Bill Gates suggests Tax Increase in the U.S

Well known for being the richest man in the world, Microsoft’s Bill Gates spoke with ABC News yesterday to talk about the economy. He also proposed raising taxes a solution to help bridge the budget gap. Although his opinions are different from President Obama’s, Gates is convinced his solution is in the best interest of the country.

According to LuckyRoom, Gates has also come out against excessive state intervention, while U.S. president Barack Obama stressed that focus should be put upon longer term policy issues, such as education, to remove the effects of the worst recession experienced by the U.S. since the late the 1930s. “When you face a financial crisis like this, it will take years to disappear completely.

The budget currently shows a large deficit, and although the economy seems to be recovering, barring any changes in tax policy and the tax enforcement mechanism will not return the budget to a balanced position, said president Obama. It is worth mentioning that Gates speech takes place just two days before the annual speech by Obama in Congress, which is expected to focus extensively on economic issues, including the need to create new jobs.

The statements made by Gates that the U.S. economy will take years to recover reflect on the sales figures of old homes in the U.S. which showed a greater decline after three consecutive increases in by big tax reduction. Sales of old homes fell 16.7% in December, while analysts were expecting a fall below 11.6%.

Continue reading at LuckyRoom…

Good Question: Do Sin Taxes Really Work?

Sin taxes – such as those levied on cigarettes and alcohol – are frequently the subject of debate by tax experts because they try to serve two different purposes. First of all, they are a great way to generate revenue, but they also work to discourage certain behaviors. WCCO.com recently published a great piece on whether or not sin taxes actually work. Check out a section of their article below.

Government often uses the tax code to encourage and discourage certain behaviors. And budget times have state and federal governments looking for money. That combination has renewed interest in the idea of new sin taxes on soda and junk food. But do sin taxes work?

"The research around tobacco has shown that large increases on taxes on cigarettes has been the single most effective policy to reduce tobacco use," said Mary Story, a dietitian and public health professor at the University of Minnesota.

Story published a brief analyzing the impact and effectiveness of sin taxes, concluding that a 10 percent increase in sugar-sweetened beverage prices could cut consumption by 8 percent to 10 percent.

Story also wrote that "a few studies have concluded that, in response to changes in relative prices, some consumers will substitute a healthier beverage for an SSB. For example, a study conducted in 2004 found that increases in SSB prices resulted in small increases in consumption of whole and reduced-fat milk, juice, coffee and tea."

However, tracking the success of sin taxes is difficult. Advocates who are against smoking and alcohol abuse point to tax increases as a strong factor in reducing consumption. The American Lung Association says a 10 percent increase in cigarette taxes is strongly correlated with a 7 percent decrease in youth smoking.

What If Cash for Clunkers Was a Tax Credit?

While auto dealerships and consumers continue to enjoy the benefits of the Cash for Clunker’s program, Gerald Prante of The Tax Foundation Blog has put together a new post explaining what would happen if the program were a federal tax credit. Check out the text of his post below.

Critics of the "Cash for Clunkers" program are out in full force, claiming that its problems are evidence that government is inefficient and that it is further proof that government shouldn't get involved in something as important as health care.

But suppose that instead of the government providing $4,500 in outlays per qualifying car in a program that is being administered by the Department of Transportation, the Congress instituted a $4,500 refundable income tax credit that met the exact same qualifying criteria as the current program, yet was administered by the IRS. Would the tax credit be good fiscal policy merely because it's mostly classified as a tax cut as opposed to an "outlay?"

The economic difference between these two scenarios is zero (except for possibly differences in administrative costs). Both policies would be financed by deficits, leading to either lower spending in the future or higher taxes in the future.

Despite this fact, it's likely that many of these same critics of the $4,500 cash for clunker outlay who are citing its problems as proof government doesn't work would have supported such a $4,500 cash for clunker tax credit merely because it would have been classified as a "tax cut" instead of an "outlay."

For these people, tax policy is all about semantics instead of understanding the economic effects of differing fiscal policies.

Newsweek Claims the “Recession is Over” – but Many, Including Obama, Disagree

In their latest issue, Newsweek magazine claims, “the recession is over, now what we need is a new kind of recovery.” However, dozens of experts have spoken out disagreeing with the publication and even President Obama expressed that he disagreed with the publication’s claims.

“I don't know whether you've seen the cover of the latest Newsweek magazine on the rack at the grocery store, but the cover says, 'The Recession is Over.'"

