With the economy still in its lackluster mode, many believe the worst is still in front of us. Unfortunately, as we head into the new year, there is a wide range of adverse tax changes that pertain to tax credits, tax deductions, sales taxes, and other tax rates you should know about. Having a better understanding of what tax law changes are coming can help you plan ahead to potentially lower your tax liabilities. Many of these projections are based of off Obama’s proposed budget. A lot of changes may be up in the air, but you can be pretty sure that on the whole taxes are going up! Although this list is not all inclusive, the major changes that could impact you are detailed below.

Changes With Income Tax Credits – Generally, a tax credit is a direct reduction in tax liabilities, and is usually put into place in order to encourage a certain behavior. Sometimes tax credits can even result in a refund. This is different from a tax deduction which only lowers your taxable income. Below are a few tax credit changes we will see in 2011 and a few weird ones that already went into effect:

• Child Tax Credit Reduced – In 2011, the child tax credit will be cut in half to $500 per child and may not even be applicable to all taxpayers. For those filing jointly, the tax credit begins to phase out at $110,000 (AGI) and for taxpayers completing a single tax return at $75,000. While President Obama has mentioned the possibility of increasing this tax credit for families that fall under the middle class, no action has thus far been taken.
• Making Work Pay Tax Credit Gone – This year workers are able to get a tax credit for 6.2% of their earned income with a maximum credit of $400 for single filers and $800 for married couples. In 2011, this tax credit will be eliminated unless Congress acts as Obama’s proposal seeks to extend this credit in 2011.
• Earned Income Tax Credit Reduced for Some – This is a tax credit for low-income working families with earned income less than or equal to $48,362. The income limits on this credit vary by your filing status and by the number of children you claim as dependents. In 2011, the EITC is expected to decrease for families with three or more children with higher income phase outs eliminated.
• Hope Tax Credit Changed – This tax credit goes back to being only applicable for the first 2 years of college and the limit goes from being $2500 to $1800. Of course there are income limits as well with this credit. Obama has stated he wants to make the changes with this tax credit in 2010 permanent but nothing is set in stone yet.
• Energy-Saving Credits Gone – The current 2010 credit for principal residence homes making changes to housing insulation, windows, doors, HVAC equipment, water heaters and more will expire next year. This tax credit allowed up to 30% ($1.5k max limit) back with applicable energy efficiency improvements.
• HomeBuyer Tax Credit for Veterans – If you or your spouse are part of the Armed Forces, Military Intelligence or Foreign service and have been engaged in activity duty for at least 90 days outside of the United States you have until Aprill 30th, 2011 to sign a real estate contract and close by at least June 30th, 2011. Be sure to make note of this date if you intend on purchasing a house and claiming this credit.

Changes With Income Tax Rates and Other Taxes – Tax rates refer to the percentage of taxes that need to be paid with regards to income tax rates, estate transfers, and capital gains.

• Estate Tax To Increase – The Estate Tax, also referred to as the Death Tax, a term that may hold more meaning to many taxpayers, is set to return. Through the Economic Growth and Tax Relief Reconciliation Act in 2001, the estate tax has been phased out over the past 10 years but will unfortunately reach an end this year. This means that unless Congress has a dramatic change of heart, the estate tax will not only return but is set to increase to 55% for homes valued over $1,000,000 dollars (under Obama plan this tax rate is 45%). Therefore, 2010 becomes the year to die!
• Capital Dividends and Gains Hikes – Those who fall within the upper tax brackets should prepare themselves for a changing rate. After this year, the current 15% long-term capital gains rate will return to 20%. However, those in the upper tax brackets will not bear the weight alone as most brackets will be affected. Under former President Bush, the lower 15% income tax bracket had a 0% capital gains rate but this number is expected to rise to 10% in 2011. For the upcoming year, dividends, excluding mutual fund capital gain distributions, will no longer be taxed at 15% for those in the upper tax brackets but will instead is set to be taxed as income. While President Obama is proposing that the dividend rate mentioned here simply be increased to 20% no action has been taken. Regardless of the outcome, those in the upper tax brackets will be faced with a higher tax on dividends.
• Income Tax Hikes – President Obama’s proposed budget for 2011 will extend changes to not only income tax rates but income brackets as well. However, tax breaks for single taxpayers with an income of less than $200,000 and married couples earning less than $250,000 will be exempt from any changes (under his plan). As far as brackets are concerned, the 28% tax bracket is predicted to rise. The 33% tax bracket is also forecasted to increase to 36%. Similarly the top 35% tax bracket is expected to be 39.6% by next year. More importantly, our government is expected to go back to discouraging marriage and the family as the well known “Marriage Penalty” will return with narrower tax brackets and the fact that the standard deduction will not be doubling for married couples what it is for single filers (those slated to get married this year or next will be discouraged to do so, if only marginally).

