I was just taking a look at a couple of properties in Zillow and found it interesting how big the real estate tax bite can be. I have 2 rental properties and the real estate tax cost is 15% and 12% of the rental income. At least for my area Zillow underestimate rent rates (the vacancy rate is very low and properties in general rent within days or weeks – at rates 10%+ higher than Zillow estimates on average -based on my very limited sample of just what I happen to notice).

I thought I would look at the real estate tax to property value estimate and rent estimate by Zillow in Various locations.

Arlington, Virginia – real estate taxes were 1% of estimated property value and 17.5% of rental estimate.
Chapel Hill, North Carolina – 1.5% of value and 41% of rental estimate.
Madison, Wisconsin – 2.4% of value and 39% of rental estimate.
Flagstaff, Arizona – .7% of value and 9.5% of rental estimate.
Grand Junction, Colorado – .4% of value and 6% of rental estimate.

This is just an anecdotal look, I didn’t try to get a basket of homes in each market I just looked at about 1-5 homes so there is plenty of room for misleading information. But this is just a quick look and was interesting to me so I thought I would share it. While the taxes are deductible (from the profit of the rental property) they are a fixed expense, whether the house is rented or not that expense must be paid.

A high tax rate to rental rate is a cash flow risk – you have to make that payment no matter what.

In my opinion one of the most important aspects of rental property is keeping the units rented. The vacancy rate for similar properties is an extremely important piece of data. Arlington, Virginia has an extremely low vacancy rate. I am not sure about the other locations.

I wanted to use Park Slope, Brooklyn, NYC but the data was confusing/limited… so I skipped it; the taxes seemed super low.

Related: USA Housing Rents Increased 5.4% in the Last Year (Sep 2012) – USA Apartment Market in 2011 – Top Markets in the USA for Buying Rental Property (2011) –
Home Values and Rental Rates

Those that want to continue the policies of the last few decades of policies that tax our grandkids to pay for us living beyond our means seem to have won the day again. Not a surprise; very sad though.

In my reading stories on the wonderful success of “avoiding the fiscal cliff” seems to amount to passing the George Bush tax cuts again (except this time when in a much much worse budgetary position) and modifying the extent to which the absolute richest benefit from those cuts (so the richest don’t get quite as step cuts as they had been getting but still are getting big cuts from before the Bush tax cuts were made. And the recent trend of treating trust fund babies as the absolute most favored taxpayers was continued (though a few of the absolute richest trust fund babies will have to have some taxes withheld from their windfalls).

I haven’t read anything about them getting rid of the “hedge fund manager” tax favors. Did they? Did they even bother to change the law so retired managers don’t get the super huge tax favors too?

On the spending beyond our means issue they seem to have just decided that having the grandkids continue to fund our spending is wonderful.

If it were up to me I would have continued some of the Bush tax cuts (certainly not for those making more than $200,000 – unless we can cut spending way more than I would guess in which case I would be fine having taxes even for the richest few lowered). I would have continued treatment that reduced taxes owed on dividends and capital gains, though perhaps a bit less than they did. I would cap mortgage deductions (at say $50,000 a year or something).

I certainly would not have supported such massive Bush tax cuts without large spending cuts. If this level of spending is what we intent to do, we need to pay for it and not just bury our kids and grandkids with huge bills. Without spending cuts I would not have voted again for the Bush tax cuts, which seems to be the main extent of their “solution” (taking a bit of the tax cuts for the wealthiest off the plate but pretty much just passing Bush’s tax cut again).

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I am glad we have a “fiscal cliff” to finally get some reduction in the future taxes both parties have been piling on with abandon the last few decades. When you have enormous spending beyond your income, as the USA has had the last few decades, cutting current taxes is just raising taxes on your grandchildren to pay for your spending. Shifting taxes to your grand children is not cutting taxes it is shifting them to future generations.

