The Endless Economic Cycle
- posted by KLR
Riddle: What is it that happens on a continual basis and yet, is always ignored until it’s too late? Answer: Economic downturns. The world economy is in an endless cycle of expansion and contraction and the only thing that changes is how extreme the highs and lows reach before reversing. But somehow, no one wants to think of the lows until they are actually facing them.
Expansions are easy to deal with. As revenues increase; businesses, governments, and households find ways to spend their new found wealth. It’s the contractions that are a problem. Most businesses are able to fend off reductions in revenue by cutting costs. Payroll being the quickest, explains the run up of unemployment at every contraction. Households don’t fare as well. Most of their expenses are related to basic needs like food and shelter with the rest being debt. The problems arise when there’s not much that can be cut. In this light, government fairs the worst. They get a double whammy at every economic downturn. Revenues decrease and expenses increase - as support is given to shore up the sagging economy. But something has happened in this downturn that is shining a bright light on some real problems.
One is, government spends all the money they take in – good times or bad. Which is understandable since there is constant pressure to do as much as possible with the resources available. The flaw that becomes very evident in this downturn is that most of this spending is fixed either by law, contract, or entitlement. No one stands up and volunteers for a cut, and worse – all proposed cuts are fought tooth and nail. If spending can’t be reduced, we are faced with deficit spending, which means borrowing against future tax collections. This simply isn’t sustainable and just makes the problem worse later on. Ask any homeowner who got caught up in the equity splurge - you can’t borrow your way out of trouble.
Expansions are easy to deal with. As revenues increase; businesses, governments, and households find ways to spend their new found wealth. It’s the contractions that are a problem. Most businesses are able to fend off reductions in revenue by cutting costs. Payroll being the quickest, explains the run up of unemployment at every contraction. Households don’t fare as well. Most of their expenses are related to basic needs like food and shelter with the rest being debt. The problems arise when there’s not much that can be cut. In this light, government fairs the worst. They get a double whammy at every economic downturn. Revenues decrease and expenses increase - as support is given to shore up the sagging economy. But something has happened in this downturn that is shining a bright light on some real problems.
One is, government spends all the money they take in – good times or bad. Which is understandable since there is constant pressure to do as much as possible with the resources available. The flaw that becomes very evident in this downturn is that most of this spending is fixed either by law, contract, or entitlement. No one stands up and volunteers for a cut, and worse – all proposed cuts are fought tooth and nail. If spending can’t be reduced, we are faced with deficit spending, which means borrowing against future tax collections. This simply isn’t sustainable and just makes the problem worse later on. Ask any homeowner who got caught up in the equity splurge - you can’t borrow your way out of trouble.
So – wouldn't it make sense to have a balanced budget based on average tax revenue instead of projected revenue? This probably sounds easier than it is, but it sure would go a long way in smoothing out the extremes. Some form of this has been tried with things like rainy day funds, but somehow those funds always seem to get tapped even before the rain. How about trying something like, excess revenues collected during upturns are only spent on things that can be put on hold during downturns – like road repair or building improvements. Locking in an endless stream of fixed costs will always bring us back to where we are today – massive deficits and unpleasant remedies.
By. Norman LeBlanc, CPA
Tax Services Group
Labels: Accounting, CPA, Cutting Costs, Economic Downturns, Economy, Fixed Costs, Fixed Spending, Government Spending, KLR, LeBlanc, Projected Revenue, Tax, Tax Collections, Tax Planning, Tax Revenue 2010
Cut Costs by Increasing Your Efficiency
- posted by KLR
In these troubling times every business seems to have one major goal -- cut costs. Unfortunately this happens most often as a knee jerk reaction with across the board cuts in payroll and everything that even smells non-essential. But what if there was a better way? And you could learn about it for FREE??
One of our clients has grabbed the Toyota concept of efficiency (lean) and taken it to an art form – and they are so passionate about it that the President of the company has felt the call to duty and is hosting a daily radio show on AM790 from 4 – 5pm. There is also a local website dedicated just to the war on waste (LeanRI.org). The show and site focuses on efficiency and cost cutting without using the all too common slash and burn process. If you can’t tune in, the show streams live from the 790 website and there are other tips you can read online. Here are some links to get you started.
http://www.790business.com/sectional.asp?id=35739
http://www.leanri.org/
http://www.facebook.com/pages/K-Dubs-Lean-Nation-Radio-Show/205913446176
What is lean anyway?
