Sorry, I could not read the content fromt this page.Tuesday, November 23, 2010
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The Expiring Bush Tax Cuts: What’s the Fuss?
Back in the good 'ole days of budget surpluses (i.e., 2001 and 2003), the Bush administration was concerned that if surpluses grew too large, they would stifle the economy's growth. In an effort to reduce the surpluses, Congress enacted significant tax cuts for all tax brackets that would be effective until the end of 2010.
Given the continually fragile state of the economy and enormous budget deficits, should the tax cuts be extended or should they be permitted to expire? The answer to that question is very complicated and requires a little background information.
From the most simplistic point of view, most economists advocate that in order to restart the economy, we need to stimulate consumption, which should cause employers to hire additional workers, which should reduce unemployment, which should further stimulate consumption, and so on and so forth. Because of this generally accepted premise, the issue at the heart of the debate surrounding the Bush tax cuts is whether the cuts will efficiently stimulate consumption and aid the economic recovery.
Even if the tax cuts do effectively add to the economic recovery, they will very likely continue to add to the budget deficit over the next 10 years to the tune of $3.7 trillion, according to the nonpartisan Tax Policy Center. Although Republicans may argue that the costs of the tax cuts will be netted out by increases in taxable earnings, there is little evidence to suggest that this will occur, at least in the short-term.
Surprisingly, many Democrats and Republicans agree that the tax cuts should be extended, at least temporarily, for 97% of Americans, i.e., all but the top two tax brackets. In terms of income, this means the cuts will be extended for those individuals that make less than $200,000 per year and those families that make less than $250,000.
Republicans argue that the cuts should be extended to all tax brackets because of the tenuous economic recovery and because of a possible "double dip," — a worsening of the economy caused by too little consumption. They argue that increasing the tax rates on the wealthy will discourage business owners from hiring new employees or reinvesting profits in their businesses. A relatively small group of Democrats also support this premise.
Democrats contend that the taxpayers in the top two tax brackets will not allow increases in their tax liabilities to affect personal spending, business spending, or hiring new personnel. They claim that business owners will hire additional employees if it is a good idea, regardless. Democrats also claim that the wealthy are much more likely to simply save their money than spend it, but that those lower-income taxpayers are much more likely to spend the money and increase consumption immediately.
According to the Tax Policy Center, if the tax cuts are allowed to lapse for the top two tax brackets, it will shave $700 billion off the budget deficits over the next 10 years. However, if all the cuts are extended, the majority of that $700 billion will go to the wealthiest 1/10 of 1% of Americans, who earn more than $7 million per year, on average, and will result in an average tax savings of $3 million over a 10-year period for those taxpayers.
Although many Democrats and Republicans do think the tax cuts should be at least partially extended, there are those that think the cuts should be allowed to lapse completely, including former Federal Reserve Chairman Alan Greenspan. During an Interview on NBC's Meet the Press, Greenspan said: "[t]he problem we've gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous."
Because this is an election year, members of Congress are loathe to increase taxes on constituents and may not act until after the November elections, at the earliest, and possibly not until next year. If the tax cuts are allowed to expire, taxpayers in most tax brackets will see a 3% to 5% increase in their tax liabilities. The marriage penalty will return, meaning the standard deduction for married couples will be less than the standard deduction for two unmarried people. The child tax credit will be reduced from $1,000 to $500. The long-term capital gains tax will increase from a maximum of 15% to 20%. Qualified dividend plans, which are now taxed at 15%, will be taxed at the same marginal rate as the taxpayer.
What do you think? Do you support allowing the cuts to expire? Why or why not?
This is a guest post by Steve Cook. Steve is an associate with a Phoenix, AZ-area law firm that specializes in taxation. He is also a bit of an economics, web design, and software engineering nerd. Read more articles from Steve's firm:
APR, APY, and Mortgage Math: A Real World Example
I have lots of readers here in the central Iowa area, so it came as no surprise to me that when I began hearing an ad frequently on local radio advertising a particular mortgage product in terms that were a bit on the confusing side, I received an email about it. Jim writes in:
I just heard an ad on the radio offering a 3.99% mortgage. That makes sense to me. Where I’m confused is when the ad then mentions a 4.22% APY immediately after that. What does it mean? What interest rate will I actually be charged?
First, let’s break down the terms.
APR, or Annual Percentage Rate, defines the interest rate that is charged to the principal of the loan. You will be charged a total of 3.99% interest on that loan over the course of a year.
APY, or Annual Percentage Yield, describes the percentage of the principal of the loan that you’ll have to pay over the course of the year.
The trick here is to understand that we’re talking about two separate and somewhat different things. An example will illustrate this difference clearly.
An Example: Quarterly Interest
Let’s say you have a loan from a bank that has 3.99% with interest that is compounded quarterly. That means that every three months, your loan is charged 1/4 of the interest for the year, which would be 3.99% divided by 4, or 0.9975% interest.
Let’s say your loan has a balance of $100,000 at the start of the year, to make the math more clear.
At the first quarter, your $100,000 loan will be charged 0.9975% interest, or $997.50. This gives your loan a new balance of $100,997.50.
At the second quarter, your loan has a balance of $100,997.50 and that balance will be charged 0.9975% interest, or $1,007.45. This gives your loan a new balance of $102,004.95.
At the third quarter, your loan has a balance of $102,004.95 and that balance will be charged 0.9975% interest, or $1,017.50. This gives your loan a new balance of $103,022.45.