If you want to really cut taxes you must cut taxes and not pass on paying for your cuts to your kids. It seems pretty obvious those that advocating cutting current taxes the last few decades were only interested in living beyond their means today and foisting the responsibility to pay to their grandchildren. That is despicable behavior.

The fiscal cliff is an opportunity to return to a budget that has the generation doing the spending paying the taxes (last seen in the Clinton administration). The fiscal cliff outcome is going to be far from perfect. But the result will be a much more honorable outcome than foisting ever increasing taxes on future generations to pay for our current spending.

Obviously, if you reducing how much you are adding to your credit card balance each month and start paying your bills that means you don’t get to live off your future earnings today. So you will suffer today compared to continuing to tax the future to pay for your spending.

I hope the compromise results in spending cuts and an elimination of the Bush generation shifting taxes (cutting taxes on the the current wealthy without spending cuts – so just taxing the future to pay for tax cuts today). It is unlikely the fiscal cliff results in us actually paying for our spending (the best possible result is not an elimination of adding to the taxes future generations must pay but just a reduction in the level of tax increases we are imposing on the future every year).

Lots of little things should be done to save a few billion (maybe it could add up to $50 billion a year if we are very lucky). But the serious spending cuts have to come from reductions in military spending, reducing waste in the health care system and making social security more actuarially sensible (social security is not part of the fiscal cliff discussions though). Reducing tax breaks also has to happen, unless absolutely huge spending cuts can be found which is not at all likely.

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Very interesting USA federal tax data via the tax foundation. Top 1% has adjusted gross income of $343,000; over $154,000 puts you in the top 5%; $112,000 puts you in the top 10% and $66,000 puts you in the top 25%.

The chart only shows federal income tax data. So the costly social security tax (which is directly based on earned income* so in reality is federal income tax but is handled in a separate account so is consistently not classified as income tax data) for outside the top 5% (income above $106,800 [for 2011] does not have to pay the social security tax) is not reflected in the rates paid here.

Looking at the data excluding social security is fine, but it is very important to remember the social security (plus medicare) tax is the largest tax for, I would guess, most people in the USA. Social security tax is 6.2% paid by the employee plus 6.2% paid by the company – a total of 12.4%. That part of the tax was capped at $106,800 in income for 2011. The medicare tax is 1.45% of income paid by the employee and 1.45% paid by the employer (and it has no cap). So that totals 2.9% (for the employee and employer tax) and brings the total to 15.3%** for most earned income.

Source: Internal Revenue Service. Table via the tax foundation.

Other interesting data shows that the top 1% earn 16.9% of the total income and pay 36.7% of the total federal income taxes. Those in the top 1-5% earn 14.8% of the total income and pay 22% of the income taxes. Those in the top 5-10% earn of the income 11.5% of the income and pay 11.8% of the federal income taxes. So once you exclude the main tax on income (social security) and use adjusted gross income the tax rates are slightly progressive (higher rates for those that are making the most – and presumably have benefited economically the most from the economic system we have).

Given that this is skewed by excluding the regressive (higher taxes paid by those earning less – social security is the same rate for everyone except those earning the very most who don’t have to pay it on their income above $106,800 [in 2011]) social security tax I believe we should have a more progressive tax system. But that is mainly a political debate. There are good economic arguments for the bad consequences of too unequal a distribution of wealth (which the USA has been moving toward the last few decades – unfortunately).

In addition to the other things I mention there are all sorts of games played by those that desire a royalty type system (where wealth is just passed down to the children of those who are rich, instead of believing in a capitalist system where rewards are given not to the children of royalty but to those that are successful in the markets). A good example of the royalty model is Mitch Romney giving his trust fund children over $100 million each. These schemes use strategies to avoid paying taxes at all. Obviously these schemes also make the system less progressive (based on my understanding of the tax avoidance practiced by these trust fund babies and those that believe it is ethical to give such royalty sized gifts to their royal heirs).