Changes With Tax Deductions – A tax deduction is not a tax credit. Instead, a tax deduction lowers a taxpayer’s gross income or tax base in exchange for a certain behavior or action. Therefore, it normally reduces indirectly by lowering the amount the taxpayer pays.

• Mortgage Insurance Premium Deduction Gone – Beginning January 1, 2011, taxpayers will no longer be allowed to deduct mortgage insurance premiums from their tax returns. Previously, homeowners who were paying insurance premiums for mortgage contracts that were signed after December 31, 2006 were able to take this deduction assuming they fell within the income cap of $100,000 for families.
• 179 Business Expense Deduction Lowered – For 2011 there are several business taxes that will be affected. The section 179 expense deduction that pertains to small companies and firms emerges as a prime example. Here, the maximum expenses deduction will see a significant decrease from $250,000. Of course, as with all tax deductions, other limitations apply.
• Student Loan Interest Deduction Limit Changes – For 2011, individuals or married couples can only deduct interest from the first 60 months of the repayment term. Moreover, the phase out income limits for claiming the deduction for both single filers and married couples will come down.

Sales Tax & Other Tax Increases That May Affect You:

• Tanning Tax – This tax is an excise or sales tax for those individuals who love to brown their skin. This tax will continue next year and it just started at the beginning of this month. Although it is a mid-year 2010 tax, it is still a new tax that will primarily impact individuals at the end of this year/start of next year as fall and winter approach.
• Brand Name Pharmaceutical Tax – This tax is an annual tax assessment on brand name pharmaceutical companies which amounts to a total of $2.5 billion for 2011. The end result is that many of us will see our brand name drug costs going higher.

Other Notable Tax Changes:

• Coverdell ESA and 529 Plan Alterations – Previously, under a 529 Plan, taxpayers with children were encouraged to invest after-tax money into an account that increased with tax free withdrawals assuming the money was being used to contribute towards educational plans. However, in 2011, 529 Plan withdrawals will not be tax free when paying for the cost of computers or internet access. Coverdell ESA Plan will see changes as well. This plan is similar to the 529 Plan but is directed towards elementary and secondary educational costs. In 2011, the maximum contribution limit per year on this plan will drop dramatically from $2,000 to $500 unless Congress moves quickly.
• HSAs, HRAs, and FSAs Cannot Be Used for Over The Counter Medicine - Americans will not longer be able to use Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) to purchase over the counter medicine if it is not insulin.
• Economic Substance Doctrine – This sounds confusing but basically is a new IRS provision that gives the IRS more power. If the Internal Revenue Service deems perfectly legal tax deductions as not having “economic substance” because the underlying transactions were enacted to avoid taxes, your business could face penalties. (Weakonomist note: this is very interesting.)

Many of these changes could be reversed if Congress acts as many bills in congress address many of these deductions, credits, and tax hikes. Given the economic environment, the President is in an inevitable tough situation as he doesn’t want the deficit to grow any more than it needs to but yet he doesn’t want to raise taxes especially during tough economic times. Pressure from Congress to curb the rapidly growing deficit coupled with cries from the public against increased taxes leave policy makers with little hope for compromise.

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Well good times or bad, SS is a mess. It was designed on the premise of a Ponzi scheme. And as long as the population kept growing it wasn’t a problem. But the post WWII adults weren’t into prophylactics so we ended up with a bloated generation. They stocked up the SS fund quite well, but because of more people living longer and Congress treating the trust like a money machine, SS has problems.