"I bet you found that news a little startling. I know I did. Now, it's true that we've stopped the free-fall. The market is up and the financial system is no longer on the verge of collapse. We're losing jobs at nearly half the rate we were when I took office six months ago.

"So, we may be seeing the beginning of the end of the recession. But that's little comfort if you're one of the folks who have lost their job, and haven't found another. Unemployment in North Carolina is over ten percent today. A lot of small businesses like Sara's are still struggling with falling revenues and rising costs. Health care premiums, for example, are rising twice as fast as wages, and much more for small businesses -- something I'll address in a minute.

"So, we know the tough times aren't over."

You can read Newsweek’s full story here, but after looking over the text it looks like their assertion that the recession is over was mostly an attention grabber. The main point of the story is that the worst part of the recession might be over technically, but that the country still has a long way to go.

“When economists proclaim a recession over, they're celebrating a technicality: they mean economic output has stopped contracting. And while that is good news, you might wait a while before adding Judy Garland's rendition of Happy Days Are Here Again to your iPod. GDP growth alone can't feed a family, or pay a mortgage. Cursed with a high national debt load and blessed with a dynamic, growing workforce, the U.S. economy needs annual growth of at least 1.5% just to feel like we're standing still.”

Fed Sees Up to $599 Billion in Bank Losses

The Federal government has reported that they believe that 19 of the largest US banks could suffer major losses over the next year if the economy does get worse. Check out the article below courtesy of the WallStreetJournal.com.

The federal government projected that 19 of the nation's biggest banks could suffer losses of up to $599 billion through the end of next year if the economy performs worse than expected and ordered 10 of them to raise a combined $74.6 billion in capital to cushion themselves.

The much-anticipated stress-test results unleashed a scramble by the weakest banks to find money and a push by the strongest ones to escape the government shadow of taxpayer-funded rescues.

The Federal Reserve's worst-case estimates of banks' total losses and capital shortfalls were smaller than some had feared. Optimists interpreted the Fed's findings as evidence that the worst is over for the industry. But questions remain about the stress tests' rigor, in part since the Fed scaled back some projected losses in the face of pressure from banks.

The government's tests measured potential losses on mortgages, commercial loans, securities and other assets held by the stress-tested banks, ranging from giants Bank of America Corp. and Citigroup Inc. to regional institutions such as SunTrust Banks Inc. and Fifth Third Bancorp. The government's "more adverse" scenario includes two-year cumulative losses of 9.1% on total loans, worse than the peak losses of the 1930s.

Treasury Secretary Timothy Geithner said Thursday that he is "reasonably confident" that banks will be able to plug the capital holes through private infusions, alleviating the need for Washington to further enmesh itself in the banking system.

Banks also said they will consider selling businesses or issuing new stock to meet the toughened capital standards.

The information provided by the stress tests will "make it easier for banks to raise new equity from private sources," Mr. Geithner said. Still, he added, "We have a lot of work to do...in repairing the financial system."

Some of the banks told to add capital raced to accomplish that by tapping public markets. On Thursday, Wells Fargo & Co., which the Fed said needed to raise $13.7 billion, laid plans for a $6 billion common-stock offering. Morgan Stanley, facing a $1.8 billion deficit, said it will sell $2 billion of stock and $3 billion of debt that isn't guaranteed by the U.S. government.

If successful, the offerings "should be a meaningful step in restoring a modicum of confidence to the banks," said David A. Havens, a managing director at Hexagon Securities. "It indicates that even the big messy banks are able to attract private capital."

Shares of more than a dozen stress-tested banks rose in after-hours trading as the government's announcement soothed jitters about the industry's immediate capital needs. Bank of America shares climbed 3.6% to $13.99, while Citigroup was up 6.3% to $4.05. Fifth Third jumped 19% to $6.35. SunTrust fell 2.5% to $18.05, and Wells Fargo slipped 0.9% to $24.54.

Nine of the stress-tested banks -- including titans like J.P. Morgan Chase & Co. and Wall Street's Goldman Sachs Group Inc. as well as several regional institutions -- have adequate capital. That finding essentially represents a seal of approval from the Fed.

The others need to raise anywhere from about $600 million for PNC Financial Services Group Inc. to $33.9 billion for Bank of America. In between are several other regional lenders: Fifth Third, which needs to raise $1.1 billion; KeyCorp, $1.8 billion; Regions Financial Corp., $2.5 billion; and SunTrust, $2.2 billion.

