Sunday, March 11, 2007

The $350 Billion Tax Gap - How Do Ordinary Americans Contribute to This Shortfall?

Not exactly earth shattering news here, but the IRS estimates that the amount that the government is shortchanged every year is somewhere around $350 billion (roughly 12% of total receipts).

Surely, we're not out there purposely trying to deceive the government of their rightful share of our AGI (adjusted gross income for normal people), are we?

A recent issue of "The CPA Journal" (yes, yes, I know - clearly I have no life when I've succumbed to the mind-numbing pleasure of reading page after illuminating page of the CPA Journal) indicated that the bulk of this gap comes from two sources - Underreported small business and self-employment income ($155 billion) and underreported nonbusiness income ($57 billion).

I am of the opinion that most people do not knowingly "cheat" on their tax return, but that they might not realize all of the income streams in their life that may be taxable.

Here is my favorite example:

Mrs. X's new Kia Sophia is rear-ended by Mr. Y's new Infinity G35. The damage is minor but still reported by both parties to their insurance companies. Mr. Y was clearly at fault and after two estimates put the repair cost at $450, Mrs. X receives a check to repair her bumper. Upon further inspection of her bumper and after seeing a sick sale on Jimmy Choo's, Mrs. X decides that she can live with the scrape on her bumper and buys 2 new pairs of pumps w/the cash.

Does Mrs. X owe tax on the $450? Of course, she does - it wouldn't be a great example if she didn't incur a taxable event. Very few people would recognize this as a taxable event, but if you failed to repair your car, this check becomes taxable income (you can postpone the repairs for up to 2 yrs, but if the repairs are not done w/in 2 yrs the check would be income at that time).

Thanks to everyone for the feedback on the gas article. I'm fairly convinced that traders are behind the recent price run. Traders will be distracted this week by the complex task of filling out their NCAA brackets so look for some easing in gas spot prices :)

Questions/comments -

Tuesday, March 06, 2007

Gas Update...

I have been completely stumped by the recent 30cent jump in gas prices. Ten days ago I paid $2.09 for regular in NJ (there is typically a 25-30 cent spread between NY and NJ due to lower gas taxes in NJ). Yesterday regular unleaded hit $2.79 in Clayton.

I've read lots of possible explanations - summer additives, OPEC cutting production, etc - but nothing explains the speed with which gas prices have risen.

Today, I heard that a major refinery is down for another 2 mths which is causing a dip into existing inventories. This explains some of the rise, but the pace of this increase is still surprising.

I have a suspicion that I can't confirm that the slow trading in other commodities (copper, oil, etc) has led some of the fast money traders to chase gasoline futures because the trend is up. By increasing the price for the gas, the wholesalers have to increase what they charge retailers, etc. I'm trying to get some volume data on gas contracts. I'll post the findings later.

Anyone have any other insights?

Update: Here are some interesting data points: The NYMEX (basically the stock market for commodities like oil/gas/copper) set their all-time record for volume on 2/23 (roughly 2 wks ago). This record volume broke a record that had been set the previous week on 2/15. What does this mean? As I suspected more and more $$$ is chasing the commodity and that by itself is pushing the price of the underlying asset (gas in this case). We saw this play out in 2006 when oil was trading at $77 when the fundamentals said it should be trading at $60.

To my eye it looks like traders are chasing the quick buck b/c oil and other commodities have been underperforming. Traders are more easily distracted than a 4 yr old at Chuck E Cheese, so I would suspect that they'll move onto something else fairly soon. Unfortunately, that won't help you or I at the pump until they let the gas contract fall back to it's Jan levels, but at least we have a reason for the recent jump in prices at the pump.

Email me w/questions or comments.

The Perfect Storm continues despite today's pop...

There are some persistent myths that resurface across the networks when the markets get choppy. On a side note, this is one of my pet peeves - it is clear that most of the major financial outlets (CNBC, Bloomberg) are rooting for stocks to rise. When investors are making $$$ they are happier and they watch more CNBC, which equals higher ad rates and more $$$ for salaries of the hosts, but the blatant cheerleading is at least annoying and possibly dangerous for your financial health.

Here is one of my favorite myths that I've heard recently:

Earnings are STRONG
The bulk of the earnings strength that everyone is referring to comes from Oil, Commodities and Financial Companies (lots and lots of mergers). Oil prices have eased (hard to tell at the pump) but the bigger risk are the big financials - Lehman, Goldman, Merrill, etc. Their balance sheets are loaded with risky credits that could lead to some huge charges in the coming years.

Also, companies continue to buy back their stock at record rates. This is how the math works - company A earns $100 in year 1 or $1.00/share if they have 100 shares outstanding. If the company buys 50 shares back and earns $100 in year 2, earnings are unchanged, but b/c they now only have 50 shares outstanding they earned $2.00/share. The headline will read EARNINGS DOUBLE IN YEAR 2 FOR COMPANY A!!!! Clearly this is a simplified example but this has been a major driver in the STRONG EARNINGS story.

Again, job creation has been horrible in this recovery, earnings are not that strong, the housing debacle is about to cripple us, inflation is real and growing, and the fed has no room to cut interest rates.

The perfect storm continues to gather steam.