The Truth About "Fuel" Surcharges

Today Bob Murphy at his blog site posted an email from a reader who was concerned about a "fuel tax" surcharge that was tacked on to the price of her flight.

This got me thinking about surcharges in general, and I posted the following comment at Bob's site:

When I book an airline, hotel etc., I always look at the final price versus the components.

Bob, as you know factors of production are determined by the consumer price, and not the other way around.

With clients I always recommend they create such price charges as gas surcharges, and the like, to establish a track record of doing such, so that in the case price controls are ever instituted, long established "fuel surcharges" might be allowed to be passed through when an increase in the ticket price would not. Bureaucrats live for this type minutia hair splitting. I suspect that if you dig deep, calling an airline price hike a "fuel surcharge" probably means that the airlines aren't paying some type of ticket tax on the increase, or some other tax.

Of course, you can't be idiotic about it and charge different "fuel charges" for the same destination.

To all consumers, I say don't sweat just what they call it, just evaluate the final price.

In the Obama Era, with more and more regs, there are bound to be more and more oddball justifications for what are basically price hikes.

Tax Hikes During Economc Downturns

There is no economic policy justifed in any economic theory that I am aware of that calls for raising taxes during an economic downturn. Yet, Barrack Obama is making noises that he wants to do so.

They tried it, of course, during the Great Depression.

The top income tax rate was increased from 25% in the early 1930s, to 63% in 1932, and then to 79% in 1936.

Sell Your Stocks, Now; Get Your Bonuses, Now...

Next year, the Obama tax hikes will be here.

Calculate Changes To Your Taxes Under McCain and Obama Proposals

Here.

Note: Actual tax hikes will vary, and will likely be much higher. HT2GM

President Obama Will Crush Greg Mankiw's Incentive To Do Additional Work

Mankiw does the numbers, here.

Note: Although he details well the heavy additional tax burden he will face during an Obama Administration and that he is thus less likely to work additional hours, he fails to note that this will also impact the standard of living of others, who will fail to benefit from his work. (Or perhaps, deep down, this is a Freudian slip, where he realizes an economist who doesn't have a business cycle theory isn't much of an economist.)

The Bizzarro World of Obamanomics

It's going to be one hell of an LSD trip.

One proposal clarified yesterday during a debate between McCain and Obama economic advisers is this, as reported by WSJ.:

Obama adviser Austan Goolsbee said at the debate that a proposed 10% deduction on mortgage interest for taxpayers who don't itemize would carry a "work requirement."

Got that. At some point during unemployment you would lose the tax deduction. Just what America always needed, a tax increase for the unemployed.

A Margin Call For An 85-Year Old Billionaire

The generally savvy financier, Sumner Redstone, may be forced to liquidate huge positions in either his controlling interest in Viacom Inc or CBS Corp, to deal with debt he owes at his holding company, National Amusements Inc.

National Amusements Inc said last week it was in talks with bankers to renegotiate terms on a $1.6 billion debt, due to a sharp drop in the value of CBS and Viacom, the collateral used on the loans.

The $1.6 billion debt was arranged by Bank of America and others. Half of that, $800 million, will need to be repaid by year's end.

At issue is a covenant that requires National Amusements to maintain a certain debt-to-asset ratio, which it failed to do after shares of Viacom and CBS plunged during the current credit crunch.

There are huge tax advantages to borrowing against a stock position rather than selling stock outright, but a Bear Market will make you hate the day you thought it was such a great idea.

Caught Not Paying His Taxes, Top Tax Legislator Writes A Check

File under: Balls, Hypocrisy.

Rep. Charles Rangel(D-NY) wrote six checks for about $10,800 in back taxes, and then penned an open letter to New Yorkers Friday, saying he has done nothing dishonorable, AP reports.

The federal government tab ended up being $4,803, according to Rangel's accountants, while he wrote checks totaling $6,022 to New York State. The state figure includes a small percentage owed to the New York City authorities.

Penalties and interest were not included in those payments, said his chief of staff, George Dalley.

"If the IRS chooses to impose them, of course he'll readily pay them," said Dalley.

Rangel is chairman of the tax-writing Ways and Means Committee.

-Robert Wenzel

Tax Evader Will Remain Top Tax Legislator

Representative Charles B. Rangel will not step down from the chairmanship of the House Ways and Means Committee.

