Supply & Demand Shifts
The pandemic has resulted in many unusual and unexpected shopping patterns as the supply-demand curve has been twisted and distorted these last 12 months.Last month consumers wanted more of most everything, except for perhaps meals made at home. Retail sales, both online and in-store, spiked last month, reflecting that people have more money from re-employment and stimulus payments. Restaurants, hotels and clothing retailers all benefited. Spending on airlines jumped 37.5% based on Bank of America charge card data.
Inflation jumped last month too. The consumer-price index (CPI), which tracks everyday prices on items such as groceries, clothes, gasoline and recreational activities, rose 2.6% on an annualized basis. Excluding food and energy, the stripped-down "core" CPI was up 1.7%.
Supply not meeting demand over the last year has been a constant theme. Early on, prices on certain items became a source of amazement and memes, purely because they suddenly had become so very expensive. Toilet paper, the subject of much ridicule and for some, stress, became an item that caused fights at Costco. Now sales are declining, as they are for disinfecting wipes, paper towels and sanitizer. Today these products line store shelves in plentiful numbers and sit without causing scuffles with other buyers.
By the way, do you have any ketchup? There is a ketchup shortage, promoted by the reopening of so many restaurants at once. The latest hot item on Ebay and Facebook Marketplace is ketchup packets. There are other more serious and expensive shortages too. School children have been delayed getting much needed laptops for distance learning. Car makers are hamstrung by the global shortage of semiconductor chips and this is affecting the rental car market, which was idle most of 2020 but is no more. Anyone have a used car they want to list on Ebay?
IRS Missing $1 Trillion
The IRS commissioner, Charles Rettig, again testified before Congress this week and divulged some interesting numbers. Although it is common knowledge that the IRS does not collect all the taxes that it is owed, it figures it will miss out on $1 trillion this year.
The IRS knows where the problems are too. One bucket of lost revenue totaling $400 billion is termed the “tax gap” and includes missed taxes from non-filers, under payers and those who under report their income. IRS research says that half of that missing "bucket" is $175 billion that the top 1% of income earners owe but do not pay.
The IRS also knows it is missing out on tax revenue from cryptocurrency trades. Those with foreign and illegally sourced income are also tax evaders. The commissioner made sure to point out that the gap is a quandary separate and distinct from the tax breaks and shelters that make the tax code so messy.
This $1 trillion shortfall is no small beans. The IRS collected $3.5 trillion in total taxes in 2019 (see chart below for breakdown) so it could be collecting some 25% more. Just think - that $1 trillion would be a nice downpayment on President Biden's proposed $1.9 trillion infrastructure bill. Or on any one of the other spending bills passed in the last 12 months.
The Global 1%
As long as the IRS commissioner is suggesting that the richest Americans are the ones who do most of the sidestepping of taxes, who is he including in that group? What does it take to be in the top 1%? Here and across the globe it is a wide span of people, from successful professionals and entrepreneurs to billionaires whose wealth dwarfs that of some countries.
The top 1% is commonly defined by looking at annual income, not necessarily how much you have already saved or accumulated in assets. Around the world, income of $200,000 to $300,000 generally puts one in the 1% range. The U.S. is closer to $500,000 and incomes of $922,000 puts one in the United Arab Emirate’s top range.
Taxation rates vary. Most countries have a progressive tax system whereby the richest pay at the highest bracket. Some countries, like Singapore, would rather attract the wealthy so keep taxes low. The U.A.E., Bahrain and other oil rich nations do not tax incomes at all because, thus far, income from their natural resources keep them afloat.
The Global 1%
Much of what the IRS defines as taxable income, the average taxpayer might not even suspect would be included on a Form 1040. Here are a few of the interesting categories of income that the IRS taxes that may be a surprise.
Scholarships – As wonderful as a scholarship award is, especially to a needy family, the IRS collects taxes on the room & board portion of the award. The educational scholarship piece, which includes tuition, fees and books, is not taxable.
Gambling winnings – Winnings must reach a certain amount to be taxed, and it depends on how it was won; slot machine winnings are taxed after $1,200 whereas poker winnings are taxed after $5,000. Also, the Fed and the state in which the money was won will collect taxes so save your receipts showing how much you spent!
Unemployment – This income is generally taxed but, special for 2020, up to $10,200 is exempt from taxation as long as one made less than $150,000 total in 2020.
Debt – In some cases, such as when credit card debt is erased, the amount becomes taxable to the borrower. Notable exceptions are discharged student loans and debt erased in a bankruptcy.
Illegal activity income – Any ill-gotten gains such as drug dealing or embezzlement are
subject to taxation. Gangster Al Capone, who reportedly quipped “they can’t collect legal taxes from illegal money” served 11 years for tax evasion, not for being a notorious criminal.
Bribes – The IRS looks past "bribery" payments from a parent to a child but will tax income received in return for bypassing protocol and awarding special favors to individuals or businesses. By most U.S. definitions it is illegal and taxable. However, in countries like France, Germany and Australia this business behavior is considered more or less acceptable and companies have historically been able to deduct these expenses.
Virtual currency – When trading in and out of any of the cryptocurrencies like Bitcoin or using it to make a purchase results in a net gain, it comes is a taxable event.
Prizes – Congratulations on the prize, winners! You now owe taxes on the haul. Some winners donate the cash directly to a charity without accepting it, thus avoiding any taxes. If one accepts the prize and then donates it, there will still be some tax.
All this begs the question - what is not taxed?
Gifts – If you receive a cash gift, you will not be taxed. However, the gift giver may be taxed if they do not adhere to certain limitations or file the correct paperwork.
Cash rebates – Such as those on certain cars or a new appliance.
Alimony – But this gets a little tricky. Starting with alimony agreements made in or after 2019, the payer of the alimony also pays the taxes. In cases where an agreement was in place by 2018 or earlier, the recipient of the alimony pays taxes. All these changes came as part of the Tax Cuts and Jobs Act (TCJA) passed in late 2017.
And just for fun, this chart shows individual income tax rates for each U.S. state.
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