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While most of America is suffering through one the worst economic downturns in U.S. history, the Obamas are living the high life at your expense. During 2011, U.S. taxpayers spent an astounding 1.4 billion dollars on the Obamas. Meanwhile, British taxpayers only spent Read more…
Michael Snyder: Barack Obama has destroyed the future of America in order to improve his chances of winning the next election. Under Obama, 5.3 trillion dollars has been ruthlessly stolen from our children and our grandchildren. That money has been used to pump Read more…
Elliott Gue: Penn Virginia Resource Partners LP owns and manages 804 million tons of coal reserves primarily in Central Appalachia, though the firm’s portfolio also includes producing properties in Northern Appalachia, the Illinois Basin and New Mexico. Read more…
There is a huge political debate going on about the national debt and the debt ceiling. You can’t open a Web page, newspaper or magazine without reading the concerns of government officials and everyday Americans. Most pundits believe the debt ceiling debate will be resolved before the government defaults. But that’s not guaranteed. And even if Congress does manage to kick the can down the road a bit, we’re all concerned about how exactly they’ll do so, and we’re concerned about the next steps the government will take to get the national debt under control.Â
We’ll give you some background here on the national debt, debt ceiling and the political debate. And, we want to remind you that even in the face of crisis, you can protect yourself and profit.
What Is the National Debt?
Here in the U.S., the Treasury Department is allowed to borrow money to keep the government functioning. They do this by selling Treasury bills, notes, bonds, and savings bonds to individuals, corporations, state or local governments and foreign governments. The national debt is the amount the United States government owes the buyers for these Treasury instruments.
The national debt as of this week is more than $14 trillion.Â
What’s the Debt Ceiling?
The debt ceiling is the maximum amount of money the government is allowed, by law, to borrow to meet payment obligations on all types of government programs such as Social Security, Medicare, tax refunds, foreign aid, civil servant and military salaries.
Before 1917, Congress had to approve borrowing each time there was a budget shortfall. The law establishing a debt ceiling in the U.S. was passed in 1917 to give the federal government the flexibility to borrow within a set limit based on that particular year’s budget. World War I funding was the major impetus for this change.  Â
Then, in 1974, under the Congressional Budget Act, Congress was authorized to set a debt ceiling to keep the government operating within financial bounds whenever the budget was not balanced. Congress has raised the debt-ceiling several times over the last decade to allow the government to borrow more money to cover payment obligations.
The debt ceiling is currently set at $14.294 trillion. And, once that ceiling is reached, the government cannot legally continue to spend unless the debt ceiling limit is extended by Congress.Â
What’s All the Excitement About?
Since it’s up to Congress, there is a huge political brouhaha in Washington. You’ve heard in years past that the government needs to increase revenues, rein in spending and balance the budget. And depending on whom you speak with, the path and the timeframe to accomplish that differ greatly. But the debate is much more urgent today because of the sheer size of our debt load.  Â
The threat of not raising the ceiling and not showing progress toward a balanced budget means U.S. creditors may lose confidence in the U.S.’s ability and willingness to pay. If we hit the ceiling, government payments could actually stop! That has never happened. In the past, the debt limit has always been increased. That’s not to say the path to get there has been smooth. But the U.S. Treasury has never failed to pay on its obligations as a result of reaching the debt ceiling.Â
Because the current global economy is unstable, even the unlikely possibility that the U.S. could default is a destabilizing factor worldwide. The markets have been and will continue to react until a resolution is reached.Â
Current Hubbub in Washington
Both the Republican and Democratic parties recognize the danger zone. And they know it would be beyond irresponsible to allow America to default. Yet they are not above using the circumstances to further their political agendas. And with the national debt so large in relation to gross domestic product, the political debate is heated. It’s about cutting government-funded programs — some of which are popular social safety nets — and about the other major political hot button, increasing taxes.Â
So you can imagine the fireworks. People say they’re all for cutting programs … until those cuts actually affect them. They say it’s okay to increase taxes … as long as it’s not their taxes that are increasing. And each political party has its own constituent interests to push forward and protect.
The Obama administration has asked Congress to raise the limit, warning that failure to act could lead to a government default and drive investors into a tizzy well before that.Â
On the other side, House Speaker John Boehner (R., Ohio) told the Economic Club of New York that any increases in the government debt limit should only be approved if deeper cuts are made to spending.Â
His remarks came after Senator Charles Schumer (D., New York), accused Mr. Boehner of “playing with fire” by using the debt limit to force spending cuts and budget restrictions. Mr. Schumer also said he believed the debt limit increase should be approved by mid-summer to reassure nervous financial markets.
Is There Another Way?
In the past, it has been suggested that the debt ceiling be replaced with debt targets for lawmakers to work within. This type of approach would eliminate the imminent threat and drop-dead date approach of the debt ceiling. But most of the possible methods for benchmarking a debt target would give the U.S. Treasury more influence over financial policies. So there is concern in some camps about that approach.
Alternatively, some believe it would be helpful to revert back to the method used before the 1974 Congressional Budget Act and raise the debt level simultaneously with the budget. This would eliminate the threat of government shutdown, keep the budget in lawmakers’ purview and focus discussion on each year’s budget decisions.Â
Undoubtedly there is more debate about this subject to come.
Where Are We Now?
Earlier in the year Treasury officials pointed to May 16 as the day the U.S. would hit the debt ceiling. Since then they have found ways to delay some payments, pushing the ultimate deadline to early August.Â
But, the federal budget deficit continues to increase with the U.S. government spending more than it collects. And the government continues to borrow more through the sale of Treasuries.
We are relatively sure a political compromise will be reached before the deadline. And we are also sure there will continue to be more debate, posturing and negotiating in Washington until that happens … and well beyond.Â
We suggest you stay tuned …Â
But regardless of whether a last-minute deal is reached to avert a default, the long-term crisis won’t be solved unless America’s lawmakers come up with a REAL plan to bring our debt down. And I just don’t think they have the political willpower to do so.
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike
Dow down 83 points yesterday. Gold down $25.
We’re waiting for a sell-off…either at the end of QE 2…or in anticipation of it. When will it come? We don’t know, but it won’t keep us waiting forever.
Meanwhile, we are seeing more and more rich-bashing in the press.
