Tuesday, April 12, 2016

Fair or Foul?

It is tax filing time and there is an interesting story circulating about the recent move of hedge fund manager David Tepper from high income tax New Jersey to no income tax Florida.

David Tepper
Photo Credit: Bloomberg TV

Tepper's change of residence caused Frank Haines, a budget and finance officer with the New Jersey Office of Legislative Services to tell a State Senate  committee, “We may be facing an unusual degree of income-tax forecast risk,” this year, citing Tepper’s move late last year as a prime cause for concern.

Tepper has been considered by many to be New Jersey's wealthiest resident. Forbes puts his wealth at $11.2 billion. One estimate I saw put his income over the last three years at over $5 billion.

New Jersey has a top income tax bracket of 8.97%. 40% of its total budget comes from the income tax. And 1/3 of income tax revenues come from the top 1% of income earners alone.

Needless to say, when a guy like Tepper leaves your state it can leave a pretty significant hole in your budget.

The situation is similar in California and many other states. The top 5% of income earners in California pay 70% of the income taxes and the top 1% pay half of the total tab. To make matters worse, California relies on the income tax for 67% of its total state revenues.

California has become dangerously dependent on those top income earners pulling in large capital gains and income from stock options. The reality in California is that the share of income of the top 1% is very volatile in that it is so dependent on stock options, the stock market, real estate investments and capital gains.

This chart shows the volatility in capital gains as reported by California taxpayers since 1986.

Thank you Google, Facebook, Amazon and many others who made it happen. Thank you also to Ben Bernanke and Janet Yellen and low interest rates.

However, can California keep the people in the state who made these ideas a success?  Can they attract new talent and capital to the state over the long term with the tax, regulatory and political climate they currently have in place?

And what happens to California if interest rates climb and tech stocks fall?

Of course, people can leave a state and move to another in the United States of America if they think their money will be treated a little more kindly in another locale.

It is a different story if you are thinking about leaving a country. However, as I wrote in my recent post, "Millionaire Migration", it is happening more and more around the world.

I think it is always instructive around tax time to see who is paying the income tax bill in the United States. We often hear that the rich are not paying their "fair share".

The facts are that the top 1% are paying 38% of all federal income taxes. This is double their share of income. The top 1% are those with over $500,000 of income.

The top 10% is paying 70% of the tax burden.

The top half is paying 97% of all income taxes.

The bottom half is paying 3% of all income taxes. That is those with adjusted gross incomes of $40,000 or less.

Is it fail or foul?

I will leave that to you.

However, if after filing your tax return you do not think that you have paid your fair share, you are free to make a contribution to the U.S. Treasury to reduce our nearly $19 trillion in debt.

The contribution is tax-deductible and considered as a charitable contribution if you itemize.

$5 million was donated for this purpose last year. I could find no information on the number of individuals that were so generous, but I can assume it was extraordinarily small. For comparison, U.S. income tax collections last year were $1.5 trillion.

If you are inclined to contribute here is the information from the U.S. Treasury website.

There are two ways for you to make a contribution to reduce the debt:

At Pay.gov, you can contribute online by credit card, debit card, PayPal, checking account, or savings account.

You can write a check payable to the Bureau of the Fiscal Service, and, in the memo section, notate that it's a gift to reduce the debt held by the public. Mail your check to: 

Attn Dept G
Bureau of the Fiscal Service
P. O. Box 2188
Parkersburg, WV 26106-2188

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