But there is good news about SS. People know that the system is broken and people like me generally expect to pay in and get nothing back. Even the old people expect to have their benefits cut or altered.

The part of me that thinks about what’s good for the country thinks this is the right time to go ahead and introduce reform. Since we already know the system is broken, let’s go ahead and fix it. But the politician in me knows that it’s not going to happen, because whichever side of the aisle introduces legislation will risk alienating the constituency partially by the other side objecting to every measure. The Democrats have control for the moment, but they wouldn’t dare doing anything that could lose a voter right now. And the Obama administration has seen the consequences of trying to do too much at once. DC is like a game of pool, as much as you want to just pick up the 8 ball and put in the corner, you have to knock all the other balls in first. Who is going to have the stones to break the rules? No one currently in office.

And just to review, what will reform look like? Could be anything, but we’ll probably see a combination of tax increases and raising the retirement age. The program should be phased out, but we’ll see that right around the time Medicare shuts down and Wall Street converts to non-profit.

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Years ago, I’ll bet people said the cigarettes were bad for you. People knew this, but continued to smoke anyway. Thank goodness those days are behind us right? It took a generation of publicity announcements to get people off of smoking, but in the mean time taxes were introduced as a means of curbing some smoker’s desires. The effectiveness can be argued, but it surely works for some, especially if the tax revenues are used for awareness.

Which brings me back to fat people. I am myself, not skinny. I’m not fat, but I’m definetly in that “I’m married and don’t have to try anymore” category. My biggest vice is ice cream, which has plenty of sugar and fat. For other people their vice is steak, or doughnuts, or beer. Whatever it is, many of us have something that we take in too much of, and it adds pounds. Obviously, putting calorie information on packaging doesn’t work, I look at the calories every time I buy ice cream. But I do believe there is some kind of tax that would keep me from eating as much ice cream.

Fat tax.

Fat tax can come in many forms. A tax on high fructose corn syrup, fat, calories, desserts, whatever. But I have a different system in mind. Volunteer yourself to join a government program where you are weighed and measured for fat content. You pay a tax of a certain amount over an “ideal” amount. Next year, you go back and do it again. If you are still above the “ideal” you pay a tax again, proportionate to what is ideal. Once you get below the ideal amount, the goverment starts paying you in the form of tax breaks. But the deal is you have to continue to do the checkup every year to get the break. If you stop coming, you don’t get the break.

The fat people paying the tax would offset the skinny people getting a break. And of course, if you’re already skinny, you can get in on the game to make sure you stay skinny. There would be a downside limit to keep anorexics from bankrupting the program.

I know this system isn’t perfect, and there are plenty of ways to game it. But there are ways to game any system. Maybe a tax on calories or sugar would be better. You can use to the revenue to subsidize healthy foods, making it cheaper for people that can’t afford it. I currently pay $1.80/lbs for apples, I’d buy more if it were $1. Same goes for lettuce, I love salads.

The reason I like my system is that it’s opt-in. And if you don’t think huge people will sign up, think again. The program would be a one-time only enrollment. So if you ever want to get money back, you have to enroll at the start.

Again, this system may not be perfect, but I am all for some kind of fat tax. It will work on me, but I don’t have the willpower to do it to myself. Bring on the fat tax.

Photo: Michael Dawes

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Why did behavioral economics get so popular so fast? What, you read a book about it and were fascinated so you started a blog just so you could talk about it? Oh wait, that’s me. But that is kind of how behavior economics did become so popular. People were fascinated by it because it offered simple solutions to real life problems.

For example: employers want to get their employees to enroll in 401ks, but they aren’t. They were given the materials on investments, told they need to do this if they want to retire, and even pointed out they’d get free money from the company in matching contributions. But many people still didn’t sign up. I’ll let you read the books to find out why, but behavioral economics has a solution. Auto-enroll people and the problem goes away. People are forced to opt-out, and few do so.

Behavioral economics focuses on the bad decisions we make, despite those decisions not being the rational ones. It’s rational to save for retirement, but many don’t. It’s no wonder behavior economics has become so popular, in many cases, the solution to a problem is simple.

