February 11, 2012
Even Critics of Safety Net Increasingly Depend on ItBy BINYAMIN APPELBAUM and ROBERT GEBELOFF
LINDSTROM, Minn. — Ki Gulbranson owns a logo apparel shop, deals in jewelry on the side and referees youth soccer games. He makes about $39,000 a year and wants you to know that he does not need any help from the federal government.
He says that too many Americans lean on taxpayers rather than living within their means. He supports politicians who promise to cut government spending. In 2010, he printed T-shirts for the Tea Party campaign of a neighbor, Chip Cravaack, who ousted this region’s long-serving Democratic congressman.
Yet this year, as in each of the past three years, Mr. Gulbranson, 57, is counting on a payment of several thousand dollars from the federal government, a subsidy for working families called the earned-income tax credit. He has signed up his three school-age children to eat free breakfast and lunch at federal expense. And Medicare paid for his mother, 88, to have hip surgery twice.
There is little poverty here in Chisago County, northeast of Minneapolis, where cheap housing for commuters is gradually replacing farmland. But Mr. Gulbranson and many other residents who describe themselves as self-sufficient members of the American middle class and as opponents of government largess are drawing more deeply on that government with each passing year.
Dozens of benefits programs provided an average of $6,583 for each man, woman and child in the county in 2009, a 69 percent increase from 2000 after adjusting for inflation. In Chisago, and across the nation, the government now provides almost $1 in benefits for every $4 in other income.
Older people get most of the benefits, primarily through Social Security and Medicare, but aid for the rest of the population has increased about as quickly through programs for the disabled, the unemployed, veterans and children.
The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits. A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement. The share of benefits flowing to the least affluent households, the bottom fifth, has declined from 54 percent in 1979 to 36 percent in 2007, according to a Congressional Budget Office analysis published last year.
And as more middle-class families like the Gulbransons land in the safety net in Chisago and similar communities, anger at the government has increased alongside. Many people say they are angry because the government is wasting money and giving money to people who do not deserve it. But more than that, they say they want to reduce the role of government in their own lives. They are frustrated that they need help, feel guilty for taking it and resent the government for providing it. They say they want less help for themselves; less help in caring for relatives; less assistance when they reach old age.
The expansion of government benefits has become an issue in the presidential campaign. Rick Santorum, who won 57 percent of the vote in Chisago County in the Republican presidential caucuses last week, has warned of “the narcotic of government dependency.” Newt Gingrich has compared the safety net to a spider web. Mitt Romney has said the nation must choose between an “entitlement society” and an “opportunity society.” All the candidates, including Ron Paul, have promised to cut spending and further reduce taxes.
The problem by now is familiar to most. Politicians have expanded the safety net without a commensurate increase in revenues, a primary reason for the government’s annual deficits and mushrooming debt. In 2000, federal and state governments spent about 37 cents on the safety net from every dollar they collected in revenue, according to a New York Times analysis. A decade later, after one Medicare expansion, two recessions and three rounds of tax cuts, spending on the safety net consumed nearly 66 cents of every dollar of revenue.
The recent recession increased dependence on government, and stronger economic growth would reduce demand for programs like unemployment benefits. But the long-term trend is clear. Over the next 25 years, as the population ages and medical costs climb, the budget office projects that benefits programs will grow faster than any other part of government, driving the federal debt to dangerous heights.
Americans are divided about the way forward. Seventy percent of respondents to a recent New York Times poll said the government should raise taxes. Fifty-six percent supported cuts in Medicare and Social Security. Forty-four percent favored both.
Support for spending cuts runs strong in Chisago, where anger at the government helped fuel Mr. Cravaack’s upset victory in 2010 over James L. Oberstar, the Democrat who had represented northeast Minnesota for 36 years.
“Spending like this is simply unsustainable, and it’s time to cut up Washington, D.C.’s credit card,” Mr. Cravaack said in a February speech to the Hibbing Area Chamber of Commerce. “It may hurt now, but it will be absolutely deadly for the next generation — that’s our children and our grandchildren.”
But the reality of life here is that Mr. Gulbranson and many of his neighbors continue to take as much help from the government as they can get. When pressed to choose between paying more and taking less, many people interviewed here hemmed and hawed and said they could not decide. Some were reduced to tears. It is much easier to promise future restraint than to deny present needs.
“How do you tell someone that you deserve to have heart surgery and you can’t?” Mr. Gulbranson said.
He paused.
“You have to help and have compassion as a people, because otherwise you have no society, but financially you can’t destroy yourself. And that is what we’re doing.”
He paused again, unable to resolve the dilemma.
“I feel bad for my children.”
