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Sin Tax

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A comment by David left on a blog post of mine a bit ago (“Winning the Savings Lotto“) got me thinking more about so-called Sin Taxes and their usage in American society.

Sin taxes have been around for a long time: Pope Leo X was known to enact taxes on registered prostitutes, and in the U.S., the Whiskey Rebellion of 1794 grew out of frustration over a federal tax on alcohol and carriages passed by Congress in 1791.

While everything from pornography, cigarettes and alcohol have been the target of sin taxes, lately talk has shifted to focus on taxing unhealthy food. In the Spring of 2009, President Obama suggested that taxing soft drinks could be a way of paying for his proposed health care reform. More recently, a state representative from Mississippi proposed a 2-cent per ounce tax on soft drinks, with the revenue to go to obesity prevention programs.

Proponents of the sin tax model have pointed out that those engaging in unhealthy behavior (such as smoking, drinking and eating bad food) create a financial burden on society when they eventually suffer the consequences of engaging in those types of behaviors long term.

While this may intuitively make sense, to the best of my knowledge there hasn’t been any good, unbiased, long-term studies done on this subject that could either support or refute that assertion. I know that there have been studies published, and I’ve looked at a few, but it wasn’t difficult for me to spot biases or study inconsistencies that negated whatever point they were trying to make, so readers, if you know of any conclusive studies, I’d love to read them.

Opponents of sin taxes often point to the regressive nature of the sin tax – that is, studies have shown that in many areas, those in low income settings are more likely to be avid consumers of things such as tobacco and alcohol. Additionally, in some cases a high sin tax reduces the consumption of those goods in the above-ground economy but can cause the black market for those items to greatly expand – cigarettes and alcohol are two legal consumer items that are a good example of this. Other will also attack the sin tax model from a civil liberty perspective, saying that the government does not have the right to control those markets when while some may find those behaviors objectionable, their usage has a limited social consequence.

My personal opinion is that sin taxes are nothing more than a politically-safe way for a public official to raise funds. In some cases, I can see the logic behind doing something like the Mississippi soda tax (even if I don’t agree with it, I can see the line of logic between taxing soda to institute an obesity prevention program), but even so, I question the true effectiveness of such program. You may raise $1-million in revenue from a sin tax, but a significant portion of that money may be eaten up by the logistics of designing, implementing and collecting those taxes.

Also, in general I’m uncomfortable with the idea of the government deciding what a “negative” behavior is. I know people who smoke, and I enjoy alcoholic beverages from time to time (if you see me out in D.C., three fingers of a single malt scotch is my drink) and New Years resolution or not, enjoy unhealthy food. I don’t like the idea of paying extra for those items – as opposed to other non-“negative” activities of similar relative value – just because some people find it objectionable.

This is definitely a controversial topic; readers, what are your opinions on sin taxes?

-Michael
Twitter: @michael_dink

Move Your Money

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Interested in finding a way to start off the New Year by making a difference? Perhaps it could be as simple as moving your money.

As most of you have likely already caught on to, there has been a movement started to try and get American to move their money from larger banks to more community based banks and credit unions. I personally liked reading the great success stories from the movement.

While it might not work for everyone, I do believe that collectively it can affect large banks and give a great infusion to smaller banks to be able to further develop a network of smaller, but stronger banks.

You can check out this video for more info as well.

My twin sister and I were having this debate over the holidays before I had come across the concept as a wider idea. She switched over to Albina Community Bank in Portland, Oregon and I think now at last will get her husband to move over as well. They used to bank with WaMu, which has since been taken over by Chase. Albina does some incredible community programs that really make an impact in the inner Portland area, so it is a win-win situation.

I only wish there was as good of an option here in DC. I used the bank finder on the Move Your Money site to see what was in our area. It looks like a couple of tiny banks that aren’t likely to have the online capability that I need while I’m out of the country. I have all my money in ING Direct, so it is likely to have less of an impact in the states as it is European owned.

Readers: I’d love to hear if you are willing to move your bank or if you are already at a community based bank.

Cheers,

Miel

FSA Pros and Cons

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It is that time of year, where most Americans have the option to take advantage of the Flexible Spending Accounts. This program allows you to take out your magic eight ball and determine how much money you might spend in the next year on medical expenses.

My office today was a buzz with folks talking about the pros and cons of this program, so I thought I’d share with out readers some of the highlights in making this choice:

Tax Break. The advantage to FSA is that it makes your medical expenses pre-tax.