But behavioral economics can only go so far, as we’re starting to learn. The minds inside the DC Beltway have caught on to the this new wave and legislation is starting to reflect some of the discoveries in this new field of research. For example, to deal with the problem of fat people in America, the healthcare reform bill includes items such as requiring calories on menu items in restaurants. A better-informed consumer will make smarter decisions. But studies are showing this doesn’t do much for getting people to eat less.

This is where traditional economics can step in where behavioral economics cannot. The problem is traditional economics pisses more people off. To fight the problem with obesity, we could start subsidizing fruits and veggies instead of high fructose corn syrup. This will drive the cost down of healthy foods. That will piss off corn growers, who I’m guessing have a stronger influence on Congress than restaurant owners. All this is a summary of what two dudes wrote in the NY Times last week about behavioral economics. But I want to take it one step further.

How do we solve the problem of Congress taking the easy way out? The solution is easy, but hard to implement. Limit Congressional terms. It doesn’t matter what the limit is, because once a Congressman can’t run anymore, then they’ll start passing stuff that’s good for the people. Just look at Chris Dodd. As chair of the Senate Finance Committee, he was no doubt in the pockets of Wall Street. He received some great contributions from the likes of AIG, Fannie and Freddie, and everyone else; even a great loan rate from Countrywide. During the financial crisis in 2008 he objected to the actions of Paulson’s Treasury Department while claiming these companies were fine.

But, I’m sure sometime in 2009 he decided he wasn’t going to run anymore so he got involved in the CARD act and the newly minted financial reform bill. Not only that, but he even flip-flopped on his position about gay marriage (he now supports it) in 2009. It’s amazing what you can accomplish when you don’t have to worry about raising money anymore. So let’s fix the real problem with policy by allowing Congress to make rational decisions not having to worry about raising money from wealthy donors with certain positions they want you to take.

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Ever been arrested? If you’re a loyal follower of this blog I doubt it, mostly because there aren’t many amateur economists/criminals out there. But maybe you got a DUI when you were young or got busted for that little bit of pot in your car. Sometimes you don’t have to post bail when you are arrested, but the more serious the crime is, the more likely, and larger amount your bail will be.

And what exactly is bail? When you’re arrested, you don’t immediately go to trial. You have two options usually, you can stay in jail, or you can leave. To leave, you will likely have to post bail. Sometimes you here about bail being set at $X for someone that’s been in the news for being arrested. For example, Bernie Madoff’s bail was set at $10 million. For small crimes, bail might be just $1000. It depends on two things, the severity of the crime, and the risk of flight. The risk of flight is the risk that you will try to leave the country, or at least not show up for trial.

So the bail is basically collateral. If your bail is set at $10,000, you give the court $10,000 to get out of jail. If you show up to court, you get your money back. If you skip out, you don’t, and the court keeps your money.

But many times, those that are arrested don’t have enough money to post bail. Perhaps that’s why they committed their crime in the first place. That’s where bail bondsmen come in.

A bail bondsman is the best and worst friend to a criminal with no money. A bondsman will front the money to get you out of jail, but they aren’t doing it out of the goodness of their hearts. They still require 10% – 20% of the bail from you, and no that doesn’t go towards your bail, that’s their fee. So your bail is $10,000 you’ll have to put up $1,000 and if you skip out on court the bondsman is going to come after you for the $1,000 fee plus the $10,000 bail.

Which brings me to my next point. Bail bondsmen will come after you. When they get you out of jail, they’re essentially promising the court that you will show up. When you sign on the dotted line for them to get you out, you also sign over some legal rights. For example, a bondman can come into your house and rummage through your stuff if you don’t show up to court. No need for warrants or prior warnings. They can take possession of you, essentially arresting you, if they find you. If you’ve see Dog the Bounty Hunter, this is why he can arrest the people he does. These people posted bail through a bondsman and didn’t show up to court. The bondsman works with a bounty hunter to try and track you down so he can get his money back from you.

But why let a criminal out of jail in the first place? Why not just hold them until trial? If trial happened the next day, or even the next week, that might make since sense. But the judicial system allows for a fair trial which gives the defense (and prosecution) time to gather evidence and witnesses. Trials can be pushed back months, and in some cases years depending on the circumstances. There are two reasons not to keep someone in jail for this time.

