Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

On May 22, the New York Times published an article entitled “What We Spend in a Month,” which reminded me of an experience I had 40 years ago.

It was the evening before Thanksgiving in 1982. The place was my financial counseling office in Troy, Michigan, where I was counseling my client, Roger, who was desperately trying to avoid a divorce due to the couple’s budgeting problems. Fortunately, I was able to assist Roger in creating a budget to solve those problems.

The fact that the New York Times budget differed significantly from the budget I proposed to Roger inspired me to write a blog on budgeting. I realize, of course, that many of my readers don’t need to budget. However, they might have family members who can benefit from the budgeting ideas discussed below. You should understand, however, that these ideas have not been subjected to rigorous scrutiny and should be considered with that in mind. I will use the acronym, B-U-D-G-E-T, to explain my ideas.    

B: Basis for Treating Savings as Expenditures

There are two things of note regarding this idea.

First, most people concentrate on spending for goods and services that help them maintain their desired standard of living. Unfortunately, this habit means that only limited or no income is available for savings. The result is that in most instances their savings fall short of what is needed to meet a financial crisis.

Second, those people who spend less than their income and accumulate savings create another problem. Dollars set aside as savings reduce consumer expenditures, which create nearly 70% of our national wealth. And so, when the growth in consumer expenditures slows down, that slows down the growth of our economy as well.  Given this scenario, if you are both a spender and a saver, it is reasonable for you to ask if you are in a no-win situation.   Not really, as I will show you now.

 When your savings are deposited in a bank, or invested in the stock market, in essence you make your savings available to borrowers from the bank or the sellers of the stock you buy, so that they can spend the money they receive and increase consumer expenditures. Similarly, if you invest in stock issued by a business in an initial public offering, your savings can be used by the business issuing the stock to invest (spend) your savings to help finance building a factory, invent new products, conduct research and development activities, etc. In all of these cases, your savings would create a win-win situation for everyone because your savings would eventually take a circuitous route to becoming much needed expenditures.

There is yet another complication that arises as a result of our standard of living psychology.  Some people believe that affluence is achieved not by just spending most or all of their incomes, but by spending more than their incomes, often creating financial stress. This requires people to tap into their savings, and can be devastating for families who lack savings. Government handouts, which are not available to everyone, can only go so far to remedy this dilemma.

I learned a solution to this dilemma from my client Jack, who was the President and CEO of a large Fortune 500 company. Jack said his dad told him to set aside 10 cents of every dollar he earned. That did the trick. He never had to worry about a lack of savings for the rest of his life. 

These observations are the basis for my coming up with the idea of considering savings as an expenditure.

U: Use Blow-off Money to Lighten the Budgeting Effort

I learned this concept from my friend Bill, who once received a check for $35.00 from a company as compensation for a defect in some gadget that he didn’t even remember he had. He gave the check to his wife as her blow-off money, telling her that it was hers to spend as she wished.

That worked only too well. After a few weeks, Bill got a kick out of it when his wife asked when she could expect to receive her next blow-off money. At that point, the couple decided that every month they would set aside a small amount of blow-off money that they could have fun spending. That certainly lightened the monthly budgeting effort.

D: Dissect Expenses and Increase Discretionary Income

Another fun exercise is to work towards increasing discretionary income, which is the money left over after all essential expenses have been paid for. Assuming that income is fixed, the only way to increase discretionary income is to minimize expenses by analyzing each expense item in an effort to find potential savings. Here are a few examples: (a) renegotiate monthly mortgage payments; (b) restructure other debt; (c) try to replace some of your insurance policies (homeowners, auto, liability, etc.) with cheaper ones that provide the same coverages; (d) consult with a tax advisor regarding ways to reduce income taxes; and (d) do comparison shopping when buying groceries and other frequently purchased items.

G: Goal Setting Assessment

Another budgeting challenge is to avoid the disappointment that comes from failing to meet a family’s goals. Since monthly incomes are usually fixed, about the only way to meet an unreachable goal is to borrow money. This might be appropriate to address emergencies, but not as a regular strategy. So, a family’s goals should be carefully reassessed on a regular basis to realign them with the family’s income. 

E: Expectations Should be Aligned with Needs

In our “buy, buy” culture, marketers are determined to convince people that if they don’t buy the newest products and fancy gadgets, they are not keeping up with the Joneses. In doing so, however, your expenditures may grow to exceed your income. . A practical solution to this problem is to periodically review your expectations by asking a simple question: Do you need it, or do you want it? If you just want it, then you should consider postponing buying it until you really need it.

T: Thorough Periodic Budget Review

Finally, the key to maintaining a balanced budget is to carefully review it periodically – preferably semiannually, but not less than annually. If monthly expenditures are carefully monitored, the semiannual or annual budget review should not be a time consuming, monumental task. In other words, if a family’s monthly expenses are properly monitored so as not to exceed the family’s net income after setting aside amounts for savings and blow-off money, periodic budgetary review should be a breeze.

Bottom Line

In this blog I have attempted to uncomplicate the task of creating and maintaining a sound budget plan, as well as to suggest some ways to have fun while doing it. Let me know if I succeeded in my endeavor. 

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

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THOUGHT FOR THE DAY

“Let all your efforts be directed to something, let it keep that end in view.”

                                                 Seneca, On Tranquility of Mind, 12.5

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Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Part One: Journey through the Universe of Inflation

Floating in Stratosphere

Early in 1922, when I lived in Germany, the German Papiermark—the currency of the Weimar Republic—was valued at around 200 Marks to the U.S. dollar. By November 1923, that figure had risen to a whopping 4,200,000,000,000 Marks to the U.S. dollar. Put another way, even though I had only $1.00 in my billfold, that day I was a multi-trillionaire.

By the way, I neglected to mention one little detail. In 1922 I was a German only in my previous life because I wasn’t born as Sid Mittra until 1930, so, technically, I cannot claim to have ever had the coveted title of multi-trillionaire. Oh well, I hope you will disregard this fact as a minor technicality.   

Back Down to Earth

Rosie Parker, a middle income housewife, is extremely pleased with her bank. She can’t say enough about the people who work there. What especially pleases Rosie is that in June 1980 the bank generously offered her an unbelievably high interest rate of 15.5 % on her money market savings account. However, during the same month the inflation rate was 14.4%, meaning that Rosie’s money market account interest rate was an inflation-adjusted rate of only 1.1%. None of that mattered to her as she continued to gloat over her high money market account return. 

Rubin Torch, Rosie’s friend, had a different experience. In February 1982 Rubin’s bank offered him a 30-year mortgage at a rate of 17.48%, a rate so high that he gave up the hope of ever buying a home. The bank’s mortgage officer tried to explain to him that the mortgage rate reflected the 15% inflation rate plaguing the economy, but this explanation did not console Rubin.  

The resulting question is this: How could two people hold diametrically opposite views on how the economy was treating them at about the same time? The answer, of course, lies in the fact that each of them was on opposite sides in a high inflation scenario. While savers in the 1980s were offered seemingly high interest rates to compensate for the prevailing inflation, borrowers, like mortgage applicants, were charged high rates of interest to compensate the lenders for the high interest rates they were paying the savers. In short, a high rate of inflation is bad for both savers and borrowers. 

Down in the Dumps

From 2013 to 2020, the inflation rate averaged only about 1.75%. Despite this very modest inflation rate, consumers still did not like to see prices on goods increase during those years. This begs the question: Is a zero inflation rate best for the economy?  

Here’s the answer: Contrary to what many may think, zero inflation is generally harmful to everyone. If the prices of goods remain constant, many consumers do not have the urge to buy goods that they do not consider to be attractively priced. At the same time, zero inflation, with its constant prices, gives producers no incentive to increase production, which is the basis for a healthy GDP growth. 

Above the Ground Level

So, if high inflation isn’t beneficial, but zero inflation can be harmful as well, how much inflation is ideal? According to the U.S. Federal Reserve, a reasonable long-term target inflation rate is 2%. A rate less than this may imply a weak economy that needs stimulus and lower interest rates. On the other hand, an inflation rate more than 2% may signal rapid price increases and the need for higher interest rates to help curb the price increases.

It should be noted that the Federal Reserve does not treat its 2% inflation target as the end-all and be-all. In fact, the Fed has recently changed its goal from achieving a flat inflation rate of 2% to an average inflation rate of 2%. This new approach allows the Fed to be more flexible. If the short-term inflation rate rises well above 2%, but is expected to return to the long-term target of 2% or less sometime in the near future, the Fed now has the ability to delay taking corrective action.

This flexibility is important today, when the U.S. economy is experiencing relatively high inflation and high economic growth. Under these circumstances it is my opinion that the Fed is justified in keeping interest rates low and continuing its monthly purchase of $120 billion of government bonds, because these actions will support the current economic recovery. I think the Fed should be commended for having the foresight to adopt this policy. 

Part Two: Federal Reserve’s Role in Managing Inflation

A. Cost of Borrowing

Simply stated, when the supply of money rises beyond what is needed to generate healthy economic growth, the Fed raises the cost of borrowing—called  the federal funds rate—thereby increasing the interest rate on loans banks offer to borrowers. Conceptually, over time, this reduces the supply of money to a desired level, which results in a healthy economy. This process is commonly referred to as the Fed taking action to control inflation.

B. Current Inflationary Pressures

Presented below is a short list of items, the prices of which have skyrocketed in recent months.  These are examples of price increases that I believe demand immediate Fed action. 

While this list is not complete, it does suggest that we are going through an unprecedented post-pandemic recovery period during which short-term spikes in prices of various items should not be treated with long-term inflationary solutions. If the Biden Administration agrees that this is the case, it should make a sincere effort to explain to people that these resent price increases are likely temporary and may, in fact, be necessary to generate a healthy economy. Of course, if the Administration fails in this effort and people react negatively to these temporary price increases, then inflation will become a regrettable self-fulfilling prophecy.

 C. A Dramatically Changed Economy

Normally, when the demand for goods and services exceeds supply, any resulting inflation is treated by increasing the cost of borrowing. That, in turn, lowers demand until the economy is back to a desired level. The pandemic has dramatically changed that time-tested economic principle, and failure to recognize this change can be fraught with danger.