Most people hate the rich. And why shouldn’t they?
The rich are good at hogging the good things in life. That’s why they’re rich, after all.
They get the fancy digs. The fancy cars. The fancy girlfriends.
You see them enjoying life in business class seats, while you ache in economy. You see them pulling their Mercedes and Audis into their big garages, while you make do with a humble split-level on the wrong side of time. And their wives always look like they just came out of a beauty spa….
Their stocks are going up…while you can’t find a job!
The rich learn how to manipulate the system for their own benefit. That’s the way it always works. Money likes power. Power likes money. Usually, they find a way to work together.
The rich howl about how much in taxes they pay. They whine about ‘soak the rich’ proposals. They kvetch about ‘giveaways’ to the zombies. But, they are probably more in control than they appear.
Take Mark Zuckerberg for example. Please. Here’s a guy who says he would be “cool†if they raised his income taxes. In this refrain, he joins the sanctimonious choir headed by Warren Buffett, Ted Turner, and other do-gooders.
Well, guess what. You know why they don’t mind an increase in the income tax rate? It’s because
1) they are so rich that the marginal utility of money for them is close to zero. They won’t even notice an income tax hike. Money hardly counts when you have as much of it as they have. It is like an extra snowball to an Eskimo. It just doesn’t make any difference.
2) They don’t pay much in income taxes anyway. They tend to have their wealth in stocks. And they make most of their money from stock market gains, which aren’t taxed as regular income; they’re taxed as capital gains.
Here’s Newsweek with the story:
It’s easy for Mark Zuckerberg to say he’s ‘cool’ with raising income-tax rates. Because it won’t affect him.
It drives economist Bruce Bartlett crazy every time he hears another bazillionaire announce he’s in favor of paying higher taxes. Most recently it was Mark Zuckerberg who got Bartlett’s blood boiling when the Facebook founder declared himself “cool†with paying more in federal taxes, joining such tycoons as Bill Gates, Warren Buffett, Ted Turner, and even a stray hedge-fund manager or two.
Bartlett, a former member of the Reagan White House, isn’t against the wealthy paying higher taxes. He’s that rare conservative who thinks higher taxes need to be part of the deficit debate. His beef? It’s a hollow gesture to say the federal government should raise the tax rate on the country’s top wage earners when the likes of Zuckerberg have most of their wealth tied up in stock. Many of the super-rich see virtually all their income as capital gains, and capital gains are taxed at a much lower rate—15 percent—than ordinary income. When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.
“It’s easy to say ‘Raise taxes’ when you know you’re not going to have to pay those taxes,†Bartlett says. “What I don’t hear is ‘Let’s raise the capital-gains tax.’
Soaking the Rich originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.
Read more here:
Soaking the Rich
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
Well… There sure are a bunch of different opinions about what the effects of Bin Laden’s death will be… Yesterday, it sure seemed as though it was a good thing to happen to the dollar, right about the time the dollar was about to head to doomsville…especially against gold and silver… I guess all those people selling their metals yesterday thought that by killing our #1 enemy the geopolitical problems of the world just went away… I’m afraid and sorry to say that the geopolitical problems of the world are not going away; and if anything, I would think that they are now heightened… We could see a spark of retaliation… I mean, didn’t we get very upset when we saw “them†dancing in the streets after 9/11?
OK… So… Silver really got sent to the woodshed yesterday after having to go out, find its own switch, and then get whipped with it! (Used to happen to me on the farm!) You see, silver saw its margin requirement raised, which was really a blow to the metal. The commodities exchange announced yesterday that they were raising the minimum amount of cash that must be deposited when borrowing from brokers to trade futures, from $14,513 to $16,200…
I’m not saying this just to fill space here, folks… But the folks at the commodities exchange sure put the “speculative element†to bed for silver, eh? Now… When I came in this morning, the silver price had gained back $1.50 of the $5 it lost yesterday… But as I write, the recovery in silver is fading fast…
You know… Many years ago, I banged on Fed Chairman Big Al Greenspan for not raising the margin requirements on equities, especially after his “irrational exuberance†statement… But, that’s water under the bridge…
So… This morning we’re looking at one of those “risk off†days, with the dollar, yen (JPY), and Swiss franc (CHF) all in rally mode. US Treasury yields are heading back down again, or have headed back down I should say… Which makes no sense to me… The Fed’s buying program is winding down, which underpinned yields, and kept them from rising too much, but with that going away, one would think that with the main buyer gone from the markets, that Treasuries would be getting weaker, and weaker… But NOOOOOOOOO! Instead they are getting stronger and stronger… Where are the bond vigilantes? And, isn’t the US still trying to figure out their debt ceiling? I thought so!
So… A dollar rally going on this morning… With very little in the way of data in the cupboard for us to chew on… We will see the color of factory orders, but that’s it…
I see where US Treasury Secretary Geithner extended the debt-ceiling deadline to August 2nd. Apparently, Treasury Secretary Geithner paid his taxes this year, because he mentioned that tax receipts were better than expected! HA! So the deficit spending flag wavers are now dancing in the streets, because this just means that now the US can continue to deficit spend even longer without facing the music! I shake my head in disgust…
Well… There was good news in the world that wasn’t tied to OBL… And it came from Brazil… Yes, the country that has done nearly everything they possibly could to stem the appreciation of the real (BRL), saw a very strong trade surplus, which leads me to ask the question, “Why penalize the currency when the strength of the currency isn’t hurting exports?†Brazil’s trade surplus reached $5.03 billion in the first four months of this year, a 132% increase from the comparable period last year, the government announced. This year, exports from Brazil totaled $71.4 billion, while imports were worth $66.67 billion.
