Search: low-income

We Did It: Bank of America Dropping $5 Debit Card Fee Proposal

This article was written by Flexo in Banking. 22 comments.

After Wells Fargo, Chase Bank, SunTrust Bank, and Regions Bank dropped their plans for debit card fees yesterday, the largest bank in the United States, the only bank holding onto its policy of eliminating unprofitable customers by annoying them with inconvenient fees, dropped their own plans to enact a $5 monthly debit card fee in 2012.

The Wall Street Journal is reporting that thanks to customer backlash and likely due to a public relations nightmare, the bank is reversing its policy. It’s a smart move, but is it too late? Bank of America has done a great job burning an imagine in customers’ minds of a bank that is willing to sacrifice its customers — not to recover from a potential loss, but to recover from a lower profit due to regulators’ new rules against excessive interchange fees. Corporations are expected to look for profit under every rock, but this particular type of fee hurts low-income customers much more than high-income customers. You would have been able to avoid the potential fee by having a significant balance of deposits held at the bank, much more than the typical customer might hold.

On Twitter, Michael Kitces from kitces.com said in response to my comment about the fee cancellation, “I think people that BoA didn’t want as customers still got the message loud & clear, even if BoA drops the fee now.” Kyle from Amateur Asset Allocator responded, “Doesn’t affect my attitude one way or another. If I were affected, I’d probably just go to cash-only instead of using the debit card.”

This doesn’t affect plans for Bank Transfer Day. This fee could have been the wake-up call consumers needed to gain the extra motivation to move to a credit union. As we’ve seen with the interchange fee regulation, a window of potential profit closed in one area leads to another window opening somewhere else. Bank of America and the other banks who dropped plans for a debit card fee will find a way to earn their profits, and the next fee may not be nearly as transparent and well-marketed as the debit card fee.

Keep an eye on those bank statements.

Wall Street Journal

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Do Millionaires Pay Less Tax Than Their Secretaries?

This article was written by Flexo in Taxes. 14 comments.

Warren Buffett has frequently claimed that he pays less tax as a percentage of his income that his secretary. President Obama has jumped on this as a basis for the Buffett Rule, a new proposed tax code that ensures that millionaires pay their fair share of income tax.

According to Buffett, his effective tax rate is 17.7 percent while the effective tax rate for his secretary, who earns $60,000, is 30 percent. There are two primary reasons that Buffett’s tax rate is so low. First, only the first $100,000 or so is subject to the payroll tax. For the secretary’s income, all is subject to this tax, while only a small portion of Buffett’s income is subject. Also, most of Buffett’s income is taxed at the lower long-term capital gains rate of 15 percent rather than the tiered ordinary income rates that are in effect for his secretary’s income.

It is also fair to consider why the secretary’s tax rate is so high. I may have to run some calculations again to check, but before I owned my own business, my effective tax rate tended to be 15 to 18 percent considering federal and state income taxes as well as payroll taxes.

Someone with a $60,000 income will also spend a larger percentage of this income on expenses subject to sales tax, increasing their total tax burden more dramatically than someone whose income is high enough so that it can mainly remain in investments or savings.

The Tax Policy Center has offered data that show that while Buffett may pay a smaller tax rate than his secretary, this is not the case on average. The research group estimates that this year, millionaires, or households earning $1 million in income or more, will pay an average of 29.1 percent of their income in federal taxes while households earning between $50,000 and $75,000 will pay an average of 15 percent. Buffett and his team do not seem to follow the norm; in fact, their tax roles are reversed.

Historically, tax situations that favor the wealthy are friendlier than they have ever been. In 1986, the top marginal federal income tax rate was 50 percent. Throughout the 1970s it was 70 percent.
In 1964, it was 77 percent. Throughout the 1950s, it was 91 or 92 percent. In the mid-1940s, the highest bracket was 93 percent. The income required to fall into the top box varied each year, but not by so much that someone earning $1 million per year in today’s dollars would have found him or herself anywhere other than in the top bracket. These highest tax brackets applies to households earning over at least $1 million in today’s dollars. Individuals today need to earn only $380,000 to be placed into today’s highest tax bracket.

