I Am the 47%

I haven't been on Facebook yet today, but I can only imagine that the subject line of this blog post has become cliched even moments after I thought of it. Alas, there's nothing new under the sun.

And that includes Mitt Romney sticking his foot in it, which seems to be a pretty regular event. The latest kerfuffle is over his comments back at a spring fundraiser with wealthy donors, where he was caught on hidden camera saying:

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that's an entitlement. And the government should give it to them. And they will vote for this president no matter what…These are people who pay no income tax. 

[M]y job is is not to worry about those people. I'll never convince them they should take personal responsibility and care for their lives.

So let's do a little personal case study of someone who falls in this 47%, voted for Obama and, according to Romney, cannot be convinced to "take personal responsibility."

My 47% Street Cred

To be honest, it would be more appropriate to say "I was the 47%" because in 2011 I actually did pay 1.12% in federal income taxes, on top of the state income taxes (4.37%) and federal payroll taxes. However, for several years before that, I was not paying income taxes:

• 2010: 0.00%
• 2009: -0.85%
• 2008: (can't find, but it was 0% or very near 0%)
• 2007: 10.37%

So, what happened in 2008 that caused my taxes to drop so much? My income from my day job has increased every year. Well, there were actually several different factors that figured into the low tax rate, all of which can be traced back to 2008:

• I got married.
• I became a stepfather.
• I began donating 10% of my income to charity and local churches (and itemizing deductions accordingly).
• I became a landlord. (My wife's previous home became a rental property.)
• I learned about the pro-business tax code and began intensely keeping records and making use of deductions to legitimately reduce my taxable business income from freelance writing.
• My wife returned to college.

Oh, yes, a couple of other things happened in 2008 that should have raised my total income tax:

• I started writing String Theory For Dummies, which resulted in a net income increase, so actually raised my gross business income for 2008 and 2009 both.
• I received an greater-than-10% raise, due to restructuring at work and them realizing that they were seriously underpaying me.

Ah, yes, and I finished my Master's Degree, paid for by reimbursement from my company (so I couldn't deduct any significant amount of it). No real bearing on my tax situation ... although it might have some bearing on that whole "personal responsibility" line.

Who Made Me Dependent Upon the State?

So the driving forces behind my sudden drop in income tax liability were primarily the following (in no particular order, since I don't feel like looking through old tax forms to figure which benefited me most):

• Small business tax deductions and credits
• Married filing jointly status
• Kid-related deductions and credits
• Rental property depreciation deduction
• Itemized deductions: Charitable (and church) donation and mortgage
• Education deductions for my wife

A quick look at this list really makes one wonder which of these deductions Mitt Romney is planning to revoke or reduce in order to wean me off of my "entitlement" mentality.

In fact, aren't these precisely the sorts of things that Republicans typically argue should reduce your tax liability even more? Isn't it really the Republicans who have decreased taxability so severely that it took me 3 years of raises and working on my writing career to work my way up to 1% income tax? Does anyone else recall Mitt Romney re-affirming his right to reduce his tax liability to the legal limits, when it was released that he way paying 15% in taxes?

Note to the IRS:

I said "legal limits."

I am very careful with my deductions and record-keeping.

If a deduction is questionable, I don't take it.

So, really, it would be a waste of time to audit me.

A waste of my time and yours.

Keep up the good work, guys!

According to Mitt Romney, this places me in a very unenviable position. I am now counted among those "who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it."

I will concede that I am probably at the top of the 47% of which Mitt Romney speaks. While he doesn't care about most of them, he maybe cares a little bit about what I think. See, I'm one of these moderates who voted for Obama in 2008 and wishes his policies had done better. And I am giving Mitt Romney the chance to convince me that his policies will do better, so that I can vote for him today.

However, we've seen the results of his policies. His policies removed my tax liability. His policies have, apparently, turned me into a entitlement-seeking person, unable to take care of my own life, let alone the lives of the two children tragically entrusted to my care by the vagaries of fortune and chance! Those poor children! How will they suffer, to be raised by a father with so little self worth?

I dare ask, is there any solution?

Yes, I believe there is ...