I don’t like the royalty based model of behavior. I much prefer the actions of honorable capitalist such as Warren Buffett and Bill Gates that give their children huge benefits that any of us would be thrilled with, but do not treat them as princes and princesses who should live in a style of luxury that few kings have every enjoyed based solely off their birthright. Both Bill Gates and Warren Buffett have honorably refused to engage in royal seeking behavior that many of their less successful business peers have chosen to engage in. Those that favor trust fund babies are welcome to their opinion and have managed to get most of congress to support their beliefs instead of a capitalist model that I would prefer so they are free to engage in their desire to parrot royalty and honor the royalty model of behavior.

* earned income – you also don’t have to pay social security or medical tax on unearned income (dividends, capital gains, rental income…). Again this by and large favors wealthy taxpayers. Everyone is eligible for the same favorable tax treatment but only those that have the wealth to make significant amounts of unearned income get this advantage.

** the social security tax has been reduced by 200 basis points (this relief was recently extended) as part of dealing with the results of the too big to fail banking caused credit crisis. So under the temporary reduction the personal tax rate is 4.2% and the total cost is 13.2%.

Related: Taxes – Slightly or Steeply Progressive? – Taxes per Person by Country – USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – Retirement: Roth IRA Earnings and Contribution Limits

I believe in weak stock market efficiency. And recently the market is making me think it is weaker than I believed :-/ I believe that the market does a decent job of factoring in news and conditions but that the “wisdom of crowds” is far from perfect. There are plenty of valuing weaknesses that can lead to inefficient pricing and opportunities for gain. The simplest of those are spotted and then adopted by enough money that they become efficient and don’t allow significant gains.

And a big problem for investors is that while I think there are plenty of inefficiencies to take advantage of finding them and investing successfully is quite hard. And so most that try do not succeed (do not get a return that justifies their time and risk – overall trying to take advantage of inefficiencies is likely to be more risky). Some Inefficiencies however seem to persist and allow low risk gains – such as investing in boring undervalued stocks. Read Ben Graham’s books for great investing ideas.

There is also what seems like an increase in manipulation in the market. While it is bad that large organizations can manipulate the market they provide opportunities to those that step in after prices reflect manipulation (rather than efficient markets). It is seriously annoying when regulators allow manipulators to retroactively get out of bad trades (like when there was that huge flash crash and those engaging in high frequency “trading” front-running an manipulation in reality but not called that because it is illegal). Those that were smart enough to buy stocks those high frequency traders sold should have been able to profit from their smart decision. I definitely support a very small transaction tax for investment trades – it would raise revenue and serve reduce non-value added high frequency trading (which just seems to allow a few speculators to siphon of market gains through front running). I am fine with speculation within bounds – I don’t like markets where more than half of the trades are speculators instead of investors.

Related: Market Inefficiencies and Efficient Market Theory – Lazy Portfolios Seven-year Winning Streak – investing in stocks – Naked Short Selling

For 2010 and 2011, the most that an individual can contribute to a traditional IRA or Roth IRA generally is the smaller of: $5,000 ($6,000 if the individual is age 50 or older), or the individual’s taxable compensation for the year. You have until your taxes are due (April 15th, 2011) to add to your IRA for 2010.

This is the most that can be contributed regardless of whether the contributions are to one or more traditional or Roth IRAs or whether all or part of the contributions are nondeductible. However, other factors may limit or eliminate the ability to contribute to an IRA as follows:

• An individual who is age 70½ or older cannot make regular contributions to a traditional IRA (just to make things complicated you can add to a Roth IRA) for the year.

Contributions to a Roth IRA are limited based on income. The limits are based on modified adjusted gross income (which is before deductions are taken). The Roth IRA earnings limits for 2010 are:

• Single filers: Up to $105,000; from $105,000 – $120,000 (a partial contribution is allowed)
• Joint filers: Up to $167,000; from $167,000 – $177,000 (a partial contribution)

For 2011 the earning limits increase to

• Single filers: Up to $105,000; from $107,000 – $122,000 (a partial contribution is allowed)
• Joint filers: Up to $167,000; from $169,000 – $179,000 (a partial contribution)

More details from the IRS website and earning limits details.