Middle-Class Blues
Mr. Gulbranson has tried several ways to make a living in the storefront he bought from his father in 1979. He ran a gift shop, then shifted to selling jewelry. Nine years ago, he moved the gold scales to the back and bought equipment for screen-printing clothing. Through it all, he has never made more than about $46,000 in a year.
Meanwhile, the cost of life — and of raising five children — has climbed inexorably.
“I used to go out and try to have a meal at Perkins, which is a restaurant here, and get out of the store with $5,” Mr. Gulbranson said. “And now it’s probably up to $10.”
In recent years he has earned so little that he did not pay federal income taxes, although he still paid thousands of dollars toward Medicare and Social Security. The earned-income tax credit is intended to offset those payroll taxes, to encourage people with lower-paying jobs to remain in the work force.
Mr. Gulbranson said the money covered the fees for his children’s sports leagues and the cost of keeping the older ones on the family’s car insurance.
“If we didn’t get these government things, then probably my kids could not participate in some of the sports they do,” he said.
Almost half of all Americans lived in households that received government benefits in 2010, according to the Census Bureau. The share climbed from 37.7 percent in 1998 to 44.5 percent in 2006, before the recession, to 48.5 percent in 2010.
The trend reflects the expansion of the safety net. When the earned-income credit was introduced in 1975, eligibility was limited to households making the current equivalent of up to $26,997. In 2010, it was available to families making up to $49,317. The maximum payout, meanwhile, quadrupled on an inflation-adjusted basis.
It also reflects the deterioration of the middle class. Chisago boomed and prospered for decades as working families packed new subdivisions along Interstate 35, which runs up the western edge of the county like a flagpole with its base set firmly in Minneapolis. But recent years have been leaner. Per capita income in Chisago excluding government aid fell 6 percent on an inflation-adjusted basis between 2000 and 2007. Over the next two years, it fell an additional 7 percent. Nationally, per capita income excluding government benefits fell by 3 percent over the same 10 years.
Mr. Gulbranson’s business struggled as other companies, particularly construction firms, stopped ordering logo-emblazoned shirts. In 2009, the family claimed the earned-income credit for the first time on the advice of their accountant, who was claiming it for herself. The share of local families claiming the credit climbed 33 percent between 2000 and 2008, the most recent year for which data are available.
To make extra money, Mr. Gulbranson refereed 40 soccer games on Tuesday and Thursday nights last fall. His wife sold clothes at equestrian events and air-brushed novelties at craft fairs, driving around the country with a one-ton trailer hitched to a 20-foot van.
Their difficulties, Mr. Gulbranson said, have made it hard to imagine asking anyone to pay higher taxes.
“I don’t think most people could bear to pay more,” he said.
Instead, he said he would rather give up the earned-income credit the family now receives and start paying for school lunches for his children.
“I don’t demand that the government does this for me,” he said. “I don’t feel like I need the government.”
How about Social Security? And Medicare? Can he imagine retiring without government help?
“I don’t think so,” he said. “No. I don’t know. Not the way we expect to live as Americans.”
A Starring Role
Bob Kopka and his wife often drive to the American Legion hall in North Branch on Thursday nights, joining the crowd gathered in the basement bar for the weekly meat raffle. Almost everyone present relies on the government to pay for their medical care.
Mr. Kopka, 74, has had three heart procedures in recent years. His wife recently had surgery to remove cataracts from both eyes.
Without Medicare, Mr. Kopka said, the couple could not have paid for the treatments.
“Hell, no,” he said. “No. Never. She would have to go blind.”
And him?
“I’d die.”
Few federal programs are more popular than Medicare, which along with Social Security assures a minimum quality of life for older Americans.
None are more central to the nation’s financial problems. The Congressional Budget Office projects that government spending on medical benefits, even taking into account the cost containment measures in the 2010 health care law, will rise 60 percent over the next decade. Then it will start rising even more quickly. The cost of caring for each beneficiary continues to increase, and the government projects that Medicare enrollment will grow by roughly one-third as baby boomers enter old age.
Spending on medical benefits will account for a larger share of the projected increase in the federal budget over the next decade than any other kind of spending except interest payments on the federal debt.
Medicare’s starring role in the nation’s financial problems is not well understood. Only 22 percent of respondents to the New York Times poll correctly identified Medicare as the fastest-growing benefits program. A greater number of respondents, 27 percent, chose programs for the poor. That category, which includes Medicaid, is slightly larger than Medicare today but is projected to add only half as much to federal spending over the next decade.