I Need to Be Taxed More ... and So Do the 53% Above Me

It's totally absurd, with the amount of income I bring in, that I am paying only 1% income tax. I'm not wealthy, by any stretch of the imagination. (Well, unless you compare me to the 95% or so of the world that makes less income than I do ... in which case I'm doing alright.) I have to crimp and save just like anyone else, and there's never quite enough to do everything I want.

However, I also have two kids. I'm a member of a community and a nation. And we're overspending. To fix that, we need to do what any businessman in that room with Mitt Romney would do if faced with a tough personal or corporate budget. They would figure out how to:

• Increase revenue
• Cut expenses

We've let taxes drop too low and they need to go up a bit on the middle class. Not a lot, but at least a bit. Cap some deductions, such as the charitable deduction. Either an absolute cap or as a percentage of income. There are a lot of options here.

But to set the country on a course to fix the deficit, taxes have got to go up. Mitt Romney has made a pledge not to raise taxes. I'm hoping that he's a good enough businessman to know that he was lying when he made that pledge, because there's no way he can be serious about the deficit while clinging to it.

Of course, there is a third option that the businessmen in that room may be familiar with, especially if Trump was there. It's an option I unfortunately had to exercise in 2006. It's one that isn't fun and, as a patriotic American, it's one I hope we can avoid:

Bankruptcy.

Update:
Sept. 26: I found out about the blog We Are the 47%, which shares open letters (ostensibly to Romney) about individual experiences within the 47%. Here's an overview of some of the people who have stepped forward through that website:

We have letters from a Pulitzer Prize-winner in fiction and a Pulitzer Prize-winning columnist, as well as an 82nd Airborne paratrooper, a recipient of a Purple Heart, the wife of a med student, a special education teacher, a union carpenter... We have letters from those who share Mitt Romney's faith, but disagree with his disregard for the 47 percent; and we have a letter from someone who, like Romney, graduated from Harvard Law School, but, unlike Romney, made the financial sacrifice to work as a public defender ...

Independent Thoughts on the Last Republican Debate

Primary debates are very interesting for someone who doesn't care what party someone is, because they're specifically geared to pull at the emotions of those who are already in one regions of the political landscape. The recent Presidential debate had a lot of expected moments, but some unexpected ones, and some which I think can be used as springboards for more genuinely understanding the politics behind this little experiment we call America.

Note: I'm pulling any quotes below from this CNN transcript of the event, and I've read the debate fact-checking on both Politifact and FactCheck.org, as well as from the ever-entertaining and very-right-leaning conversation taking place on Facebook's General Election 2012 group. Also, I've only found one place that contains the whole CNN/Tea Party Express debate, although it's broken up into a lot of smaller videos.

There'll be another debate tonight - Thursday, September 22, at 9:00 pm ET - run by FoxNews/Google. You can view it streaming online live at this link at 9:00 pm ET. This one will feature the libertarian Gary Johnson, governor of New Mexico, who is a social liberal, fiscal conservative, and seems far saner than Ron Paul. We'll see.

Now, on to my thoughts and commentary on the last debate:

1. The HPV Issue

One issue that's gotten a lot of press was the fact that Rick Perry, as governor of Texas, signed an executive order requiring that girls in the state get a vaccine against the Human Paploma Virus (HPV), which is a sexually-transmitted virus that has been linked to certain forms of cervical cancer. There is voluminous scientific evidence that HPV is very wide-spread, occurring as often as in 50% of sexually-active adults. In other words, if you have sex, there's a very good chance that you'll be exposed to HPV.

Now, I have always considered the debate over HPV to be fairly silly, the ramblings of anti-government puritans who fear that children will become sexually active if told their risk of getting cervical cancer in 30 years is diminished ... but Rick Santorum (of all people) framed it in a way that I think actually has some legal, constitutional, and even logical merit:

Why do we inoculate people with vaccines in public schools? Because we're afraid of those diseases being communicable between people at school. And therefore, to protect the rest of the people at school, we have vaccinations to protect those children.  

Unless Texas has a very progressive way of communicating diseases in their school by way of their curriculum, then there is no government purpose served for having little girls inoculated at the force and compulsion of the government. This is big government run amok. It is bad policy, and it should not have been done. 