Take, for instance, the savings story. Investment analyst Michael Batnick recently created a chart showing that the pandemic-generated personal savings rate has surpassed the 60 – yes 60 — year savings rate. What, may I ask, should be expected when all these savings are spent, increasing the demand for everything from homes and vehicles to scores of consumer products? That does not resemble an economy coming out of a normal recession, does it?

D. Unique Role of the Federal Reserve

At this time, the role of the Fed should be to exercise patience with vigilance. Fortunately, as noted above, the Fed, recognizing the strange economic period we are in, recently announced that its target now is to maintain an average 2% inflation rate rather than a flat 2% inflation rate. That gives it the wiggle room it needs to manage the current post-pandemic recovery period.

Bottom Line

In this blog I have discussed the role of inflation in helping the economy regain its strength, and the role the Fed can play in achieving that objective. Let me know if you agree with my analysis.

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

INTRODUCTION

Poverty. We may feel uncomfortable discussing it. But in today’s blog I will share with you five episodes describing my real life experiences in five developed and underdeveloped countries (with one exception) where I witnessed instances of poverty that taught me priceless life lessons. Please let me know if you recognize them.

EPISODE ONE: INDIA

The date was June 12, 1973. The place was Mumbai.

I was on my summer vacation, visiting family in India. My first stop was in the Mumbai suburb of Dadar, where my in-laws lived. On that day, our seven-year-old son, Robert, was getting restless in the strange surroundings and needed a change. So, I decided to visit the popular Chowpatty beach, which was not far from my in-laws home. It was a beautiful summer afternoon, with a gentle breeze blowing over the white sand on the gorgeous beach. The mood was festive, and people seemed to be enjoying themselves with their families and friends.

The beach was also home to many vendors selling Indian foods and hors d’oeuvres.  When Robert saw them, he announced: “I am starving. Please bring me something to eat.” That created a problem for me because I did not think the exposed food they were selling was “safe” to eat. Fortunately, I did find a vendor selling a paper cone full of roasted peanuts. I purchased one, hoping that it would satisfy Robert’s hunger. Little did I realize that while it did solve one problem, it created another one.

As soon as I gave Robert the peanuts, a little beggar boy dressed in tattered clothes approached Robert and silently stood there, staring at him and extending his hand.  Robert had never seen a beggar child before, and he could not speak the other boy’s language. The boy, on the other hand, had never seen a well-dressed boy like Robert, who seemed interested in him but could not speak his language. The boys could not communicate with each other but, amazingly, they understood each other perfectly. The beggar boy wanted Robert to share some of his peanuts, and I felt that Robert wanted to do so. But Robert did not act, and the other boy did not move, so that’s how the episode ended.

Fortunately, the lesson learned from the precious moment created by the beggar boy’s poverty was not lost on me.

EPISODE TWO: CHINA

In 1992 I returned to China to see how the country had changed after the Tiananmen Square massacre and how the country was able to achieve an unprecedented 10% economic growth rate, year after year. I noticed dramatic growth and heightened economic activity in both Beijing and Shanghai, although evidence that the Communist Government was ruling with an iron fist was noticeable everywhere.

One day, during a guided walking tour, I noticed something that caught my attention. As I was waiting at an intersection for the traffic light to change, I noticed an elderly Chinese lady carrying such a heavy weight on a balancing rod placed on her shoulders that she was hardly able to move. Behaving like a Good Samaritan, I sprinted over to her and offered to take some of the weight off her shoulders. Although she did not understand my language, she knew perfectly well what I meant and said something in Chinese that I did not understand. It was clear, however, that she did not want my help. At that point, my tour guide told me that the lady had said: “If I want your help today, tomorrow I will need it, but you won’t be there. So, thank you, but no thank you.”

A priceless lesson in life, coming from a poor Chinese lady.

EPISODE THREE: NEW ZEALAND

In 1989, I returned to New Zealand to tour the countryside by car and stay in bed and breakfast residences during this trip. In the course of my stay I learned a valuable lesson.

As instructed, I arrived at the Christchurch bed and breakfast residence precisely at 10:00 a.m. but found that no one was at home.  There was, however, the following note posted outside the door:

“Dr. Mittra, I am running an errand but will be back
in about 30 minutes. But don’t worry, the front door
is open. So, please come in, have a muffin, a doughnut
with cream cheese and coffee. Then settle down on the
living room sofa. I should be back shortly.
Sincerely, Jack.”

Holy Toledo, I said to myself. This guy must be a trusting soul. He is letting a total stranger come into his home, risking that I might steal valuable items and flee! However, after reflecting on the situation for just a moment, I went in. Everything was exactly as Jack had described, so I enjoyed the breakfast items he had left for me and waited for him to return.

When Jack returned, I offered the following advice: “Don’t let a stranger come into your home when you are away. What if I had stolen whatever items of value I could carry and fled? You would not know where to find me.”

Without hesitation, Jack replied: “Yes, I admit that we have limited means. I run this bed and breakfast because I have no other source of income.  But I strongly believe in the following principle:

And so, my dear friend, let me make you an offer. As you can see, we are poor people and don’t have much. But if you need any of my belongings more than we do, I would be delighted if you would feel free to take them.”

The lesson I learned that day will last a lifetime.

EPISODE FOUR: MOROCCO

In August 1982, my group of U.S. financial planners was attending a financial planning conference in Barcelona, Spain. While there, we were offered the amazing opportunity to visit Morocco, where we could stay in the palace of Moroccan King Mohammed VI, which had been converted into a hotel for foreign tourists.  The room rate was an astronomical $400 per night, which was far beyond my budget, but since it was an opportunity of a lifetime, I jumped at the chance.

The King’s Palace hotel was indeed an amazing place. One highlight was the daily breakfast, which was served in the palace garden, where a wide variety of breakfast items from some 30 countries was spread out on a 60 foot long table! Hotel guests picked up their favorite items from a vast array of offerings and moved to nearby tables to “eat like a pig.” We were told that it was how breakfast was served when the king’s family lived in the palace. In those days, however, any items left over after the family had breakfast were thrown away because they were meant only for the royal family.  What a shame!

Following our sumptuous breakfast, which ended at about 10:00 a.m., we relaxed in the palace garden where soft music was being played. Later, after a light lunch, we were offered a guided sightseeing tour, and warned not to leave the palace without a tour guide because sometimes the Moroccans were hostile to white tourists.

I was hesitant to join the guided tour because, having experienced how the King once lived, I wanted to see for myself how the rest of the people of Morocco really lived. But that would not be possible if I joined the guided tour.

After reflecting on it for a while, a thought occurred to me. I realized that although Morocco was in Africa, Moroccans resembled natives of India more than other Africans. As a result, I felt that, as an Indian, I could easily pass as a Moroccan anywhere in the country, and I felt comfortable taking the risk of venturing out on my own without a tour guide. And that’s exactly what I did.

I left the hotel shortly after lunch and started walking toward the city while keeping close track of where I was headed. I was amazed to find that there was widespread poverty, even within about three blocks of the King’s Palace hotel, where I noticed a very large group of people patiently waiting in line to pick up what appeared to be their food ration. Two things struck me about this scene. First was the fact that these people did not have access to any of the breakfast items I left behind at the hotel, and second, this line looked very much like the lines I was used to waiting in when I was growing up in India in the 1940s.

I stood there, speechless, watching the long line of people who I felt had been waiting there overnight. Then something interesting happened. A man standing near the front of the line suddenly left the line, sprinted over to where a crippled man was vainly waiting for his ration, picked him up and brought him to the front of the line. I heard some grumbling from others in line because they didn’t like what this brave man did. In response to the grumbling, the man said something (presumably explaining that the crippled man was taking his spot near the front of the line) and the crowd quieted down.

That amazing incident got me musing. Clearly this gentleman, even after standing in the line for 24 hours, felt sorry for the crippled man and voluntarily sacrificed his chance of getting his week’s food ration. I wondered what his family would say when he returned home empty handed?

Did you see beauty behind this poverty, existing as it did so near to the King’s gorgeous former palace? I certainly did.

EPISODE FIVE: ENGLAND

This is the only incident where I was not present. And yet, it is so powerful that I present it wishing I had been there to experience it.

A long time ago there lived a poor Scottish farmer named Fleming. One day while working on his farm, he heard a cry for help from a nearby bog. He dropped his tools and ran toward where the cries were coming from. There he found a young boy stuck in the bog and unable to free himself. Fleming threw a long rope to the helpless boy and pulled him to safety.

That was not, however, the end of the story. The next day, an elegantly dressed nobleman arrived at Fleming’s farm in a fancy carriage and introduced himself as the father of the boy Fleming had saved.

 “I want to repay you,” said the nobleman, “You saved my son’s life.”

 “No, I can’t accept payment for what I did,” Fleming replied as he declined the offer. Before the nobleman could respond, Fleming’s son appeared.

“Is that your son?” the nobleman asked.

 “Yes,” the farmer replied.

The nobleman responded: “I’ll make you another offer. Let me provide your son with the same education opportunity my own son will enjoy. I am confident that your son will take advantage of this opportunity and ultimately grow to be a man we both will be proud of.”

And that he did. Farmer Fleming’s son attended the very best schools and, in time, graduated from St. Mary’s Hospital Medical School in London. Later in life, the boy became Sir Alexander Fleming, the discoverer of Penicillin. Years later, the nobleman’s son was stricken with pneumonia. What saved his life this time? Penicillin, of course. The name of the nobleman? Lord Randolph Churchill. His son’s name? Sir Winston Churchill.

This is a wonderful story of how a poor farmer named Fleming was handsomely rewarded because of his compassionate heroic action, for which he expected no reward.   

BOTTOM LINE

In this blog I have shared real life examples from five countries where stories behind poverty can teach priceless life lessons. I did so hoping that these episodes would encourage you to look at the world we live in through a different lens.

Please let me know if I succeeded in my mission.

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.