Rangel’s lawyer, Lanny Davis, told reporters during a conference call today that the House speaker, Nancy Pelosi, supports his decision to remain in the chairmanship.

Davis added: “Mr. Rangel believes, I believe and his colleagues believe that making inadvertent errors with no intention to conceal, no personal enrichment and no corruption of the public trust, is not disqualifying. He is prepared to let his constituents make the final judgment on his fitness to serve. Whatever the facts are, he has not dishonored the House, he has not dishonored himself he has not done anything intentionally wrong.”

Rangel (D-NY) has admitted that he earned more than $75,000 of income from a Dominican Republic villa, after the New York Post reported the details in an exclusive report. He did not report the income to the IRS or on Congressional disclosure forms.

Rangel acknowledged on Monday that there were even more errors and omissions on his financial disclosure forms, and said he would hire a forensic accounting company to pore over his records.

He is currently under investigation by the House Ethics Committee with regard to the matter.

The House Ways and Means Committee writes all Federal tax code.

-EPJ Newsdesk

Taxes and their Effects on the Economy

By Christopher Espinal

I have to start off with this lame introduction: tax policy is one of the most highly politicized tools of local and national government. Everyone thinks the solution to the nation's biggest problems are cutting or raising taxes on the privileged cohort of American society. Fiscal conservatives believe that cutting taxes can actually lead to more revenues and liberals think that raising taxes will lead to greater government funds. You can actually take some of the words in the previous sentence, mix them up, and create more fallacious statements.

The art of tax policy is actually much more delicate than some may believe. Hopefully the following economics tutorial on taxes will help us understand why this tool of fiscal policy may or may not assist political goals.

The Laffer Curve

Firstly, economic fundamentals are a must when discussing taxes. Suppose we have a supply and demand model and the government wishes to impose a revenue maximizing tax. Here is our market situation:

What the government really wants to do is impose a tax with the biggest square area which represents larger government revenues. If you look at the picture carefully, the area of the box can go from small, big, and small again along the demand curve. This is a fundamental concept behind the main economic tool right wingers wrongly appreciate - the Laffer Curve. Here is what the infamous curve looks like in picture:

So why do right-wingers wrongly appreciate this tool: because it creates a greater incentive for government spending and intervention. If lefties want to make government grow at its quickest, they need to understand the theory behind maximizing revenues - not fiscal conservatives. Right wingers need to talk about pushing taxation to the left side of that revenue maximizing tax rate. People have an incentive to be more productive with a smaller government siege on their potential human capital.

It seems that the politically motivated religiously espouse ideas that accommodate, yup, just ideas- rather than reality. That's why fiscal conservatives get caught up in "lower taxation" and liberals the opposite, without realizing the true potential effects. My conspiracy theory is that Arthur Laffer knew this all along and secretly wants the US to emulate Europe as soon as possible. Just kidding, but it's important that people really know their science before using it to embellish their political debates.

Oh, we aren't finished with tax policy just yet. There's more!

Yes, People aren't that Stupid!

Remember that Permanent Income Hypothesis and Rational Expectations stuff? That applies to tax policy as well, which leads me a conclusion contradictory to the advice I just gave fiscal conservatives.

I will start off by saying that people assess their economic situation in the long run, as said by the PIH, and people also intuit activities that may disrupt their long run plans as said by RE.

Let's think of some things going on that everyday Americans feel will disrupt their future: borrowing trillions from overseas to fund huge projects as the War in Iraq and an increase in unbalanced budgets.

Just as people can rationally expect inflation from liquidity going out of control at the Fed, they will rationally expect a point in time when the US government will have to pay its bills - or the IOU's given to foreigners on interest.

Since people know that John McCain will want to remain in Iraq and the Middle East for quite some time,they know that McCain will continue to borrow beyond government revenues and further expand our unbalanced budgets. This means that a fiscal stimulus by cutting taxes will have very little to no effect on the economy in the long run - people will put their tax cuts in their bank accounts to prepare for future tax increases aimed at balancing budgets.

In other words, there may be no significant increase in consumption, and thus no shift in Aggregate Demand. Ronald Reagan's trick will not work this time. However, if people save their money it certainly improves the investment side of GDP - and probably the future productivity ofthe economy.