The legal justification for mandating innoculation is not to protect that one person, but to protect all of the other people who will get sick if they're exposed to that person's illness. As such, a State does not have the right to implement it. Michelle Bachmann echoed this idea:

... to have innocent little 12-year-old girls be forced to have a government injection through an executive order is just flat out wrong. That should never be done. It's a violation of a liberty interest.

Now, the overall trend of these attacks is on the idea that Perry implemented this as an executive order, which means it never came up for debate in the legislature, and was more of a decree than an actual law... however, as the next point point brings up, even legislation can be dictatorial.

2. When States Attack 

In attacking Romney's "Romneycare" plan (the Massachusetts plan which provided the framework for much of Obamacare, implemented when Romney was a governor of Massachusetts), Michelle Bachmann took a hard line against the government's right to mandate that citizens buy health insurance:

... no state has the constitutional right to force a person as a condition of citizenship to buy a product or service against their will. It's unconstitutional...  (APPLAUSE) ... whether it's the state government or whether it's the federal government

So, here we have two things that the state can mandate which Michelle Bachmann seems to believe are fundamentally against individual liberty. Both Romney and Perry have suggested that they are states' rights issues, and were good for their states, but that similar plans on a national level are unconstitutional, because the Tenth Amendment leaves all rights not expressly granted in the Constitution with the states.

Here is my question:

Based on a strict reading, does the Constitution allow the federal government to strike down an unjust state law?

Obviously, the Supreme Court of the United States (SCOTUS) has done this many times - especially in the last century and a half - but this is always a fundamental dividing line between Republicans and Democrats. Democrats feel SCOTUS should have this power, Republicans typically do not. When the court legislates in this manner, the justices are dismissively called "activist judges."

But what if a state implemented an unjust law, then would those who vote it down still be "activist judges?" If SCOTUS overturned Massachusetts' health insurance mandate, would they be violating their Constitutional limitations or defending the liberty of a people who are being oppressed by their state government?

Of course, this question could also be asked about slavery, executions, Jim Crow laws, treatment of women, homosexuals, the mentally handicapped, and other legislation that some states have considered fine and others consider oppressive in some way.

I'd love a Constitutional purist/states' rights advocate to explain what I'm missing on this one and what, if any, role the federal government has to play in such a scenario.

3. Romney & Capital Gains

This was the one aspect of the debate which I found swayed me toward a candidate instead of away from them. Here is Romney's response to a question about a flat tax rate:

The idea of a national sales tax or a consumption tax has a lot to go for it. One, it would make us more competitive globally, as we send products around the world, because under the provisions of the World Trade Organization, you can reimburse that to an exporter. We can't reimburse our taxes right now. It also would level the playing field in the country, making sure everybody is paying some part of their fair share. But the way the fair tax has been structured, it has a real problem and that is it lowers the burden on the very highest income folks and the very lowest and raises it on middle income people. And the people who have been hurt most by the Obama-economy are the middle class.

Back in 2008, I spoke fairly highly of the Fair Tax, which was a flat tax bill that had some enthusiastic support among conservative commentators such as Sean Hannity and Glenn Beck. I liked that the Fair Tax removed all tax burden from the poor, and the notion of taxing consumption rather than income seems just philosophically like a more egalitarian approach.

Until, as Romney points out, you actually run the numbers. What you find really happens is that the tax burden on the poor and the wealthy tend to drop heavily, but the middle class is saddled with a huge tax burden. (I also personally question the validity of many of the economic assumptions behind the Fair Tax, especially in light of the bang-up job economists have done managing the economy over the last decade.)

Romney continues with a proposal that intrigues me:

And so my plan is to take the middle class individuals and dramatically reduce their taxes by the following measure. And that is for middle income Americans, no tax on interest, dividends or capital gains.

If this was handled right, I think this might be a really good tax reform proposal. It depends on how you are dividing "middle income Americans." The benefit is obviously that it will allow low and middle income Americans to keep more money, and this seems like a good way to give a tax break.

However, if Romney extends this exemption too high, then it becomes yet another tax break for the wealthy, and one which they don't need. Capital gains tax rates are not huge. As Warren Buffett said in an interview last month, current capital gains taxes are great for the wealthy.