Remember last week, when I explained the interest rates on non-deliverable currencies, like China, Brazil and India? I told you that speculators drive the interest payments that could be paid, down, by making it so expensive to buy the currency forward? Well… That’s what we’re seeing in Brazil right now… Everyone wants a piece of Brazil these days…and that might not be a good thing… But as long as you’ve listened to these warnings about only using the speculative portion of your investment portfolio to buy reals, you’ll ride the waves…
Chris Gaffney gave me his Economist from last week to read on the plane ride home on Sunday, and I found a piece in the magazine on Greece and their debt situation… I was reading it, and thinking to myself… This is the same stuff I wrote about a couple of weeks ago! You don’t think? Nah… Just a co-inky-dink… But, to repeat… Here’s my thought from the April 19th Pfennig…
When is Europe going to restructure the Greek debt once and for all? Rather than have these problems continue to come back and bite them in the rear every time it looks like the Eurozone is ready to move forward… Again, I’m feeling quite regal this morning, and once again, if Chuck were king… Look, most of the Greek debt is either held by the ECB or Greek Banks… So take the hit on a maturity extension and get it over with! Greece has this maturity schedule: 2011: 39.7 billion, 2012: 45.2 billion, 2013: 40.6 billion…
Yes… That was me! And now The Economist agrees… Extend the maturity on the debt, forego some payments of interest and be done with it! And then maybe, just maybe, we could go six months without hearing about Greek debt!
I’m reading my friend John Mauldin’s new book, Endgame, and he sure spends a lot of time talking about and referring back to Greece and their debt… I’m only part way through the book, but so far, I like it…
The Reserve Bank of Australia (RBA) left rates unchanged last night (no surprise here), but maintained a clear tightening bias… I think the thing that stung the Aussie dollar (AUD) – bringing it back to $1.08 after hitting an all-time high of $1.1012 yesterday – was the statement by the RBA after the rate announcement that… “The Australian dollar strength was exerting additional restraint on the trading sector  I would have to say I agree with them… It’s not like I didn’t enjoy seeing the Aussie dollar rise to $1.10, it just didn’t look right to me… And like the RBA said, the level was adding additional restraint… There’s a time and place for A$1.10, but I don’t think we’re there yet… So, I think seeing profit taking is healthy…
Then there was this… You know… The number one question I’m asked all the time, is “Do I think that the government will confiscate everyone’s gold like they did in the ‘30s?†And I always have the same answer… While I wouldn’t put it past this government to attempt to do it… I doubt they would… You see, in the ‘30s gold was a part of our money, tied to the dollar… If the US wanted to increase their debt spending, they had to have the gold to back it, so they took/stole/confiscated everyone’s gold. But gold isn’t a part of our money any longer, and so, why would the government need to take everyone’s gold again? Besides, there are too many of us that now own gold, and the pitchforks and rakes would be raised!
Well… I see where the great mind, Richard Russell, had something to say about this question of whether the government would take people’s gold again…
I’ve thought about this at length, and I’ve arrived at what I believe to be the correct answer. The answer is – No, the government will definitely not call in the gold. The simple reason is that a tremendous amount of gold is held in very powerful hands. Gold (GLD) and gold bullion is held by pension funds, university endowment funds, large powerful hedge funds, corporate reserves, and state treasuries.
In other words, my thesis is that gold is now in such powerful hands (much of it even political) that there’s no way that the US government would call in gold. Furthermore, what purpose would it serve if the US did call in the gold? In 1933 Roosevelt called in privately-held gold and then raised the price of gold from $20.22 to $35 an ounce, this in an effort to reinflate the depression-laden economy.
Thanks to Richard Russell…one of my fave writers!
To recap… Experts are debating the Bin Laden effect with varying opinions… But, in Chuck’s eyes, the geopolitical problems of the world continue to ramp up, with the fear of retaliation. It’s a risk off day, with dollars, Treasuries, yen, and francs all rallying… Silver saw a huge loss yesterday after the CME raised the margin requirement for the metal. Brazil’s trade surplus widened, which makes one wonder why the Brazilian government has spent so much on trying to keep the real from getting strong!
Chuck Butler
for The Daily Reckoning
Raising the Margin Requirements originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2
.
Read more here:
Raising the Margin Requirements
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
Well… There sure are a bunch of different opinions about what the effects of Bin Laden’s death will be… Yesterday, it sure seemed as though it was a good thing to happen to the dollar, right about the time the dollar was about to head to doomsville…especially against gold and silver… I guess all those people selling their metals yesterday thought that by killing our #1 enemy the geopolitical problems of the world just went away… I’m afraid and sorry to say that the geopolitical problems of the world are not going away; and if anything, I would think that they are now heightened… We could see a spark of retaliation… I mean, didn’t we get very upset when we saw “them†dancing in the streets after 9/11?
OK… So… Silver really got sent to the woodshed yesterday after having to go out, find its own switch, and then get whipped with it! (Used to happen to me on the farm!) You see, silver saw its margin requirement raised, which was really a blow to the metal. The commodities exchange announced yesterday that they were raising the minimum amount of cash that must be deposited when borrowing from brokers to trade futures, from $14,513 to $16,200…
I’m not saying this just to fill space here, folks… But the folks at the commodities exchange sure put the “speculative element†to bed for silver, eh? Now… When I came in this morning, the silver price had gained back $1.50 of the $5 it lost yesterday… But as I write, the recovery in silver is fading fast…
You know… Many years ago, I banged on Fed Chairman Big Al Greenspan for not raising the margin requirements on equities, especially after his “irrational exuberance†statement… But, that’s water under the bridge…
So… This morning we’re looking at one of those “risk off†days, with the dollar, yen (JPY), and Swiss franc (CHF) all in rally mode. US Treasury yields are heading back down again, or have headed back down I should say… Which makes no sense to me… The Fed’s buying program is winding down, which underpinned yields, and kept them from rising too much, but with that going away, one would think that with the main buyer gone from the markets, that Treasuries would be getting weaker, and weaker… But NOOOOOOOOO! Instead they are getting stronger and stronger… Where are the bond vigilantes? And, isn’t the US still trying to figure out their debt ceiling? I thought so!
So… A dollar rally going on this morning… With very little in the way of data in the cupboard for us to chew on… We will see the color of factory orders, but that’s it…
I see where US Treasury Secretary Geithner extended the debt-ceiling deadline to August 2nd. Apparently, Treasury Secretary Geithner paid his taxes this year, because he mentioned that tax receipts were better than expected! HA! So the deficit spending flag wavers are now dancing in the streets, because this just means that now the US can continue to deficit spend even longer without facing the music! I shake my head in disgust…
Well… There was good news in the world that wasn’t tied to OBL… And it came from Brazil… Yes, the country that has done nearly everything they possibly could to stem the appreciation of the real (BRL), saw a very strong trade surplus, which leads me to ask the question, “Why penalize the currency when the strength of the currency isn’t hurting exports?†Brazil’s trade surplus reached $5.03 billion in the first four months of this year, a 132% increase from the comparable period last year, the government announced. This year, exports from Brazil totaled $71.4 billion, while imports were worth $66.67 billion.