My point is the efficiency of a tax cut depends on government activity and it's relation to the magnitude of unbalanced budgets. The tax cut will create an incentive to limit government size as it will decrease revenues (assuming we are already on the left side of the revenue maximizing tax rate as Martin Feldstein suggests), but it will not help the economy in terms of a demand stimulus -which is usually the initial purpose.

Christopher Espinal is an economics student at the University of Chicago. He can be reached at espinalc@uchicago.edu

Paulson Had Special Future Tax Break Written For Fannie and Freddie

How's this for a smack on the side of the head. Not only does the government bailout Freddie Mac and Fannie Mae, but if they become profitable down the road, they won't have to pay income taxes on billions of those earnings. This  tax break will amount to tax free earnings for roughly  the first $14 billion of any future Freddie and Fannie net income. Treasury Secretary Paulson had the special tax rule written for Freddie and Fannie, so that they will be eligible for the huge tax break. It won't apply to any other companies.

Paulson ... had the IRS issue Notice 2008-76, which essentially allows the two government-sponsored enterprises to retain all of their [net-operating losses] NOLs, despite a change of control of ownership, tax expert Robert Willens told CFO.com.

Under the tax code — specifically Section 382 — NOLs are severely limited when there is a change of control. But not for Fannie and Freddie, thanks to the change in rules, just for them. The rule is generally in place to prevent acquiring companies from buying up targets just to gain access to their NOLs. The NOLs for Fannie and Freddie are substantial. Over the last four quarters, Fannie and Freddie recorded about $14 billion in aggregate losses.

"I am not saying that the IRS ruling is a good thing, or a bad thing, it is just unusual," added Willens. "Then again, this is a very unusual situation."

One has to wonder what bizarre justification Paulson will have to come up with to explain, after putting billions of dollars of taxpayer money at risk to bailout Freddie and Fannie, that he then grants Frannie and Freddie special privileges so that they won't have to pay taxes on billions of dollars in income. 

Paulson's Formula: Use taxpayer money to bailout Freddie and Fannie. Write in special tax breaks so that Freddie and Fannie, if they turn profitable again (Thanks to the taxpayer bailout), won't have to pay billions taxes.

Obama: Recession Could Delay Rescinding Tax Cuts

Barack Obama says he would delay rescinding President Bush's tax cuts on wealthy Americans if he becomes the next president and the economy is in a recession.

Nevertheless, Obama has no plans to extend the Bush tax cuts beyond their expiration date. Instead, Obama wants to push for his promised tax cuts for the middle class, he said in a broadcast interview aired Sunday.

"Even if we're still in a recession, I'm going to go through with my tax cuts," Obama said. "That's my priority."

Top Tax Writer Dodges Taxes

U.S. Congressman Charlie Rangel (D-NY)may lose his position as head of the powerful House Ways and Means committee following news that he failed to report income on a Dominican resort property he occasionally rented out.

His lawyer, Lanny Davis, said that Rangle didn't declare about $75,000 in rental income from his villa with panoramic ocean views at the Punta Cana Yacht Club.

Rangel will apparently use the "my wife was in charge of finances" defense.

Davis told NyPo that Rangel thought he didn't have to declare the income for a variety of reasons, including that his wife, Alma, handled their finances, so he never saw the sporadic statements.

Since the House Ways and Means Committee writes tax law, for the head of the committee to fail to report all his income, is a bit akward for the committee. The write all the tax laws you want, but never report the income philosophy is causing Republicans to take notice.

"Charlie Rangel is the designated leader on tax policy in the Democrat-led Congress, but while he is authoring massive tax hikes to exact on middle-class Americans, he is apparently dodging the IRS at all costs," said Ken Spain, spokesman for the National Republican Congressional Committee.

Why Everyone Should Be in Favor of Reducing Taxes on the "Rich"

George Reisman explains why Obama's tax the rich plan will lower the standard of living across the board, including for wage earners:

The progressive personal income tax, the corporate income tax, the inheritance tax, and the capital-gains tax are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.

By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers' goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers' goods. This implies a reduction in the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. The individual and corporate income taxes, and the capital-gains tax, of course, also powerfully reduce the incentive to introduce new products and improve methods of production. In all these ways, these taxes undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living of everyone, not just of those on whom the taxes are levied.