Medicare’s financial problems are much worse than Social Security’s. A worker earning average wages still pays enough in Social Security taxes to cover the benefits the worker is likely to receive in retirement, according to an analysis by the Urban Institute. Social Security is still running out of money because the program must also support spouses who do not work and workers who earn lower wages. But Medicare’s situation is even more dire because a worker earning average wages still contributes only $1 in Medicare taxes for every $3 in benefits likely to be received in retirement.
A woman who was 45 in 2010, earning $43,500 a year, will pay taxes that will reach a value of $87,000 by the time she retires, assuming the money is invested at an annual interest rate 2 percentage points above inflation, according to the Urban Institute analysis. But on average, the government will then spend $275,000 on her medical care. The average is somewhat lower for men, because women live longer.
Medicare is often described as an insurance program, but its premiums are not nearly high enough. In simple terms, Americans are getting more than they pay for.
But many older residents in Chisago say this problem belongs to younger generations. They paid what they were told; they want to collect what they were promised.
Some, like the Kopkas, have savings they can tap. Mr. Kopka still owns the landscaping business he started after leaving the Navy in the early 1960s. He and his wife own a three-bedroom home on three acres, valued by the county at $153,700. The mortgage is paid. They hope to pass the house to their children.
Others have nothing else. Barbara Sullivan, 71, moved last year to the apartments above the Chisago County Senior Center in North Branch. Waiting on a recent Friday for the hot lunch, which costs $3.50, she watched roughly 20 people play bingo for prizes including canned soup and Chef Boyardee pasta.
“Most of the seniors around here are struggling to make it,” she said.
She counts herself among them. She lives on $1,220 a month in Social Security benefits and relied on Medicare to pay for an operation in November.
She believes that she is taking more from the government than she paid in taxes. She worries about the consequences for her grandchildren. She said she would like politicians to propose solutions.
“We’re reasonable people,” she said. “We’re not going to say, ‘Give it to me and let my grandchildren suffer.’ I think they underestimate seniors when they think that way.”
But she cannot imagine asking people to pay higher taxes. And as she considered making do with less, she started to cry.
“Without it, I’m not sure how I would live,” she said. “With the check I’m getting from Social Security, it’s a constant struggle on making sure that I pay my rent and have enough left for groceries.
“I haven’t bought a Christmas present, I haven’t bought clothing in the last five years, simply because I can’t afford it.”
Keeping a Promise
Representative Cravaack often says he entered politics to lift the burden of debt from the shoulders of his two sons.
“I vision that I open up their backpacks and I put in a 50-pound rock and zip it back up again,” Mr. Cravaack told the Minnesota Freedom Council in October 2010. “And I say, ‘Sorry, son, you’re going to have to hump this the rest of your life.’ Because that’s exactly what we’re doing to our national debt right now to our children.”
Mr. Cravaack, a 53-year-old Navy veteran and a retired pilot for Northwest Airlines, was grounded by sleep apnea in 2007. He and his wife, an executive at the drug company Novo Nordisk, decided he would stay home with their sons. He soon became the first man to serve as president of the Chisago Lakes Parent Teacher Organization.
In August 2009, while driving the children to North Branch, he heard a talk radio host urging people to protest President Obama’s health care legislation. Mr. Cravaack and about two dozen others spent more than two hours the next day in Mr. Oberstar’s North Branch office before a staff member told them the congressman would not meet them. The rejection convinced Mr. Cravaack that Mr. Oberstar should be replaced. One of the other protesters, a woman who had taken her six children to the office, became Mr. Cravaack’s campaign scheduler.
Two weeks after speaking to the Freedom Council, he beat Mr. Oberstar by 1.6 percentage points, or 4,407 votes. Voters in Chisago, the southern tip of an expansive district, provided the margin of victory.
“We have to break away,” Mr. Cravaack told supporters, “from relying on government to provide all the answers.”
Mr. Cravaack has said he drew unemployment benefits during a furlough from Northwest in the early 1990s. He did not respond to several requests for an interview, nor to an e-mail with questions about his views and about whether his family has drawn on other benefits programs. This account is based on a review of his public statements.
Shortly after arriving in Congress, Mr. Cravaack voted with a vast majority of House Republicans for a plan to remake Medicare by providing money to its beneficiaries to buy private insurance. Senate Democrats have rejected that plan.
But Mr. Cravaack has also consistently said the government should not reduce its largest category of spending — benefits for the current generation of retirees. He also says he does not support cuts for people who will turn 65 over the next decade.
“If you’re 55 years and older, you don’t have to listen to this conversation because we have to keep those promises,” Mr. Cravaack told The Daily Caller last April. “People like myself, 52, if you’re 54 or younger, we’re going to have a conversation.”