Lean is eliminating the 7 deadly wastes that are in every corner of our businesses, homes, and government.
1. Waiting - people or goods idle while a process finishes
2. Over production – making more than you need now
3. Over processing – doing more work than is necessary (too many steps)
4. Motion – reaching, turning, bending, or walking to your resources
5. Transportation – moving product around
6. Defects – we all know this one
7. Inventory – do you need more than you could have on-hand tomorrow?
I know these sound like they only apply to manufacturing but don’t be fooled. They apply to everything and anything that involves a process resulting in a finished product (even making toast has a process to it). What I’m saying is: everything is manufacturing when you think about it. For example (and I’ll pick a tough one) - an insurance agent. They might not have a machine shop but they do go through the process of obtaining leads, researching, quoting, revising, and ultimately binding coverage - all which results in the finish product of an insurance policy. Their equipment is a computer, printer, and fax machine instead of drill presses and grinding machines - but they still go through a process - and that process is burdened with the 7 wastes above.
You will never reach the perfection of a totally waste free environment but the idea is to continuously improve towards that goal. For a lot more on this topic check out one of the links above. You’ve got nothing to lose and it will make you look at your business in a whole new way.
By. Norman LeBlanc, CPA
Tax Services Group
One of our clients has grabbed the Toyota concept of efficiency (lean) and taken it to an art form – and they are so passionate about it that the President of the company has felt the call to duty and is hosting a daily radio show on AM790 from 4 – 5pm. There is also a local website dedicated just to the war on waste (LeanRI.org). The show and site focuses on efficiency and cost cutting without using the all too common slash and burn process. If you can’t tune in, the show streams live from the 790 website and there are other tips you can read online. Here are some links to get you started.
http://www.790business.com/sectional.asp?id=35739
http://www.leanri.org/
http://www.facebook.com/pages/K-Dubs-Lean-Nation-Radio-Show/205913446176
What is lean anyway?
Lean is eliminating the 7 deadly wastes that are in every corner of our businesses, homes, and government.
1. Waiting - people or goods idle while a process finishes
2. Over production – making more than you need now
3. Over processing – doing more work than is necessary (too many steps)
4. Motion – reaching, turning, bending, or walking to your resources
5. Transportation – moving product around
6. Defects – we all know this one
7. Inventory – do you need more than you could have on-hand tomorrow?
I know these sound like they only apply to manufacturing but don’t be fooled. They apply to everything and anything that involves a process resulting in a finished product (even making toast has a process to it). What I’m saying is: everything is manufacturing when you think about it. For example (and I’ll pick a tough one) - an insurance agent. They might not have a machine shop but they do go through the process of obtaining leads, researching, quoting, revising, and ultimately binding coverage - all which results in the finish product of an insurance policy. Their equipment is a computer, printer, and fax machine instead of drill presses and grinding machines - but they still go through a process - and that process is burdened with the 7 wastes above.
You will never reach the perfection of a totally waste free environment but the idea is to continuously improve towards that goal. For a lot more on this topic check out one of the links above. You’ve got nothing to lose and it will make you look at your business in a whole new way.
By. Norman LeBlanc, CPA
Tax Services Group
Labels: Accounting, efficiency, KLR, LeanRI, LeBlanc
Simple Taxes
- posted by KLR
There’s been some talk in Washington recently about simplifying the tax codes and there’s hardly anyone who wouldn’t agree -- our income tax system is too complicated. Why is that? Hasn’t congress simplified the system before?
The answer is: yes, the tax code has been rewritten many times. Sometimes to make sections of the code simpler and twice, in 1954 and 1986 the tax code was completely rewritten cover to cover. If that’s the case, why does the current code stand at 70,000 plus pages? The answer is simple… it has to be.
Every time congress makes the tax code less complicated, two things happen. One, savvy tax advisors find loopholes in the law and show their clients how to save money by structuring their transactions accordingly. There is nothing illegal about this, the tax code is there to be adhered to, whether that helps or hurts. Congress then reacts by modifying the law and closing the loophole. The second phenomena we see is congress realizing that many things can be accomplished quickly by putting a monetary incentive to it. This tool can really rack up the page count.
