Friday, February 15, 2008

Stimulate This!

Time for another bitch session. The economy is tanking during an election year, so lawmakers want to do something about it. They've come up with a plan to take 170 billion dollars out of the treasury and give it to the citizens. Many of us will be getting checks that range from $300 to $1200, and if we're concerned Americans, we'll spend it. An article in explains who's eligible:

To be eligible for a full rebate, single tax filers must have 2007 adjusted gross income (AGI) below $75,000 and joint filers must have AGI below $150,000. Single filers with AGI below $75,000 will get rebates of as much as $600. Couples with AGI below $150,000 will receive rebates of up to $1,200. In addition, parents will also receive $300 rebates per dependent child; there is no cap on the number of children eligible.

The stimulus legislation allows for a 5% phaseout rate for households above the income caps of $75,000 for single filers and $150,000 for joint filers. That means the rebates of those taxpayers will be reduced by the amount of income above the cap multiplied by 5%.

This means a family of four that earned $150k will get a check for $1,800 ($1,200 for the adults plus $300 for each dependent). A family of four that earned $160k will get a check for $1300 ($1800 - $10,000*0.05 = $1300). A family of four that earned $190k will get nothing ($40,000*0.05 = $2000 > $1800).

Why does this bother me? Well, let's take a look at two groups of people.

Group A

* Bob and Kitty Katz earned $139,000 living in La Verkin, Utah. The mortgage on their 6-bedroom home on five acres costs them $1,400 a month. They want to replace the 3-year-old hot tub, but they're not very liquid right now after paying cash for their Hummer. Bob's favorite football team was the Dallas Cowboys until he took a fancy to the Patriots this year, but after the Super Bowl defeat, the Cowboys are his favorite team again. Kitty never drives faster than ten miles under the speed limit.

* Bobby and Barb E. Dahl earned $149,500 in 2007 living most of the time in Jackson, Mississippi. Their income in 2007 came entirely from investment proceeds, but their yields were so weak last year that they fired their investment manager. All three of their homes are paid for. Bobby is a member of the KKK, and Barb picks at a festering boil.

* Brock A. Lee earned $75,000 in 2007 living in Kearns, Nebraska. The monthly mortgage on his 3-bedroom house is $750. Brock drives a Corvette, his favorite band is Genesis, and he has committed more than one date rape.

* Owen Cash earned $50,000 in 2007 living in Moreno Valley, California. He bought a home with an interest-only ARM loan in 2005 and wasn't able to make payments when the new interest rate kicked in. When he got his foreclosure notice, he declared bankruptcy, trashed the house and moved into an apartment. His favorite band is The Who, and he feeds anti-freeze to the neighbor's cats.

Group B

* Eaton Wright and Liv N. Good earned $180,000 living in Palo Alto, California. They usually earn about $110,000 a year together, but Eaton sold nearly all of his stock options to make a down payment on a 2-bedroom, 1-bathroom home next to a freeway in San Francisco; the home cost them $745,000. Eaton's favorite band is Radiohead and Liv volunteers at her daughter's elementary school.

* Rocky and Sandy Beach earned $185,000 last year in Seattle, but this was unusually high. They were both laid off from their jobs and received severence packages that pushed up their income. Sandy got a contract job at Microsoft, but unless Rocky can get a job soon, they might need to cash out some of their retirement savings to make their $3,200 mortgage payment for the 3-bedroom house in Ballard. They were too frugal to see their favorite singer, Ryan Adams, when he played in January.

* Anita Shower is in financial trouble. To avoid short-term capital gains, she thought it would be a good idea to purchase ISO stock that her company in Boston offered her. She used her life's savings to pay for the stock, only to realize too late that the IRS treats purchasing the stock as income. According to the IRS, she "earned" $112,000, but her real income was closer to $70,000. Under the dreaded alternative minimum tax, she owes the government more than $17,000 in income tax. Unfortunately, her company's stock has lost most of its value under the current economic crisis, so she had to sell all her stock and borrow money to pay the IRS. If she didn't have her charity work and Bruce Springsteen albums to fall back on, she'd be in even worse shape.

What's the difference between Group A and Group B? Group A gets the stimulus refunds while Group B doesn't.

One of the great injustices of the current tax system is that the government fails to account for cost of living. Earning $150,000 in San Jose is far different from earning that same amount in Springville. In San Jose, that amount gives you a decent shot at buying a home, but a condo is a better bet for someone who doesn't want to be house poor. In Springville, that amount lets you buy a big house in a nice neighborhood and hire a housekeeper and buy garden gnomes. To the IRS, the salaries are identical.

Another problem is that the handout is based exclusively on 2007 earnings. I'm bitter because I picked 2007 to sell a bunch of stock options, which, combined with Wendy going back to work, pushed us over the cutoff point. Yes, it was great to be able to make a bunch of money last year, but it was just one year. And here's the thing. The government classifies us as too wealthy to get a piece of the $170 billion handout. In Seattle, we're smack dab in the middle of the middle class. And all my friends and neighbors who live in nicer houses and drive nicer cars are going to talk about what to do with this extra money, and I just have to take my ball and go home.

Don't make the mistake of thinking it's just this one-time tax handout that bugs me. No, sir. The IRS fails to account for cost of living in all kinds of ways. I'm fine with higher tax brackets, since people who make more money should pay a higher percentage of taxes, but why hamper the middle class' ability to save for retirement? A person who makes more than a certain amount ($140-$160k) can't contribute to a Roth IRA fund. Why? Because we're too wealthy to get a tax break when we retire? Pfff, I say. That's right. I said it! Pfff.