_________________________________________________________________________

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

A year ago, my eight-year-old granddaughter asked me an innocent question: “Grandpa, have you ever lied about something and then justified it?” Hearing this, I felt like someone had dropped a ton of bricks on my head. After recovering from the shock, I promised to get back to her if I ever recalled such an incident.

In this blog I present seven lies (and there are more) that involve lies I have told over the years. I share these incidents with you in hopes that you will find them entertaining, but also to ask your honest opinion as to whether you find any of the lies described below to be justifiable. 

EPISODE #1

One day back in India, there was a loud knock at our front door.  When I answered the door, there was my school mate and best friend, Amman, a Muslim.  He blurted out: “Mittra Bhai (brother Mittra), please save me. They are coming to kill me.” I looked past him but didn’t see anyone coming after him. So I asked: “What are you talking about? Who is trying to kill you?” Amman pushed me aside in his rush to get inside our home, and then closed the door behind him.

Amman’s loud knocking and his frightful announcement had scared me, and I stared at him as he was panting for breath and looking terribly afraid. Amman took a deep breath and said: “This morning when I went to the vegetable market, I overheard someone saying that the RSS group (a Hindu nationalist paramilitary volunteer organization) was coming to our neighborhood with their knives and sickles to ‘take care of us.’ I ran home, but found our door locked and no one at home. I couldn’t think of anyone else but you who could help me, so I came running. Please don’t let these hoodlums kill me.”

Suddenly an idea came to mind that I thought would work. There was a narrow interior passageway between our house and the house next door. No one even remembered that it was there. The door to this passageway was always locked because it wasn’t a usable space. There was, however, an exit door from the passageway to Chili Int Street, on which our house was located. My idea was to unlock the door to the passageway and let Amman go into the narrow passageway and lock the door behind him. Then, when I felt it was safe for Amman to come out of the passageway, I could open the door and let him back into our house.  Amman agreed with my idea, so I let him enter the passageway and locked the door behind him. After about half an hour — which seemed like an eternity — there was another knock on the front door. When I opened it, I found a bunch of strangers looking directly at me, carrying knives and sickles.

I asked them nervously: “What can I do for you?”

A young boy demanded to know: “Did anyone come to see you this morning?”

I responded: “No, no one has come here this morning. I have been here all morning, studying for my class.”

The boy persisted: “Are you telling us the truth?”

Before I could answer, another young boy turned to the group and said: “Look, these people rent this house from the well-respected Bagchi Hindu Brahmins (the highest caste), who would never rent the house to a Muslim lover.”

The first boy agreed and apologized, saying: “Forgive us for disturbing you.”

And then the group left.

After waiting awhile to make sure that the group did not return, I unlocked the passageway door and let Amman back into the house. I felt that I had managed to save his life. But there was no denying that, in the process, I had lied. 

Our home on Chili Int Street
The arrow points to the Passageway I used to hide Amman

EPISODE # 2

One summer when I was living in Michigan, I decided to visit my daughter in Rochester, New York. The most convenient route was for me to cross into Canada at Port Huron, Michigan, and then return to the U.S. at the border crossing in Buffalo, New York. I was familiar with that route and anticipated no problem.

But when I approached the Port Huron border crossing, a security guard with a gun pointed at me ordered me to put my hands up and get out of the car without touching anything. I followed the order. The guard then asked me to move to a nearby building. Naturally, I obliged.

At this point, I remembered that, on the previous day, I had visited my cardiologist, who had injected me with a strong narcotic medicine to protect my heart valve. He had assured me, however, that it was non-detectable and harmless to others. So I surmised that the sensitive equipment used by Border Patrol had detected foreign material in my body and suspected that I was a suicide bomber who was planning to blow myself up, and kill a bunch of innocent bystanders in the process.

Once inside the building, the guard asked me if I had injected myself with any strong narcotic medicine. Fearing that telling the truth would get me into serious trouble I vehemently denied having done so. After he was done questioning me, the guard ordered me to sit in an empty room for four hours just to make sure that I was harmless. Naturally I obliged, realizing that I had lied to him to get out of this mess.

When my four hour isolation was over, the guard reappeared and said that I was free to leave. But as I was about to leave, the guard turned around and said, with a smile on his face:  “Dr. Mittra, I got a 4.0 in your Econ 200 class. But damn it, I still can’t explain marginal utility.”

Port Huron Border Crossing

EPISODE # 3

In 1965, while working in Thailand as a consultant for the United Nations, I met Colonel Amit Mitra (name spelled with one “t”), who turned out to be a distant cousin of mine. He was the Indian Military Attaché posted in Burma, and he invited me to spend time with him before returning to the U.S.

During my time with the Colonel, I was given the rare opportunity to take video pictures of anything I liked, so long as Col. Mitra was with me. One afternoon, he drove me to downtown Rangoon and let me venture out on my own with my video camera. Well, I got so engrossed with taking pictures that I didn’t realize I had lost track of him.

As I was taking videos, I suddenly felt a big thud on my back. Turning around, I found a military officer pointing a gun at me as he asked: “Where is your permit to take pictures in Burma?” Nervously, I told him that I was working for the United Nations and was visiting my cousin, Col. Amit Mitra. He told me it was okay to take pictures so long as my cousin was with me. Hearing that, the officer asked me where Col. Mitra was. I looked around and did not see my cousin anywhere. So I nervously replied: “He is here somewhere and will show up shortly. Please believe me.”

The officer was not convinced and responded: “I think you are an Indian spy, taking pictures of our country without a permit. For spying you can be thrown in jail for 30 years.” I nearly collapsed, especially since I had known about the atrocities inflicted on Burmese prisoners. But as I was considering how to respond, the officer spoke again: “I know Col. Mitra and I will do this for him. If you sign this paper admitting that you are a foreign spy taking pictures without a permit, your jail sentence will be reduced to one day. After that I will call Col. Mitra and allow him to take you home.”

Imagine my predicament. I was asked to lie by signing a paper admitting that I was a foreign spy, illegally taking pictures in this country. That admission might be sufficient to get me a 30-year jail sentence. I prayed – oh God, please save me.

Since I had no choice, I signed the paper. At that point the officer, ignoring my one-day jail sentence, called Col. Mitra. Fortunately, he showed up almost immediately and took me home. Realizing the potential great danger I faced, my cousin arranged for me a return flight to India the next day, and promised not to leave me alone until I had boarded the plane.

The next day, when the plane took off, I bade goodbye to Rangoon, promising never to return to a country that possessed my false confession to being a foreign spy.

EPISODE # 4

While working for the United Nations in Bangkok, one of my favorite outings was to visit Thip Samai, which was Bangkok’s famous and best Pad Thai restaurant. Visiting the restaurant was never a problem, since every taxi driver knew of the place. But returning home in a taxi was another story. Even when I wrote down my apartment address for them, the drivers could neither understand me nor read the address. Fortunately, one day a Thai colleague taught me how to pronounce my address in Thai: Soi Sip Ha Kruna. I trusted my colleague, which led to a scene I will never forget.

The next time I visited the restaurant, after my sumptuous dinner, I hired a taxi to take me to (you guessed it) Soi Sip Ha Kruna. But guess what? Instead of taking me home, the taxi driver drove me to a gated address; and when I tried to stop him from entering when the large gate opened, he didn’t listen, but drove on in.

At that point I panicked, suspecting that the establishment behind the gate was some type of fancy private night club. But as I was contemplating my next move, a lady appeared at the taxi and said to me in broken English: “Every visitor who enters our gates must buy at least one basic service for $15. We have many other services, but they cost more money. What is your wish?

Panicked, I said: “I don’t want your services. The cab driver drove me here instead of taking me home. Please let me go back to my apartment, PLEASE.”

The lady thought for a moment and then replied: “Okay, I understand you made a mistake. But at least you must pay $15 for our basic service, because that is the rule. Also, for $10 more we will get you a different taxi that will take you home. Is that okay?”

I was greatly relieved to hear her offer and agreed to it. But then something happened that blew me away. As I was taking $25 out of my billfold, the lady dropped another bombshell: “Sign this official document acknowledging that you used our basic service.”

Paying money to get out of a jam is one thing. But signing a document lying about having used their services? That really stunk. I nevertheless signed the document and got home safely. But to this day, it bugs me that in the archives of a Bangkok night club there exists a document containing my written confession that I used their basic service for money. 

Replica of the Bangkok Night Club Gate House

EPISODE # 5

In April 1965, on my way to the U.S. from India, I vacationed a few days in London. On the night before my departure for New York, I discovered that my passport was missing. Without a valid passport there would be no way for me to enter the U.S. The next morning, I sprinted over to the Indian Embassy, seeking a new passport. I was told that since I had misplaced my passport they would have to wait two weeks before issuing me a new one. I felt totally lost.

Then, something miraculous happened. The Immigration Officer, speaking in Bengali (my native Indian language), proposed an idea to me that I was cautioned not to share with anyone. After I promised not to do so, he explained that the two-week waiting period was strictly applied in the case of lost passports; but that if I guaranteed in writing that my passport was stolen – by a hotel staff member for instance – he could cancel my original passport immediately and issue me a new one within 24 hours. I willingly agreed to report that my passport had been stolen.

It’s been over half a century since this incident occurred, but I still feel ashamed of having told such a blatant lie. I left London the next day with my new passport in hand. As the plane took off, I looked out the window and saw nothing but a thick blanket of shame covering the city. 

Replica of the room where I met with the Immigration Officer

EPISODE # 6

This is by far the most troublesome episode. Here’s why.  

In 1957, I was awarded a fellowship by the University of Florida, and I planned to leave India for the U.S. in August of that year. At that time, India was under strict exchange control regulations, which prohibited anyone traveling abroad on non-official business from carrying more than $8.00 (this is not a typo). There were reportedly no exceptions to this rule, and that certainly applied to me. So, I was puzzled when in June, Mr. D (his actual name was Satyapadi Dharuwala, but everyone called him Mr. D), the Chief Administrative Officer for the Reserve Bank, summoned me to an urgent meeting with him. Naturally I showed up on time, somewhat concerned.