Use or Loose. The biggest issue of FSA is that you must use or loose whatever you decide to allocate during the calendar year. For example, if you are like my sis last year and knew she would be giving birth, but didn’t know how much cheaper it would be to choose a home water birth, you may end up with more bandaids and aspirin than you know what to do with.

Management. FSA requires someone who is willing to deal with reimbursements. If you are someone like me, this is fine, but many others just can’t manage the effort of submitting receipts. No matter how good the tax free part is, if you don’t submit for reimbursement then FSA isn’t for you.

Effort v. Payout. For me, I take advantage even though it is for a relatively small amount of money. Last year I took $160 in allocations and would have been able to reimburse for $180-$200 without any difficulty. Obviously this isn’t a huge tax advantage for me, but I take what I can manage.

Upfront Reimbursement. You can spend all of your medical expenses on day one and ask for reimbursement but you will continue to pay into your allocations per pay period through the rest of the year. This means that if your expenses fall at the beginning of the year, you don’t have to pay off right away.

Quitting Time. Also remember that if you leave a job, you must spend all of your FSA allocations by your last day of employment. This means that if you leave at the beginning of the year and have already been fully reimbursed, you get off for the rest of the allocation – but on the flip side, you must spend everything that day. If you know you’ll be leaving, start booking those appointments now!

Readers: Let us know whether you are opting for FSA this year!

Cheers,

Miel

Winning the Savings Lotto

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As I was going through my daily list of websites I check in the morning, I came across this article on CNN about people who play the lottery (“Seduced Into Spending Thousands on Lottery Tickets“).

While the lottery is itself an interesting personal finance topic, what really caught my interest was a blurb at the end of the article about incentivized savings programs. A program developed by Peter Tufano from Harvard Business School plays on the “game” appeal of a lottery to encourage people to save money. This program has caught on in Detroit, MI, where a number of credit unions have joined the “Save To Win” program. Essentially how the program works is for every $25 you contribute to a 1-year CD you receive a lotto ticket. The winner of the lottery wins $100,000.

Using incentives to encourage “proper” behavior is nothing new within economics. So-called “Sin Taxes” work in the opposite direction: the idea that heavily taxing such vices as smoking and alcohol raises tax revenue as well as discourages those negative behaviors. This is also why we have first-time home owners tax credits, tax deductions for charitable donations and the like. The popular book “Nudge” by Richard Thaler outlines a system of nudges and incentives that can be used by a government to encourage positive behaviors from its citizens.

Peter Tufano and Daniel Schneider wrote an interesting paper outlining their ideas regarding incentivizing savers and the theory behind such financial innovations in their paper entitled “Using Financial Innovation to Support Savers: From Coercion to Excitement“, published as Harvard Business School Financial Working Paper No. 08-075 (the full paper can be downloaded from the link above). That paper basically surveys a whole series of financial programs designed to encourage low and middle-income families to save. The article does not derive any conclusions about which programs are the “best”, but rather lays out a number of programs in a number of different categories, such as “Making it Easy for People to Save” to “Making Savings Exciting or Fun”.

What I concluded from the article after reading it was that the most effective or popular programs weren’t necessarily the ones that required a lot of government action, and some did not involve government agencies at all, instead relying on charitable organization or other non-government entities. For example, the lotto program mentioned above is very easy to implement – assuming that each specific program meets certain legal provisions, which admittedly can be tricky – and is very effective at attracting new savers.

Also, Tufano and Schneider make a point of noting that no broad solution exists for the problem of getting low and middle-income individuals to save, the effectiveness of a program is dependent on the personality of the participants as much as any other factor. All too often it seems like the government attempts to create a one-size-fits-all solution to a problem. Alternatively, if government agencies can instead support a broad range of programs, the cumulative effectiveness of all the programs could possibly be more effective than a massive program designed to be the all-encompassing solution.

Readers: what do you think of the paper (if you read it) and these types of programs? Do you think they’re effective in the long-term? Is there a better way to approach the problem of getting people to save who otherwise wouldn’t?

Michael
Twitter: @michael_dink

Goals

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It’s that time of year again. Set goals and find a way to stick to them. Our goal at the moment is to finalize ours for 2010 in the next week. We haven’t managed to do so yet, as we are just now rolling back into town from our holiday with family on the west coast.

We all very well know that it is basic, but here are a few tips to achieve your goals:

Inspire Yourself. Whether it is paying off debt, saving for a new gadget, putting away for retirement, or balancing your accounts – you must find a way to inspire yourself to do so. What is the pay off for you? Make sure it is worth while, and you’ll be much more likely to achieve your goals.