Remember last week, when I explained the interest rates on non-deliverable currencies, like China, Brazil and India? I told you that speculators drive the interest payments that could be paid, down, by making it so expensive to buy the currency forward? Well… That’s what we’re seeing in Brazil right now… Everyone wants a piece of Brazil these days…and that might not be a good thing… But as long as you’ve listened to these warnings about only using the speculative portion of your investment portfolio to buy reals, you’ll ride the waves…
Chris Gaffney gave me his Economist from last week to read on the plane ride home on Sunday, and I found a piece in the magazine on Greece and their debt situation… I was reading it, and thinking to myself… This is the same stuff I wrote about a couple of weeks ago! You don’t think? Nah… Just a co-inky-dink… But, to repeat… Here’s my thought from the April 19th Pfennig…
When is Europe going to restructure the Greek debt once and for all? Rather than have these problems continue to come back and bite them in the rear every time it looks like the Eurozone is ready to move forward… Again, I’m feeling quite regal this morning, and once again, if Chuck were king… Look, most of the Greek debt is either held by the ECB or Greek Banks… So take the hit on a maturity extension and get it over with! Greece has this maturity schedule: 2011: 39.7 billion, 2012: 45.2 billion, 2013: 40.6 billion…
Yes… That was me! And now The Economist agrees… Extend the maturity on the debt, forego some payments of interest and be done with it! And then maybe, just maybe, we could go six months without hearing about Greek debt!
I’m reading my friend John Mauldin’s new book, Endgame, and he sure spends a lot of time talking about and referring back to Greece and their debt… I’m only part way through the book, but so far, I like it…
The Reserve Bank of Australia (RBA) left rates unchanged last night (no surprise here), but maintained a clear tightening bias… I think the thing that stung the Aussie dollar (AUD) – bringing it back to $1.08 after hitting an all-time high of $1.1012 yesterday – was the statement by the RBA after the rate announcement that… “The Australian dollar strength was exerting additional restraint on the trading sector  I would have to say I agree with them… It’s not like I didn’t enjoy seeing the Aussie dollar rise to $1.10, it just didn’t look right to me… And like the RBA said, the level was adding additional restraint… There’s a time and place for A$1.10, but I don’t think we’re there yet… So, I think seeing profit taking is healthy…
Then there was this… You know… The number one question I’m asked all the time, is “Do I think that the government will confiscate everyone’s gold like they did in the ‘30s?†And I always have the same answer… While I wouldn’t put it past this government to attempt to do it… I doubt they would… You see, in the ‘30s gold was a part of our money, tied to the dollar… If the US wanted to increase their debt spending, they had to have the gold to back it, so they took/stole/confiscated everyone’s gold. But gold isn’t a part of our money any longer, and so, why would the government need to take everyone’s gold again? Besides, there are too many of us that now own gold, and the pitchforks and rakes would be raised!
Well… I see where the great mind, Richard Russell, had something to say about this question of whether the government would take people’s gold again…
I’ve thought about this at length, and I’ve arrived at what I believe to be the correct answer. The answer is – No, the government will definitely not call in the gold. The simple reason is that a tremendous amount of gold is held in very powerful hands. Gold (GLD) and gold bullion is held by pension funds, university endowment funds, large powerful hedge funds, corporate reserves, and state treasuries.
In other words, my thesis is that gold is now in such powerful hands (much of it even political) that there’s no way that the US government would call in gold. Furthermore, what purpose would it serve if the US did call in the gold? In 1933 Roosevelt called in privately-held gold and then raised the price of gold from $20.22 to $35 an ounce, this in an effort to reinflate the depression-laden economy.
Thanks to Richard Russell…one of my fave writers!
To recap… Experts are debating the Bin Laden effect with varying opinions… But, in Chuck’s eyes, the geopolitical problems of the world continue to ramp up, with the fear of retaliation. It’s a risk off day, with dollars, Treasuries, yen, and francs all rallying… Silver saw a huge loss yesterday after the CME raised the margin requirement for the metal. Brazil’s trade surplus widened, which makes one wonder why the Brazilian government has spent so much on trying to keep the real from getting strong!
Chuck Butler
for The Daily Reckoning
Raising the Margin Requirements originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2
.
Read more here:
Raising the Margin Requirements
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
2011 will hopefully go down as the year the United States finally tackles its imposing budget problems. The arguing has just begun, but by the end of the year, Washington will likely have agreed to some combination of deeper budget cuts and higher taxes. As I mentioned before, inaction is no longer an option.
Yet in a number of other nations, inaction remains the norm. And because of the rising imbalance between taxing and spending, the International Monetary Fund (IMF) has come out with a forecast of which countries may be in a deep hole by 2015 if they don't act now.
But first you should know that not all countries have similar bearings on your portfolio. Yes, the larger the economy, the greater the chance a train wreck will derail the global economy. But that's not the whole picture. Economic size counts, but it's really about the relative wealth of a country on a per-capita basis. Countries like India and Indonesia may be among the world's 15 largest economies, but their citizens have little extra income to purchase the goods and services that drive international trade. Therefore, economic problems at countries with low per-capita income won't be nearly as devastating as economic setbacks among wealthier nations.
To put things in context, here's a list of the top 20 global economies, according to the CIA's The World Factbook, and where each one is ranked according to per-capita income.
Okay, I promise this is the last column I’m going to write about taxes for a long time. Really!
It’s not like I enjoy talking about them all that much, mind you.
It’s just that we are right down to the filing deadline and I DO think that being smart about your taxes is one of the surest ways to not only keep your wealth intact but also to keep it growing efficiently.
So today I want to key off what I said last week about Master Limited Partnerships and do a quick rundown on the rest of the big tax issues related to dividends and other income investments, starting with another unique type of vehicle — Real Estate Investment Trusts (REITs).