Tomorrow, Tomorrow
The government helps Matt Falk and his wife care for their disabled 14-year-old daughter. It pays for extra assistance at school and for trained attendants to stay with her at home while they work. It pays much of the cost of her regular visits to the hospital.
Mr. Falk, 42, would like the government to do less.
“She doesn’t need some of the stuff that we’re doing for her,” said Mr. Falk, who owns a heating and air-conditioning business in North Branch. “I don’t think it’s a bad thing if society can afford it, but given the situation that our society is facing, we just have to say that we can’t offer as much resources at school or that we need to pay a higher premium” for her medical care.
Mr. Falk, who voted for Mr. Cravaack, said he did not want to pay higher taxes and did not want the government to impose higher taxes on anyone else. He said that his family appreciated the government’s help and that living with less would be painful for them and many other families. But he said the government could not continue to operate on borrowed money.
“They’re going to have to reduce benefits,” he said. “We’re going to have to accept it, and we’re going to have to suffer.”
One of the oldest criticisms of democracy is that the people will inevitably drain the treasury by demanding more spending than taxes. The theory is that citizens who get more than they pay for will vote for politicians who promise to increase spending.
But Dean P. Lacy, a professor of political science at Dartmouth College, has identified a twist on that theme in American politics over the last generation. Support for Republican candidates, who generally promise to cut government spending, has increased since 1980 in states where the federal government spends more than it collects. The greater the dependence, the greater the support for Republican candidates.
Conversely, states that pay more in taxes than they receive in benefits tend to support Democratic candidates. And Professor Lacy found that the pattern could not be explained by demographics or social issues.
Chisago has shifted over 30 years from dependably Democratic to reliably Republican. Support for the Republican presidential candidate has increased relative to the national vote in each election since 1984. Senator John McCain won 55 percent of the vote here in 2008.
Residents say social issues play a role, but in recent years concerns about spending and taxes have predominated.
Voters in the North Branch school district have rejected increased financing for local schools in each of the past three years. In 2010, the district switched to a four-day school week, striking Monday from the calendar to save money.
Some of the fiercest advocates for spending cuts have drawn public benefits. Many, like Mr. Falk, have family members who rely on the government. They often cite that personal experience as the reason they want to cut government spending.
Brian Qualley, 49, has a sister who survived a brain tumor but was disabled by its removal. The government pays for her care at an assisted-living facility. Their mother scrapes by on Social Security.
Mr. Qualley said that the government should provide for those who need help, but that too much money was being wasted. Mr. Qualley, who owns a tattoo parlor in Harris, north of North Branch, said some of his customers paid with money from government disability checks.
“They’re getting $300 or $400 tattoos, and they’re wearing nice new Nike shoes that I can’t afford,” he said, looking up from working a complicated design into the left leg of a middle-aged woman. “I guess I shouldn’t say it because it’s my business, but I think a tattoo is a little too extravagant.”
But Mr. Qualley said he did not want to reduce benefits for the current generation of retirees. Rather, he said his own generation should get less, because they have time to prepare. This is a common position among the young and healthy in Chisago.
Mr. Qualley said he was saving some money for retirement, although, he added, “I don’t have a 401(k) or anything like that.”
“I also have a job that I don’t necessarily ever want to — or have to — retire from,” he said.
What if his hands start to shake as he gets older?
“Actually,” he said, the electric needle falling silent in his hand, “it’s my shoulders and neck that bother me most.”
Safety in Numbers
Barbara Nelson has little patience for people who say they will not need government help. She considers herself lucky she has not, and obligated to provide for those who do.
“Catastrophes happen in life,” she said, sitting in a coffee shop in Taylors Falls. “To be so arrogant that you think it won’t happen to you, that somehow you’re going to be one of the special ones, I disagree with that.”
Ms. Nelson, 61, who describes herself as a centrist Democrat, also dismisses the claim that people cannot afford to pay more taxes.
“Anyone who can come into a coffee shop and buy coffee is capable of paying more,” she said. “If someone’s life can be granted, in terms of adequate health care, if that means I give up five cups of coffee a month, that is a small price to pay.”
Gordy Peterson, 62, who has used a wheelchair for 30 years since a construction accident, has reluctantly reached a similar conclusion.
“I’m a conservative,” he said by way of introducing himself. He built his own house before his injury and paid for it in cash. He still thinks the government should operate that way. He never intended to depend on federal aid and said he sometimes felt guilty about it.
But for the last three decades, he has received a regular check from the Social Security disability insurance program, and Medicare has helped to pay his medical bills.
“Here I’m getting money, and everybody is struggling,” he said. “Even though it ain’t no cakewalk for me.”