Well, I think -- what really gives the low rates to the very rich like me is the -- is the low tax on dividends and capital gains.  If you take these rich people what the IRS singles out, from 1992, they’ve almost had a tenfold increase in capital gains.  They’ve had a tenfold increase almost in dividends.  And those -- those are taxed at 15 percent and there’s no payroll tax on it.  Now, the payroll tax accounts for almost as much revenue to the government as the income tax.  It’s close -- $800 billion plus on payroll taxes last year; about $900 billion on income taxes.  That’s where the money comes from in Washington.

The argument in favor of reducing these rates, even among the wealthy, is often that they'll encourage investment, but Buffett sort of refutes that argument based on his experience:

I’ve worked with capital gains rates of 39.9 percent and 36 percent and 25 percent, I have yet to hear one person say to me, "If I call you in the middle of the night Charlie and I say Charlie I’ve got this hot investment idea."  Your reaction is not to say "No matter what the tax rate, forget it, I’m going back to sleep because the capital gains rates are too high."  No, what you’re going to do is you’re going to say, "Tell me the name, quick, Warren, before you change your mind."  And you know, I have never had one person decline to invest with me. 

Okay, I do question that last sentence as perhaps a bit of hyperbole, or maybe he meant "decline to invest with me [because of the capital gains tax]". Still, overall I think this is probably very true. My guess would be that during Mitt Romney's years in the private sector, the capital gains tax was never a cause for someone to avoid investing in one of his businesses, either.

Buffet does a great job of laying out the distinction in how these tax rates get distributed, based on the way your money comes to you:

If you make money with money, you get taxed ... at very low rates; 15 percent dividends in capital gains.  No payroll tax.  If you make money with muscle or hard work or sweat of your brow, you get taxed at rates that move on up.  And most of the people, the middle-class gets taxed at rates of either 15 percent or 25 percent on their income tax, but then they get really hit hard on the payroll tax and that’s what brings the rates in our office up to an average of 36 percent if you leave me out.

Middle income earners, of course, can still "make money with money," in which case they'd get hit with both the payroll tax AND the capital gains tax. If you're talking about someone making a low 3-figure salary, perhaps married, with kids and a mortgage, that could be crippling. So I think reducing the capital gains - in a way that's either got a cap on the amount excluded or has an exemption tied to income - has a lot to go for it.

And, honestly, it strikes me as a common sense plan that could be consistent with both liberal and conservative values, depending on how it were implemented. It's a shame that the government's not going to do anything useful until after the election, or maybe we could get this passed.

4. Herman Cain's Regulatory Reform

I really like Herman Cain. He's a businessman and so says what he thinks. He's the idea guy. And his ideas usually are interesting and make some sense ... until you think about them for 10 seconds.

In the last debate, he said, when responding to how he would handle energy exploration:

I would put together a regulatory reduction commission for every agency starting with the EPA. This regulatory reduction commission -- one of my guiding principles is if you want to solve a problem go to the source closest to the problem. So the people that I would appoint to that commission will be people who have been abused by the EPA. That would be the commission that would straighten out the regulatory burden.

On the surface, this sounds rather sane ... again, until you think about it for five seconds. His "guiding principle" is "if you want to solve a problem go to the source closest to the problem." So, who does he go to in order to solve EPA regulation problems? "People who have been abused by the EPA."

In other words, the group in charge of re-defining EPA regulations would be the people that the EPA has designated as having had the worst track-record of following EPA regulation.

It seems like Cain basically believes that the EPA just shouldn't do it's job, which is fine ... but he's going to use this strategy to "put together a regulatory reduction commission for every agency."

Who is going to be on the regulatory reduction commission for the Pentagon? The people who have been abused by the Pentagon? Does this mean terrorists will be on the commission?

Will criminals be reviewing Justice Department regulations?

Like I said ... his plans sound good, until you take a few seconds to think them through.

Tax Tips for Writers #2: Business Miles Are Your Friend

It might not seem that business mileage is a big deal for a writer, but this can actually turn out to be a major deduction for any small business person. There are a few ways to handle this particular deduction, though, and you have to be careful about how you keep your records to make sure the deduction qualifies. (Again, keep in mind that you should get tax professional advice before implementing these suggestions.)