The income limits do not cap what you can add using a 401(k). So if you were planning on adding to a Roth IRA but cannot due to the income limits you may want to look into increasing your 401(k) contributions.

Related: Add to Your Roth IRA – Add to Your 401(k) and IRA – 401(k)s are a Great Way to Save for Retirement

401(k), IRAs and 403(b) retirement accounts are a very smart way to invest in your future. The tax deferral is a huge benefit. And with Roth IRAs and Roth 401(k)s you can even get tax exempt distributions when you retire – which is a huge benefit. Especially if you don’t retire before the bill for all the delayed taxes of the last 20 years starts to be paid. The supposed “tax cuts” that merely shifted taxes from those spending money the last 10 years to those that have to pay for all the stuff the government spent on them has to be paid for. And that will likely happen with higher tax rates courtesy of the last 10 years of not paying the taxes to pay for what the government was spending.

When looking at your 401(k) and 403(b) investment options be sure to pay close attention to expenses for the funds. Some fund families try to get people to investing in high expense funds, that are nearly identical to low expense funds. The investor losses big and the fund companies take big profits. Those people serving on the boards of those funds should be fired. They obviously are not managing with the investors interests at heart (as they are obligated to do – they are suppose to represent the investors in the funds not the friends they have making money off the investors).

Here is an example (that I ran across last week) expense differences for funds that have essentially identical investment objectives and plans in the same retirement plan options: .39% (a respectable rate, though more than it really should be) for [seeks a favorable long-term rate of return from a diversified portfolio selected to track the overall market for common stocks publicly traded in the U.S., as represented by a broad stock market index.], .86% [for "The account seeks a favorable long-term total return, mainly from capital appreciation, by investing primarily in a portfolio of equity securities selected to track the overall U.S. equity markets based on a market index."]. Do not rely on your fund provider to have your interests at heart (and unfortunately many companies don’t seek the best investment options for their employees either).

The .47% added expense isn’t much to miss for 1 year. However, over the life of your retirement account, this is tens of thousands of dollars you will lose just with this one mistake. Personal financial literacy is an easy way to make yourself large amounts of money over the long term. It isn’t very sexy to get .47% extra every year but it is extremely rewarding.

$200,000 at 6% for 25 years grows to $858,000
$200,000 at 6.47% for 25 years grows to $958,000

So in this case, $100,000 for you, instead of just paying the fund company a bit extra every year to let them add to their McMansions. In reality it will be much more than a $100,000 mistake for you if you save enough for retirement. But if you save far too little (as most people do) one advantage is the mistake will be less costly because your low retirement account value reduces the loss you will take.

Related: 401(k)s are a Great Way to Save for Retirement – Retirement Savings Allocation for 2010 – Many Retirees Face Prospect of Outliving Savings
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Alan Greenspan made several huge errors while chairman of the Federal Reserve. Failing to deal with the massive risk taking and fraud by the member banks of the Federal Reserve was one. And supporting tax cuts for a country that was hugely in debt (while current deficits were still huge was another. Yes anyone can claim (and he did) future surpluses, but there had yet to be a single year of surplus, and obviously we would have been in deficit even before the tax cuts put us much much further in debt, history has shown .

That is either amazingly bad economic forecasting or a lie. My guess is he knew this wasn’t true. Which would make it a lie. If he really was that out of touch with economic reality, we have to question why we ever thought he had insight into the economy.

Greenspan Says Congress Should Let Tax Cuts Expire

Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household

Accepting that, I don’t agree with those that vilify his performance. He was Fed chairman from 1987-2006. He made some very bad decisions that cost people dearly. But it isn’t very surprising someone in such power for so long would make some very bad and costly decisions. My guess is he caved to pressure from political allies that reminded him how the current President Bush’s father blamed Greenspan’s decisions for his losing the Presidency. And so Greenspan was trying to do what he could to do what the then President Bush wanted. Not a very honorable explanation but people often do not make the most honorable choices.

