AskDong

Larry Page, and Sergey Brin of the I will do no evil folks of Google and Megalomaniac Steve Jobs have one thing in common. All three of them of earn a lot less than me in wages. Too bad that isn’t really saying something about me. All three of them take home a salary of $1 per year. Sergey and Larry have been earing $1 for a few years now. Steve has been doing it longer than those two. The nominal salary is intended to indicate a commitment to the company each of them works for (and founded). At the surface of it, it sounds like these CEOs have been able to eschew the greed that is so prevalent in the corporate world. However, like everything in life, it’s not so simple, especially in the case of Steve Jobs.

None of these billionaires are lacking in money. Their wealth is primarily determined by how the GOOG and AAPL stock performs. I applaud a compensation structure that rewards CEOs who truly add value to a company instead of just holding the job. Long term ownership is the key part of a proper incentive structure for senior executives. While I do believe that all three of these men have taken the $1 salary as symbolic gesture of how they feel about their work, I also feel that $1 salary is a bit of a sham.

In the case of Steve Jobs, his $1 salary is particularly disingenuous because he receives particularly generous compensation in the form of stock. The Googler’s $1 salary is a more genuine reflection of their compensation as they are not given gigantic stock grants. They have enough stock as is.

The problem of the $1 salary is that it’s another example of the problem with having two different tax rates for capital gains versus income. I have a problem with this in the realm of private equity, and with further reflection have an increasing problem with it in all aspects. Not only are capital gains taxed at lower rate, but income derived by capital gains avoid payroll taxes as well. The uber wealthy like Jobs and Larry Page can avoid paying social security and medicare taxes. Are they intentionally avoiding these taxes? In the case of Larry and Sergey, I doubt it. Steve Jobs, I’m not so sure of. Regardless of the reason for their compensation structure, it exposes flaws in what should be progressive tax structure.

At the same time I am conflicted. Fundamentally I do understand why it’s good to have a lower capital gains rate - to spur new investment. The problem is really with what is often an arbitrary distinction between regular income and capital gains. Salespeople who are paid by commission have as much income risk as as an executive who is paid by stock grants. Yet their incremental income is viewed very differently by the IRS.

I have a question from a reader of AskDong.

i’m doing my own taxes this year for the first time in my life. what is the best software to help me? i would like to download turbotax, but want to get the right one. my taxes should be very simple. i have one salaried job, and a few bank accounts earning interest. will the free version of turbotax be enough, or should i get deluxe?

thanks!

-R

Intuit in effort to increase sales and extract extra margins had 4 different versions of TurboTax, and the online cost vs purchasing a physical copy of the software.  The physical versions are more expensive but allow those who are concerned with privacy to hold their own data, and also allow the completion of different returns. Using TurboTax online is cheaper than buying the actual turbotax software for the computer, but limits you to filing only one return.  For a family that might have many different taxes to file, the online solution might not make sense.  Intuit still charges for each electronic filing, so it still profits from each additional tax filing unless of course you decide the mail the filing.

Free - $0/Not Available. The free version of Turbotax is only available online.
Basic - $14.95/$19.95
Deluxe - $29.95/$44.95
Premiere - $49.95/$74.95
Home & Business - $74.95/$89.95

This year I got premiere, but in years past I’ve stuck with Deluxe. I know from experience now that Deluxe doesn’t differ much from Premiere. Premiere does handle rental properties, investments, and business income slightly better than Deluxe.  However for most individuals especially those who don’t have rental or business income,  Deluxe is more than adequate.

The real question is when is standard enough? Since I’ve never used either the Free or Basic version before, I decided to give them a quick run though online. There’s hardly any difference between the Free and Basic version. The Basic version has a slightly more interactive interface, and guides the user better with questions.  In terms of content I believe they are identical. I would say if you’ve used the 1040EZ in the past, and/or rent instead of owning then the free version of TurboTax is probably enough. I don’t see much of point in ponying an extra $15 for the basic version.  The big addition to the Deluxe version of TurboTax is that it handles mortgage interest deductions.

I was at Costco the other night, and ended up picking up a copy of TurboTax Premiere. I’ve been a user of TurboTax every year since 1999, and have owned Intuit stock since last year. Intuit’s Turbotax franchise is a cash cow. Every year, users buy another copy. There’s minimal software development year to year. I’ve been using it for 8 years, and the cosmetic changes are minimal. The more important part is incorporating changes to the tax code, and even there we’re not talking rocket science.

In the past I’ve purchased the Deluxe version, but this year I decided to go with the Premiere edition for an extra $20 or so. The Premiere version includes more features geared towards Rental Property owners and Investors. While I don’t consider myself much of either, I am at least technically both. Shelling out the extra money for a few more features seemed like a worthwhile experiment. Intuit offer 4 different version of TurboTax:

• Basic - If you’re doing pretty good with the 1040 EZ then I imagine the basic version is more than enough
• Deluxe - If you itemize your deductions, then Deluxe is probably the way to go
• Premiere - Some additional features for Investors (Better entry and tracking of cost basis) and Rental Property Owners (Depreciation)
• Home & Business - This version is for people who have their own business.