Like MLPs, Real Estate Investment Trusts get special tax treatment at the corporate level. That allows them — requires them, actually — to pass along most of their earnings to shareholders in the form of dividend checks. And despite the massive real estate implosion … a lot of these companies HAVE continued paying out solid income.
The bad news is that — unlike the income from MLPs — REIT dividends do not carry any special tax advantage. In fact, they are actually taxed more heavily than most dividends because they are treated as ordinary income.
Remember, Most Dividend Income Received from Common Stocks
Continues to Get Treated Very Favorably in 2010 and Beyond!
For most people, dividends from plain ol’ corporations are still taxed at just 15 percent.
Originally, this favorable rate was set to expire in 2010. But because of the latest tax package it will remain in effect through 2011, too.
That’s terrific news, and is yet another strong argument in favor of buying and holding solid dividend payers (as I’ve been advocating for years!).
So how do you take advantage of this special rate?
When you look on your 1040 form, you will see a box on line 9b for “qualified” dividends. This is where you enter dividend amounts that are covered under the special treatment. And when you receive 1099 statements from your broker, they should specifically note what dividends count as qualified distributions.
From there, you will probably have to use the IRS’s supplied worksheet to figure out exactly how much tax is owed on those dividends. But generally speaking, you will pay a much lower rate than you would on many other investment gains.
One hitch is that you must have held the stock for more than 60 of the 121 days surrounding the “ex-dividend” date. Many investors fail to note this rule.
In addition, you cannot treat qualified dividend payments as “investment income” for investment interest expense deductions. You can forgo the special tax rate and then use them to offset the interest expense.
It’s also worth noting that other categories of income investments are excluded from the favorable rate.
Take preferred shares, for example.
This special type of stock blurs the line between a bond and a stock. But not all preferred shares are treated equally come tax time. Only some qualify for the 15 percent dividend tax rate. These are known as “traditional preferred” stocks.
In contrast, any income from “trust preferred” shares will be taxed at your ordinary income rate. That is because they are technically considered debt securities. So in addition to some of the other risks surrounding these shares, there is also the prospect of having your dividends taxed at a higher rate.
What about mutual fund dividends?
If you invest in mutual funds, you probably see all sorts of “dividend” payments, even when your fund doesn’t invest in dividend stocks! That’s because many institutions use the term to denote even regular interest payments.
But the same basic rules I’ve just outlined will also apply to your mutual fund holdings:
The tax statements sent from your fund company or brokerage should break the categories up for you.
And Now One Last Word of Warning for Anyone Reinvesting Dividends …
It’s no secret that I love the idea of reinvesting dividends. I think it’s a great way to rapidly build your wealth and increase your future income streams.
However, I do feel compelled to note that it can create a major headache come tax time.
Reason: When you sell your shares, the IRS expects you to figure the actual price you paid for each lot of stock. It’s not enough to come up with an average price!
What this means is that it’s critical to keep good records — especially if you’re going to employ a dividend reinvestment plan over many years. Having that paper trail will make determining your cost basis much easier.
You might also be wondering when your holding period for the new shares begins. If you receive the shares instead of a cash dividend, it’s the day after the dividend date. It you buy optional shares through a DRIP plan, it’s the day after the plan makes the purchase for you.
Also, while paying commissions typically lowers your stock’s cost basis that is not necessarily true in the case of dividend reinvestment. For example, if the company pays the commission or provides a discount on purchases, those are treated as additional dividends. And if your DRIP charges you a service fee, that is considered an investment expense — i.e. it is deductible on Schedule A but doesn’t lower your cost basis in the shares.
Of course, perhaps the smartest thing you can do is simply use some of the tax-sheltered accounts I’ve discussed here before — things like IRAs, 401(k)s, or education savings accounts.
Doing so will — in nearly all cases other than with MLPs — minimize the amount of tax homework you have to do PLUS allow your nest egg to grow even more quickly. And it will often lower your current tax burden to boot!
Best wishes,
Nilus
P.S. If you want to know what specific dividend plays I’m recommending right now, just click here to watch my latest video presentation.
Read more here:
When Uncle Sam wants your dividends …
After a pair of stopgap funding measures, Washington is getting ready to play hardball on the government budget. Both sides have drawn clear lines in the sand, and April 8 looms as the day when government buildings could be officially locked, government employees told to stay home and all non-essential services could grind to a halt. Whether the shutdown lasts a few days or a few weeks, your portfolio will feel the impact. And you need to start preparing now…
Whether they realize it or not Americans live in a constant state of fear every day. I’m not referring to the fears of everyday life like losing a job or having an accident of some kind, but rather a more sinister and devious fear; a fear that Americans only dare talk about around the water cooler or at cocktail parties so as not to be taken seriously; a fear they try to mask with a with a whimsical tone of sarcasm or indifference. Whether Americans want to admit it or not, it’s the single greatest fear in their lives: fear of the government.
Right about now there are those reading this thinking: Don Cooper is a drunk. To which I reply: what’s that got to do with it? Maybe more people should drink if that’s what it takes to sober up and confront what they are really afraid of.
In their defense, I’ll admit that reality is scary. No argument that living in delusion is warmer, safer, cozier, and easier. Pretending is always more fun than reality, that’s why we go to the movies. But fear of the government is a fear that invades a person’s soul and – since the government intervenes in every aspect of our lives – it affects every move we make every day.
Fear of the government is hard to recognize and acknowledge. It’s a fear that we are taught early on in life and to which we become accustomed. We inevitably end up tucking it away in the far reaches of our minds in order to function “normally†every day and live our lives. But just as a car backfiring will trigger a sense of fear from a shell-shocked veteran, so too can the State trigger that sense of fear they’ve instilled in us.
One need only ask: when you see a cop in your rearview mirror with his lights on, do you feel a sense of safety and comfort or do you get a shot of adrenaline from your body’s “fight or flight†reflex? Do you immediately start asking yourself what he could possibly pull you over for, other than the fact that he was abused as a child, bullied at school and his mother didn’t love him, and now he’s going to whittle away at that chip on his shoulder by abusing you.
