, which means, almost by definition, that it exists separate from the real world.

    Which do you think is a bigger driver of tax policy: 1) an analysis of the underlying economic environment, or 2) the political winds, re-election schedules, etc?

    I’m tempted to say it’s 100% choice 2, but I’m willing to concede that it might be up to 10% choice one.

  96. Josh says:

    Tracy,

    Wow. My original post (comment 4) was the one from the Tax Policy Center. The quote you gave was from my post about corporate income taxes in response to someone who made the claim that they are not really paid by individuals. In that post, I was talking exclusively about corporate taxes. Your last paragraph was from the comment I was responding to, not a comment I made.

    You say “If I own 1 share of stock in a company that pays 30% corporate taxes, the percent of corporate taxes I pay on that stock is EXACTLY THE SAME as the person who owns 100,000 shares.”

    True, but rich people invest a larger percentage of their income than anyone else. So, yes, in terms of percentage of income, they pay more.

  97. Tracy says:

    Right, but that was in the context of comments replying to each other – it literally went:

    1)you ‘the wealthy pay xyz percentage amount in income tax’

    2) Jim saying ‘I don’t see why they consider corporate taxes part of income taxes when they income taxes are paid by corporations, not individuals’ and

    3) then you saying ‘the wealthy do pay it, and this is how it can be considered paid by an individual’

    4) and then me saying ‘yes, but in terms of their actual total income, they pay less of a percentage of their *total* income in taxes than middle class’

    5) and then you coming back and saying ‘but I wasn’t talking about individual income tax, I was talking about corporate tax’

    What exactly am I missing? I was responding to your comment in the LARGER context of the conversation, not in isolation.

    And”True, but rich people invest a larger percentage of their income than anyone else. So, yes, in terms of percentage of income, they pay more” brings me back to my original point, that as a percentage of income across the board, the rich pay much less.

  98. jim says:

    Josh,

    Individuals do not pay corporate taxes.

    Corporations pay corporate taxes. Its not realistic to claim that corporations are just directly carried by individuals.

    How about we just pretend that corporations pay individual taxes? I mean its the same logic. If individual taxes didn’t exist then corporations wouldn’t have to pay people so high wages, therefore corporations indirectly pay individual taxes. Presto whammo, my income tax burden is actually zero cause its actually my employer who cares that financial burden.

    If you can pretend that individuals pay corporate taxes then lets just pretend that corporations pay our taxes too.

    If they abolished corporate taxes tomorrow we would not all see refund checks in the mail or get fat raises. Nor would we see prices drop across the board in the products we buy.

    Another point… if we feel a need to assign the financial impact of corporate taxes on individuals then what about the financial impact of all the government handouts and subsidies? If you can pretend that I somehow pay the tax bill for corporations then why not pretend that I get a tax benefit out of all the government money being spent?? If you want to add corporate taxes, lets subtract all the government aid too. I mean I don’t get food stamps but someone does right? So that money goes into my pocket just as much as corporate taxes come out of my pocket.

  99. Tracy says:

    “That’s exactly what I’m saying. Tax policy is written by politicians, which means, almost by definition, that it exists separate from the real world.

    Which do you think is a bigger driver of tax policy: 1) an analysis of the underlying economic environment, or 2) the political winds, re-election schedules, etc?

    I’m tempted to say it’s 100% choice 2, but I’m willing to concede that it might be up to 10% choice one.”

    I absolutely agree that in many cases, the reasons for the decisions in the tax code are political. But I absolutely disagree that it exists separate from the real world, because every bit of it has an economic impact (some positive and some negative).

    And in many cases, the political decisions themselves are driven by the economic climate (although not always in a solution-oriented mode, so much as the appearance of one.)

    But my point is – good or bad political decisions regarding the tax code still have an actual impact on the economy. So in a sense, it doesn’t matter if the EIC qualifying bars were lowered because

    A) it was shown to be successful at lifting families out of poverty and so it was decided to expand the efforts even further

    B) in order to bring more minimum wage workers into the workforce

    C) as part of overall tax cuts in order to garner political votes

    Three very different motivations (and all of them are true and part of the reasoning behind EIC) aimed at serving very different groups of people – the people that are given the credit, the corporations that benefit from the workforce and the politicians that benefit from looking like their ‘doing something’ – but they’re all intertwined.

    I absolutely do agree that we need an overhaul, however. And I am also in agreement with you that I don’t think it solely is a problem of the wealthy not paying enough (although I do believe that’s a significant component).

    A huge part of the problem is the massive unemployment we’re experiencing, in the very obvious ‘more people employed = more people paying taxes’ (with some percentage still probably not making enough to pay much or anything at all) combined with the fact that EIC is used instead of raising the minimum wage to a ‘living wage’. Granted, I understand that’s in context of some people who don’t *need* to live on minimum wage (teenagers/students) but still.