At the fourth quarter, your loan has a balance of $103,022.45 and that balance will be charged 0.9975% interest, or $1,027.65. This gives your loan a new balance of $104,050.10.
Over the course of a year, your $100,000 loan turned into $104,050.10, earning $4,050.10 in interest. That’s 4.05% of the balance of the loan, which is your APY.
Thus, this loan has a 3.99% interest rate, but a 4.05% APY.
In the United States, APY is legally defined as being the rate achieved when using daily compounding. In this case, that would give you an APY of 4.07%. So, where does the rest of that 4.22% come from?
The Other Parts of a Mortgage
What the radio ad isn’t telling you is that in order to get that 3.99% interest rate, you’ll have to pay some fees and possibly a discount point or two. These are up-front costs that add to the balance of the loan.
In this specific case, the fees and points will add enough to the balance of the loan to raise the APY from 4.07% to 4.22%. In other words, the total of the fees and points will be somewhere around $165 on a $100,000 loan, or about $817 on a $500,000 loan.
These fees will be rolled into the true APR that the lender has to give you (not that nominal rate given on the radio that doesn’t include these fees), and it’s that APR that you should be paying attention to if you’re intending to live in the house for a long time.
Another point worth considering is the fact that banks are allowed to advertise interest rates as much as 0.125% lower than what they’ll actually give you. In theory, this is done to allow for market fluctuation between the time you hear the ad and the time you sign on the dotted line, but lenders often push this so that they can advertise with seemingly incredible low rates.
What’s the moral of the story? Two things.
First, shop around. Getting a mortgage is a major financial decision, one that will have an impact on you for a long time. You owe it to your finances to shop around.
Second, get the APR on paper. Remember that APR takes into account most loan costs (points, most loan fees, mortgage insurance), but doesn’t account for some other charges, like application fees, title insurance, title examination, appraisals, document prep, and so on. You’ll likely have to come up with some additional cash for those when you move forward with the loan.
No matter what, never take out a mortgage based on an advertisement. This is far too important of a decision to do it based on a radio ad. Spend the time doing your homework and shopping around first, even if your favorite radio host is recommending a particular product.
Monday, November 22, 2010
Lip Service: What We Say Versus What We Do
Charities. Our family commitments. Our work commitments. Our political beliefs. Our spending choices. Our savings and investing choices.
So often, we give lip service to these things, saying that we find them important and even, on some level, believing that they’re important, but when push comes to shove, they’re not really important in our lives.
A good way to explain this is to use the example of why I decided to leave my last job before taking up The Simple Dollar full time.
When my wife and I found out that we were pregnant with our first child in 2005, it was a life-changing moment. I decided, on a very deep level, that I would never allow myself to be the kind of father who wasn’t there for his children, no matter what. I told other people about this, too – my children were, flat out, going to be the center of my life.
My son was born, and what did I find myself doing? I found myself, if anything, focusing more intensely on my job than before. I was traveling constantly (at least it seemed like it) and when I wasn’t traveling, I was often spending weekends fixing problems that had cropped up at work. Even on the day he was born, I was engaged with conflicts about my job.
It finally came to a head when I was traveling for work in 2007. My wife called me to tell me that my son had taken his first steps in our living room. I was excited, but as I sat there alone in my hotel room after hanging up the phone, I realized that I had just been paying lip service to the idea of being dedicated to my family.
It was what I wanted on some level and it was what I told others about, but when it came down to the choices I was actually making, my family wasn’t my top priority.
I had a choice to make. Was I going to live up to my words and promises, both to myself and others, or was I going to allow all of my pledges to my family be mere lip service?
In 2008, I walked away from a job I loved very much into a very scary unknown path, with uncertain income and an uncertain future. I had as many bases covered as I possibly could, with writing opportunities and other freelance work lined up, but leaving behind a secure job I loved very much was scary to say the least.
Today, I know it was the right choice. The stress and personal conflict of my previous job was immense and I’ve found that, over the past two years, I’ve ben able to be the person I wanted to believe that I was. I am a father and a husband that is there for his children when they need him. I am the kind of father who can spend an afternoon at the park with his kids and is always right there when they need help or advice or a hug.
Reflecting on this has made me ask myself what I pay lip service to in other areas of my life. Charities? Financial obligations? Spending promises? Statements to family and friends and loved ones?
In what areas of my life do I talk big but fail to really follow through?
I don’t feel that I give enough to charities, but I usually keep my charitable giving quiet. Sometimes, I don’t feel that I hold as strongly as I should to my spending pledges – I give in sometimes and spend more than I should, particularly on items like board games that I can easily share with friends and loved ones.
What areas of your life do you talk about and think of as important to you, but you fail to follow through on?
This is more important than you think. A person who pays a lot of lip service without a lot of action can easily develop a negative and unreliable reputation among the people around them. On the flip side, people who actually live up to what they say are viewed as reliable and are given a positive reputation among the people around them.
Reputation is valuable. Your reputation precedes you and helps (or hinders) in building future relationships. It helps you when you need help the most: with projects, with job hunts, and so on.
More importantly, to me at least, when you’re actually living up to what you’ve promised to yourself, you feel far more empowered on a day-to-day basis.
My life has drastically improved since I stepped back and chose to become the person I always told others that I was. At times, I miss my previous work greatly, but when I hear my children chattering away (as I do right now, since they’ve just woken from their nap), I know with every ounce of my being that I made the right choice.
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