The thing to keep in mind is that when keeping records for business driving purposes, you get to identify what the "primary purpose" of the trip is. If you post flyers for editing/proofreading services (assuming you offer them) on a local community board at your grocery store, and you travel every week to make sure that the flyer is still up (or perhaps replaced, if it has those little tear-away tabs at the bottom), then you can declare that as the primary purpose of your trip. It is perfectly legal if, on that same trip, you also get groceries - the government doesn't need, nor does it care, about any secondary purposes of the trip. It just needs to know the primary purpose.

To figure out the best way to get your deduction, you should track three things:

• Total mileage in 2010 (record odometer reading on January 1 - or now!- and on December 31, then subtract)
• Total business miles (see below)
• Total vehicle operating expenses

Now, there are two ways to establish how many total miles end up being deductible.

1. You can record every single business trip and add them up at the end of the year.
2. For a period of 90 days (any 90-day period over the year should work, where you're using the vehicle normally), you record every usage of the vehicle. Indicate if each use is "business" or "personal." Calculate the % of business usage during those 90 days. This is your business usage percentage. Multiply the total 2010 mileage by the business usage percentage. This gives the total business miles.

I find the second method to be much easier to track.

The deduction can be figured two different ways, as well:

• Record your vehicle operating costs (having a credit card solely for vehicle expenses is a good way of doing this), and multiply directly by your business usage percentage. This is the amount of vehicle operating cost that is deductible as business use of vehicle.
• Take your total business miles and multiply by the amount per mile dictated by federal law. ($0.55 for 2010)

You are allowed to use either of these systems, so should record all of this and figure out which method gets you the best deduction, then use that. This can amount to thousands of dollars in deductions, which can count against other income sources (such as your W-2 job) if it exceeds the amount you made from writing.

The problem with business mileage is that "commuting miles" - travel from home to work - is absolutely not deductible. If it were, everyone would get major deductions. It's just not deductible.

However, if you have business travel on the way to your job, then the whole trip counts. For example, I know someone who is a roofer. On the way to his job, which is a half-hour drive, he stops by his union offices, which is near his house. His work day, therefore, starts at his first business stop - the union offices - and the mileage from the union offices to the job site is deductible business travel.

So, here's the question:

If I run a home-based business (such as writing), does the travel from my qualified home office to another job location count as deductible business miles?

The short answer is that there has never been an official ruling on this interpretation of the law. Travel from "residence" to a work location is not deductible, but does the home-based business count, in this case, as your residence?

There is a strong case (complete with relevant tax law/ruling citations) to be made in favor of it, though. However, this only works if you are actively engaged in work at your home office prior to traveling to your work location. If you eat breakfast and immediately go to work, it doesn't count. But if you eat breakfast, head into your home office to work for a half hour, then go from your home office to your other job, the argument seems fairly sound. This takes work. My mileage log shows some days where I don't successfully meet these criteria, and on those days I just am not able to qualify the travel as deductible, so I record it as personal.

This also works if you've done the work to qualify as a business, and to make sure you have a legitimate home office that qualifies under the IRS code. (Information on that will be coming shortly.)

What's really nice about this interpretation is that it gets you in the habit of being actively engaged in your writing, preferably twice a day (before and after your W-2 job) to maximize the deductible miles.

Vehicle Mileage log - 2010

Vehicle Operating Costs

Can "Commuting Miles" Ever Be Deductible Business Miles?

Tax Tips for Writers #1: Uncle Sam Pays Writers

No, I'm not talking about grants.

I'm talking about establishing yourself as a legitimate home-based business, and getting all of the commensurate tax benefits that go along with that. Writers can fully qualify for these tax breaks, but it requires education, preparation, and dedication to legitimately claim them.

If you're like me, the New Year typically brings resolutions related to two major aspects of life: work and money. And, for me, "work" includes "writing" ... an enjoyable form of work, to be sure, but work nonetheless. So here are some thoughts on how I've been able to keep more of my writing income the last couple of years, thanks to the U.S. Tax Code (behemoth though it is).

