It's Not Just Math

What is so special about $1 million? Is it that much more special than $999,999? Not to me. They would both represent a significant amount of income for one year -- more than I ever expect to see. What is so special about a defined benefit pension plan having a funded status (AFTAP) of 90% or 92% or 94% or 96% or 100% instead of 0.01% less than any of those magical percentages? Nothing that I can see.

Yet, much of public tax policy seems to revolve around hitting or missing these thresholds or cliffs as I think of them. Make the mark and all is well. Miss it by the smallest of margins and you fall off ... perhaps to your death.

I'm sorry. Cliffs may exist in the landscape, but putting them into tax policy is just plain stupid. I repeat, it's just plain stupid. You want to know what I really think about cliffs in tax policy? Let's move on.

I decided to read the President's version of the American Jobs Act of 2011 (AJA). If you want your own copy, you can get it at http://www.whitehouse.gov. It's 199 pages and it's not a fun read. It doesn't have a real good plot; in fact, there is no mystery in this thriller.

I am going to focus on something specific here, and I am going to tie it back to 401(k) plans. According to the current version of AJA (not Steely Dan's version or Louie Gohmert's version), a married couple filing jointly becomes more fortunate when their combined earnings equal or exceed $250,000. By my quick reading, it would suck to have combined earnings of $250,000. $2,500,000 would work out just fine, but if my earnings (combined with those of my wife) were exactly $250,000, I would be looking to find a way to give up one of those dollars to get to $249,999.

Because of the cliff-like nature of tax policy, trust me, the couple earning $249,999 would be far more fortunate than the couple earning $250,000. Their deductions (also known these days as loopholes) wouldn't go away.

What is one of those deductions? How about the one that you get for deferrals to a 401(k) plan or the one that you get for pre-tax payments of health care premiums? At $249,999, you still seem to get them; at $250,000, to quote Phil Rizzuto (that is scary), those deductions will be gone, gone, goodbye. So, after figuring in the tax bill, earning one dollar more costs you a whole bunch. That is just plain stupid.

To quote President Obama, "[I]t's not class warfare; it's just math." President Obama is a very smart man. He taught constitutional law, and I presume that he knows far more about it than I do. However, I taught math and he didn't. This is not just math (I leave the proof that it is or is not class warfare to the reader as that's what authors do in math books).

When there is a literal incentive to earn less or a disincentive to earn more, that's not just math. It's stupid. When a cliff causes you to be worse off than if you had successfully begged for a $1 lower salary, that's stupid.

Some of my readers tend Democrat, some tend Republican, some do not tend at all. This is not about that, however. You can tax the high earners more or not as you choose, but as for the AJA, it's not just math!

Washington, We Have a Problem

I reported last week on the American Jobs of 2011, President Obama's landmark jobs legislation introduced to the country during a joint session of Congress last Thursday night. In a stunning act of name-stealing, Representative Louie Gohmert (D-TX) has introduced HR 2911 -- The American Jobs Act of 2911.

Representative Gohmert's bill is not nearly as thick as President Obama's, but each, in its own way, purports that it will achieve the same goals.

The good news is that I can explain all of the provisions of Representative Gohmert's bill to you here in a clear and concise manner.

1. Effective for taxable years beginning after December 31, 2011, the corporate income tax shall be zero percent of corporate income.
2. Effective for taxable years beginning after December 31, 2011, the amount of the Corporate Alternative Minimum Tax shall be zero.

That's it. This is not an April Fool's joke.

Whose bill do you like better?

Everything You Should Know About the American Jobs Act

Ever needy for material to blog about, I eagerly awaited President Obama's address to a Joint Session of Congress where he would introduce his American Jobs Act (AJA). I listened carefully.

I did hear about cuts in FICA taxes. I did hear about small business tax credits. I really didn't hear much, though, that is relevant to what we discuss here.

So, I searched the internet. Google couldn't find text of AJA. Bing couldn't find AJA. Yahoo couldn't find AJA. Only Steely Dan could find AJA (if you get that one, you must either be old like me or old at heart).

We are supposed to learn in a week and a half how it is that the President plans to pay for this stimulus (my word, not his). Here are some things to look for (and everything on this list is 100% speculation on my part):

• Reduction in the defined contribution 415 limit to $20,000. That is, workers who can afford to make large 401(k) deferrals will not be able to get much in the way of company contributions.
• Limits on corporate tax deductions for so-called Cadillac health plans for non-union workers. That is, if your employer gives you "too" rich a health benefit, they can't get a tax deduction for all of it.
• Further erosion of the $1 million limit on deductible compensation under Code Section 162(m). As the President seems to believe that "CEOs and CFOs" make too much money, and he can't stop companies from paying that much money, he will seek to limit the tax deductions that they get. My feeling is that if you limit the deduction much more, most companies will just ignore the deductibility issue and pay their executives however they like.
• Means testing of Social Security (and perhaps Medicare) benefits so that those who are better financially prepared for retirement will not receive the full benefits to which they thought they were entitled.
• Some sort of restriction on the tax deductibility of equity compensation.

Ultimately, if the first bullet [above] becomes reality, it may result in joblock. That is, employees currently in the workforce will have difficulty being able to retire and thus will not open up jobs to those not in the workforce. Of course, it's possible that all of my thoughts are incorrect and misguided.

Perhaps Donald Fagan and Walter Becker know.