Experts warn that the tests could have a serious unintended consequence: Loans could be harder to come by for consumers and businesses. That's because the government's intense focus on thicker capital cushions might prompt banks to hoard cash and further curtail lending, said Jim Eckenrode, banking research executive at TowerGroup, a financial consulting firm. He said banks will have less room to offer consumers low interest rates, while corporate customers may have a tougher time getting financing for commercial real-estate and property development.

Obama's Poor Tax

A journalist from The Wall Street Journal posted his opinion on Obama’s recent decision to raise the tobacco tax levy, and how it will negatively affect the country. You can find a snippet of the story below, but the full text can be found here.

"I can make a firm pledge . . . no family making less than $250,000 a year will see any form of tax increase." Remember that? It was Barack Obama, campaigning to become president last Sept. 12 in Dover, N.H.

Indeed, he promised repeatedly that 95% of American families would get a tax cut. So it's especially fitting that he chose April Fools Day to implement his first tax increase -- which will fall mostly on individuals and families who do not make anywhere near $250,000 per year.

Early in February, the president signed a law to triple the federal excise tax on cigarettes -- which will jump from 39 cents per pack to $1.01 today. His administration projects this tax hike will bring in at least $38 billion over the next five years.

If you don't smoke, maybe you don't care. Maybe you even think a higher "sin tax" is a good thing. But health issues aren't the only concern here. There are also questions of fairness, federalism, macroeconomic impact, and crime.

The fairness issue is particularly troubling. According to the Centers for Disease Control and Prevention, only one in five Americans smokes, so the excise targets a minority -- and over half of all smokers are low income, and one of four are officially classified as poor.

Mr. Obama prefers to tout his tax cuts for low-income households. But his "stimulative" Make Work Pay tax cut gets dribbled out at $8-$10 a week. A pack-a-day smoker will pay half of that back in higher cigarette taxes. Smokers getting welfare, unemployment or disability checks instead of paychecks won't get as much in tax cuts, but they will still pay the whole cigarette tax increase. Anyone concerned about widening income inequality should have second thoughts about this distribution of the tax burden.

We should also note how this tax increase affects state finances. State governments rely on their own cigarette excise taxes for hefty revenue streams. In 2008, according to the National Tax Foundation, state governments took in $15.4 billion in cigarette taxes. Hard-hit Michigan, Pennsylvania, and California each took in over $1 billion; New York and Texas took in $1.5 billion each.

IRS Amnesty Would Stimulate Economy, Give Struggling Taxpayers a Fresh Start

One writer from the Cincinnati News recently posted an article urging Congress to offer amnesty to taxpayers that have not filed because of unpaid taxes. The author suggests that by doing so, the IRS would stimulate the economy. A portion of the article can be found below, but the full text can be read here:

Congress is looking for ways to raise money as well as stimulate the economy. Many hard-working Americans, despite good intentions, have fallen behind on their taxes - it could be divorce, medical problems, or the challenges of a business during hard times. These life situations often lead to an unfortunate dropping out of the tax system. If the taxes cannot be paid, the returns are often not filed.

I urge Congress and the Secretary of the Treasury to offer amnesty to the 6.1 million IRS non-filers if they come forward and pay the taxes they owe.

The non-filing is usually accompanied by a feeling of helplessness. Once behind, interest and penalties escalate to the point that a taxpayer can never catch up.

The failure to act is magnified by the fact that interest and penalties double the original tax liability every five years. Someone paying $100 monthly on a $20,000 IRS debt will find that the amount owed actually increases, not decreases, because of the interest and penalties.

For honest taxpayers that come forward with their taxes, provide relief from the interest and penalties if the tax is paid when the returns are filed. To ensure future compliance, implement a five-year probationary period to stay current on all future obligations. Those suspected of tax crimes would not be eligible.

Higher Cigarette Tax Is Very Sensible

From The Wall Street Journal:

The Feb. 2 editorial "The New Poor Tax" is based on the same old faulty logic that manufacturers have been making for decades whenever cigarette tax hikes are suggested as a means of paying for social programs. There is no argument that cigarette taxes discourage consumption especially among the poor, who can least afford to be addicted to cigarettes.

Ninety-five percent of those who smoke say they regret their decision ever to start. The majority of smokers say they want to quit, so why is it so bad for the government to provide an economic incentive to help move smokers to cut down or quit? The U.S. has one of the lowest tax rates on tobacco in the world and the meager 39 cents-per-pack tax is hardly enough to pay for the massive annual medical bill caused by smoking.