1st, in the United States you are assumed innocent until proven otherwise. It is unfair to keep someone in jail. But at the same time you need to make sure they show up for trial, which is the point of bail.

2nd, it’s expensive to keep people in jail. Estimates vary and change from location to location, but I’d say $100 a day is the minimum cost per criminal. And the more arrests you have the more facilities you need. Since taxpayer money goes to keep them in jail, and criminals are innocent until proven guilty, the bail system seems to make sense.

But that doesn’t mean it’s perfect. Far from it. If you check your local paper, you’re bound to find an article once in a while that talks about the relationship between bondsmen and the court system. It’s not always the case, but since bondsmen are always located near the courts and have lots of interaction with them, it’s no doubt relationships sometimes get friendlier. Bondsmen are sometimes able to negotiate the amount of bail down when you don’t show up. So again, if you don’t show up and the bondsman must pay $10,000, they might negotiate to half that. Still though, they’re insured against these losses so the insurer will share some or all of the burden.

Researching how this system works was very interesting for me. As I’ve never been arrested and am not active in anything that could put me there, I don’t expect to learn from this first hand. But I love watching crime shows and always wonder exactly how this system works. The guy that robbed a gas station probably didn’t have $5,000 for bail so I didn’t really know why they would make him pay.

What started out as a learning exercise for how bail works, has me on a new tangent, how we can make jail cheaper. We’ll come back to that another day perhaps. Throw some ideas in the comments and if you’ve ever been arrested I’d love to read about your experience with bail.

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A study carried out in 2009 by Theos, a British think-tank, found that poor Britons spent a greater part of their income on lottery tickets, particularly scratch cards, than rich ones. In South Carolina, households with incomes of less than $40,000 a year account for 28% of the state’s population but more than half of its frequent lottery players.

More than one American in five thinks that buying lottery tickets constitutes a sound retirement plan, according to a Tax Foundation study. And research carried out by the Federal Reserve Bank of St Louis in seven American states found that much of the money spent on lottery tickets came from some form of government assistance (such as social security, unemployment or disability benefit).

How do we solve this problem?  Mandatory 10% tax that goes towards retirement?  That can’t work.  Should society just accept this is the general behavior of low-income homes and those on government assistance?  I can’t just shrug my shoulders and move on.

Economist via Nudge Blog

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Let me give you a little background on Krugman so we can compare.  He’s a professor of economics at Princeton, and has degrees from Yale and MIT.  He also has a column with the NY Times and won the equivalent to a Nobel Prize in Economics (but not in a field related to  domestic economic policy).  I have none of those things.

Krugman writes a column and a blog for the NY Times, he’s highly liberal, and very much loves to spend money.  I’d probably say he’s as crazy as Glenn Beck.  My basis for this is he complains about policy, preaches his doctrine to loyal and brainwashed followers, and despite having so many followers nobody wants him in their administration advising on real political affairs.  So that basically covers why I have such a fundamental problem with him, now I want to talk about a specific one.

In his latest column, Krugman is writing about how Congress cannot pass legislation that would extend unemployment benefits.  He argues that unemployment benefits is a great way to stimulate the economy because it helps support demand, which is the biggest issue with the economy now.  He even acknowledges that prolonged unemployment benefits supports a disincentive for people to seek work (see France).  He says that such a situation does not apply here because there are no jobs for people to pass on.

Congress is getting held up by Republicans and some Democrats that are tired of spending money.  It’s no secret we don’t have any money to spend, and since the Obama stimulus was a bomb, they’re reluctant to throw more money after bad.  Krugman believes government spending money in recession is key to get it out.  There is historical precedent to this, so he’s not crazy there.

Krugman misses a few things with the unemployment claim.  First of all, extending benefits won’t do much for demand.  People still have to pay off their demand from a few years ago, via credit cards, HELOCs, and mortgages.  Second, the reason there is no demand is we have no confidence in the future.  Those of us with incomes won’t spend our money until we’re sure we’ll have incomes in the future.  Finally, it’s too hard for us to have demand when the government is spending all the money taking up what would be our demand.