  100. Tracy says:

    Also, I would say you can’t say that someone is responsible for paying corporate taxes as part of their personal tax burden without giving them corporate profits as part of their personal income.

  101. Josh says:

    Jim,

    Where do corporations get their money? From consumers, also known as taxpayers. Are you somehow under the impression that there is a magic pot of money used for paying taxes that did not get there from the sale of a good or service?

    Again, corporate taxes are part of the cost of doing business. They are paid out of company revenue, which comes from consumers/taxpayers. There’s just no other way about it.

    You then say, “If they abolished corporate taxes tomorrow we would not all see refund checks in the mail or get fat raises. Nor would we see prices drop across the board in the products we buy.” If the corporate tax went away, there are only 3 places the money could go, and it would go somewhere. Either it would be in higher wages, reduced prices, higher profits, or more likely, a combination. Your statement makes it sound like the money would go nowhere, which is completely absurd.

    The last analogy is bizarre. As I’ve stated, we’re all impacted by the effects of corporate taxes. Likewise, we’re all impacted by government spending in both good and bad ways.

    Tracy, your last comment makes sense, especially because that’s already how it works. Investors receive corporate profits back in two ways: dividends and higher stock prices. Both are taxed, albeit at different rates than earned income.

  102. jim says:

    Finance nerd asked :

    7% – college students
    9% – senior citizens living on SS alone
    9% – unemployed
    2% – no income or losses

    Where did you get these numbers?

    The # college and unemployed are rough estimates. The # seniors and no income are from IRS data.

    There are 20.5M college students and thats 7% of the population. Of course not all of them work, but most do I guess. There are also many kids / teenagers who work summer jobs and have some income but not enough to pay taxes. Theres about 21M people age 18-26 who file taxes, about 9.5M age 18-26 have income lower than standard deduction, about 15M people age 18-24 are in college and about 1.3M people age 18-26 make over $40k a year. Given these numbers I think we can assume that about 5-10M people are in college and pay no taxes. SO thats 3.5-7% of the total for all tax payers.

    9% of tax filers over age 65 have income that would fall below the standard deduction levels and therefore have no tax liability. This one was easy to figure get via IRS tax data.

    9% of the labor force is unemployed. But of course some/many of those people do pay taxes. So I stated the maximum here not the actual % who don’t pay taxes. IRS data for ’09 shows 11.2M forms with unemployment compensation and 6.3M of them were taxable so thats about 5M people who were unemployed and did not pay taxes. This is about 3.5% of all filers.

    2% of tax filers have no income or losses. This is straight out of IRS data.

    So more accurate figures:
    3.5-7% college students
    3.5% unemployed
    9% retired
    2% people with losses

    total 18-21.5%

    Of course there are other groups who don’t pay taxes too like low income workers, middle class families with several children, etc.

  103. Tracy says:

    Right, and that’s been my entire point all along – that because of the different rates that capital gains and dividends are taxed, wealthy americans pay far less in income tax percentage than middle class americans.

  104. Josh says:

    You can say the wealthy pay a lower percentage all day long, but it’s simply not true.

  105. Johanna says:

    *Some* of the wealthy pay a far lower percentage than *some* of the middle class. How’s that?

  106. Josh says:

    Johanna, that’s a true statement. So why don’t we just get rid of every single deduction and credit and dramatically lower the rates? That way the federal income tax is guaranteed to be progressive and we won’t spend so much money on tax law compliance. We also have the added benefit of not incentivizing behavior through the tax code.

  107. jim says:

    Josh, we’ll have to agree to disagree on this.

  108. jim says:

    Josh, to be specific, we will have to agree to disagree on the idea that individuals pay corporate the tax.

  109. Johanna says:

    “So why don’t we just get rid of every single deduction and credit and dramatically lower the rates?”

    Because that’s tantamount to raising taxes on (most of) the poor and middle class, and lowering them on (most of) the rich, which is not something I’m in favor of.

  110. Tracy says:

    Actually, I will totally give you that – I realized as soon as I posted that I should be more precise and said ‘most’

    And assuming that capital gains (suitably adjusted for inflation) would also be taxed as income and that the federal minimum wage would be adjusted upward so that the EIC would no longer be necessary, as well as wages across the board adjusted for benefits currently not taxes, I am very open to that.