Mr. Peterson used a workers’ compensation settlement to buy a farm that he managed with his brother-in-law, who is mentally handicapped and also on government disability.
“He was my legs, and we worked it,” Mr. Peterson said.
They grew corn, soybeans and rye, and even kept steers for a while. In good years they earned enough to live on. In bad years they lived on the government’s checks. Life would have been very difficult without them, he said.
Mr. Peterson, an easygoing man who looks down when he thinks and smiles sheepishly when he offers an opinion, looked down after completing the story of his own dependence on the safety net.
“It’s hard to beat up on the government when they’ve been so good to you,” he finally said. “I’ve never really thought about it, I guess.”
Lately, the government has been very good, indeed. The county, with federal financing, bought a corner of Mr. Peterson’s farm to build a new interchange for Interstate 35. He used the money to open a gas station at the edge of the farm in 2008 to serve the traffic that rolls off the new ramp. The business is prospering, and he no longer worries that he will need to depend on Social Security.
“But you can’t take that away,” he said. “My own sister has only Social Security. That’s all. That’s all she’s going to have. And if you take that away from her, Christ, she’d be a street person. I don’t think we can cut them off on that.”
How about higher taxes?
Maybe a little higher, he said. Maybe.
“I’m glad I’m not a politician,” he said. “We’re all going to complain no matter what they do. Nobody wants to put a noose around their own neck.”
Sunday, February 12, 2012
Most Expect to Give More Than They Receive, Poll FindsBy ALLISON KOPICKI
February 11, 2012
Most Expect to Give More Than They Receive, Poll FindsBy ALLISON KOPICKI
A majority of Americans say they expect to pay more in federal taxes over their lifetime than they will ever receive in benefits from the government, according to a recent New York Times poll. At the same time, the taxes Americans pay today are not keeping pace with the growing costs of government.
Medicare is the program projected to add the most to federal spending over the next decade, likely increasing the government’s annual budget deficits. But only one in five Americans surveyed named Medicare as the fastest-growing benefits program. From a number of choices, 27 percent identified programs for the poor, 17 percent said unemployment benefits and programs, 14 percent said Social Security and 5 percent named veterans’ benefits. Twenty-two percent named Medicare.
Most Americans realize that the taxes they pay during their working years may not be enough to cover either their Medicare or Social Security benefits. But a majority of those surveyed, 55 percent, also said they would pay more in taxes than they would ever get back from the government in benefits.
In follow-up interviews, some respondents said that was because their tax dollars were also paying for government programs that did not benefit them directly, like foreign aid, the military and assistance for the poor. Some also said government waste contributed to their pessimism.
Majorities of Americans also say Social Security and Medicare will not be there for them when they reach retirement. Nearly three-fourths of those under 45 do not expect Medicare to provide benefits for them, and more than two-thirds of these younger Americans said Social Security would not have money available for their retirement years.
That pessimism is another likely reason that 6 in 10 Americans under the age of 45 said the taxes they pay over their lifetime would exceed the benefits they would receive.
Those who currently receive benefits from the government were more likely than others to say their taxes would match what they receive in benefits.
To keep Medicare solvent, a majority of Americans favor raising taxes or premiums rather than reducing benefits. When asked to choose just one proposal to reduce the program’s deficit, 37 percent said they supported higher taxes on current workers, and 22 percent supported increasing the premiums paid by current recipients. Just 16 percent supported reducing benefits for future recipients, and 8 percent endorsed reducing benefits of current Medicare recipients.
Eighty-five percent agreed that increasing taxes on the wealthy should play a role in reducing the overall federal deficit, and three in five said it should play a major role. Seventy percent also favored raising taxes on all Americans, although only 32 percent said this should play a major role.
And 56 percent favored cuts in Medicare and Social Security; only 20 percent said this should play a major role.
The poll was conducted from Dec. 14 to 18 among 992 adults nationwide and has a margin of sampling error of plus or minus three percentage points.
Most Expect to Give More Than They Receive, Poll FindsBy ALLISON KOPICKI
A majority of Americans say they expect to pay more in federal taxes over their lifetime than they will ever receive in benefits from the government, according to a recent New York Times poll. At the same time, the taxes Americans pay today are not keeping pace with the growing costs of government.
Medicare is the program projected to add the most to federal spending over the next decade, likely increasing the government’s annual budget deficits. But only one in five Americans surveyed named Medicare as the fastest-growing benefits program. From a number of choices, 27 percent identified programs for the poor, 17 percent said unemployment benefits and programs, 14 percent said Social Security and 5 percent named veterans’ benefits. Twenty-two percent named Medicare.