If you’re having trouble following, it’s a chicken and egg argument.  What cog in the wheel of the economy will get everything going again?  I don’t know, but I don’t pretend to know either.  Krugman pretends he knows.  He references “recent research” (but doesn’t link to anything), but at the same time is a worshiper of the godfather of economic spending, John Keynes.  Keynes’ research would be considered ancient today compared to a real science.  So what matters, recent research or WWII economic thinking?

Krugman would say the stimulus wasn’t effective because it wasn’t done properly.  No $#!+.  But you can make that argument every time it doesn’t work until the economy is up and running again.  Krugman’s brilliance is that he can be wrong until he’s right and look like a hero.

This is because he sits on the sidelines.  He’s in New Jersey, not in Washington.  He’s an Ivy League, east coast, cushy jobbed economist.  I’d trade my job for his in a heartbeat.  But, I don’t think anyone in such a position of power over people should talk the way he does about policy without actually making a meaningful contribution to it.  Like I said, he’s like Glenn Beck, but for left wing economics.  And like Beck, he should keep his mouth shut until he’s sitting at The Fed, in the White House, or the Capitol.

Photo: Tony the Misfit

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I’ve always thought about the days leading up to the signing of the Declaration of Independence. I imagined John Hancock, Sam Adams, Tommy Jefferson, and Benji Franklin drinking at a pub the night before thinking two things: “we’re about to make history tomorrow” and “WTF are we doing?”

But of course, history is never how you imagined it. They may have been too distracted with details the night before to really take a step back and think about what they were doing. See, July 3rd was spent arguing all day about the verbiage of the Declaration itself. Just as Congress today will spend hours upon hours debating something, the 2nd Continetal Congress did the same thing. In the end, they actually deleted almost 25% of the Declaration; I’d guess they did that to fit everything on one page single spaced with one inch margins. But it was actually to remove some key parts, such as a condemnation of slavery. My how history could have been different if that was in there!

Being a history buff, and this being the weekend of July 4th, I thought it would be fun to look at what happened just before and after July 4th. Here are some interesting factoids I came across:

It was on July 2nd that Congress voted for independence and is the official day we became independent.

The whole process involved a lot of debate, disagreement, and voting. And that was just to agree on whether or not they’d declare independence and form their own country. The final vote was 3-2, so it barely even happened.

John Adams wrote a letter to his wife saying he knew this day would be an important day in the history of this country. Though he was off by two days because he thought it would be July 2nd.

So what is it that happened on July 4th? After a couple of days debating over what should be in the Declaration, they finally decided on a final draft. This is why the Declaration is dated July 4, and that date explains why we celebrate independence then. It’s not the day we decided to be independent, just the day we made it official.

The signing of the Declaration is very much a debated topic. Benjamin Franklin and others are known to say that the Declaration was signed on July 4th. But there are official documents of the day that said it wasn’t signed until later. Furthermore, some of the people that signed it were not present on July 4th, and still others weren’t even members of the Congress then. If I had to venture a guess, I’d say some people signed it on the 4th and some people signed it later.

And what about this John Hancock guy, what’s he famous for? He was very much a patriot, but other than having the biggest signature on the Declaration we don’t know him very well. Well, he was smart enough to get to be the president of the Congress for that session, which probably explains why his signature shows up first and is biggest. I’ll let you search more about him if you want.

Interestly, 8 people never signed the Declaration. Either it was because they opposed it or weren’t member of Congress when the opportunity presented itself. I’ll bet they regret that decision now.

You know that famous picture of everyone signing the Declaration? That’s not what it’s a picture of. It’s just a picture of the committee presenting their work to the full Congress.

Some of these things will be lost in history, but that’s OK. The spirit lives on today, and it’s why we celebrate the 4th of July. Even though we might should celebrate the 2nd.

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Just like I get a lot of ideas in my head that I never seem to make their way into a full blog post, I get lots of links that never seem to find their way into a a post of their own.  To clear out my “ideas” document I’ve decided to just let a few speak for themselves.  Hopefully one or more of these will interest you.