Reisman's full argument is here.

Nobel Prize Winner To Obama: Screw All Taxayers, Not Just The Rich

Proof positive that just because you win a Nobel Prize, doesn't necessarily mean you understand the complex waste of most government agencies. Anyone who isn't in favor of more and more tax cuts doesn't understand the stifling nature of most governmant operations . Clearly, Robert Solow doesn't get it. David Wessel at WSJ reports:

Robert Solow, the Nobel Prize winning economist who long has counseled Democrats, said Barack Obama should roll back the Bush tax cuts for the rich but shouldn’t use the proceeds to cut taxes for the middle class, as the Democratic presidential candidate has proposed.

Mr. Solow, attending a conclave of Nobel laureates in economics on Lake Constance in southern Germany, said in an interview: “While cancelling the Bush tax cuts for upper income groups is certainly the right thing to do, I would not use the proceeds to finance a tax cut for middle-class people.”

Instead, he would use the money “both for urgent needs now and for future
deficit reduction,” he said. “The government needs that money and ought not to
be using it to promote consumption [consumer spending.]”

The retired MIT professor, who has not been advising Sen. Obama, said in a weak economy a temporary tax cut would have a limited stimulative effect and a permanent tax cut would widen an already significant long-run federal budget deficit, he said.

Mr. Solow was quick to add: “I understand this” — backtracking on a promised middle-class tax cut — “is not a politically easy thing to do.” He remains an Obama backer.

In 1992, Bill Clinton campaigned on a platform that included a middle-class tax cut but abandoned the proposal after the election to focus on deficit-reduction in his first term.

Obama's Tax Plan...

...means higher taxes for nearly everyone.

Alex Brill and Alan D. Viard chart the impact of his plan.

McCain's Latest Attack Ad On Obama

Titled: "Painful Taxes", it's pretty good. It nails Obama's "celebrity" personality (again), and the tax hikes that would come under an Obama administration. The earlier ads attacking Obama's "celebrity" now can be seen as pretty much a set up for this type ad. I wonder what's next?

At this point, McCain has clear television "air" superiority.

The Housing "Rescue" Bill Actually Has Incentive For Some To Sell Their Homes

Only from Congress.

Stuck with a second home you can't get rid of? Now, you are really screwed.

The massive 600 page tax bill, supposedly created to help get the housing market back on its feet, has a clause that will create huge incentive for some to sell second homes and thus put added pressure on the housing market.

Taxpayers have played hopscotch, moving from home to vacation home to the next home, etc. and avoiding income taxes on the sale of each one, according to Eva Rosenberg, founder of TaxMama.com . That free ride is at an end.

The personal resident exclusion is still good on your personal home. However, you'll be paying taxes on the sale of your vacation home, or rental property converted to a home or any "unqualified" home. As with anything coming out of Congress, the calculations of the taxes owed will be complicated to determine.

The tax will be based on the amount of days the house was not a qualified personal residence divided by the total number of days you owned it. This ratio is multiplied by the amount of gain realized on the sale of the property.

The new law defines unqualified use as:

any period after the last date the property is used as the principal residence of the taxpayer or spouse (regardless of use during that period), and

any period (not to exceed two years) that the taxpayer is temporarily absent by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances, are not taken into account.

This law becomes effective January 1, 2009. Thus, this creates huge incentive for those who are considering selling their vacation or other second homes to sell them before the first of the year, creating even more supply in this weak housing market.

The Myth of Low Tax America

Sterling T. Terrell reports:

The historical and current belief is that taxes in America are low, compared to the world in general. America is the model of free markets, low regulation, and economic freedom. Right? This is simply not the case. The United States has high taxes in general and higher corporate taxes in particular.

In the 2008 Index of Economic Freedom, assembled by the Heritage Foundation, personal income taxes and corporate tax rates are compared across the globe — along with many other economic measures. In regard to personal income taxes, the United States ranks 87th out of 156 nations. And in corporate rates, it ranks 125th out of 156. In other words, 86 nations have lower tax rates on personal income than the United States, and 124 nations have lower corporate tax rates.