Most Americans realize that the taxes they pay during their working years may not be enough to cover either their Medicare or Social Security benefits. But a majority of those surveyed, 55 percent, also said they would pay more in taxes than they would ever get back from the government in benefits.
In follow-up interviews, some respondents said that was because their tax dollars were also paying for government programs that did not benefit them directly, like foreign aid, the military and assistance for the poor. Some also said government waste contributed to their pessimism.
Majorities of Americans also say Social Security and Medicare will not be there for them when they reach retirement. Nearly three-fourths of those under 45 do not expect Medicare to provide benefits for them, and more than two-thirds of these younger Americans said Social Security would not have money available for their retirement years.
That pessimism is another likely reason that 6 in 10 Americans under the age of 45 said the taxes they pay over their lifetime would exceed the benefits they would receive.
Those who currently receive benefits from the government were more likely than others to say their taxes would match what they receive in benefits.
To keep Medicare solvent, a majority of Americans favor raising taxes or premiums rather than reducing benefits. When asked to choose just one proposal to reduce the program’s deficit, 37 percent said they supported higher taxes on current workers, and 22 percent supported increasing the premiums paid by current recipients. Just 16 percent supported reducing benefits for future recipients, and 8 percent endorsed reducing benefits of current Medicare recipients.
Eighty-five percent agreed that increasing taxes on the wealthy should play a role in reducing the overall federal deficit, and three in five said it should play a major role. Seventy percent also favored raising taxes on all Americans, although only 32 percent said this should play a major role.
And 56 percent favored cuts in Medicare and Social Security; only 20 percent said this should play a major role.
The poll was conducted from Dec. 14 to 18 among 992 adults nationwide and has a margin of sampling error of plus or minus three percentage points.
The Numbers Behind the ArticleBy ROBERT GEBELOFF and BINYAMIN APPELBAUM
February 12, 2012
The Numbers Behind the ArticleBy ROBERT GEBELOFF and BINYAMIN APPELBAUM
The article and graphics package about government benefits draws heavily on figures tabulated by the Bureau of Economic Analysis, a branch of the Commerce Department that serves as a scorekeeper for the nation’s economy.
The bureau tracks economic activity at the local, state and national levels. The Times used data from 2009, the most recent year for which the bureau has published local figures, but the picture has not changed substantially over the past two years. The most recent national figures, for 2011, show Americans still get 18 percent of their income from government benefits.
The bureau calculates that last year Americans received $8.4 trillion from work (about 65 percent of income), $2.2 trillion from investments (17 percent), and $2.3 trillion in cash, medical services and other government benefits.
Benefits are distributed through more than 50 programs ranging from the giants — Social Security, Medicare and Medicaid — to the $40 coupons the government issued to people with old televisions so they could buy digital converter boxes.
Tracking benefits is not an exact science, particularly at the county level, because some federal programs report distributions only by state. Tricare, which provides medical benefits for veterans and the dependents of active-duty personnel, is one such program. The bureau of analysis estimates that 75 percent of its county-level data is drawn from actual tabulations, while the rest is based on statistical estimates.
The results are the most comprehensive available data on county-level economies, widely used by government planners and academic researchers. But The Times’s county-level data, which is based on the government’s, are estimates and subject to estimation errors, particularly in counties with small populations.
Another issue: How to treat payments that the government makes on behalf of beneficiaries, like Medicare payments to hospitals. The bureau counts such payments as income for the beneficiaries, because it reflects the value of the service they received. Some researchers caution that this method creates the misleading impression that a person has become very wealthy when in fact the person has become very sick. And while the ability to gain access to treatment is a form of wealth, it is conditional. No one would have access to the money without being sick.
The Bureau of Economic Analysis also differs from some other federal agencies in counting tax credits, like the earned income credit, as a form of income. The Congressional Budget Office, for example, treats such credits as a reduction in taxes paid. In this case the difference does not affect the total amount of income.
The question is whether money paid to the government and then returned in the form of a tax credit should be treated as income from the original source, or from the government. The budget office methodology yields a lower estimate of the share of income from benefits.
Notwithstanding these differences, the bureau data are broadly consistent with other analyses of the distribution of government benefits, and of the trend toward increased dependence.
The budget office is a second major source of the data cited in the story. The Times in particular relied on its projections of future federal spending and revenues, which were updated in January. The nonpartisan office is widely respected, but its forecasts incorporate a host of assumptions — from the pace of growth to the whims of Congress. Take these, too, with grains of salt.
The estimate of the share of benefits going to low-income households is from a budget office study published last fall. The figures cited come from an analysis of the Current Population Survey by the Census Bureau, which is known to under-report participation in some benefits programs, a problem that has worsened in recent years. The budget office concluded, however, that the effect on its calculations was small, in the neighborhood of a single percentage point.