As you search for your proof of government permission to drive (i.e., your license), and your government permission to own the car (i.e., your registration), and your proof of government mandated insurance, do you do so calmly and with a smile on your face and with gleeful anticipation of speaking with someone who gives of himself to serve and protect you, or do you do so nervously, fumbling through your papers hoping everything’s up to date and acceptable to him for fear of being detained for whatever reason and having it affect your job, your family, and every aspect of your life?
And when it’s all over, do you feel glad that it happened or are you just glad it’s over? Later that evening do you recount the story to others with a sense of pride, or do you do so with a sharp tongue and kick yourself for all the things you wish you would have had the presence of mind to say at the time but didn’t? Do you feel happy that you have to pay $150 to the government because you were driving down the street faster than the government allows you to, or are you angry?
And in the end, do you send the money to the government even though you don’t agree with it? Even though you feel it’s unfair to have to pay so much money yet you’ve harmed no one? Of course you do. And why? Because you’re afraid of what the government will do to you if you don’t. In the end, you’ll retreat back into your cubby-hole of delusion in order to justify paying the fine by convincing yourself that what you did was wrong, the government was right, and you deserve the punishment.
My favorite delusional argument from those still attached to the matrix is that they pay their taxes voluntarily. To these people I ask: when you do your tax returns, do you take as many deductions as the government will allow you? Of course, the answer is always yes. Then I ask them that if they could take enough deductions such that their tax liability was zero would they do so? Again, not surprisingly, the answer is yes. I then ask them that if their preference is to pay zero taxes then why don’t they simply refuse to pay taxes. Inevitably, that’s where their train of thought always runs out of track. Of course everyone knows the answer: because they’re afraid of what the government will do.
I challenge everyone to ask themselves: when was the last time you even thought about the possibility you might be robbed, your house broken into or shot at? Can you even remember? Now ask yourself when was the last time you were afraid of doing something that could be deemed “illegal†by the government and for which you could be fined, detained or arrested? Something like not wearing a seatbelt, speeding, making a U-turn, going through a yellow light, not crossing the street at the cross-walk, riding a bike on a sidewalk, forgetting your license at home, taking too many deductions on your taxes, talking on your phone while driving, not allowing strangers to touch you or your children at the airport, cutting down a tree on your own property, owning and transporting a gun, collecting rain water and the list goes on. I would wager the answer is: daily! The first word out of everybody’s mouth when asked a normal, completely benign question these days is: “Well legally…†It’s first and foremost on our minds, and why wouldn’t it be, there are 76,000 pages to just the federal register alone. Some argue that everyone commits at least three felonies every day!
Ignorance is a dangerous thing, and it must be stopped in our lifetime, fo’ it kill somebody.
At the end of the day, all government mandates are enforced at the end of the barrel of a gun, and that scares the hell out of everyone, as it should. But if we truly believe we are free then we have to start acting like it. It’s time we cared about something bigger than ourselves. It’s time we stopped living our lives in fear.
Having said all that, I’m not holding my breath. It’s proven to be difficult to convince people that freedom is more important than the real housewives of New Jersey.
And that’s why I drink!
Regards,
Don Cooper
for The Daily Reckoning
American Fear originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and the great correction.
Read more here:
American Fear
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
Whether they realize it or not Americans live in a constant state of fear every day. I’m not referring to the fears of everyday life like losing a job or having an accident of some kind, but rather a more sinister and devious fear; a fear that Americans only dare talk about around the water cooler or at cocktail parties so as not to be taken seriously; a fear they try to mask with a with a whimsical tone of sarcasm or indifference. Whether Americans want to admit it or not, it’s the single greatest fear in their lives: fear of the government.
Right about now there are those reading this thinking: Don Cooper is a drunk. To which I reply: what’s that got to do with it? Maybe more people should drink if that’s what it takes to sober up and confront what they are really afraid of.
In their defense, I’ll admit that reality is scary. No argument that living in delusion is warmer, safer, cozier, and easier. Pretending is always more fun than reality, that’s why we go to the movies. But fear of the government is a fear that invades a person’s soul and – since the government intervenes in every aspect of our lives – it affects every move we make every day.
Fear of the government is hard to recognize and acknowledge. It’s a fear that we are taught early on in life and to which we become accustomed. We inevitably end up tucking it away in the far reaches of our minds in order to function “normally†every day and live our lives. But just as a car backfiring will trigger a sense of fear from a shell-shocked veteran, so too can the State trigger that sense of fear they’ve instilled in us.
One need only ask: when you see a cop in your rearview mirror with his lights on, do you feel a sense of safety and comfort or do you get a shot of adrenaline from your body’s “fight or flight†reflex? Do you immediately start asking yourself what he could possibly pull you over for, other than the fact that he was abused as a child, bullied at school and his mother didn’t love him, and now he’s going to whittle away at that chip on his shoulder by abusing you.
As you search for your proof of government permission to drive (i.e., your license), and your government permission to own the car (i.e., your registration), and your proof of government mandated insurance, do you do so calmly and with a smile on your face and with gleeful anticipation of speaking with someone who gives of himself to serve and protect you, or do you do so nervously, fumbling through your papers hoping everything’s up to date and acceptable to him for fear of being detained for whatever reason and having it affect your job, your family, and every aspect of your life?
And when it’s all over, do you feel glad that it happened or are you just glad it’s over? Later that evening do you recount the story to others with a sense of pride, or do you do so with a sharp tongue and kick yourself for all the things you wish you would have had the presence of mind to say at the time but didn’t? Do you feel happy that you have to pay $150 to the government because you were driving down the street faster than the government allows you to, or are you angry?
And in the end, do you send the money to the government even though you don’t agree with it? Even though you feel it’s unfair to have to pay so much money yet you’ve harmed no one? Of course you do. And why? Because you’re afraid of what the government will do to you if you don’t. In the end, you’ll retreat back into your cubby-hole of delusion in order to justify paying the fine by convincing yourself that what you did was wrong, the government was right, and you deserve the punishment.
My favorite delusional argument from those still attached to the matrix is that they pay their taxes voluntarily. To these people I ask: when you do your tax returns, do you take as many deductions as the government will allow you? Of course, the answer is always yes. Then I ask them that if they could take enough deductions such that their tax liability was zero would they do so? Again, not surprisingly, the answer is yes. I then ask them that if their preference is to pay zero taxes then why don’t they simply refuse to pay taxes. Inevitably, that’s where their train of thought always runs out of track. Of course everyone knows the answer: because they’re afraid of what the government will do.