Mr. D began by saying that he was aware of the $8.00 limit, but that he had followed my career for some time and was very impressed. He was experienced with foreign travel and was convinced that I would not make it to the U.S. with only $8.00. He therefore advised me that, to avoid that impending disaster, I should reject the fellowship offer.

I responded by saying that my mind was made up and that I would even take the risk of dying penniless somewhere in Europe if it came to that.  Mr. D was startled with my brash response.

After five minutes of silence, which seemed like an eternity, Mr. D spoke again: “Mr. Mittra (in India no one called anyone by their first name), I am amazed at your tenacity. During all the years that I have been the Chief Administrative Officer, I have never met anyone quite like you. So, I am going to make an unusual offer that hopefully will save your life. But if you accept this offer, you will have to live with your decision.”

The gist of the offer was that, if I submitted to the Reserve Bank a signed document stating that the University of Florida required a payment of $50 prior to my admission – which, of course, was not true – then he would be authorized to give me an additional $50. However, he made it clear that, if he did that, he would also be obligated to contact the University to make sure that, upon my arrival there, I paid $50 to the university. I knew that the University would deny having received the $50 because it had no such admission requirement. By that time, however, I would be out of India, which was my goal. Mr. D assured me that, if after getting my degree, I repaid the $50 to the Reserve Bank, everything would be okay.

Mr. D ended the meeting by saying that I had 24 hours to respond to his offer. If I accepted it, I would be on my own and that he would deny any knowledge of our arrangement. I leave it to your imagination as to how I felt leaving his office. Needless to say, I accepted his offer.

On August 10, 1957, I sailed from Bombay to France. I had $8.00 in my billfold; but I also had the extra $50 in another envelop, so tightly taped that it seemed permanently sealed. The ending of this incident is just as dramatic as the beginning. I made it to the U.S. with $8.00 (I have detailed in a previous blog how I survived the trip by spending my $8.00 so I will skip repeating it here), and did not have the courage to open the other envelop until I graduated five years later. Subsequently, I repaid the Reserve Bank far more than $50 in the form of lectures I was invited to deliver – which were worth several hundred dollars – but which I delivered free of charge.    

Mr. D in his office at the Reserve Bank

EPISODE # 7

This episode is different from the rest in that here I did not directly tell a lie. But I unintentionally cheated a small business out of its just compensation.

Early in the 1980s, I visited Rome to attend a financial planning meeting. It was a valuable experience. After the meeting I decided to make a short visit to Venice, Italy’s unique canal city. Once I got there, I discovered that the hotels facing the canal were pricey, so I decided to stay at a nearby family-owned Bed and Breakfast hotel. My three days there went by very fast, as I was mesmerized by the beauty and grandeur of the city and its surroundings.

On the evening prior to my departure, which was early the next morning, I decided to settle my account with the hotel manager. But he turned me down because their rules did not allow him to accept payment until I was ready to leave. He assured me, however, that he offered 24 hour service, and that I should have no trouble paying my bill just before leaving the next morning.

Well, no one was around when I was ready to leave at 4:00 a.m. My screaming and banging on the front desk did not arouse anybody. So, I had no alternative but to leave without paying my bill of more than $600. I did, however, pick up one of the hotel’s self-addressed envelopes before leaving.

Upon my return to the U.S. I mailed a $600 check to the hotel with a note indicating that I would gladly pay any additional amount due. I then forgot all about the incident.

My story did not end there. After six months, my bank informed me that since the check had not been cashed, they had voided it. I realized then that, albeit unintentionally, I had cheated a small family-owned Bed and Breakfast hotel in Venice out of at least $600. Can there be anything more shameful than that?

Replica of my Bed and Breakfast hotel room in Venice

                                                                  BOTTOM LINE

In this blog I have shared with you seven of my randomly selected lies for a special reason. Thus far I have not responded to my granddaughter’s question because I can’t decide which of these lies I can claim to be justifiable. Won’t you please take a moment to give me your unbiased opinion about how I should respond, so that I can put this matter to rest?

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

The Federal Reserve (Fed) is undoubtedly one of the most powerful and independent institutions in America. And yet, few of us understand what its mandate is, how it operates and whether it is truly independent. A request to the Fed for clarification has been met with silence.

I am, therefore, moving forward with a novel plan. I have requested Smarty, an academic type specializing in our central bank, to ask me questions that address my issues with the Fed. Next, under the assumed name Fedup, and posing as Fed Chair Jerome Powell, I will answer Smarty’s questions in simple, understandable language. 

🙂 How did Congress define the monetary policy objectives of the Fed when it was established in 1913?

😟 Congress loosely defined the Fed’s original monetary policy objectives as achieving full employment, stable inflation and financial stability. The Fed’s tools for achieving these objectives consist of the discount rate, open market operations, reserve requirements and the federal funds rate, which has been the one tool used most often and effectively. 

🙂  Can you explain how the federal funds rate works?

😟 The interest rate the Fed charges on its loans to member banks is called the federal funds rate. When inflationary pressures develop in the economy, the Fed raises this rate. This increase signals the member banks to raise lending rates to their customers. These increased lending rates lower the demand for loans which, in turn, solves the inflationary problem. The Fed would take a reverse action – and lower the rate – in the case of a recession. 

🙂  It appears that the Fed limits its role to controlling the money supply in order to maintain a stable value of the dollar and full employment. For how long did the Fed efficiently pursue its objectives before it was challenged to make major changes to its method of operation?

😟  Skipping the details, I’d say that the Fed met its first major challenge during the Great Depression of the 1930s. Unemployment was so widespread that people did not have money to buy food, let alone other consumer goods. In such a scenario, money played an insignificant role in bringing the economy back to full employment. That experience taught policy makers an important lesson: When the economy suffers a major recession, both monetary and government fiscal policies play a vital role in bringing the economy from the depths of a recession to full employment and economic stability.

🙂  When did the next crisis occur?

😟  This is a tricky one, since few people ever publicize it. Up until 1973, the U.S. was on the gold standard, which tied the supply of money to the reserves of gold held in the U.S. Treasury’s vault. In 1973, the U.S. abandoned the gold standard, replacing gold with its own currency, the U.S. dollar. As a result, the country’s money supply was no longer limited. Since then, the Fed’s unelected officials have had the power to issue new money any time they saw fit. It was then that that the Fed entered a new era with an uncertain future.

🙂  And how did things work out after that?

😟  At first, things operated normally and, as noted in the Appendix, the ratio of federal debt to GDP remained around 30% for a long time. It’s important to note that, as expected, an increase in the federal debt eventually led to an increase in the money supply. This created a condition significantly deviating from the traditional relationship between monetary and fiscal policy. The new relationship was accepted by both the Fed and the U.S. Treasury as ideal to achieve full employment in a low inflation environment.

The ratio of federal debt to GDP increased significantly under President Ronald Reagan, reaching 50% for the first time in 1988. After that, there was no slowing down of this trend. In fact, the ratio reached an unprecedented level of 129% in early 2020 – even when the economy was humming along with no recession in sight. The Fed witnessed it all, but did not have the tools to control the situation. 

🙂  Was there another crisis after President Bill Clinton’s term ended?

😟 Good question. Until the turn of the 21^st century, the Fed had jealously guarded its independence, refusing to weigh in on heated political issues. But that changed in 2001 when Fed chair Alan Greenspan enthusiastically supported President George W. Bush’s tax cuts. And with that, the die was cast.

🙂  What happened next?

😟 Alan Greenspan served for 18 years during the presidencies of George H.W. Bush and Bill Clinton; but in 2006, President George W. Bush replaced him as Fed chair with Ben Bernanke. It was Bernanke who was chair of the Fed during the 2007-2009 great recession. During his tenure, Bernanke transformed the Fed from more of a “last-resort” option for the U.S. economy into an active first responder. He flooded the markets with unprecedented amounts of liquidity and openly rallied the support of legislators, major U.S. banks and central bankers around the world. This was something the Fed had never done before.

Although President Barack Obama re-nominated Bernanke for a second term as Fed chair in 2010, the division between them increased over time. By late 2013, Obama made it clear that he was not thrilled with some of Bernanke’s policies and that he would be nominating a new Fed chair, who would end up being Janet Yellen.  Although Yellen supported many of Bernanke’s policies, she was much more left-leaning. Among her beliefs was that the skyrocketing income inequality the country was experiencing was not outside the scope of the Fed, which resulted in her tenure being politically charged. When President Donald Trump took office in 2016, he made it clear that Janet Yellen would not continue, and she was eventually replaced by Jerome Powell in 2018.

🙂  It seems that the Fed became more political with ever-changing roles. Has this ended yet?

😟  Are you kidding? This problem continues to grow exponentially. Below are a few examples to make my point.

Current Fed chair Powell recently stated that the Fed saw its full employment target as “a broad-based and inclusive goal.” Subsequently, he clarified that this statement was his way of raising the issue of income inequality at a time when low inflation rates allowed the Fed to encourage a better job market that engaged more people and pushed higher wages.  Powell was, in effect, pointing out that, in a typical inflationary environment, the Fed’s primary goal is to raise the federal funds rate which, in turn, raises the cost of borrowing money and depresses inflationary pressures. However, since inflationary pressures did not intensify, the Fed found the opportunity to push for higher wages while encouraging an expanding job market. It worked. 

But Powell did not stop there. When the pandemic hit the country in March 2020, the Fed introduced programs to keep credit flowing, especially to the non-financial sectors, including state and local governments. It was also reported that Powell aggressively encouraged more congressional spending to shore up the economy, an action clearly outside the domain of monetary policy.  Now that he has addressed the problems of income inequality and labor market inclusion, can addressing climate change and the minimum wage be far behind?

  🙂 This is puzzling me. If the Fed is venturing so far away from its mandated objectives, why is no one objecting to it?

😟  Important people, such as Michael Strain, an economist at the American Enterprise Institute, are voicing major concerns. But in response, the Fed is arguing that it is being “pragmatic, not political.” Powell points out that the Fed believes that racial, gender and other disparities in economic outcomes are holding the economy back. He further asserts that the Fed now realizes that low unemployment worsens these disparities and may outweigh the consequences of inflation.