The Census Bureau also estimates the share of Americans living in households that get benefits. These data, from its sporadic Survey of Income and Program Participation, are drawn from a smaller sample than the Current Population Survey, but are gathered more carefully and therefore regarded by experts as more accurate in tracking the flow of benefits.
All dollar figures in the story were converted to 2011 dollars using the inflation index maintained by the Federal Reserve Bank of St. Louis rather than the widely quoted Consumer Price Index, because the St. Louis index is based on gross domestic product, which experts regard as a more relevant baseline for comparing changes in the level of government spending.
The Numbers Behind the ArticleBy ROBERT GEBELOFF and BINYAMIN APPELBAUM
The article and graphics package about government benefits draws heavily on figures tabulated by the Bureau of Economic Analysis, a branch of the Commerce Department that serves as a scorekeeper for the nation’s economy.
The bureau tracks economic activity at the local, state and national levels. The Times used data from 2009, the most recent year for which the bureau has published local figures, but the picture has not changed substantially over the past two years. The most recent national figures, for 2011, show Americans still get 18 percent of their income from government benefits.
The bureau calculates that last year Americans received $8.4 trillion from work (about 65 percent of income), $2.2 trillion from investments (17 percent), and $2.3 trillion in cash, medical services and other government benefits.
Benefits are distributed through more than 50 programs ranging from the giants — Social Security, Medicare and Medicaid — to the $40 coupons the government issued to people with old televisions so they could buy digital converter boxes.
Tracking benefits is not an exact science, particularly at the county level, because some federal programs report distributions only by state. Tricare, which provides medical benefits for veterans and the dependents of active-duty personnel, is one such program. The bureau of analysis estimates that 75 percent of its county-level data is drawn from actual tabulations, while the rest is based on statistical estimates.
The results are the most comprehensive available data on county-level economies, widely used by government planners and academic researchers. But The Times’s county-level data, which is based on the government’s, are estimates and subject to estimation errors, particularly in counties with small populations.
Another issue: How to treat payments that the government makes on behalf of beneficiaries, like Medicare payments to hospitals. The bureau counts such payments as income for the beneficiaries, because it reflects the value of the service they received. Some researchers caution that this method creates the misleading impression that a person has become very wealthy when in fact the person has become very sick. And while the ability to gain access to treatment is a form of wealth, it is conditional. No one would have access to the money without being sick.
The Bureau of Economic Analysis also differs from some other federal agencies in counting tax credits, like the earned income credit, as a form of income. The Congressional Budget Office, for example, treats such credits as a reduction in taxes paid. In this case the difference does not affect the total amount of income.
The question is whether money paid to the government and then returned in the form of a tax credit should be treated as income from the original source, or from the government. The budget office methodology yields a lower estimate of the share of income from benefits.
Notwithstanding these differences, the bureau data are broadly consistent with other analyses of the distribution of government benefits, and of the trend toward increased dependence.
The budget office is a second major source of the data cited in the story. The Times in particular relied on its projections of future federal spending and revenues, which were updated in January. The nonpartisan office is widely respected, but its forecasts incorporate a host of assumptions — from the pace of growth to the whims of Congress. Take these, too, with grains of salt.
The estimate of the share of benefits going to low-income households is from a budget office study published last fall. The figures cited come from an analysis of the Current Population Survey by the Census Bureau, which is known to under-report participation in some benefits programs, a problem that has worsened in recent years. The budget office concluded, however, that the effect on its calculations was small, in the neighborhood of a single percentage point.
The Census Bureau also estimates the share of Americans living in households that get benefits. These data, from its sporadic Survey of Income and Program Participation, are drawn from a smaller sample than the Current Population Survey, but are gathered more carefully and therefore regarded by experts as more accurate in tracking the flow of benefits.
All dollar figures in the story were converted to 2011 dollars using the inflation index maintained by the Federal Reserve Bank of St. Louis rather than the widely quoted Consumer Price Index, because the St. Louis index is based on gross domestic product, which experts regard as a more relevant baseline for comparing changes in the level of government spending.
Even Critics of Safety Net Increasingly Depend on It JEREMY WHITE, ROBERT GEBELOFF, FORD FESSENDEN, ARCHIE TSE and ALAN McLEAN Source: Bureau of Economic Analysis
Tuesday, February 07, 2012
The Zuckerberg Tax By DAVID S. MILLER
The Zuckerberg Tax By DAVID S. MILLER
WHEN Facebook goes public later this year, Mark Zuckerberg plans to exercise stock options worth $5 billion of the $28 billion that his ownership stake will be worth. The $5 billion he will receive upon exercising those options will be treated as salary, and Mr. Zuckerberg will have a tax bill of more than $2 billion, quite possibly making him the largest taxpayer in history. He is expected to sell enough stock to pay his tax.