These are just two of the reasons you probably will never see a simple tax system in the U.S. Another major factor is fairness. Believe it or not, our tax system is designed to allow taxpayers with the lowest incomes to pay the least tax (as a percentage of income). Despite all the commentary, high income earners pay a much higher percentage than their lower income counterpart and many of the deductions and credits afforded to lower bracket taxpayers are passed out or disallowed for higher earners. This is partially what complicates the tax code. There are countless triggers and mechanics to calculate and formalize who gets a deduction/exemption/ credit and who doesn’t.
So what are the alternatives? There’s always a flat tax, but is that the best way to administer a tax system considering the same total dollars need to be collected? Wouldn’t it shift the tax burden? If it doesn’t, how would it be different than what we have now? Many European countries have implemented a variation of a flat tax by using a value added tax. The disadvantages of a value added tax are: anyone who provides goods or services becomes the tax collector and, the tax is continuously rolled into the cost of the product so no one really knows how much tax they are paying. Ask a European how much tax they pay and many will respond with - I don’t pay tax. In the U.S. there have been proposals of a national sales tax. This, unfortunately, isn’t much different than a value added tax because tax is paid as part of the cost of goods and services.
There have also been proposals to have the IRS prepare income tax returns for all tax payers having simple sources of income like W2 wages and bank interest. Does this really help considering that the real complexities of the tax law don’t affect this category of taxpayer?
So what’s the solution? Do we continue with the system we have, do we opt for stealth taxes like the value added tax or do we have the IRS do tax returns for us? It’s likely that there is no easier solution than the tax code we have. For every gain in simplification, we lose in transparency, fairness, and administration. How about no tax at all? Oh yea, that doesn’t work either.
The answer is: yes, the tax code has been rewritten many times. Sometimes to make sections of the code simpler and twice, in 1954 and 1986 the tax code was completely rewritten cover to cover. If that’s the case, why does the current code stand at 70,000 plus pages? The answer is simple… it has to be.
Every time congress makes the tax code less complicated, two things happen. One, savvy tax advisors find loopholes in the law and show their clients how to save money by structuring their transactions accordingly. There is nothing illegal about this, the tax code is there to be adhered to, whether that helps or hurts. Congress then reacts by modifying the law and closing the loophole. The second phenomena we see is congress realizing that many things can be accomplished quickly by putting a monetary incentive to it. This tool can really rack up the page count.
These are just two of the reasons you probably will never see a simple tax system in the U.S. Another major factor is fairness. Believe it or not, our tax system is designed to allow taxpayers with the lowest incomes to pay the least tax (as a percentage of income). Despite all the commentary, high income earners pay a much higher percentage than their lower income counterpart and many of the deductions and credits afforded to lower bracket taxpayers are passed out or disallowed for higher earners. This is partially what complicates the tax code. There are countless triggers and mechanics to calculate and formalize who gets a deduction/exemption/ credit and who doesn’t.
So what are the alternatives? There’s always a flat tax, but is that the best way to administer a tax system considering the same total dollars need to be collected? Wouldn’t it shift the tax burden? If it doesn’t, how would it be different than what we have now? Many European countries have implemented a variation of a flat tax by using a value added tax. The disadvantages of a value added tax are: anyone who provides goods or services becomes the tax collector and, the tax is continuously rolled into the cost of the product so no one really knows how much tax they are paying. Ask a European how much tax they pay and many will respond with - I don’t pay tax. In the U.S. there have been proposals of a national sales tax. This, unfortunately, isn’t much different than a value added tax because tax is paid as part of the cost of goods and services.
There have also been proposals to have the IRS prepare income tax returns for all tax payers having simple sources of income like W2 wages and bank interest. Does this really help considering that the real complexities of the tax law don’t affect this category of taxpayer?
So what’s the solution? Do we continue with the system we have, do we opt for stealth taxes like the value added tax or do we have the IRS do tax returns for us? It’s likely that there is no easier solution than the tax code we have. For every gain in simplification, we lose in transparency, fairness, and administration. How about no tax at all? Oh yea, that doesn’t work either.