🙂  So going forward, where does the Fed stand?

😟  I am on shaky ground here because the Fed has not issued an official statement on this issue.  As a result, I have taken the liberty of crafting a new mandate for the Fed, which is set forth below and is based upon the following April 7, 2020, statement by Fed chair Powell: “The U.S. economy, boosted by quickening vaccinations and signs of rapid hiring, is headed toward a strong recovery; but to a different economy…not all will immediately benefit.”  

MANDATE FOR FEDERAL RESERVE

APPENDIX

RATIO OF FEDERAL DEBT TO GDP

1973-2020

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

INTRODUCTION

The Biden Administration (hereafter called the BA) has proposed sweeping tax law changes based upon the following four principles: 1. Selectively tax a rarified group of “wealthy” taxpayers who make more than $400,000 a year, represent the top 1.8% of taxpayers, and earn about 25% of the nation’s income. 2. Cut taxes for those who need financial support. 3. Enact a potpourri of tax increases for corporations. 4. Create tax breaks for those who encourage domestically produced goods and services.

At this point these are mere proposals that Congress may or may not enact. Consequently, it is premature to critically analyze these proposals. So, in this blog I merely present the major tax law changes proposed by the BA, along with explanations of key terms and concepts. I hope that this blog will give you a clear picture of the debate generated by these proposals.

BIDEN ADMINISTRATION’S TAX HIKE PROPOSALS

Individual Income Tax Rates

The BA plans to raise the top federal tax rate from 37% to 39.6% for those who file married filing jointly and have taxable income above $509,300. The BA also plans to raise the rates for the top class of single filers. Those who make above $452,700 and file single, will owe more taxes under the proposal.

Payroll Tax

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. These taxes comprise 23% of combined federal, state and local government revenue, the second largest source of that revenue.

Long-term Capital Gains Tax

A capital gains tax is a tax on the growth in the value of investments realized when the owner sells those investments. The tax doesn’t apply to unsold investments or unrealized capital gains, so investments appreciating in value will not incur capital gains taxes until they are sold, no matter how long they are held.  

Long-term capital gains are realized upon the sale of assets held for more than one year and are taxed at long-term capital gains tax rates. Short-term capital gains are realized upon the sale of assets held for less than one year and are taxed at ordinary income tax rates — a taxpayer’s so-called tax bracket. The long-term capital gains tax rates apply to taxable incomes above a minimum threshold and are 15% or 20 %, depending on the taxpayer’s income. Long-term capital gains rates have typically been lower than short-term capital gains rates and ordinary income tax rates to motivate long-term investment.

The BA proposes that all long-term capital gains be taxed as ordinary income. This would almost double the rate from 20% to 39.6%. In addition, the BA proposal would keep the current net investment income surtax of an additional 3.6%. This would make for long-term capital gains being taxed at 43.4% for the highest income earners.

Eliminate Step-up Basis for Inherited Assets

Currently, an heir’s cost basis of an inherited asset is stepped up for tax purposes to the market value of the asset on the date of the deceased person’s death.  For example, if an asset purchased by a deceased person 40 years ago for $10,000 is valued on the date of the person’s death at $500,000, that amount would become the heir’s tax basis for the asset. As a result, if the heir sells the asset for $550,000, the capital gain would be only $50,000.  If the deceased person had sold the asset before death for $550,000, the capital gain would have been $540,000, which would have resulted in a far greater capital gains tax. The BA proposes to eliminate this step-up in basis for inherited assets.

Social Security Tax

The BA proposes a 12.4% Social Security payroll tax on wages above $400,000, evenly split between employers and employees. Currently, the Social Security payroll tax applies to wages up to $137,700, so the new proposal would create a “donut hole” in the current Social Security payroll tax, because wages between $137,700 and $400,000 would not be subject to the tax.

Itemized Deductions

A taxpayer is allowed to deduct certain expenses, called itemized deductions, from gross income, to determine the taxpayer’s adjusted gross income (AGI). The taxpayer’s AGI determines the taxpayer’s tax bracket. Examples of itemized deductions include interest on mortgages of $750,000 or less, charitable contributions, medical and dental expenses (over 7.5% of AGI), state and local income, sales and personal property taxes up to $10,000, and gambling losses.

The BA proposals would cap the tax benefit of itemized deductions at 28% of value for taxpayers with incomes above $400,000, and would restore the “Pease” limitation on itemized deductions.  The Pease limitation would reduce the value of certain itemized deductions by 3% for every dollar of a taxpayer’s taxable income above $400,000, with a maximum reduction equal to 80% of the total value of the taxpayer’s itemized deductions. For a taxpayer with itemized deductions, the 28% cap on the tax benefit of itemized deductions and the Pease limitation would reduce the value of a taxpayer’s deductions – and increases his or her taxes – by 12.44% of the amount of the deductions.

Corporate Income Tax

Perhaps the biggest changes included in the BA proposals are in the area of corporate taxes.  These changes would:

Increase the corporate income tax rate from 21% to 28%. 

Phase out the qualified business income deduction for taxpayers with taxable incomes above $400,000.

Impose a 15% minimum tax on corporations with book profits of $100 million or higher. This would establish an alternative minimum tax – corporations would pay the greater of their regular corporate income tax rate or the 15% minimum tax, while still allowing for net operating loss and foreign tax credits.

Double the tax rate on Global Intangible Low Tax Income earned by foreign subsidiaries of U.S. firms from 10.5% to 21%.

Impose a new 10% surtax on corporations that “offshore manufacturing and service jobs to foreign nations in order to sell goods or provide services back to the American market.” This surtax would raise the effective corporate tax rate on this activity to 30.8%.

Establish a 10% “Made in America” tax credit for activities that restore production, revitalize existing closed or closing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.

Estate Tax

Upon a person’s death, the estate tax is imposed upon the transfer of estate assets, such as cash and securities, real estate, insurance, trusts, annuities and businesses. The values of the estates of the vast majority of Americans fall far short of the amount required to trigger the estate tax. In 2019, the estates of less than one out of every 1,000 people who died – 2,570 estates – paid an estate tax. Equally important, the total of estate taxes collected from those estates was only $23.7 million, a relatively small amount by any standard.

Here’s how estate taxes are imposed.  Currently, a deceased person’s estate passes tax free to a surviving spouse who is a U.S. citizen. For other single deceased persons, the estate tax applies to estates valued above $11.7 million. The estate tax threshold for married couples is double that amount.

The BA proposes to restore the estate tax threshold and rates to 2009 levels, when the threshold was $3.5 million per person, and top estate tax rate was 45%. Incidentally, some states have their own estate taxes which would be added onto any federal estate taxes.                                                                                                   

Gift Tax

The gift tax is a tax on the transfer of property from one person to another during the donor’s lifetime. Certain gifts are exempt from the gift tax, including the following: 1) Gifts valued at $15,000 or less to any one individual in a single calendar year. 2) Gifts to a spouse. 3) Payment of someone else’s tuition or medical expenses. 4) Charitable contributions. 5) Certain gifts to political organizations.

BIDEN ADMINISTRATION’S PROPOSALS FOR TAX CUT PROPOSALS

The BA proposals also include tax cuts to help the needy, encourage domestic products, and maximize growth. To achieve these objectives, the proposals would:

Expand the Earned Income Tax Credit for childless workers aged 65 and over.

Provide renewable energy-related tax credits to individuals.

*Expand the Child and Dependent Care Tax Credit for qualified expenses from a maximum of $3,000 to $8,000 ($16,000 for multiple dependents) and increase the maximum reimbursement rate from 35% to 50%.

Increase the Child Tax Credit (CTC) from a maximum value of $2,000 to $3,000 for children age 17 or younger, while providing a $600 bonus credit for children under age six. The CTC would also be made fully refundable, removing the $2,500 reimbursement threshold and 15% phase-in rate.

Reestablish the First-Time Homebuyers’ Tax Credit that was originally created during the Great Recession to help the housing market, and which would provide up to $15,000 for first-time homebuyers.

Expand the New Markets Tax Credit and makes it permanent.

Offer tax credits to small businesses who adopt workplace retirement savings plans.

Expand several renewable energy-related tax credits, including tax credits for carbon capture, use, and storage, as well as credits for residential energy efficiency.

Restore the Energy Investment Tax Credit and the Electric Vehicle Tax Credit.

End tax subsidies for fossil fuels.

BOTTOM LINE

In this blog, I have presented a complete list of all the major tax law changes proposed by the Biden Administration. I hope that you find this list useful.

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Recently, at dinner, a valued reader asked me if I could confirm that Joe Biden was really the first U.S. president ever to make fixing the country’s infrastructure and other physical problems his top priority.  Somewhat bemused, I said I could not confirm that without first researching the topic.  Here’s what my extensive research has turned up. I feel that this time I got a lot more than I had bargained for

HISTORY OF PRESIDENTIAL INVOLVEMENT WITH SOCIAL, ECONOMIC AND PHYSICAL PROBLEMS 

1854.  The Kansas-Nebraska Act, sponsored by Democrat Senator Stephen Douglas, was enacted in 1854. The Act related to development of certain western territories of the U.S.  However, the Act’s passage required support from Southern Democrats, who approved of it because the Act repealed the Missouri Compromise and eliminated its restrictions on slavery above Missouri’s southern border. This created the potential for slavery to exist in the unorganized territories of the Louisiana Purchase.  Passage of the Act alienated Democrat and Whig politicians in the North, and led to the formation of a new anti-slavery party – the Republican Party.

1859. Abraham Lincoln, a Republican Illinois lawyer, argued that the government should work toward making the country’s resources available to all people. He especially emphasized the need for equal access to educational resources so that the poor could achieve economic security. In essence, Lincoln vigorously argued that the government must take the leading role in developing the country’s infrastructure.

1861. After the Republicans gained power, they embraced Lincoln’s vision. First, the system of national taxes, including an income tax, was introduced. Second, the government gave ordinary citizens access to resources in the form of virtually interest-free loans that enabled them to meet their tax and other obligations. Third, the 1862 passage of the Homestead Act offered western land to anyone willing to take the risk of settling on it.

