The Cruelest Taxes

It's amazing how politicians, Republican and Democrats alike, LOVE to tax and spend. They need problems even more than dentists need cavities.  The major difference is that dentists actually fix problems, which are NOT their fault, whereas politicians CREATE problems then "solve" them - usually in a way that makes them worse.  Imagine a dentist who filled one cavity and created two new ones!

Yesterday, I wrote "The Fallacy of Federal Job Creation" with emphasis on some aspects of the program that do very little to fix employment.  Tax breaks, like the kind John Kennedy and Ronald Reagan pushed through, absolutely resulted in periods of prosperity. 

The "Stimulus Plan" DOES contain tax breaks, but it misses two of the most important and helpful to Americans, especially benefitting the ones most in need like poorer Seniors. 

Many of us are unemployed and either living off an IRA or 401-K.  If you withdraw early, i.e before 59 and a half, you are subject to a surtax.  The Federal surtax is a whopping 10%, while states' vary.  In, California where I live, the surtax is an additional 2.5%, thus a total of 12.5%. Needless to say, if you need early withdrawal you're hurting, since the tax disincentivizes you from accessing what may be your last asset. You can borrow from your IRA or 401-K, but that requires return of the funds rather quickly to avoid the penalty.  Think about it for a moment, the people who saved and are having trouble finding jobs are being PENALIZED.

If there was ever a chance to repeal that tax its now by executive order - without the endless debates and committees that destroys even good legislation. (Good legislation is a bit of an oxymoron).

But another cruel tax is the one on savers, especially on old folks who receive ridiculously low interest rates anyway.  This is a disincentive from saving, which we badly need to restore to more adequate levels.  In fact, for a period of time last year and this year, interest rates on TBills went NEGATIVE.

But of course, the reasons for low rates are simple.  If you give people no other safe alternatives, this induce them to take risk in search of higher returns.  Secondly, keep the budget deficit from ballooning yet further by  having to pay higher rates on our already out-of-control debt.  Sadly for borrowers, for would the beneficiaries, these low rates don't help either. Loans are rather hard to come by and it is common for credit card companies to jack up rates to more than 25% at the drop of a hat. For these reasons, I expect low interest rates to be kept low for a long time or at least until market forces simply overwhelm the Fed.

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Marko's Take