By Norman LeBlanc, CPA
Tax Services Group
Are Quarterly Payments Getting You Down?
- posted by KLR
I have noticed that people generally get excited when they talk about paying taxes, but they get really excited when they talk about paying their property taxes. How come? The upsetting factor seems to be making the payments. I’m not so sure landowners don’t feel they are getting their money’s worth -- it’s more about the actual payments. Of course that makes me think - wow - I wonder what would happen if all taxes had to be paid the same way as property taxes; you know - quarterly.
It would mean that an unmarried person who makes $25,000 a year would need to write a quarterly check for $502.50 to the US Treasury, a check for $150.75 to the State, and a check for $478.13 to the Social Security Administration. That is $1,131.38 in tax payments every three months. That is surely more than the property tax check for this individual.
What about a married couple making $70,000 a year? That would mean quarterly checks to the US Treasury for $1,754, the State for $505.25, and the Social Security Administration for $1,338.75. Each quarter would see the couple writing checks for $3,598 and they would do this four times a year (or put another way, $1,199.33 a month)!
How about sales tax? The $25,000 single person will spend an average of $5,200 a year on consumables for an additional check to the State for $364. The married couple will spend an average of $11,700 for an additional check to the State for $819.
This does seem a lot less pleasant than having the income and social security taxes withheld from our paychecks. And paying the sales tax annually is not nearly as nice as paying a little bit with every purchase. With that in mind, we could be thankful that there is a system to make paying our income, social security, and sales taxes so convenient. Maybe someone could find a way for property taxes to be withheld from our paychecks - it would be a lot easier than making those quarterly payments.
By. Norman LeBlanc, CPA
Tax Services Group
It would mean that an unmarried person who makes $25,000 a year would need to write a quarterly check for $502.50 to the US Treasury, a check for $150.75 to the State, and a check for $478.13 to the Social Security Administration. That is $1,131.38 in tax payments every three months. That is surely more than the property tax check for this individual.
What about a married couple making $70,000 a year? That would mean quarterly checks to the US Treasury for $1,754, the State for $505.25, and the Social Security Administration for $1,338.75. Each quarter would see the couple writing checks for $3,598 and they would do this four times a year (or put another way, $1,199.33 a month)!
How about sales tax? The $25,000 single person will spend an average of $5,200 a year on consumables for an additional check to the State for $364. The married couple will spend an average of $11,700 for an additional check to the State for $819.
This does seem a lot less pleasant than having the income and social security taxes withheld from our paychecks. And paying the sales tax annually is not nearly as nice as paying a little bit with every purchase. With that in mind, we could be thankful that there is a system to make paying our income, social security, and sales taxes so convenient. Maybe someone could find a way for property taxes to be withheld from our paychecks - it would be a lot easier than making those quarterly payments.
By. Norman LeBlanc, CPA
Tax Services Group
Labels: KLR, LeBlanc, Quarterly Property Taxes
Super Tax Incentives
- posted by KLR
Wow – if you like incentives, tis the season. Cash for clunkers; First time homebuyers; Bonus depreciation; Energy credits. One of these is sure to get you stimulated.
Remember in my last post (Constantly Changing Tax Laws) I talked about how tax policy is often used as a means to social policy…..and I promised to cover super incentives next time. Well, the supers are here!!
We all know it’s nice to get a tax deduction for mortgage interest (subject to limits of course) or it’s nice to get a learning credit for spending on higher ed, but these probably aren’t big enough by themselves to make or break your decision to buy a house or go to college. Why? Because they are governmental tokens of affection and not a lot more than that. And, they are chump change compared to a super incentive like the homebuyer credit. Think about this: If you’re a first time homebuyer and closing before November 30, 2009, you can get a credit of $8,000 directly on your tax return -- and this credit is refundable, which means a check from the US Treasury. Still seems small? Did you know that an $8,000 tax credit is equivalent to a $40,000 deduction for most taxpayers? And, it gets better.
In the cash for clunkers program, you don’t even need to wait for a tax return. You don’t even need to file a thing. A payment of $4,500 can go directly to the auto dealer – no waiting. Now, $8,000 for the homebuyer sounded pretty good but when your buying a house, $8,000 doesn’t go far (it’s probably only 4-5% of the purchase price). A clunker rebate is closer to 25% of a car’s price tag. Who wouldn’t want that? Match that up with a few dealer incentives and the cars are flying off the lot.