Around that same time, the following acts were also passed: (i) the Land-Grant College Act, that provided government funds to states to finance the establishment of colleges specializing in agriculture and the mechanic arts; (ii) an act establishing the Department of Agriculture, that provided scientific information and good seeds to farmers; and (iii) the Pacific Railway Act, that provided for the construction of a railroad across the continent to get workers to the fields and mines in the West.

1902.  Republicans joined with Southern Democrats in passing the Newlands Reclamation Act that funded irrigation projects for the arid lands of 20 western states.  These projects included the construction of more than 600 dams.  The Act’s supporters included Republican President Theodore Roosevelt, who stated: “The sound and steady development of the West depends upon the building up of homes therein.”

1933. During the Great Depression, Democrat President Franklin Roosevelt skillfully combined expenditures on infrastructure development and massive economic support to fight the Depression. In 1933, the Civilian Conservation Corps, a voluntary public work relief project, was created. In 1935, Congress created the Works Progress Administration. Employed by three million workers, this coalition built and repaired scores of public buildings, and constructed more than 500 airports, 500,000 miles of roads, and more than 100,000 bridges. It also employed actors, photographers, painters, and writers to conduct interviews and paint murals of our history.

1956. Republican President Dwight Eisenhower signed into law the Federal-Aid Highway Act and declared: “Our unity as a nation is sustained by free communication of thought and by easy transportation of people and goods.” The law provided $25 billion for constructing 41,000 miles of roads, which at the time was the largest such project in U.S. history.  

1964. Democrat President Lyndon B. Johnson launched the Great Society, the main goal of which was the total elimination of poverty and racial injustice.  It consisted of major domestic spending programs that addressed education, medical care, urban problems, rural poverty, and transportation.

1981. Up until this time, Republicans and Democrats both supported the government playing a major role in the continuous development of the country. However, in 1981 President Ronald Reagan declared that “government is not the solution to our problem; government is the problem.” Since then, Republicans have argued that the best way to run the country is to shrink the federal government and turn the fundamental operations of the country over to private enterprise. This approach is based on the belief that the government is inefficient and wasteful, while businesses can pivot rapidly and are far more efficient than their government counterparts.

1996. The era of smaller government was finally ushered in. Even Democrat Bill Clinton said in 1996 that “the era of big government is over.”  However, he subsequently reversed course and stated: “But we cannot go back to the time when our citizens were left to fend for themselves. We must go forward as one America, one nation working together, to meet the challenges we face together. Self-reliance and teamwork are not opposing virtues – we must have both.” President Clinton then identified welfare reform, V-chip technology, education, community policing, and the environment as examples of the challenges that lay ahead.

2001. Republican George W. Bush’s administration was able to implement significant income tax cuts in 2001 and 2003 and Medicare Part D in 2003; and it increased military spending for two wars. The latter years of the Bush presidency featured a housing bubble that contributed to the subprime mortgage crisis of 2007–2008, and the Great Recession that followed.

2012. Democrat President Barack Obama, in his State of the Union Address, said: “I’m a Democrat. But I believe what Republican Abraham Lincoln believed: That government should do for people only what they cannot do better by themselves, and no more. That’s why my education reform offers more competition, and more control for schools and states. That’s why we’re getting rid of regulations that don’t work. That’s why our health care law relies on a reformed private market, not a government program. On the other hand, even my Republican friends who complain the most about government spending have supported federally financed roads, and clean energy projects, and federal offices for the folks back home.”

2020.  A joint scholarly study conducted by the Center for American Progress and Hart Research Associates, characterized Republican President Donald Trump’s view of government as follows: “Based on the results of the current study and comparisons with earlier responses from the 2015 research and other publicly available data, we believe that reactions to the Trump administration represent a genuine break with past public views of government in significant ways. Most importantly, the partisan divisions on measures of trust and confidence in government found in earlier research are now fully solidified. Many American voters today are not basing their evaluations of government on objective criteria that weigh policy choices and overall performance in a neutral manner. Rather, in-party and out-party voters are reacting in entirely divergent ways to the government itself based primarily upon who is leading the government and which party is in control.”

2021. On January 20, Democrat Joe Biden became the 46^th President of the United States. Within the first 100 days of his presidency, he has vigorously addressed the pandemic issue on the pandemic while also proposing and implementing a number of physical, economic, and social projects.  President Biden appears to have adopted President Franklin Roosevelt’s playbook, which piloted the nation through the Great Depression and World War II. For example, President Biden has proposed: (i) the $1.9 trillion Rescue Plan; (ii) a $2 trillion American Jobs Plan, which covers infrastructure among other things; (iii) immigration reform; (iv) gun control laws; and (v) international cooperation among major world countries. He proposes to pay for these expensive proposed projects by increasing corporate income taxes from 21% to 28%. 

Bottom Line

I hope that this brief history of achievements of U.S. presidents since Abraham Lincoln will not only satisfy my valued reader but also will enlighten you. In a future blog, I plan to present a critical analysis of the Biden Administration’s successes and failures; but for now, this blog must suffice.  

 _________________________________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog.

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

(Special note: In this blog, the author presents his dreams of creating a New America, bringing the country into the 21^st century. The arduous task of analyzing and determining the practicality of each of the pillars essential to achieving this dream is left to a future blog.)

INTRODUCTION

How would you like to see the U.S. Government collect trillions of dollars without raising a single tax rate? I believe that this can be done; but you don’t have to take my word for it. Two internationally recognized scholars, former Treasury Secretary Lawrence H. Summers, and Natasha Sarin of The Wharton School, warned in a December 2020 study for the National Bureau of Economic Research that: “Between 2020 and 2029, the IRS will fail to collect nearly $7.5 trillion of taxes it is due.” 

Wow! This study alone leads me to suggest a platform with four strong pillars on which to build a future America. If you are so disposed, please join me in supporting this platform.

PILLAR ONE: COLLECT UNPAID TAXES

Even if half of the unpaid taxes referred to by Summers and Sarin could be collected over the next 10 years, we would have little difficulty financing major government projects without raising anyone’s taxes. But wait! Let’s not get ahead of ourselves.  Summers and Sarin have also warned: “It is not possible to calculate with precision how much of this ‘tax gap’ could be collected.” Various estimates place this amount anywhere between $1 trillion and $5 trillion, depending upon the extent to which the IRS is funded and empowered to pursue collection of these unpaid taxes.  

At present, the IRS is so lacking in personnel and technical resources that it is finding it difficult to improve its performance. In a recent Washington Post article, Catherine Rampell notes that, compared to 10 years ago, the IRS budget has shrunk 20%, while its responsibilities have grown exponentially to include things like implementing the Foreign Account Tax Compliance Act, combating identity theft and tax-refund fraud, dispensing multiple rounds of pandemic stimulus payments, and potentially issuing monthly payments to families with children. With fewer resources available to handle these additional duties, the IRS has been forced to drastically cut its tax collection efforts. A Syracuse University report indicates that the number of “qualified” IRS revenue agents has plummeted 43% over the past decade. As a result, the percentage of millionaires audited in 2020 dropped a whopping 75% from the number audited in 2012.  Likewise, the percentage of large corporations being audited declined from 93% in 2012 to a mere 38% in 2020. 

Now that we know the reason behind the dismal performance of the IRS, does it make sense to further empower the agency? According to the Treasury Department, every additional dollar invested in the IRS generates a $6.00 return in the form of unpaid taxes collected. And that return does not even take into account the likely increase in voluntary tax payments by potential tax evaders who may be wary of the newly empowered IRS.  

At this point, a caveat is in order. Spending money to collect more money might appear to be counter-intuitive, but here that is not the case. The estimated size of the U.S. “tax gap” — the difference between what’s owed and what’s collected — varies. As noted above, Summers and Sarin have warned that the IRS will fail to collect nearly $7.5 trillion of taxes due over the next decade. And even that may understate the amount of tax evasion. A new paper co-authored by IRS employees suggests that the ultra-wealthy may be hiding more money abroad than had been previously estimated. However, the good news is that the task of collecting unpaid taxes is simplified by the fact that 40.1% of all unpaid federal income taxes are owed by the top 1% of taxpayers.  

Against this background, let’s spell out our next step. Assuming that the major task of the IRS is to collect all unpaid taxes without getting mired in politics, it is time for Congress to empower the IRS. If it succeeds, there is the potential to collect trillions of dollars of unpaid taxes without raising tax rates. That, I maintain, will go a long way toward financing the major share of critical items like infrastructure projects and controlling climate change, without resorting to significant tax hikes. 

PILLAR TWO: GROSS VS. NET COST OF PROJECT FINANCING

We are all familiar with estimating the total cost of financing a major project before it is launched. Cost estimate experts work closely with other specialists to accomplish this challenging task.  But is the final cost estimated by these experts the real cost? I think not.

Let’s assume that our project involves controlling climate change, which like any other project has two components. The first consists of the expected cost of the project. For example, assume that the estimated total cost of the project is $2 trillion. The second component is the estimated savings resulting from the investment in the project.  If climate change is adequately controlled, the cost of climate change-related disasters could be eliminated or drastically reduced. For example, assume that the total cost of these disasters – such as forest fires, tornadoes, floods and earthquakes – is $500 billion over five years, and that this cost is incurred by both the government and the private sector. In this example, the ultimate net cost of investing in the urgently-needed climate change control project is $1.5 trillion, and not $2 trillion as originally estimated, which is a dramatic decrease. 

I therefore suggest that in calculating the final real cost of controlling climate change, or any other project for that matter, we estimate the net cost of the project – i.e., we reduce the total cost of the project by any savings generated by eliminating the adverse condition that is the target of the project. Any such savings would by no means finance the entire project, but it would substantially reduce the burden on taxpayers. Keep in mind also, that in arriving at the net cost of the climate change control project, I did not even take into account the potential elimination of human suffering and adverse impact on wild life. In addition, the economy would likely benefit from the massive job creation resulting from the project.