  111. Tracy says:

    (and by adjusting the minimum wage, I am not talking about adding a dollar or so and considering it good. It would probably have to be roughly half again as much to make it workable, and then everybody else’s wages would probably end up having to go up in order to attract employees and somehow I doubt that will happen. )

  112. Tracy says:

    Plus it would absolutely blow a whole in our economy and cause the price of goods and services to rise dramatically – so obviously it would have to be automatically adjusted for inflation every year and …

    (Just to be clear that I know that the idea is absurd, but so is the idea of elimination of all credits and deductions without protection in place for the people barely making ends meet – and just lowering rates across the board – you’re basically just proposing Huntsman’s plan which I have already debunked on a previous thread a few days ago)

  113. Micki says:

    @Q10: I know there has been a lot of debate about tax rates and the poor vs. rich, but I would like to contribute my experience.

    Several years ago, I became a single mother, and I was a waitress at the time. I had to switch from the night shift to the day shift, in order to pick up my daughter before daycare closed, and on the day shift, I pulled in less than 20K.

    However, a lot of the ladies I worked with were also single mothers, and I came to realize something….Not paying taxes is just the beginning. I realize not everyone will agree with me, this is just what I witnessed during my lean years with a small child:

    1. Daycare assistance would nearly cover all of my daycare bill.
    2. Low income housing provided me a nice two bedroom townhome with attached garage for less than I would have paid for a small apartment.
    3. I qualified for a small amount of food stamps, roughly $25 per month.
    4. I paid in perhaps $1000 in federal income taxes, but received back at the end of the year $3500, which I consider another form of welfare.
    5. My and my daughter’s medical expenses were covered.
    1. I qualified to have some of my heat bill subsidized.

    I did not accept all of the programs I qualified for, because, honestly, it was embarassing to me, and also, because I did not need that much.

    I lived well. Our bellies were full. We had clothes to wear, cable tv, a cell phone, internet service. I could afford a modest but good condition car. The other single moms I worked with also had cell phones, large chunks of their rent subsidized, and nice cars. They also wore name brand clothing, and thought nothing about dropping money out at the bar on a regular basis. Why not? It wasn’t like they needed rent, heat, or daycare money.

    When I decided to return to school, it was all paid for except about $5k in loans. The only reason I went back to school was that I was bored with waitressing, and unqualified to do anything else. There was no other motivation to improve my life. I had no unmet needs.

    Now, years later and off welfare, I life only a bit better than I did before. I have a few more ‘perks’, since I can buy new clothes once in awhile if I want them, (before we were strictly a Goodwill household)and Christmas is a little nicer, but really there is less difference between $18 K and $32 K then you would think. I now pay my own medical insurance and deductible, daycare, mortgage, heat, groceries.

    So my answer to Q10 is that the government of “WE THE PEOPLE” also gives plenty of preferential treatment to the poor.

  114. Johanna says:

    “I had no unmet needs.”

    I am genuinely glad to hear this. It means that the programs you describe were working as intended.

    And yet, you complain that you had no motivation. Well, guess what – whether you have unmet needs or not, motivation has to come from inside you. There is not actually any way to “spread the motivation around.” If you want to improve your life, you have to summon up the motivation yourself (which it seems you eventually did). Or, work as a waitress your whole life – that’s OK too.

    The notion that your daughter (who did not, after all, choose to be born to an unmotivated waitress) or you (her sole caregiver) should have had your needs left unmet, just so that you might have had a little more motivation, is, I fear, rather appalling.

  115. SwingCheese says:

    “Now, years later and off welfare, I life only a bit better than I did before. I have a few more ‘perks’, since I can buy new clothes once in awhile if I want them, (before we were strictly a Goodwill household)and Christmas is a little nicer, but really there is less difference between $18 K and $32 K then you would think. I now pay my own medical insurance and deductible, daycare, mortgage, heat, groceries.”

    I think this gets more to the crux of the motivation matter. While I agree that motivation needs to come from within, and that needs should not go unmet to foster a sense of motivation, I can also say that the author of that statement is absolutely right in her assessment that living on $32K can seem lean. In fact, my husband and I lived a much leaner lifestyle when I was making about $35K and he was a full time student whose commute and class load made his holding a job an impossibility than the one that Micki has described living while she was a waitress. And I can see how that fact, combined with the effort it takes to get to a decent SES level, combined with one’s previous experience and comfort level with receiving long-term federal aid could coalesce to create a situation where motivation to leave federally subsidized lifestyle is slowly eroded.

  116. Tracy says:

    @SwingCheese

    I think that’s more a reflection on how hard it is to get by on a lower/middle class salary than it is that there are too many entitlements for the working poor.

    I mean, would we prefer that young children go hungry rather than parents making under 20k a year get help? Would we rather have them taken away and placed in foster care because the parent can’t make pay their unsubsidized gas/electric bill? Would we rather have the parents just not working because by the time you factor in daycare and transportation, they actively lose money from their net income?

    *********************************************

    The rest of this is so long and ranty, nobody is probably going to read it but *shrug*

    **********************************************

    And (this a bit of a tangent) – I think people (not specific people, but rhetoric-people who repeat some of these GOP candidates talking points) really need to unpack the reasons behind a lot of these credits a little more thoroughly. We’ve already addressed the daycare subsidy and EIC and why the net benefit for working without it.