Why would Uncle Sam pay writers? Because small business is regularly the largest growing sector of the economy, and that includes home-based businesses. Microsoft, IBM, Ford, Disney, GE, and Google ... all are just some examples of major corporations that started as small home-based businesses.

Similarly, every writer out there who is now a major name started as someone who was writing in their spare time, with dreams of making it big.

One such dreamer, esteemed author Robert J. Sawyer, told me at the Banff Centre for the Arts' "Writing with Style" workshop in fall 2005, "Live a deductible lifestyle."

What most don't know is that the deductions that apply when you're successful also apply when you're still trying to be successful. I personally didn't deduct writing expenses for years, because I was afraid that my net loss would trigger an audit and penalties, but I've since found out that I have the legal right to claim those deductions.

The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them by means which the law permits, cannot be doubted.

- United States Supreme Court (Gregory v. Helvering, 293 US 465)

Do you qualify for these deductions? If you are writing with a profit intent, you are actually the head of your own home-based business. Mine is called The Philosopher's Stone and has a federal tax ID number (because I employ my wife as my assistant) but you don't need all of that. If you work the business regularly and consistently, you qualify for business deductions on your taxes.

If you are not writing regularly and consistently with the intent to make a profit, you do not qualify as a business. If you're writing purely out of love of it, then it's a hobby, not a business. Keep records, of course, because your expenses can offset your profits as a profit-generating hobby, but you can't deduct over and above that ... and that's where Uncle Sam "pays" you for writing. And you never know when your hobby may take off!

How do I prove I'm a business? Here are the records I keep:

• A business plan, including forecasted revenues/expenses with an objective of future net profits.
• A business bank account (business and personal finances should not mix - unless you're loaning funds to your business or repaying loans from your business)
• Clear business financial records (I use Quicken Home and Business)
• Annual report of profit/loss, along with revisions of business plan and objectives for the coming year (I do this in lieu of revising the whole business plan each and every year)
• Daily ledger of all business activities (to establish the "regularly and consistently" part)

What deductions can you qualify for? Well, let's see, as a writer you can probably qualify for deductions in the following areas, at least:

• Home Office (Business Use of Home - this is the only way to deduct portions of rental expenses from federal taxes)
• Business Use of Vehicles
• Research (magazines, books, and possibly movies/television, depending on what you write about)
• Business-related travel (conventions, interviews, research trips, book signings, etc.)
• Employee benefits (hire your spouse as an employee - and make him/her actually do work - or, if you're single, establish your business as an LLC and hire yourself - you'll have to pay Social Security & Medicare on the wages, but this converts money from available)
• Self-employed retirement account (if you're actually making a profit)
• Possibly other expenses such as cellphone, internet, entertainment, meals, etc. ... these can require some planning to legitimately work as business, but are well worth it.

How do I get the money? Once you are keeping the documentation to establish yourself as a business, working it regularly, and taking the necessary deductions, you can then calculate the overall amount you'll save on taxes. You can adjust your W-4 accommodations accordingly, so that your paychecks from your (or your spouse's) W-2 employer have less removed from them. There's an IRS Withholding Calculator online which can help with this, or you can have your accountant take care of it. Every paycheck goes up, and that's your pay for regularly and consistently writing with the intent of profit.

Disclaimers: I am not a tax professional, so get the advice of one for your particular situation. Though these things generally apply, they don't apply to every situation. You may get audited, of course, but you'll have the documentation to get out of the audit, because you are only claiming legitimate business deductions. If you claim an illegitimate deduction, you deserve to get nailed.

Resources: Most of the information for this post comes from the following book, which along with some other resources have helped guide me through my economic re-awakening as a info-preneur the last couple of years.

Do your own research. Use this post as a jumping-off point for organizing your financial and writing spheres. Here are some free resources to help get started:

• Home Business Tax Savings
• Tax Reduction Institute
• Tax Tips for Freelancers
• Tax Tips and Resources for Writers
• Tax Time Tips for Freelancers
• June Walker's self-employed tax tips
• Freelance tax FAQ
• Writer's Pocket Tax Guide
• Click Here! Tax Help for Writers