Originally I was going to download TurboTax as that was more convenient, and my cursory search online for a deal returned no stellar deals. However at Costco, I was pleasantly surprised to find TurboTax selling at price point that was better than anything I found online, about $20 cheaper than the listed prices at Intuit. I purchased Premiere for $54. Deluxe was being sold for about $31 or about $15 cheaper than list price.

I’m still waiting on a number of tax documents mostly from my banks and brokerages, but I’m hoping to be done with my taxes by mid February.

Politics is politics. Economics is Economics. While too often cross paths, nary do they go in the same direction.  Now that people are speaking of recession in less than hushed terms, politicians of all stripes and colors have raised their no so collective voice in a cacophony of proposals.  I’m personally less than impressed.

We’ll start from the top with Bush proposed tax rebate. While personally I’d welcome a tax rebate, I also question a) how much good it will do the economy and b) how are we paying for it? There’s no question the economy is sputtering. While there’s still debate amongst experts if we’ll hit an actual recession, there’s not no debate in mind.  A recession at this point is inevitable.  I hope it to be mild, and more importantly that Americans will learn some valuable lessons on over consumption and bubbles.  A tax rebate will certainly help prop up consumer spending which is the largest part of the U.S. Economy, and potentially help get the economy sped up again. However, I find the tax rebate to be a short term fix, a short term fix that will not address fundamental problems.  The biggest long term problem is that the U.S. Savings Rate is too low.  Americans spend more than they can, saving much less than they should.  The tax rebate exacerbates the problem because the U.S. Government is one of the more profligate borrower and spenders. The money to fund the refund isn’t appearing from thin air.  The Government will have to borrow to fund those checks.

Hilary Clinton also made some headlines for her proposal to deal with the housing meltdown. The thrust of her proposal are:

• 30 Billion Fund to Help with the Foreclosure Fallout
• 90 day moratorium on foreclosures, and 5 Year rate fix
• 25 Billion Emergency Energy Assistance Fund
• 10 Billion in Extended Unemployment benefits

The majority of the press has been pretty merciless on attacking point 2, the 5 year moratorium on interest rates.  This would effectively be government price fixing. While there are merits to some price control like minimum wage, and caps on interest rates, this would be price fixing after the fact.  The fact is that consumers need be reminded that they should not borrow more than can afford, and banks need to recall that good underwriting means not lending to those who can’t afford to pay the loan back.  The current housing crisis has hit banks and consumers alike, but to reward bad behavior sets a bad precedent that will only lead to more pain the future.

As my blogroll would indicate, I am avid reader of Greg Mankiw’s Blog even though some of our politics diverge. I’ve become somewhat backlogged on my reading, and only recently came across a december post in which he highlighted a study from the COB (Congressional Budget Office) on historic taxation. Dr. Mankiw given his views on taxation uses the study to highlight the fact that rich are not paying less in taxes today than they have historically. If anything they are footing a greater portion of the tax bill. Below is a chart of effective tax rates for the different income quintiles from 1979 to 2005. The chart on the right is normalized in that I’ve expressed the effective tax rate as ratio of the average tax rate. Everyone is paying less in taxes today on the most part, and the bottom quintile more than any other group.

Since taxation is something I know I have disagreed with Dr. Mankiw in the past, I was curious to take a deeper look into the actual report. My first questions was, “How is the effective tax rate being measured?” Many times studies will ignore payroll taxes such as social security and medicare which impact lower income families more since both are flat taxes and in the case of social security maxes out (i.e. only the first 97,500 of income is taxable by social security for 2007). I read through the COB FAQ and was reasonably assuaged that their methodology was appropriate.

However, looking more into the data it becomes clear that effective tax rates, and contribution to the taxroll is only one part of the story. The other and more important part of the story is income distribution. The rich are getting richer. The share of income that is accruing to the top quintile has been steadily increased, while the bottom quintiles has seen stagnation.  Below is a chart from the same study which shows the share after tax income by quintile over the same period.  The dip in 2000 I suspect is attributable the huge stock market declines which led to lower capital gain income for the top earners.  On the Y axis is the share of total after tax income each quintile earned.

Numbers don’t lie, but what conclusions we draw from the numbers are often a function of personal beliefs and politics. I’m not the the type of person who believes taxes for sake of taxes, but I am believer when poorer Americans are failing to make economic progress while rich Americans are making money hand over fist there’s something wrong. I certainly don’t feel like rich Americans should be punished for our success via higher taxes, but I also question why is that the poor have failed to enjoy the economic boon that the top of America has? I know personally I would not be opposed to paying higher taxes to make sure those at the bottom of the ladder have better health care and more opportunities for advancement.