How about going green? The federal government will give you a 30% tax credit towards the cost of adding alternative energy sources to your home – things like solar, wind, and geothermal. The best part -- there’s no limit to this credit. So, if you spent $50,000 on a wind turbine, you get a tax credit of $15,000 which can be used just like a tax payment on your personal return. It’s like someone is sending a payment to the IRS for you!
But we can’t leave out the business owner. Here is the granddaddy of all incentives -- bonus depreciation. It doesn’t sound fancy, but what it does is allow businesses who buy brand new furniture, fixtures, and equipment to deduct half the cost in the year of purchase. Under normal circumstances, a business is required to deduct these purchases over 7 years. Still doesn’t sound like much? How about this: MegaStore buys $10 million dollars of new store shelving in 2009. They get to bonus depreciate $5 million in 2009 alone – this saves MegaStore $2,000,000 in federal taxes! Under the normal rules, Mega would have saved $500,000. That’s an incentive of $1.5 million dollars. Wouldn’t you think it was super if someone lowered your tax bill by $1.5 million? It’s so good; the States don’t even allow it.
Now the hard part – someone has to pay for these jumbo credits and deductions. To see how that’s done, tune in next time when we’ll talk about disincentives.
Remember in my last post (Constantly Changing Tax Laws) I talked about how tax policy is often used as a means to social policy…..and I promised to cover super incentives next time. Well, the supers are here!!
We all know it’s nice to get a tax deduction for mortgage interest (subject to limits of course) or it’s nice to get a learning credit for spending on higher ed, but these probably aren’t big enough by themselves to make or break your decision to buy a house or go to college. Why? Because they are governmental tokens of affection and not a lot more than that. And, they are chump change compared to a super incentive like the homebuyer credit. Think about this: If you’re a first time homebuyer and closing before November 30, 2009, you can get a credit of $8,000 directly on your tax return -- and this credit is refundable, which means a check from the US Treasury. Still seems small? Did you know that an $8,000 tax credit is equivalent to a $40,000 deduction for most taxpayers? And, it gets better.
In the cash for clunkers program, you don’t even need to wait for a tax return. You don’t even need to file a thing. A payment of $4,500 can go directly to the auto dealer – no waiting. Now, $8,000 for the homebuyer sounded pretty good but when your buying a house, $8,000 doesn’t go far (it’s probably only 4-5% of the purchase price). A clunker rebate is closer to 25% of a car’s price tag. Who wouldn’t want that? Match that up with a few dealer incentives and the cars are flying off the lot.
How about going green? The federal government will give you a 30% tax credit towards the cost of adding alternative energy sources to your home – things like solar, wind, and geothermal. The best part -- there’s no limit to this credit. So, if you spent $50,000 on a wind turbine, you get a tax credit of $15,000 which can be used just like a tax payment on your personal return. It’s like someone is sending a payment to the IRS for you!
But we can’t leave out the business owner. Here is the granddaddy of all incentives -- bonus depreciation. It doesn’t sound fancy, but what it does is allow businesses who buy brand new furniture, fixtures, and equipment to deduct half the cost in the year of purchase. Under normal circumstances, a business is required to deduct these purchases over 7 years. Still doesn’t sound like much? How about this: MegaStore buys $10 million dollars of new store shelving in 2009. They get to bonus depreciate $5 million in 2009 alone – this saves MegaStore $2,000,000 in federal taxes! Under the normal rules, Mega would have saved $500,000. That’s an incentive of $1.5 million dollars. Wouldn’t you think it was super if someone lowered your tax bill by $1.5 million? It’s so good; the States don’t even allow it.
Now the hard part – someone has to pay for these jumbo credits and deductions. To see how that’s done, tune in next time when we’ll talk about disincentives.
By. Norman LeBlanc, CPA
Tax Services Group
Labels: Government Tax Credit, Green, IRS, KLR, LeBlanc
Constantly Changing Tax Laws
- posted by KLR
Have you ever noticed that our tax laws are constantly changing? (and I do mean constantly). When was the last time a tax form had the same lines on it two years in a row? Hint: stop trying to remember.