PILLAR THREE: SELF-PAYING PROJECTS

Certain projects can be considered “self-paying.” For example, consider a project that involves constructing a new turnpike or extensively upgrading the highways in a major metropolitan area like New York City or Los Angeles. Needless to say, such a project could cost billions of dollars; but, over time, most of this cost can be recovered by charging tolls and other user fees.  The one caveat, of course, is that in this example we are ignoring the time value of money – i.e., money received today is more valuable than money to be received in the future. Since this significantly affects the net cost, it must be considered when calculating the total net cost of any self-paying project.   

PILLAR FOUR: BENEVOLENCE OF CHARITABLE AMERICANS

Every year, millions of Americans voluntarily donate billions of dollars to support their favorite charities, and the U.S. government encourages this benevolence by making these donations tax deductible, subject to certain limitations.

Based on this fact, I am suggesting that a government-private sector partnership be established by making donations to specific major projects fully tax-deductible, without limitation.

Below are three steps necessary to implement this partnership. 

         Step 1:  Billionaire Donors

There are many billionaires who generously donate to their favorite charities every year. This list includes Warren Buffett, Bill & Melinda Gates, George Soros, Michael Bloomberg, Charles “Chuck” Feeney, MacKenzie Scott, Gordon & Betty Moore, Eli & Edythe Broad, Jim & Marilyn Simons, and Mark Zuckerberg & Priscilla Chan. The first major task for the Biden Administration should be to convince at least two such donors to take leadership roles in encouraging other philanthropists to donate to critical infrastructure projects and controlling climate change. The government would join the partnership by permanently making these donations fully tax deductible and would publicize the generosity of these donors. With this unique government-private sector partnership, there is a good chance that significant amounts of money can be raised for these two projects. 

        Step 2: Top Bracket Taxpayers

The 1% of taxpayers in the top tax bracket, who earn 20% of all reported income, should be encouraged to direct part of their charitable donations to these two projects. Here again, the role of the billionaire leaders in encouraging these donations, and the role of government in publicizing these donations, are vital. Initially, this may be slow going; but once these taxpayers realize that, without these voluntary donations, the government would be compelled to raise taxes on everyone, the chances of their participation might significantly improve.

    Step 3: Rest of the Taxpayers

Finally, the promotion of charitable contributions described Step 2 should be addressed to all taxpayers. Hopefully, many would respond positively. A vigorous national promotion of the benefits of voluntary donations to these projects would hopefully result in a positive response. 

BOTTOM LINE

In this blog I have laid out my dream of creating a New America supported by four distinct pillars. In sharing my dream with you I am inspired by Helen Keller’s powerful observation: “[I} t is my chief duty to accomplish small tasks as if they were great and noble. . . . I know I am only one; but I still am one.”

At this point, I need to add an important caveat. Subjecting these pillars to scrutiny based on rigorous studies would certainly be required before making the decision to accept or rejecting them. That subject will be addressed in a separate blog. But my dream of building a new America will remain the focus of this blog.

I feel that if I persuade even one person to share this dream with me, I will have accomplished my objective. So, am I lucky to have you as one of my fellow dreamers?

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

 I wish to share with you four extraordinary incidents that I have experienced in my life.  Each carries a valuable life’s lesson.  Can you identify them?

1. Bangkok, Thailand

In 1965, I was stationed in Bangkok, Thailand, as a consultant to the United Nations. While there, I had the good fortune of visiting the world famous Temple of the Reclining Buddha – known as Wat Pho in Thai – which housed a reclining gold plated Buddha statue, the largest in Thailand.  It is located right behind the Temple of Emerald Buddha. 

On a muggy Sunday afternoon, I headed for the temple in a cab. But the cab had to drop me off a long way from the temple because, in order to provide tranquility for the resting Buddha, public vehicles were prohibited from driving any closer to the temple. 

After the cab dropped me off, I walked toward the entrance. I was mesmerized by the structure’s ornate entrance that seemed to dominate the site.  

As I approached the shrine where the Buddha statue was located, a guard standing at the entrance to the shrine announced that no cameras were allowed inside the shrine. Equally disturbing, there were no lockers available for safely storing my camera.  That left me with only two choices: I could either walk all the way back to the cab, leave my camera there and then return to visit the Buddha, or I could leave without visiting the Buddha.  

As I stood there perplexed, I spotted another American tourist carrying a fancy video camera and additional ancillary equipment. I learned that the tourist was named Jack, and that he worked for a weekly magazine headquartered in Minneapolis (what a coincidence!). He, too, had encountered the camera restrictions, but had already found a satisfactory solution.  

“Let’s hear it,” I said impatiently. 

Jack reported that he had been assured that it would be perfectly safe to leave his video equipment on the outside porch unattended, and that no one would dare steal it, because that would mean instant death for the thief. Jack said that he believed in this tradition-steeped ancient culture and was planning to leave his equipment outside on the porch. 

I decided to follow Jack’s lead, although my reason for doing so was vastly different. My camera was acting up and would need to be replaced soon. So I thought that my risk in leaving it outside would be minimal.

When I first laid my eyes on the gold plated 151 foot long reclining Buddha, the deep emotion and intense passion I felt made me feel as though I had entered an entirely different world of eternal peace and tranquility. It was truly a life changing experience I will never forget. 

I could have spent the rest of the day in that shrine; but shrine attendance times were strictly limited, so Jack and I exited the shrine and headed straight for our cameras. What we found there was simply unbelievable. 

As I had hoped, my old Nikon camera was still there, right where I had left it. As expected, no one was willing to risk their life by stealing it. But guess what? All of Jack’s expensive video equipment was gone. Panicked, Jack confronted the guard and started yelling at him. The guard nonchalantly responded by predicting that the thief, if not already dead, would soon die. 

Upon returning home, I bought a new Nikon camera. I never saw Jack again, and I presume that his employer reimbursed him for the stolen equipment. But if that didn’t happen, his colossal loss may eventually have caused him to commit suicide (just kidding).

2. Djibouti, Africa

On August 10, 1957, I sailed from Mumbai, India, headed for New York. Two days later, our ship docked at a port in the northern African country of Djibouti. No one was allowed to leave or board the ship; but passengers were treated to an unusual business practice. Local merchants threw a rope ladder with hooks up to the ship’s first deck railing. Once the hooks were attached to the railing, we were in business. The merchants hoisted up boxes containing a variety of clearly priced brand name merchandise for inspection. If a passenger wished to purchase an item, the buyer placed money in an envelope and sent it down the ladder. Items not purchased were eventually returned to the merchants. Truly a fascinating experience. 

I was astonished at the low cost of the merchandise offered for sale. In India, these brand name items had just started to arrive. But they were so overpriced – an Arrow shirt cost $100 – that purchasing them remained a pipe dream for most of us. So, when I noticed that an Arrow shirt was offered for $7.00, I was hooked and frantically began trying to figure out how I could afford to buy it. 

I realized that the $8.00 I was allowed to carry with me was untouchable. But I also remembered that I had a pouch containing a bunch of American coins. A quick count revealed that the pouch contained $4.95, a nickel shy of $5.00. 

At that point, the devil in me took over as I made a counter offer of $5.00 for the shirt, knowing that I would be cheating the merchant out of a nickel. Surprisingly, the merchant agreed and the transaction was completed.   

Later, when I returned to my cabin, I had second thoughts about having cheated the merchant out of a nickel. However, not willing to spoil the moment, I convinced myself that since it was only a nickel, it really didn’t matter. That calmed me down. 

Then, after taking a deep breath, I carefully removed the Arrow shirt from its package, ready to celebrate the deal of a lifetime. I would never forget that fateful moment when I laid my eyes on the shirt.  

The portion of the shirt that was visible through the front of the package was all there, but the rest of the shirt was missing.  

3. Country Fair, Oxford, Michigan

On Memorial Day in 1971, my five-year-old son Robert and I attended the St. Mary’s Polish Country Fair near Oxford, Michigan. I was anxious to use my new video camera for the first time, but I was also mindful of my son’s safety. So, I directed him to tightly hold on to my jacket. He readily agreed. 

Soon I started taking videos, planning someday to convert them into a documentary. Things seemed to move along nicely until I realized that Robert was no longer with me. 

Terribly scared, I started running like a mad dog, screaming Rob’s name and frantically looking for him. Just then, I saw a security officer driving past in a golf cart. I flagged him down, hopped on his cart and the search continued. We traversed the vast festival area but had no luck. Finally, at the officer’s suggestion, we went back to where I had last seen Robert. 

There was Robert, standing alone, admiring the crowd, and having a great time. I jumped off the cart and yelled at Robert, “I told you a million times not to let go of me, but you didn’t listen to me and got lost.” 

Rob did not say a word, which angered me even more. So I yelled at him again, “Why did you get lost and cause me so much trouble?” This time, he mumbled softly: “That is not fair. I never got lost. I always knew where I was. You are the one who got lost and you are yelling at me.”

The security officer, who overheard our conversation, drove away with a mischievous smile on his face mumbling, “The kid has a point, you know.”

As I drove back from the festival with Robert sitting in the back seat with a long face, I was confronted with a critical dilemma: Who do I blame more for this stressful experience, Rob or the security officer?

I am still thinking.

 4. Barcelona, Spain

In 1980, my financial planning colleagues and I were invited to present a comprehensive seminar in Barcelona, Spain, for the benefit of aspiring Spanish financial planners. That gave my wife, Bani, and me the opportunity to spend time soaking up the rich culture of Barcelona, the capital of Catalonia, located on the Mediterranean Sea. 

On the last day of our visit, Bani and I decided to visit the famous El Corte Ingles Department store. We left our hotel at noon in a rental car, expecting to be back by 4:00 p.m. so that we would not miss our extravagant farewell party. 

Upon arrival at the department store, I found its parking arrangement utterly confusing. So, I let Bani get off at the store entrance and proceeded to attempt to find a parking space.   

My attempt turned out to be a nightmare. Luckily, after an hour I did locate a parking place in a huge parking garage. But here again, another roadblock presented itself. I could not find an exit door that connected the parking garage to the store. Eventually, at 3:00 p.m., after a desperate search, I found the exit door.  