I challenge everyone to ask themselves: when was the last time you even thought about the possibility you might be robbed, your house broken into or shot at? Can you even remember? Now ask yourself when was the last time you were afraid of doing something that could be deemed “illegal†by the government and for which you could be fined, detained or arrested? Something like not wearing a seatbelt, speeding, making a U-turn, going through a yellow light, not crossing the street at the cross-walk, riding a bike on a sidewalk, forgetting your license at home, taking too many deductions on your taxes, talking on your phone while driving, not allowing strangers to touch you or your children at the airport, cutting down a tree on your own property, owning and transporting a gun, collecting rain water and the list goes on. I would wager the answer is: daily! The first word out of everybody’s mouth when asked a normal, completely benign question these days is: “Well legally…†It’s first and foremost on our minds, and why wouldn’t it be, there are 76,000 pages to just the federal register alone. Some argue that everyone commits at least three felonies every day!
Ignorance is a dangerous thing, and it must be stopped in our lifetime, fo’ it kill somebody.
At the end of the day, all government mandates are enforced at the end of the barrel of a gun, and that scares the hell out of everyone, as it should. But if we truly believe we are free then we have to start acting like it. It’s time we cared about something bigger than ourselves. It’s time we stopped living our lives in fear.
Having said all that, I’m not holding my breath. It’s proven to be difficult to convince people that freedom is more important than the real housewives of New Jersey.
And that’s why I drink!
Regards,
Don Cooper
for The Daily Reckoning
American Fear originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and the great correction.
Read more here:
American Fear
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
As impressive as the stock market looked when it is was rising ever higher in 2009 and 2010, recent trading action has been even more impressive. Sure, the S&P 500 has gone nowhere for the past six weeks, but it has hung in there despite a series of shocks that would have derailed a more fragile stock market. Rising oil prices? The earthquake in Japan? Tensions in the Middle East? The seeming intractability of the European economic crisis? Nothing can dent the armor. This bull is robust.
But it's also important not to get complacent. The market has been resilient thus far, but with the foundation taking so many hits, it may not take much more to cause the edifice to tumble. When that happens, stocks are finally likely to pull back in a meaningful fashion. Not necessarily a snarling bear market, mind you, but perhaps a 10% to 20% correction.
The good news: that could set the stage for the next bull market as the United States moves onto firmer footing. So what could finally knock the legs out from under this current bull market?
Budget wrangling gets more heated. Congress is working on continued stopgap funding bills as the two parties remain far apart on some very important issues. At some point, the appetite for more short-term funding bills may vanish and we may see another government shutdown as we had in 1995.
The market would be disrupted by such a move, as investors hate uncertainty. Yet an opposing outcome may also be true. If bipartisan legislators finally make headway and come up with a budget fix, investors will soon realize that a combination of lower spending and higher taxes is a real drag for the economy. Deficits are loathsome, but they have stimulated the economy as the government spends more than it takes in. Deficit cutting means the government is pulling money out of the economy.
Troubling inflation numbers. There's a building debate about whether food and energy should be used to assess monthly price trends. Some consider these “non-core” items to play too important a role in consumer behavior to be ignored. And if recent agriculture and oil price trends are any indication, expect to see a spike in inflation in coming months, at least when these “non-core” items are included.
For many investors, the specter of rising prices would signal an end to the era of ultra-low interest rates. Economists predict the Federal Reserve will start raising rates next January, but if the U.S. economy looks healthier in coming reports, that start date could happen sooner. Investors look ahead and they'd prepare for the start of rate hikes before they actually happen.
The end of QE2. The Fed's massive $600 billion bond buyback program has been great — for investors. Some believe that was the primary catalyst for the strong stock gains posted from September 2010 through the end of January 2011, as freed-up cash went into stock purchases. That program is almost completed and now the Fed has to decide when to withdraw that $600 billion from the economy. Fed Chairman Ben Bernanke has signaled that he's in no hurry, but many investors may not wait around, noting that all QE2-related gains have already been made anyway.
China, Japan and the Gulf. Events in any of these areas could alter the course of global trade and U.S. investors would surely be affected. China is trying to cool down a heated economy but also faces pressures that may cool the economy even faster than government planners would like. Social pressures remain just below the surface but may erupt if the Chinese economy sharply slows.
Japan's devastating earthquake is presumed to have a minimal effect on the rest of the world, as evidenced by the fact that the S&P 500 fell just 0.6% on Monday, March 14. Yet, Japanese institutions play such a key role in global financial markets — including the United States — and if funds get withdrawn to shore up rebuilding efforts, then the liquidity impact could create a vortex for the U.S. market.
Lastly, major OPEC players are maintaining output right now, but any further political destabilization among key regional players could create even more upward pressure on oil prices. The U.S. economy may be hard-pressed to handle $120 or $130 oil.
Action to Take –> Despite the gloomy nature of these scenarios, the U.S. economy is likely to be quite stronger than a few years ago. That's why a market correction may not be long-lasting. But in the near-term, there are many reasons to be cautious about U.S. stocks and you may want to take profits in some of your most profitable investments.
– David Sterman
P.S. — Few investors realize that a 20-year energy agreement between the United States and Russia is about to expire. This deal supplies 10% of America's electricity. As broke as our government is, the situation is so serious that President Obama is asking for $36 billion to avert this crisis. And Republicans support him. Here's what's going on…
This article originally appeared on StreetAuthority
Author: David Sterman
What You Need to Know About the Market This Spring
Read more here:
What You Need to Know About the Market This Spring
It’s time, Fellow Reckoner…time to announce the winner of this year’s “The-name-of-the-guy-who-came-up-with-the-idea-of-evolution-but-who’s-name-we-cannot-use-due-to-trademark-infringement-constraints-Award!â€
Or, for short…
The winner of our inaugural Daily Reckoning Dodo Derby.
Let’s start where all good evolutionary tales start: at the beginning…
This year, 44 of America’s united states will deliver a combined 2012 budget shortfall of approximately $125 billion. They are broke, in other words, and determinedly bureaucratizing themselves ever closer to outright insolvency…the financial equivalent of the dinosaurs’ tar pit.