    But I really want to emphasize that a large portion of that benefit is NOT for the working poor – it’s for the classes they work to support, both for the middle class and the wealthy and for the corporations. Because who is *really* benefiting from other people working minimum wage jobs? (Or, like in Micki’s case, waitressing jobs where the staff aren’t even paid minimum wage and whether you make enough money to survive depends on the price of the menu?)

    It’s not the person receiving the 1,000 credit. They’re still living a pretty minimum subsidence lifestyle (basic needs met, maybe a small bonus) – it’s *everyone else*

    Who loses out if it goes away? Again, it’s *everyone else* I mean, everybody wants everybody else to pay something (again, the rhetoric everyone) but nobody looks at what that would actually mean. They don’t have to – they’re running on campaign promises.

    But for 99% of the people reading this blog, if credits and deductions are eliminated, your taxes will go up, your standard of living will go down.

    More people with less income than you will be starving, less people will be able to work/live on minimum wage. Welfare entitlements absolutely would HAVE to go up. Except the same mindset that says the working poor don’t deserve some credit for working – how much are they willing to hand out to the non-working poor?

    So, we’ll have to accept a higher child illness/hunger death rate, a higher crime rate (because desperate people do desperate thing), our ranking in children’s education will continue to plummet (because a child who doesn’t eat, doesn’t learn)

    The prices of goods and services will go up. Other than students and a few people looking for supplemental income rather than money to live on, who is going to work a minimum wage job when it’s a net loss to them to do so? I mean, we already have this ‘problem’ will illegal immigrants ‘stealing’ jobs because they’re able to work for less than minimum wage (or even at minimum wage for jobs nobody wants to do) and many of whom are living in (company ‘sponsored’) conditions that are illegal but since *they’re* ‘illegal’ nothing gets done. So we either increase that activity and hey, maybe spread it to our own working poor (Yay, lets live the american dream of barrack housing for the poor) or we raise some wages elsewhere. Or we bring even more goods in from other countries. We’d actually probably have to do a combination of both.

    Seriously, every person who is mandating this ‘everyone should pay [at least a dollar]‘ – WHAT do you think is going to happen? How do you see it playing out in the economy? I’ve also seen people say ‘if you don’t pay taxes, you shouldn’t get a vote’ … I mean, no representation without taxation, that was TOTALLY what the founding fathers really said, right?

    Anyway, genuinely, genuinely curious as to how people think eliminating these credits would actually play out in a different scenario than the one I believe will happen. (Although I don’t think will happen, because I think there is enough awareness that ‘everything eliminated’ will never happen – again, it’s rhetoric to stir people up, but when push comes to shove, if certain people get elected it won’t be a slash elimination. At best/worst, it’ll be a death by a thousand cuts and we’ll just bleed out as a country slowly)

    Although there is a bit of a sense that our economy is already totally screwed, so why not go whole hog and see just how thoroughly we can crash it and go to a Corporatocracy.

  117. Micki says:

    @Johanna: Eh, part of my reply was tempered with irritation at the author of the origional question. I have the uncomfortable feeling that when peoples lives become difficult, or they are unable to live the life they think they should have, they tend to rant and blame government and act as though they are being kept down by taxes, or the rich, or whatever the demon of the day is.

    I certainly do not expect a child in this country to go hungy, or sit cold under a bridge because they are poor. And I know that I was lucky to live in an area that had a fair amount of public programs, coupled with a slightly lower than average cost of living. Many people are not so lucky, and I know that in spite of welfare programs, there are children who live cold and hungry in this country. And that is a tragedy.

    But the original author seemed to be angry at the government, as though they were to blame for keeping poor people down, and raising rich ones up. I just happen to disagree and wrote my answer while I was still in a bit of a huff. :)

  118. SwingCheese says:

    @Tracy

    “I think that’s more a reflection on how hard it is to get by on a lower/middle class salary than it is that there are too many entitlements for the working poor.”

    That may very well be. I wasn’t attempting to argue either of those points, though. I was reflecting on Micki’s words in the context of a person moving from using government aid to becoming more economically self-sufficient, and why someone might choose not to make that move at all.

  119. Korea Beat says:

    Linking taxes to changes in the national debt would make it nearly impossible for the government to implement countercyclical fiscal policy. In other words, you would be forced to either raise taxes or shrink spending during recessions, either of which would exacerbate the recession. And then during the boom times politics would most likely force cutting taxes rather than spending, which would encourage overheating of the economy leading to inflation and financial-sector troubles.

  120. Laura says:

    Q7: Leave the money alone. It took me 10 years after high school graduation before I finally started college.

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