Do you think it’s because our lawmakers have a strong desire to fine tune the system so it will be as fair and equitable as possible for everyone? Do you think it's because some things are not working quite right and need fixing? If either of these were true, our tax code would be perfect by now with all the “improvements” our governing bodies are making. Why can’t the tax system just get established once and for all and be left alone (with maybe an update now and then for inflation)? Can you imagine if a retail store changed its pricing policies the way are tax system changes? One month you’d get a discount for shopping on Tuesdays between 10 and 2, and the next month you’d get a credit for buying a solar powered flashlight – if bought on a Wednesday and only if paid in cash using bills no larger than $5. Why does it have to be so complicated?
Maybe there’s an ulterior motive in the tax system. Steady now - I’m not suggesting there is a conspiracy or that we are being taken as fools. What I am suggesting is that our tax laws are more than just tax laws. Our tax laws are a huge carrot and stick that pulls us - like a magnet - right into the socially acceptable agenda of the day. The carrot / magnet is the money we save by voluntarily maximizing our tax benefits. For example:
1. Buy a home - get a deduction for interest and taxes. (no deduction for rent)
2. Go to college - get a credit for tuition and a deduction for student loan interest
3. Buy a hybrid car or add solar panels to your house – get a large tax credit
The list could go on for pages. The point you see, is that the leadership’s view of what will help America’s future is written right into the tax code. Sure, the legislators could write other kinds of laws to shape social policy but we all know that nothing works faster than an economic incentive. Besides that, the Constitution protects us from forced actions and violations of our civil rights. So, why not make the actions voluntary by giving a little tax reward to those who are socially compliant. Brilliant!
Hmmm….maybe even more can be accomplished by adding super-incentives to the tax code. More on that next time.
By Norman LeBlanc, CPA
Tax Services Group
Do you think it’s because our lawmakers have a strong desire to fine tune the system so it will be as fair and equitable as possible for everyone? Do you think it's because some things are not working quite right and need fixing? If either of these were true, our tax code would be perfect by now with all the “improvements” our governing bodies are making. Why can’t the tax system just get established once and for all and be left alone (with maybe an update now and then for inflation)? Can you imagine if a retail store changed its pricing policies the way are tax system changes? One month you’d get a discount for shopping on Tuesdays between 10 and 2, and the next month you’d get a credit for buying a solar powered flashlight – if bought on a Wednesday and only if paid in cash using bills no larger than $5. Why does it have to be so complicated?
Maybe there’s an ulterior motive in the tax system. Steady now - I’m not suggesting there is a conspiracy or that we are being taken as fools. What I am suggesting is that our tax laws are more than just tax laws. Our tax laws are a huge carrot and stick that pulls us - like a magnet - right into the socially acceptable agenda of the day. The carrot / magnet is the money we save by voluntarily maximizing our tax benefits. For example:
1. Buy a home - get a deduction for interest and taxes. (no deduction for rent)
2. Go to college - get a credit for tuition and a deduction for student loan interest
3. Buy a hybrid car or add solar panels to your house – get a large tax credit
The list could go on for pages. The point you see, is that the leadership’s view of what will help America’s future is written right into the tax code. Sure, the legislators could write other kinds of laws to shape social policy but we all know that nothing works faster than an economic incentive. Besides that, the Constitution protects us from forced actions and violations of our civil rights. So, why not make the actions voluntary by giving a little tax reward to those who are socially compliant. Brilliant!
Hmmm….maybe even more can be accomplished by adding super-incentives to the tax code. More on that next time.
By Norman LeBlanc, CPA
Tax Services Group
Labels: KLR, LeBlanc, Tax, Tax Credit
About this Blog
KLR is one of New England's premier accounting and business consulting firms. With 160 team members and offices in Providence, Boston, Waltham and Newport, KLR provides a wide range of services to both individuals and businesses.
Recent Posts
- Credit Card Fees on Contributions
- Find Fraud: Know Where You Should Be Looking
- The Endless Economic Cycle
- I Want To Sell My Company But No One's Buying
- Can you identify who’s going to steal from your co...
- Last-Minute Moves to Save 2009 Taxes
- Cut Costs by Increasing Your Efficiency
- Detecting Fraud
- Hidden Savings Within Your Building
- Simple Taxes