By way of honoring their commitment to financial evolution – that is, by rendering themselves extinct so that newer, more adaptive and innovative concepts of trade and freedom can take their place – we featured a handful of these states during recent Daily Reckoning musings.
First, in last weekend’s edition, we narrowed the field to ten finalists – California, Connecticut, Illinois, Louisiana, Massachusetts, Mississippi, New Jersey, New York, Ohio and Wisconsin.
Then, on Monday and Tuesday, we awarded special mentions to Connecticut and New Jersey for their commitment to wasteful state government spending. Next, we bestowed first and second runners-up honors on California and Massachusetts, respectively.
And now, today, it’s time to announce the winner of our shamelessly non-scientific, mostly tongue-in-cheek, change-the-name-halfway-through-the-competition competition.
But first, the stats…
Population: 12.88 million.
Unemployed: 603,000.
Food stamp recipients: 1.97 million.
Total debt: $143 billion.
Debt/GDP ratio: 22%…
And, here’s the kicker…
Total state debt per man woman and child – whether working or not: $11,138!
Yes, Fellow Reckoner, this year’s winning state, occasionally referred to as Land of Lincoln or The Prairie State, home of the president of the country with the largest total debt the world has ever seen, is…
Illinois.
Congratulations Illinois. Here are your residents:
“I think I’ll chime in,†begins our first Reckoner, kicking things off. “I live in Illinois and, like Wisconsin, our day of reckoning will be coming soon. Picking on the middle class will result in a mutiny of grand proportions.
“Start taking a look at the School Boards where they vote themselves raises and plum retirement benefits… The politicians and judges who get automatic raises each year or ever other year… The City Councils who bicker of not making enough… The special stipends these people get so they can hire family members… Raises and promotions for those who have contributed to the funds of those running for re-election… Get with the State Comptroller’s Office and investigate who gets what in payroll. Politicians SHOULD also increase their contribution to Health Care. Eliminate state positions that crossover and are duplicating waste and make sure that all building contracts come within budget. Reduce and/or eliminate nepotism within state offices.â€
And here’s reckoner Bob, with a few specific tales of local waste…
“Here in Chicago IL, at Piotrowski Park, they demolished a nice playground area and replaced it with a greatly inferior playground. Then, in the field house, they installed an elevator that goes from the ground floor to the locker room one floor below, as if the stairs were not enough. Oh…and they tore out the field house reception area just so they could rebuild it. In the playing field, they tore out perfectly good water fountains just to replace them.â€
Adds Reckoner Charles…
“I live in Illinois too, where instead of postponing two overpasses across the railroad tracks, they are going ahead with it. That would cut costs buy over $2,000,000 just by putting it off for a while. The overpasses are NOT needed. Just that some council person wants a few more votes.â€
And this, from Reckoner John…
“Illinois has an interesting strategy for funding teacher salaries and retirement. Illinois schools and teacher salaries are funded by property taxes, but the taxes remain in the community where they are collected. There is no statewide distribution. The rich get richer…
“Then there are the pensions. The Illinois Taxpayers Union has lists of the top 100 educator pensions on a county-by-county basis. In Cook County, the top 100 pensions run from $238K to $146K annually. Pensions range from 60% to 120% of the average salary for the last four years of employment. These are for primary and secondary educators in suburban Cook County. An ‘educator’ from the National Education Association is #2 on the list at $235K.
“The top 100 Community College educator pensions in Cook County have a slightly lower range – $208K-$102K. Guess who picks up the tab for pensions?â€
And finally, an appropriately named Reckoner “Cost†sounds off…
“They are now going after the residents for online purchases made from retailers located outside the state with no in-state presence, but used/consumed within the state, to the tune of a 6.25% tax rate. Ludicrous. And they are offering amnesty going back to 2004 along with the option of using the estimated tax table if you don’t have records. The tables are heavily skewed to the State’s favor (assuming, for example, that if your gross income was $75-100K, you would have spent $1,000 online for such purchases.) Keep in mind, though, that this is the State that also lets residents voluntarily pay cigarette taxes for purchases made outside the State. Go Illinois!â€
Go Illinois, indeed.
Thanks again to the hundreds of readers who wrote in from around the nation will tales of waste and incompetence at their individual state levels. And congratulations again to our finalists and, of course, this year’s winner.
Joel Bowman
for The Daily Reckoning
The Winner of This Year’s Daily Reckoning Dodo Derby originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.
Read more here:
The Winner of This Year’s Daily Reckoning Dodo Derby
The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.
I spent a number of years as a freelance writer.
And I have to admit, there were some benefits in being my own boss. I definitely prefer a pair of jeans to a pair of pantyhose. Also, slipping out to the grocery store during the day cut my shopping time in half. My daily commute? Just a short walk down the hall to my office.
However, there's one thing I don't miss about freelancing — the paperwork.
Monthly invoices had to be issued to all my clients and payments had to be accounted for. Depending on the client, that involved tracking bank wire and PayPal account transfers, depositing checks and, in some cases, waiting weeks for checks issued in foreign currencies to clear.
Records of every penny spent on office supplies, postage, software, business trips and meals had to be maintained. Writing an annual check to the IRS is bad enough. As a freelancer, I was obligated to pay estimated taxes quarterly. At the end of the tax year, a few of my clients issued 1099 tax forms, while others didn't. And, of course, all my income had to be properly accounted for.
It didn't take me long to realize the benefit of owning a good business accounting software program.
The demand for paperwork gets kicked up a notch
I was reminded of my accounting escapades the other day, after reading an article about a proposed new tax law. Starting in 2012, some lawmakers are trying to get small businesses, freelancers and independent contractors to generate even more paperwork: They will have to issue 1099 tax forms to any vendor on which they spend $600 or more annually.
So for instance, if a small business occasionally buys pizza for its employees, it may have to issue a 1099 form to the local pizza parlor at the end of the year.
I started to envision what my records would look like if I were still freelancing. Would I have to issue 1099s for my hat and bubble gum expenditures?
Regardless of whether this proposed tax law is enacted or not, we're living in an increasingly entrepreneurial age, as experienced workers strive to start their own firms.
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