In 2003 he publicly disagreed with the wisdom of additional cuts:

Politicians, eager to give favors, at the expense of the future, went ahead and passed more tax cuts – weakening the country for their (and their political allies) short term benefit.

Related: Estate Tax Repeal (2006) – Charge My Government to My Kids (2007) – USA Federal Debt Now $516,348 Per Household

Greenspan’s thoughts on the economy, from his July 16th 2010 interview:
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Failing to pay for the deferred costs of current expenditures gets all those practicing credit card budget thinking in trouble. That includes lots of individuals. But it also includes many governments. They pay huge rewards to special interests and act like they think the cost doesn’t exist. Only an extremely financially illiterate society could elect so many of these people. We have not learned that in the modern financial economies financial illiteracy is a huge societal problem (along with scientific illiteracy).

Padded Pensions Add to New York Fiscal Woes

Such poor financial management by public sector organization (California is horrible also) are causing huge damage to those living in such poorly managed states.

It isn’t complicated. So long as you elect people that are financial illiterate and only care about granting favors to special interests, not the consequences of doing so, you are setting yourself up for a great deal of pain once your credit card bill comes due.

Related: NY State Raises Pension Age to Save $48 Billion – Charge It to My Kids – Bogle on the Retirement Crisis – Politicians Again Raising Taxes On Your Children

The Wall Street Journal wrote “Their Fair Share” in July of 2008 claiming that the rich are paying their fair share of taxes.

Wow. The Wall Street Journal against a tax cut? Well I guess if it is a tax on the poor they don’t support cutting those taxes. I think it may well make sense to reduce the social security and medicare taxes on the working poor (including the company share). Of all the taxes we have this is the one I would reduce, if I reduced any (given the huge amount of government debt any reduction may well be unwise). But reducing income taxes for those under the median income doesn’t seem like something worth doing to me.

They seem to ignore that income inequality has drastically increased. When you have a system that puts a huge percentage of the cash in a few people’s pockets of course those people end up paying a lot of cash per person. One affect of massive wealth concentration is that the limited people all the money is flowing to naturally will pay an increasing portion of taxes.

It is fine to argue that the rich pay too much tax, if you want. I don’t agree. I think Warren Buffett explains the issue much more clearly and truthfully when he says he, and all his fellow, billionaires (and those attempting to join the club) pay a lower percent of taxes on income than their secretaries do. He offers $1 million to any of them that prove that isn’t true.

And I guess you can say that the top 22% of the income paying the top 40% of the taxes is “steeply progressive.” I wouldn’t call that steep, but… It is nice the graphic is at least decently honest. Saying just “top 1% of taxpayers, those who earn above $388,806, paid 40% of all income ” is fairly misleading. It is much more honest (I believe) to say that “the top 1% (that made 22% of the income) paid…” Those with the top 22% of income paid 40% of the taxes, the next 15% payed 20%, the next 31% paid 26% the next 20% 11% and the final 12% paid 3%. That is progressive. From my perspective it could be more progressive but I can see others saying it it progressive enough.

If 22% to 40% is “steeply” progressive what is 1% to 22%? The income distribution seems to be what? very hugely massively almost asymptotently progressive? The to 1% of people, by income, take 22% of the income, the next 4% take the next 15% of the total income, the next 20% take 31%, the next 25% take 30% and the bottom 50% take 12%. This level of income inequality is much more a source of concern than any concern someone should have about a slightly progressive tax result.

Related: House Votes to Restore Partial Estate Tax on the Very Richest: Over $7 Million – IRS Tax data – Rich Americans Sue to Keep Evidence of Their Tax Evasion From the Justice Department
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