Once inside the store, I looked for Bani but could find no trace of her. By then, it was approaching 5:00 p.m., the department store’s closing time.  So, as a last resort, I started screaming, which ultimately brought results. The store manager was summoned. We eventually located Bani, who had purchased a $150 ornate boat-shaped souvenir. At that point, the store manager reminded me that the parking garage was closed for the evening, so I had to hire a cab to return us to our hotel.   

By the time we reached our hotel it was close to 6:00 p.m., too late for us to join our extravagant farewell party, so we settled for peanut butter sandwiches before retiring for the night. 

This episode, in addition to being bizarre, came with a hefty price tag. As you can see below, our $150 souvenir wound up costing us a whopping $550!  

So, was it worth it? Take a look at this gorgeous picture of the souvenir, and then, 
you tell me.

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Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. Roger Wingelaar, formerly associated with Oakland Press, is in charge of selecting blog titles.  However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

(Special Note: Since tax reform has been placed at the top of the Biden Administration’s priorities, it is imperative that we become conversant with a balanced view of this complex issue. Articles blaming the rich for dodging their tax responsibilities routinely appear in the news media. This blog presents the viewpoint of the rich members of our taxpaying community.)

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

Hello, 

My name is Rich Richardson and I am rich. I am pretty much fed up and at the end of my rope after listening to the almost daily baseless allegations that rich folks like me are tax dodgers. It seems as if the IRS has created the following 2020 tax return form for me: 

Now that you have an idea of how I feel, I am ready to present my case. Today, by using publicly available information, I will try to convince you that, in fact, the rich pay more than their fair share in taxes.   

Definition of Rich and Fairness

Unfortunately, there is no universally acceptable definition of “rich.” Some people consider those with annual incomes of $200,000 to be rich. For others, it might be annual incomes of $500,000 or $1 million.  President Biden has decided that anyone with an annual income of $400,000 is rich and should pay additional taxes. For this discussion, let’s stick with Biden’s definition and call everyone with an annual income of $400,000 or more “rich.”  

Next, we get to the trickier definition of “fairness.” For simplicity, let’s agree that it is fair for the rich to pay more in taxes than other taxpayers.  On this subject, an  October 15, 2019, observation of the Congressional Budget Office (CBO) can be taken as unbiased and universally acceptable. As the CBO put it: The rich generally pay more of their incomes in taxes than the rest of us. The top 20% of taxpayers received 54% of all income and paid 69% of all federal taxes; the top 1% received 16% of all income and paid 25% of all federal taxes.  Elaborating further on this theme, the CBO reported that the top 1% of taxpayers pay an average tax rate of 33.7%, while the bottom 20% of taxpayers pay an average tax rate of 20.2%.  The data also show that the highest-income taxpayers are the only group that pays a larger share of total taxes than their share of total income. 

Devil is in the Details

You may say: “Okay I got that, but the devil is in the details.” Here is my response to that observation:  

1. The two highest income tax brackets are 35% and 37%. The majority of rich taxpayers pay the highest tax rates on their earned income. That defies the perception that most rich taxpayers pay hardly any taxes at all. Equally important, for the rich, average tax payments are far in excess of those who are not in the rich category.  
2. The two highest long-term capital gains tax rate brackets are 15% and 20%. Further, for those with annual incomes above $200,000 (single) or $250,000 (joint), an additional 3.8% federal tax applies to net investment income. Here again, I claim that most rich taxpayers pay these taxes at a rate much higher than most taxpayers.
3. The situation is no different when it comes to estate taxes. Estates of less than $11.7 million for singles and $23.4 million for couples are exempt from paying estate taxes, so few people actually end up paying estate taxes. This exemption amount is scheduled to be reduced by 50% in a couple of years, making more people subject to the estate tax. However, above these thresholds, the super-rich are subjected to an estate tax rate of up to 40%. 

Rich are Denied Many Tax Breaks and Pay Extra Taxes

You may say: “Okay I got that, but the devil is in the details.” Here is my response to that observation:  

1. The two highest income tax brackets are 35% and 37%. The majority of rich taxpayers pay the highest tax rates on their earned income. That defies the perception that most rich taxpayers pay hardly any taxes at all. Equally important, for the rich, average tax payments are far in excess of those who are not in the rich category.  
2. The two highest long-term capital gains tax rate brackets are 15% and 20%. Further, for those with annual incomes above $200,000 (single) or $250,000 (joint), an additional 3.8% federal tax applies to net investment income. Here again, I claim that most rich taxpayers pay these taxes at a rate much higher than most taxpayers.
3. The situation is no different when it comes to estate taxes. Estates of less than $11.7 million for singles and $23.4 million for couples are exempt from paying estate taxes, so few people actually end up paying estate taxes. This exemption amount is scheduled to be reduced by 50% in a couple of years, making more people subject to the estate tax. However, above these thresholds, the super-rich are subjected to an estate tax rate of up to 40%. 

Rich are Denied Many Tax Breaks and Pay Extra Taxes

Not only are the rich subjected to the highest tax rates, but they are also denied many tax breaks commonly available to, and are subject to additional taxes not imposed upon, the not-so-rich taxpayers. Here is a partial list of these denied tax breaks and additional taxes compiled by Jay Smith, a noted Michigan financial planner. 

A. IRA’s. A single taxpayer is not allowed to deduct IRA contributions if the taxpayer’s annual income exceeds $75,000. For joint taxpayers, the deduction is disallowed for income exceeding $124,000.

B. Roth IRA.  A single taxpayer cannot contribute to a Roth IRA if the taxpayer’s annual income is over $139,000.  Joint taxpayers cannot contribute to a Roth IRA if their annual income is over $208,000.

C. Itemized deductions. Itemized deductions (Schedule A) become limited starting at annual incomes of $287,000. 

D. Qualified Dividends. The tax rate starts at 15% for annual incomes of $40,000 for single taxpayers and $80,000 for joint taxpayers, and increases to a maximum tax rate of 20% for annual incomes of $441,550 for single taxpayers and $496,600 for joint taxpayers. Regular dividends, however, are taxed at ordinary income tax rates.  

E. Capital Gains. The tax rate starts at 15% for annual incomes of $40,000 for single taxpayers and $80,800 for joint taxpayers, and increases to a maximum tax rate of 20% for annual incomes of $445,850 for single taxpayers and $501,600 for joint taxpayers.  Capital gains taxes are 28% on the sale of some assets, such as businesses and collectibles. 

F. Medicare Surtax. The rate increases from 1.45% to 2.35% on incomes starting at $200,000 for singles and $250,000 for couples. There is no limit or cap on earnings for this tax like there is with Social Security tax withholding.

G.Net Investment Income Tax. A surtax of 3.8% is imposed on net investment incomes of $200,000 for singles and $250,000 for couples. 

H. Medicare Premiums. The more taxpayers earn after retirement, the higher their monthly Part B and Part D Medicare premiums are for the next year. This surcharge, called the Income-Related Monthly Adjustment Amount (IRMAA), is graduated, and is deducted from a taxpayer’s Social Security benefit payments. The surcharge for single taxpayers starts at approximately 45% on incomes of $88,000, and increases to a maximum of 400% on incomes of $500,000. For joint taxpayers the comparable amounts are $176,000 and $750,000. 

I. Estate Tax. As stated above, estates of single taxpayers over a threshold amount of $11.7 million are subject to estate taxes up to a maximum rate of 40%.  The threshold amount will sunset and revert back to $5.6 million in 2025.

J. Inheritance Taxes. Seventeen states and the District of Columbia impose these taxes on heirs inheriting assets valued above each jurisdiction’s threshold amount. Minnesota and Hawaii have the highest rates, with a 20% tax on all inherited assets over their threshold amounts. 

K. Coverdell Education Savings Account. Contributions are not allowed if the parent’s income exceeds $110,000 for singles or $220,000 for couples. 

L. Social Security. Social Security payments become taxable at up to 85% for taxpayers with annual incomes exceeding $34,000. 

This partial list should convince you that rich people are treated rather harshly by the current tax laws. 

Legitimate Criticisms of the Rich 

        1. The withholding tax remains the cornerstone of our income tax system. Over 95% of incomes subject to income tax withholding are properly reported. But the tax collection burden is challenging because the IRS has no comparable system for verifying the incomes of businesses. The result is that most wage earners pay their fair share while some business owners fail to report income not subject to withholding. In a 2019 analysis, the IRS estimated that taxpayers report less than half of all income that is not subject to some form of third-party verification like a Form W-2. Billions of dollars in business profits, rent and royalties are not reported each year. Unreported income is the single largest reason that unpaid federal income taxes may amount to more than $600 billion this year, and more than $7.5 trillion over the next decade. 

Since the earned income reporting system is highly effective, the IRS should undertake to overhaul the current system for reporting non-wage income. So long as the current ineffective reporting system exists, taxpayers can continue not reporting non-wage income.

        2. The New York Times reports that, to save on taxes, scores of rich people are buying collectibles like coffee tables, whiskey, Air Jordans, and Pokémon cards. The tax rules applicable to collectibles are highly complex and beyond the scope of this discussion. However, there are many legal ways of determining the cost and resale values of collectibles so as to reduce the taxable gain to near zero. As a result, the 28% tax rate imposed on any resulting gain would generate very little tax revenue.  In my view, since this opportunity is available to everyone, it does not constitute an example of tax evasion and is not a benefit solely available to rich taxpayers.

I could go on and on, but I am informed that my space is limited and I must stop.  I think I have clearly demonstrated that rich people indeed pay far more in taxes than their non-rich counterparts. Did I succeed in changing your mind about rich people not paying their fair share in taxes?

Sincerely,
Rich Richardson
_______________________________________________________

Travis Smith provided technical support for this article. Charles Gauck professionally edited this blog and made valuable suggestions for improvement. However, the author takes full responsibility for the contents of this blog. 

Feedback

If you’re enjoying what you’re reading, please consider recommending it to friends you like (and also to those you don’t like). They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.