By boosting the federal tax by the proposed 61 cents-per-pack to pay for the children's insurance fund, Congress will not only maintain a much-needed health insurance program but will also help reduce smoking.

8 Signs the U.S. Economy is NOT Headed Towards a Recession

As I discussed in a blog entry last week, 8 Signs the U.S. Economy is Headed Towards a Recession, dozens of leading economists adamantly claim that we are either headed towards a full fledged recession, or that we are already into the first few months of a recession. Although we can all admit to feeling the pains of a poor economy, saying that we are definitely headed for a recession may be a bit drastic.

As with most economic and financial issues, there is always room for debate. A looming recession is no exception. Dozens of highly educated, well respected, economists still proclaim that we are not headed towards a recession. The majority of their argument is that “yes” the economy is worse than it was a few years ago, but we are still a long way away from a recession.

"My view is that taking all the new data into account, that there is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple weeks ago," claims Federal Reserve Chairman, Ben Bernanke. "If the housing sector begins to stabilize and if some of the inventory corrections that are still going on in manufacturing begin to be completed, there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year."

So are we headed towards a recession or not? The truth is that no one can give a 100% sure answer. The economy can be sporadic. Moreover, just because we seeing some signs of a looming recession does not mean that the economy will not bounce back in the next few months. The only way to really know for sure, is just to wait and see. In the mean time, enjoy the following list of 8 signs that the U.S. economy is not headed towards a recession.

1. Overall Economic Growth

Although it is more of a technicality, the economy must exhibit negative growth 2 quarters in a row to validate a full-fledged recession. Yet, between January and March of 2008 the economy actually grew at a rate of 0.9%, and the overall growth was at 1.9% for 2007. As such, the economy is not in an actual recession. In addition, no one can claim that we are until there is data to back up the statement.

2. Consumers are Still Spending

Although the numbers have dropped, there are still plenty of people spending their hard earned cash on things they don’t necessarily need. Just look at the millions of people who lined up to buy the new iPhone. Box office sales are also doing well, with major summer hits drawing in crowds, such as “Dark Knight,” the new Batman movie, which is already performing above expectations. Are people just forgetting to be frugal, or do we have a better grip on our cash than we thought?

3. Election Year

The looming election may seem far off, but a change in the White House may make all the difference. Backed by his former competitor Sen. Hillary Clinton, Sen. Barack Obama plans on changing tax codes to better benefit the US economy. Obama has publicly blamed President Bush and contender Sen. John McCain for misleading the public on a looming recession. He argues that he is "the only candidate in this race to propose a genuine middle-class tax cut," and claims the nation needs as president a leader who "doesn't defend lobbyists as part of the system, but sees them as part of the problem."

4. Media Awareness

Possibly due to the popular election coverage this year, more Americans seem to be keeping up with the news. Practically every major news station has covered the possibility of a recession, and viewers have taken notice. An aware public makes a drastic difference in economic affairs, and many will be watching to see what they can do to prevent our economy from failing.

5. Confusing Unemployment Figures

Unemployment rates are misleading. The percentage comes from individuals collecting unemployment from the government for the 2 months they’re allowed. These numbers are unreliable, because there is no real way to tell just how many people have or do not have jobs, and certain factors just are not being added in. Economists also argue that unemployment may be rising, but that more people are seeking out alternative forms of income, such as self-employment or independent contracting. In addition, any studies conducted at this point of the year have to be discounted to account for the influx of high school and collegiate aged individuals seeking work for the summer.

6. Decrease in Abroad Travel = Increase in U.S. Travel

Due to limited spending money, more people are spending their summers and vacations in the States. This is beneficial because the cash they would be spending in Europe is now being fed directly into our economy instead. As more and more families take road trips this summer, the money generated from tourism is likely to help the economy.

7. Isolated Housing Crash

The housing and mortgage crash of recent years is widely considered one of the leading causes of a poor performing U.S. economy. Home sales are continuing to drop, and more and more Americans are facing foreclosure. However, many economists claim that the housing crash is somewhat isolated. Moreover, other sectors of the economy are actually picking up extra slack. Additionally, experts also predict that the housing market will cool off in the next few months, and will help improve the economy overall.

8. Reasonable Inflation Rates

Although there are many signs that point towards a recession, the inflation rate of the U.S. dollar does not. When you look at our “core inflation” – which excludes food and energy prices – it is actually under 2%. Some economists argue that if we were headed to a recession, this number would be much, much higher.