Via TaxProf, I found essay by economist Greg Mankiw, claiming that his actual income tax will be 83% under McCain and 93% under Obama. It's a surprising claim, but Mankiw has at least done the math. He argues that for any new income, he'd invest it, and let his kids inherit it. Thus: Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years? The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids. Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids: (1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4). For my illustrative calculations, let me ...

The IRS has recently announced that hundreds of thousands of stimulus and rebate checks haven't made it to their intended recipients. You can blame out-of-date mailing addresses and social security number snafus. Fortunately, the IRS is bending over backwards to make sure these get delivered. They've publicized the issue (though 383,000 wrong addresses out of over 100 million tax filers doesn't call for much of a mea culpa), and they've whipped up some useful tools for curious taxpayers: Visit their Where's My Refund? service for information on your refund. Check Where's My Stimulus Payment? for stimulus payment data. It's almost inevitable that this will lead to a new a new generation of advance-fee frauds, so be on the lookout. An unsolicited email about how you can get the returns you're owed -- for just the smallest of fees! -- should be trashed immediately. One obvious question that comes up in a situation like this is: how much does this cost us, as taxpayers? Obviously, the IRS is holding on to money that would otherwise be ours to spend. Does the economy suffer for it? There are two popular theories, both supported by stirring rhetoric and elegant mathematics, and both leading to precisely opposite conclusions. The first is ...

According to a new study, yes: people earning $500,000 to $1 million understate their income by about 21%, compared to 8% for those earning $50,000 to $100,000. The first obvious response is outrage -- how dare they lie, when they're already so much better off? But a more practical question is to ask what we can do about this -- and whether we should do anything at all. To deal with tax evasion, you have to think like a tax evader. The first thing to do is to restate your term: the marginal tax rate isn't a tax rate -- it's the return on dishonesty. Someone taxed at 15% gets fifteen cents for every dollar worth of lies; someone taxed at 35% gets a hefty $.35 for every dollar of dishonesty. Next, you have to ask what they're thinking. First, stipulate that it's not a moral question to the tax evader. It's just a question of keeping as much money as possible. The decision to lie about income is just a practical question: what are the odds of getting caught, what is the punishment, and how much do you prefer certainty to risk? For example, let's say our unfriendly evader is looking into ...

Charles O'Byrne, a top aide to New York Governor David Patterson, refused to file income taxes for years. He now owes the state $300,000 and an apology -- he's been able to tender one of these on his own. What's surprising is that for someone earning so much -- his last salary was $178,000 per year -- and working directly for the state government, O'Byrne didn't get much attention from the tax authorities. From 2001 to 2005, he accumulated a six-figure debt without ever being asked to pay up. According to his lawyer, Richard Kestenbaum, he suffered from 'Non-Filer Syndrome', which made him too depressed to do his taxes, even though, "Most times, with professionals, these are very high-functioning people who otherwise complete all the other ordinary tasks of their life." But having a mental illness custom-tailored to explain your misbehavior isn't the only benefit from being Mr. O'Byrne. He was also able to raise money from Brian Krisberg (a politically active attorney) and Jean Kennedy Smith (yes, a Kennedy Kennedy). Thanks to this help, O'Byrne was able to pay off his debt -- though he was still finishing that up as of earlier this week. It's hard to imagine the average taxpayer being ...

With the market in the doldrums and the election turning nastier every day, most people are feeling increasingly negative about everything, their finances included. But the markets have (for now) stopped crashing, and some people are taking stock and seeing reasons to be optimistic. Meanwhile, others point out that there are still some financial follies to avoid. And, of course, there's a new crop of entertaining tax evaders since the last edition of Today in the Taxosphere. Legendary investor Warren Buffett says to buy stocks -- he is. According to his new authorized biography, the normally cautious Buffett made lots of personal investments in the late 1970's -- using borrowed money. Could be a good sign. Of course, as Buffett would usually argue, you should do your own research and avoid trying to time the market. FIRE Finance offers a detailed guide to how to save -- and how much to save -- for retirement. Particularly useful: they offer several tables showing how much income to set aside at various ages. If you're thinking of procrastinating, keep this in mind: the savings required if you start at 45 or 50 are many times the proportional savings required of someone who starts at ...