Make it Achievable. Dream big, but not so big as to dissuade yourself or to become uninspired. Stretch yourself.

Keep Track of Yourself. Tracking your progress is also essential to making progress. You can continue to motivate yourself by seeing your progress, determine what you might be able to do to improve upon yourself. Give yourself timelines and stick to them.

Readers: What are your goals for 2010? We’d love to hear what is on the horizon!

Cheers,

Miel

The "Aughts" In Review

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The Washington Post had an excellent article/graph the other day about the year 2000-09, essentially saying that after numerous consecutive decades of growth, our economy in the first decade of the 21st century was at best stagnant (“The Lost Decade For the Economy“). I suppose two recessions will do that.

To quote the article:


Job growth was essentially zero, as modest job creation from 2003 to 2007 wasn’t enough to make up for two recessions in the decade. Rises in the nation’s economic output, as measured by gross domestic product, was weak. And household net worth, when adjusted for inflation, fell as stock prices stagnated, home prices declined in the second half of the decade and consumer debt skyrocketed.

It’s interesting to think that our nation’s economy has had such unbridled success for most of its history, and this past decade was the first in a long time where growth at best minimal and at worst stagnant. Obviously we’re still in the process of turning things around, and while some positive progress has been made, there’s still a long way to go. Let’s hope the Post does this graph again in 10 years and that it looks a lot different!

-Michael
Twitter: @michael_dink

What Won’t You Buy Online?

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I became an adult just as online shopping became a major industry. Bolstered by such outlets as Amazon.com and eBay.com, the digital marketplace has expanded exponentially in the last 15 years (Amazon.com was founded in 1994, eBay.com in 1995). In 2008, Amazon.com brought in over $19 billion in revenue; eBay.com brought in over $8.5 billion. While those numbers still trail traditional brick and mortar establishments – Target, for instance, brought in nearly $65 billion in revenue in 2008 from both their online and brick and mortar stores – those companies and other like them are still heavy hitters, and their forecast remains very positive.

Looking at those numbers made me think about what I buy online. Looking at my order history from such sites as Amazon.com and Newegg.com, I bought everything from books and hard drives to a GPS, a camera and even a kitchen knife set. In total, for the year 2009 I spent $1,335.98. That number was a bit hard to type, but when I look back, all of my major purchases were made online. And that doesn’t even count airline tickets or hotel reservations. So if I’m willing to buy books for school, home electronics and Christmas gifts, what am I not willing to buy online?
  • Engagement Ring – Although I didn’t purchase the ring in 2009, I did briefly consider that option when I did make the purchase. I think this rule extends to most jewelry. This isn’t for a lack of reputable online shops, but if I’m going to buy something along those lines I’d like to see it in person first.
  • Most Clothes – T-shirts are the exception to this rule, but if I have to buy clothes, I’d at least like to try them on first to see how they feel and fit. Some things can’t be reproduced online it seems.
  • Furniture – For pretty much the same reasons as clothes. There’s only so much that a picture can do for you.
  • Special Products – For example, I would never buy a new guitar online; I need to hold it, feel its weight and hear how it sounds.
While I was making this list, it struck me that the primary reason why I wouldn’t buy a certain product online was not due to a lack of faith in online retailers, or a lack of availability. Instead, it was because each product required some sort of tactile feedback that is meaningless for other products (I don’t care how a GPS “feels” in my hands). Will technology one day break down that barrier? First instinct says no, but then again, it wasn’t long ago that the idea of doing something like instantaneously sharing a document with someone across the world would be considered ridiculous. So who knows. Readers: is there anything you wouldn’t buy online?
Michael
Twitter: @michael_dink

Are Taxes Making you Blue?

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The latest reports are linking happiness with your taxation level. Are Taxes the Root of Unhappiness?, by Allysia Finley with the Wall Street Journal reports on a a study published in Science magazine showing that happiness levels may actually be linked to taxation.

The study found that New Yorkers are the unhappiest people in America and their neighbors in Connecticut come in a close second, followed by Michigan, Indiana, New Jersey, California, and Illinois. While at the same time, Louisiana, Hawaii, Florida, Tennessee, and Arizona came in as most happy.

The piece does say that they took into consideration the factor of weather, as California was not among the happiest. However, I think that one of the things that they didn’t consider is that all of the happiest places versus unhappiest do tend to fall towards the more laid back rather than the more driven areas of the country.

Needless to say, happiness is probably not an exact science, but it is something to consider.

The article gives a great deal of the detailed stats and findings, and it is certainly worth checking out if you are interested.

Cheers,

Miel
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