• CNET got to see how the new $100 bill is made.  If you remember, I talked about this new bill back in April.  It’s the most advanced monetary note ever made.  CNET’s tour starts off with an awesome picture of a guy holding millions of dollars worth of uncut bills.  I’m quite jealous as I’ve wanted to tour this facility for a long time.  Be sure to check out all the pictures and even a video of the process as well
• Morningstar has started to rank not just mutual funds, but rank mutual fund companies as well.  That’s a good idea as not all mutual fund companies are made equal.  I won’t tell you who they consider the best, but I’d bet you a new $100 bill that you couldn’t name the top 3, even out of order.
• My good economics buddy over at Economists Do It With Models posted a lot of good economics jokes as well as a good video from a stand-up economist.  Yes, stand up economist.  To get you interest I’ll borrow one of the jokes: How many economists does it take to change a light-bulb? 8, 1 to screw it in, and 7 to hold everything else constant.
• Economix talks about a term they call “swear jar economics“.  I’m sure behavioral economists have a more sophisticated term but it works.  Here’s the idea, if you want to stop doing something, punish yourself by having to give up money every time you do it.  Say you want to stop dropping the F-bomb.  Every time you drop it, throw $5 in an envelope or jar.  But what to do with the money?  Well it’s a punishment, so you can’t have any good use for it.  The best idea is to force yourself to donate it to a cause you hate.  If you’re a member of the Tea Party then maybe you have to donate the money Obama’s campaign, or some organization that supports stimulus spending.  I love this idea, I hope to implement something like this to help me cut back on sweets.  We’ll see if I can do it.

That’s all for this cleanup of my blog notes page.  I’ll probably start doing this more often.  If you crave more content please check out my blogroll as these blogs are selected by me for their interesting contributions to finance and economics.

Photo: Matt Browne

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And it’s no wonder, the government sucks not only at spending money, but collecting it too.  Case in point: the IRS.  I feel sorry for the IRS.  I’ll be it’s a madhouse every time Congress is in session.  No doubt they’ll pass another tax break or increase that makes their job that much harder.  The homebuyer tax credit apparently made their job really hard.  More than $27 million in fraudulent claims were filed in 2008 alone.  People taking the homebuyer credits included people in jail for life, and people that bought their homes before the credit was available.  On top of that, more than 10,000 people claimed credits for homes that someone else already got the credit for.  In one instance, 67 people claimed the same house.  Even IRS employees were found to have made fraudulent claims on the homebuyer credit.I don’t blame the IRS for not catching these.  I blame Congress for making the code so complicated that the IRS could never catch all the frauds, even with double the budget, resources, and agents.

If that weren’t bad enough, the government really sucks at spending money too.  I won’t go into too many details, but the Heritage Foundation found dozens of great examples of poor spending choices by our government.  Here’s another link in a slideshow format.  I don’t agree that all of these were wasteful, and acknowledge that some are taken out of context; but some of these look really bad are were the result of porked bills and poor planning.  Here are some of my favorites:

• $123 billion was wasted annually over the last 5 years on projects that didn’t benefit the intended parties
• Almost half of all government credit card purchases are improper or fraudulent.  Including gambling, mortgage payments, $167/person meals for USPS employees
• Former House speaker Dennis Hastert collects $40k/month for work expenses, despite being employed today as a lobbyist
• Some federal employees refuse to fly coach, costing us $100+million a year in upgrades
• DOD wasted $100 million on unused flight tickets when they were refundable

Admittedly, these were cherry-picked.  However there is no way a private sector employee would get away with such things.  They have controls in place to catch wasteful spending.  Sure stuff slips through the cracks, but nonetheless our government has not fostered an atmosphere where employees realize they’re spending OUR money when they do such things.  There is no feeling of guilt here.

Now in full disclosure, the Heritage Foundation is a conservative thinktank.  But much of this spending has happened on conservative watch and Hastert himself is a Republican.  I think they, like me, really have a problem with wasteful government spending.  This is why I’m concerned about the government’s ability to actually stimulate our economy.  Sure they can spend money, they do it better than you or I could ever hope to.  But if the money isn’t spent properly and strategically, it won’t help anyone.  So until the government can figure out how to spend and collect money, I suggest they take a back seat.

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1. A Look At Savings, Spending, and Income
2. Top 10 Reforms To Make The US Federal Government Better
3. WaMu Crying Because They Didn’t Get TARP Money

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