Since he burst onto the national scene earlier this week, Joe the Plumber has become a symbol of how tax policy affects ordinary Americans. He's the center of attention in today's Taxosphere, but the debates also get some coverage as well. And of course, personal finance is in the news because of the continued market gyrations. Today's Taxosphere goodness: Paul Caron, the TaxProf, has a comprehensive roundup of Joe the Plumber coverage. There's bad news for Joe's ambitions; he's not quite a plumber (though he doesn't need a license since he works for a licensed plumber), and he doesn't quite pay his taxes. At Don't Mess With Taxes, Kay Bell also covers Joe Wurzelbacher's story, with more details about what the different tax policies mean for him. This entry includes a comprehensive list of other people named "Joe the Plumber," who are doubtless seeing a boost in business thanks to their new brand name. I'm sure Inbev is, as we speak, scouting for an actual Joe Sixpack (whether he's a bodybuilder or a couch potato is a matter for the focus groups). Via Answerbag, I found this bizarrely-headlined Reuters story about how many corporations don't pay taxes. Tell me -- does a headline ...

Joe Wurzelbacher might think twice about getting involved in politics again. A week ago, Joe the Plumber was just another plumber. Now he is the Joe the Plumber, a more important political topic than the War in Iraq, and a more sensitive debate subject than abortion or gay marriage. How did Joe the Plumber find his way into the spotlight? First, he happened to be named 'Joe': every candidate wants a less insulting, more family-friendly replacement for "Joe Sixpack," and Joe the Plumber is definitely it. But more importantly, he touched on a crucial issue: what are the long-term effects of the Obama and McCain tax plans? In the video that made him famous, Joe sounds like his mind is made up, but he's in for a surprise: he asks Barack Obama about how a small plumbing business earning $250,000 to $280,000 would be affected by Obama's tax plans, and Obama responded with a blizzard of facts and figures about the new tax breaks, tax subsidies, and capital gains tax cuts that completely change the picture. Obama's extended remarks involve a bit of transparent double-talk: in his version, lower taxes on low income-earners would have allowed Joe to make more money, but higher ...

$700 billion. It's an incredible number. The Troubled Asset Relief program (abbreviated TARP, often just called "The Bailout") is an unprecedented spending spree. The closest comparison, the Marshall Plan, cost about $110 billion in present dollars, so the scope of the TARP is beyond that of any new government program. When people hear about $700 billion in new spending, their first reaction after scraping their jaw off the floor is to ask: "Who will pay for this?" with the sneaking suspicion that the answer is, as usual, "The taxpayers." But it's not that simple. The first important thing to realize about paying for the bailout is that it's not necessarily going to mean a higher tax rate or an end to tax refunds. Although the government will be spending more money, it's able to print up an effectively unlimited amount, so the usual rules can still apply. That said, doesn't that huge sum of money need to come from somewhere? Not quite. Most government spending involves gifts, with strings attached: the government spends money on social security, health care, law enforcement, defense, and many other services without charging directly for them, and pays for some things -- public parks, mail delivery -- with ...

It's hard to miss the headlines about hedge fund collapses. It seems like every day there's a story of another hedge fund that blew up thanks to esoteric bets on mortgages, metals, or currencies. One easy lesson to draw from this is that the hedge fund concept has been thoroughly debunked. But a better lesson is to ask how you can behave more like a smart hedge fund owner. I don't mean to suggest that any small investor should play with the financial high-wire act that some funds use. Nor should typical investors play around with complex securities like stock options -- if a team of MIT-educated PhDs could lose billions of dollars on 'risk-free' options trading, it might be a good plan to stay away. Instead, I think most people don't appreciate the power of hedging. The original hedge funds understood this: if they bought stock of Ford, they'd bet against General Motors at the same time, on the theory that nobody could predict how the auto market would turn out, but a smart investor could tell that Fords were outselling Chevrolets. These hedge funds were run by a more entertaining cast than the current crowd, including Benjamin Graham, the polyamorous polymath ...

Is it true that there's no law saying I have to pay income taxes? This is a common question on tax forums and discussion boards. Many websites and publications argue that paying taxes is illegal, immoral, unconstitutional, dishonest -- basically every synonym for evil except "fattening". The famous tax protestor Irwin Schiff calls income taxes "The Biggest Con." The rise of popular libertarian candidates like Ron Paul has caused many people to scrutinize the Constitution and reconsider current tax rates. So what's the big deal? Is it true that we don't owe taxes? Can we do anything about it? There are several common conversational gambits among tax protestors, but the most common is: "What law, specifically, requires us to pay income taxes?" That's as good an introduction as any to the subject. So we can deal with it quickly: the law is Title 26 of the United States code, Subtitle A, Chapter 1, Subchapter A, part I. It starts with "There is hereby imposed on the taxable income ... a tax determined in accordance with the following table." The Code goes into an excruciating amount of detail about what is taxable, what is not, who must pay, what doesn't count, etc. etc. etc. Many tax protestors will ...