Beyond the rates, the poorest and the wealthiest all have ways to reduce their tax bill, though depending on your point of view, the other group seems to have more opportunities to do so. Over the long term, tax policy in the United States has shifted greatly in favor of wealthy households and corporations, while assistance plans for the poor have been facing more scrutiny.

“People who are doing quite well and worry about low-income people not paying any taxes bemoan the fact that they get so many tax breaks that they are zeroed out,” said Roberton Williams, a senior fellow at the Tax Policy Center. “People at the bottom of the distribution say, ‘But all of those rich guys are getting bigger tax breaks than we’re getting,’ which is also the case.”

The Buffett Rule, intended to ensure that wealthiest households pay their “fair share” to avoid situations like the one between Buffett and his secretary, could be designed to have no effect on the “average” household earning more than $1 million, those households that conform to the averages predicted by the Tax Policy Center.

Associated Press

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The Buffett Rule: Tax for Millionaires

This article was written by Flexo in Featured, Taxes. 38 comments.

As a continuation of President Obama’s jobs proposal (economic stimulus) for curbing spending and increasing federal government revenue, the administration is taking a cue from famous investor, Warren Buffett. On many occasions, Buffett has claimed that wealthy Americans do not pay a fair share of the tax burden relative to their means to do so. In his famous example, Buffett describes his effective tax rate as being lower than his secretary’s.

Many wealthy people earn income through investing returns, not ordinary income, which are taxed at a rate of 15 percent rather than a marginal rate schedule with a maximum of 35 percent in 2011.

Warren Buffett Critics of Buffett’s outspoken desire to reform the tax code say that Buffett can help reduce the deficit by donating a portion of his net worth to the U.S. Treasury, as the government allows for such donations. Those who feel that Buffett’s comments, if they influence policy, could hurt them today or in the future say that Buffett could voluntarily not take deductions that lower his tax liability, but like a good capitalist, Buffett will continue to take advantage of every avenue the tax code provides his for saving money.

Economists have crunched the numbers to show that tax law changes fashioned after Buffett’s statements would not raise enough revenue to cover the gap between government spending and revenue, but there doesn’t seem to be any implication by the plan’s supporters that this would be the case; cutting back cable television service won’t allow a poor family to afford a house, but it’s still a beneficial change.

People who once respected Buffett’s investing prowess now call him a socialist, despite the fact he’s one of the most successful capitalists the modern world has seen. I have no interest in defending Buffett’s philosophies, but he is a literal capitalist, as through his company Berkshire Hathaway he provides the means in the form of capital for other companies to thrive. Like a good capitalist, Buffett invested $5 billion in a struggling bank, with conditions only he could negotiate, such as a significant discount on the investment and influence among management for operational decisions.

To take advantage of Warren Buffett’s name, the president is informally calling his tax-related measures the “Buffett Rule.” If I were Warren Buffett, I wouldn’t my name attached to a politically-charged discussion even if I believe in the core aspects of the proposal. Buffett doesn’t mind that his name is being used in such a manner and is publicly supporting the measure.

What’s included in the Buffett Rule

Simply put, the Buffett Rule is a minimum tax on taxpayers with an income over $1 million. This would replace the misdirected Alternative Minimum Tax (AMT). The original purpose of the AMT was similar: wealthy households should pay a fair share of taxes. Over time, though, as the income range for middle class grew, the AMT was not automatically adjusted. The AMT began to hit an increasing number of families who would not consider themselves wealthy.

In addition, the Buffett Rule would limit the tax deductions available to families in this income range and end subsidies to major corporations such as oil companies.

Another key to the revenue portion of Obama’s proposal is to let the tax cuts enacted under President Bush expire for couples with incomes over $250,000. That’s not necessarily part of the Buffett Rule, and the proposal has been making the rounds since at least the beginning of Obama’s presidency.