Maybe I'm the problem. Maybe I am really wealthy, and I just don't realize it. Yes, I'm going with that from now on. Here, let me get the check -- I make a lot of money. Or how about this? Listen, price is no object. The government thinks I'm a plutocrat.


  1. I don't even pretend to understand the tax code, but what I do know is that it scares me. This year we've moved into a new tax bracket and at the same time have to start paying back a quarter million in student loans. Is it any wonder that we don't feel like wealthy Seatllites? BTW, we will be getting our government handout this year, and no, we won't be using it to stimulate the economy.

  2. My main problem with it is that it flies in the face of reason.

    Make the government go further into debt to give people money to spend to revive the economomy that tanked because people are too far in debt.

    Anyhoo, I don't think that an $1800 check is going to change anyones life. Especially if those people made $180,000. If my maths serve me, that's 1%.

    The reason the gov't shouldn't consider cost of living is that people choose to live in expensive cities.

    I could be making twice my current salary by working in Washington DC. Unfortunately, I figure it would cost me about twice as much to live there as here, so I 'just said no.'

    I think people that live in, oh lets say seattle, for example, live there becuase they think it's worth it financially and otherwise.


    P.S. I understand the checks are coming in June. June. As in 4 months from now.

  3. Sean - A quarter million in student loans? I hope you came out of school with something better than a B.A. degree in political science.

    Botched - I agree with you about the debt issue (especially since I don't get my slice of the pie). I also agree that it won't change anyone's life, but I disagree with the 1% argument. I don't need $1800 anymore than a 0.95 neighbor who earned 'only' 150k -- especially someone who bought a house well before the housing bubble started -- but I want it. I feel like a kid who wasn't given Christmas gifts because I just bought a bunch of toys with my paper route money. "Don't be a spoiled brat. You don't NEED Christmas gifts. Go play with your other toys." What percentage of Americans earn between $150k-$300k a year? Three percent? Five percent? How much more would it strain the deficit to dole out $185 billion instead of $170 billion? For us middle class people with kids living in expensive cities, that cut-off point hurts. I hate you, Barbara Boxer!

    I also disagree with your "choice" argument. A lot of people live in San Francisco or Boston or Seattle because it's where they grew up, and it's where their families live. They live the double-income/day care lifestyle to be close to family and friends, and they're stuck in a higher tax bracket as a result. As soon as they start making middle-class incomes, they start getting penalized as if they were wealthy.

    It is worth it to me financially to live in Seattle even though the cost of living is so high, but the government doesn't have to compound the problem by not adjusting for cost of living. They also fail to adjust for inflation in a lot of instances, as happened with the AMT tax that was originally designed to force the super wealthy to pay their fair share of taxes but ended up hammering a bunch of middle class people a couple decades after the law went into effect.

    I shouldn't undercut my argument, but there are benefits to earning a high salary in a high-income city. The cutoff point for paying social security is $97k. Do I think this figure should be higher? Absolutely. But I've benefitted it from it (last year, anyway).

    The whole tax code is way to complicated and illogical. Why the write-off for mortgages but not rent? But there's a long history behind it that somewhat excuses it. This new handout was put together this year. There's no excuse for its being so exclusive.

  4. For the record, I don't think there's any way the government could factor in cost of living. The whole thing still makes me bitter.

  5. probably the largest portion of the cost of living difference is the housing. and mortgage interest it tax deductible so it's of an adjustment.

  6. One thing is for sure, and that is that the gov't starts dinging people pretty badly long before the person's income even approaches what could be considered "above middle class."

    As for bitching, how 'bout this one. I'm considered an "employer" becuase I run a business and as such, I have to pay into the unemployment insurance pool. Unfortunately, I'm not eligible for unemployment guessed it, I'm an "employer."

    Further, as an "employer" I have to pay the other 1/2 of social security payment that the "employee" doesn't make. So, since it's just me, I have to pay 2x as much into social security as the average Joe.

    While my "by choice" argument from above may be applicable, it just doesn't seem right that a single person and IBM should be considered the same by the gov't.


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  8. I understand how you feel, but you ARE talking about the Government after all. What's the logic of calling it a rebate for all of the people they ARE giving the money to, who didn't pay in? Everytime I think I couldn't get more cynical about the government, they prove me wrong.

  9. Yes. I agree. It's a pretty weird response to the economic downturn. I think there's actually a cutoff on the low end as well . . . you have to have made a minimum amount to qualify for it at all, I think. The min is pretty low.

    I thought my hundred grand in student loans was pretty bad. A quarter mil? Zoinks. I feel for you.

  10. Yes, again government is the paragon of logic. Those that pay in the most aren't eligable for the rebate. I'm glad we are just under the limit, 'cause I want a new bike and just can't seem to save for it. Thanks UncaSam!!

  11. Nice rant! And I particularly enjoyed the excessive use of stereotypes. ;-)

    I'm upset our "dear leaders" are plunging our country deeper into debt in a desperate, unsound, panic ploy to "save the economy". I understand the logic of an expenditure now that could shorten the recession- but, really, who thinks this is going to work? But political idiots will get credit for "doing something". Bahh!

    Following your stereotypical examples, you can see why they are giving the money to middle and lower income people - they spend the money instead of save it. ;-)

  12. I got nothing for the $250,000, unless of course you count my doctor wife. Two and a half more years to the end of residency. I like to tell myself that's when I can retire(cue an unrestrained punch from my wife).