Venezuela, India, Finland, Haiti, Burma, Canada, Mexico, Egypt, Cambodia, and Russia are among the many nations whose top personal income tax rate is lower than the rate in America.

The only nations who have a higher corporate tax rate than America are Suriname, Pakistan, Togo, Benin, Republic of Congo, Cameroon, Chad, Libya, and Vietnam. No information was available for The Democratic Republic of Congo, Iraq, North Korea, Montenegro, Serbia, or Sudan.

Obama On Taxes

The Republican National Committee is starting to go after Barack Obama's tax stand. They are pointing out that Obama pledged not to raise taxes on the miiddle class , but voted in favor of the Democrats' FY 2009 gudget, which would raise tax rates for anyone earning $31,850 or more.

Obama on ABC's George Stephanopoulos: "Would you take the same pledge [that there will be no middle class tax increases of any kind]?" Obama: "Well, I not only have pledged not to raise their taxes, I've been the first candidate in this race to specifically say I would cut their taxes." (ABC Democrat Candidates Presidential Debate, Philadelphia, PA, 4/16/08)

-- Obama: "I'll Give A Tax Cut To Working People..." (Sen. Barack Obama, Remarks At A Campaign Rally, Denver, CO, 1/30/08)

But, Obama voted twice in favor of the Democrats' FY 2009 budget resolution:

(S. Con. Res. 70, CQ Vote #85, Adopted 51-44: R 2-43; D 47-1; I 2-0,3/14/08, Obama Voted Yea; S. Con. Res. 70, CQ Vote #142: Adopted 48- 45: R2- 44; D 44- 1; I 2-0, 6/4/08, Obama Voted Yea)

"Under both Democratic plans, tax rates would increase by 3 percentage points for each of the 25 percent, 28 percent and 33 percent brackets. At present, the 25 percent bracket begins at $31,850 for individuals and $63,700 for married couples. The 35 percent bracket on incomes over $349,700 would jump to 39.6 percent." (Andrew Taylor, "Presidential Hopefuls To Vote On Budget," The Associated Press, 3/13/08)

Further, Obama claims he wants to "Keep Taxes As Low As Possible," but repeatedly voted or higher taxes in the U.S. Senate And the Illinois State Senate:

Obama: "First of all, I don't want higher taxes, I have to pay taxes,and it's no fun. You know I think sometimes there's this presumption that Democrats, we just love taxing people. No, I would prefer to keep taxes as low as possible." (ABC's "The View," 3/28/08)

Obama hoted at least 94 times for higher taxes in The U.S. Senate. (RNC Research)

-- To date, Obama has voted for a tax increase approximately once every five days Congress has been in session. (RNC Research; The Library Of Congress Website, thomas.loc.gov, Accessed 6/8/08)

--In the State Senate, Obama supported "Hundreds Of Tax Increases." ABC's Terry Moran: "[O]bama was considered a reliable liberal Democratic vote in Illinois. For instance, voting for most gun control measures, opposing efforts to ban so-called partial birth abortions and supporting hundreds of tax increases." ABC's Nightline, 2/25/08)

Checkout Of The U.S. Anytime, But Your Money Can't Leave

President Bush recently signed the Heroes Earnings Assistance and Relief Act of 2008, aka, the HEART bill.

Hidden in the bill is new taxation on those who renounce their citizenship. The bill specifically calls for taxation on the net unrealized gain in their property, as if the property had been sold. Call it the "Hotel California" Tax, checkout any time you want, but a good chunk of your money can't leave. The first $600,000 in estimated net worth is exempt, then the tax kicks-in at regular rates. Thus, this tax creates the potential for huge taxable phantom gains, with huge cash flow ramifications.

The bill also applies to foreigners who are living and working in the United States legally with green cards. When they decide to go home, the tax kicks-in for them, also. The green card aspects of the tax, have double ramifications. First, at a time when immigrants are a political hot potato, this tax creates incentives for them to remain in the United States. Secondly, the tax will discourage high income, highly skilled foreigners from entering the country in the first place.

From the bill, JCX-44-8,:

In general, the provision imposes tax on certain US citizens who relinquish their US citizenship and certain long-term US residents who terminate their US residency. Such individuals are subject to income tax on the net unrealized gain in their property as if the property had been sold for its fair market value.