A Congress unfriendly to tax increases will make passage of the Buffett Rule difficult. Wealthy families believe they are already paying their fair share of the tax burden and want to see low-income families pay more. According to the U.S. Census, the gap between the top and the bottom of the income scale has expanded to its widest point in history, and a situation in which both the rich and the poor feel the government unfairly discriminates against them will not lead to a solution.

The desired outcome in this case would be enough revenue to cover the government’s obligations plus the feeling among the systemically lower class that they have a fair opportunity to succeed and a feeling among the wealthy that they have an obligation to pay for a representative bulk of the country’s expenses.

Photo: Aaron Friedman

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Save Money By Not Having Children

This article was written by Flexo in Family and Life. 35 comments.

I don’t have children; perhaps I will at some point, but I don’t see kids in my immediate future. It’s not due to the cost of raising children, though for many years, I believed I wasn’t in a financial position to provide all that I would want to provide to a child growing up.

A few weeks ago, this comic from xkcd was making the rounds among my friends on social media websites. The comic increased the level of smugness among single men, single women, and dual-income-no-kids couples, while tacitly angering those who have chosen to bring miniature humans into the world, particularly those who have realized the implied truth of the comic — the smaller bank accounts and lighter wallets.

Save money by not having children

I never understood the appeal of those family window decals in the first place. They deserve the same derision as those “My kid is an honor student” bumper stickers. It’s great to have pride in accomplishments, but there is no need to announce successes to strangers who haven’t asked about the academic performance of your family. I don’t think there’s a need to share reproductive accomplishments, either, as those family decals seem to do. Perhaps this is my bias as a non-parent; would my opinions change after I have kids?

The above comic illustrates that the typical couple trades in significant wealth for the blessing of children. To generalize, happy and well-adjusted parents might say you can’t put a price on the positive experience of nurturing a family, while a couple sans enfants par choix might laugh all the way to the bank, directing the hundreds of thousands of dollars saved per each non-existent young adult towards retirement, fun, business opportunities, and charity.

According to a cost calculator from BabyCenter, a family earning over $100,000 in an urban area in the northeast United States could expect to pay $500,000 for rearing a child through college, including tuition for a public college. Choose a private college and the cost increases to $530,000. Alternatively, a family could reduce this cost by requiring children to pay their own way through college.

In an article I wrote last year for U.S. News and Yahoo Finance, I suggested people could save money by, among other things, choosing not having children. This engendered a a vitriolic response from parents offended by the implication children — their children, specifically — were nothing more than a waste of money. For those who have not had children, though, continuing to not have children is a legitimate choice. Most decisions in life are temporary, but once you have children, you cannot un-have them. This permanence, while a beautiful life-affirming experience, is expensive, and if having children by choice, families should consider the financial consequences.

The idea of having children is one of those special conversations where the decision isn’t always about the bottom line. Finances must always play a role, but the choice isn’t always logical in nature. How strong a role should finances play in the decision to have children? And if finances pay a strong role, does it follow that low-income or poor families shouldn’t procreate?

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Low Income Families Paid More for College While Everyone Else Paid Less

by Flexo

Sallie Mae and Ipsos Public Affairs, a research company, shared some good news for college students and their families. In the latest research results, gleaned from a representative sample of 1,600 undergraduates and their families, the total amount paid for a year in college has decreased. With tuition costs increasing every year faster than the ... Continue reading this article…

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Chase Increasing ATM Fee to $5

by Flexo

Chase Bank can’t seem to stay out of the news. Last week, I mentioned that the bank was considering limiting debit card transactions to $50 or $100 as a protest against the industry’s regulation of interchange (swipe) fees. Today, there is news that the bank has increased the ATM fee for non-customers to $5 in ... Continue reading this article…

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Bank Branches Abandon Poor Communities

by Flexo

Whether banks are still dealing with the effects of the 2008 financial crisis, merging with other institutions, or taking advantage of increased automation opportunities, brick and mortar bank branches are closing more frequently than new locations are opening. According to the FDIC, 2010 was the first year in fifteen years that the balance tipped in ... Continue reading this article…

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