But how much income tax will Mr. Zuckerberg pay on the rest of his stock that he won’t immediately sell? He need not pay any. Instead, he can simply use his stock as collateral to borrow against his tremendous wealth and avoid all tax. That’s what Lawrence J. Ellison, the chief executive of Oracle, did. He reportedly borrowed more than a billion dollars against his Oracle shares and bought one of the most expensive yachts in the world.
If Mr. Zuckerberg never sells his shares, he can avoid all income tax and then, on his death, pass on his shares to his heirs. When they sell them, they will be taxed only on any appreciation in value since his death.
Consider the case of Steven P. Jobs. After rejoining Apple in 1997, Mr. Jobs never sold a single Apple share for the rest of his life, and therefore never paid a penny of tax on the over $2 billion of Apple stock he held at his death. Now his widow can sell those shares without paying any income tax on the appreciation before his death. She would have to pay taxes only on the increase in value from the time of his death to the time of the sale.
Now compare Mr. Zuckerberg with Lady Gaga. Last year she told Ellen DeGeneres that she had to get “completely wasted” to sign her tax returns because she owed so much. Lady Gaga reportedly earned $90 million in 2010. Because she earns fees and royalties, she’s subject to the highest income-tax rate. So, assuming she’s just as successful this year, she will certainly pay more than $30 million in taxes and probably more than $45 million, which is infinitely more tax than Mr. Zuckerberg will pay on the $23 billion of Facebook stock he now holds.
Why is this?
Our tax system is based on the concept of “realization.” Individuals are not taxed until they actually sell property and realize their gains. But this system makes less sense for the publicly traded stocks of the superwealthy. A drastic change is necessary to fix this fundamental flaw in our tax system and finally require people like Warren E. Buffett, Mr. Ellison and others to pay at least a little income tax on their unsold shares. The fix is called mark-to-market taxation.
For individuals and married couples who earn, say, more than $2.2 million in income, or own $5.7 million or more in publicly traded securities (representing the top 0.1 percent of families), the appreciation in their publicly traded stock and securities would be “marked to market” and taxed annually as if they had sold their positions at year’s end, regardless of whether the securities were actually sold. The tax could be imposed at long-term capital gains rates so tax rates would stay as they were.
We could call this tax the “Zuckerberg tax.” Under it, Mr. Zuckerberg would owe an additional $3.45 billion when Facebook went public (that’s 15 percent of the value of the roughly $23 billion of stock he owns). He could sell some shares to pay the tax (and would be left with over $20 billion of Facebook stock after tax), or borrow to pay the tax.
If his Facebook shares decline in value next year, he’d get a refund.
President Obama has proposed a “Buffett rule” that would require millionaires to pay tax at a 30 percent effective minimum rate. Under the rule, Mr. Buffett’s taxes might have doubled to $12 million in 2010, but this would represent only a trivial amount of additional tax for him. If the Buffett rule applied in 2010, Mr. Buffett’s effective tax rate would be only about 2/100 of 1 percent on the $8 billion in appreciation of his holdings. A Zuckerberg tax would be far better: under it Mr. Buffett would have paid $1.2 billion in tax in 2010.
A mark-to-market system of taxation on the top one-tenth of 1 percent would raise hundreds of billions of dollars of new revenue over the next 10 years. The new revenue could be used to lower payroll taxes, extend the George W. Bush tax cuts, repeal the alternative minimum tax, reduce the budget deficit, prevent military cuts or a combination of all of these.
This tax would not affect the middle class, or even most wealthy Americans. Nor would it affect small-business owners. It would affect only individuals who were undeniably, extraordinarily rich. Only publicly traded stock would be marked to market.
Some would argue that it is inherently unfair to tax “paper gains” before they are realized — Mr. Zuckerberg won’t receive $28 billion in cash; he holds only paper. Moreover, markets are inherently volatile; one year’s paper gains is another’s real losses. However, these arguments are far less credible when paper losses give rise to real tax refunds. Moreover, in a downturn, the mark-to-market tax would act as a fiscal stimulus — the cash refunds would offset a declining stock market.
This proposal follows the Ronald Reagan model by broadening the “base” of tax without increasing rates. In fact, Reagan was responsible for the last major reform of our antiquated realization system when he signed a law requiring taxpayers to pay a tax on interest that accrued on bonds but was not paid.
The most profound effect of a mark-to-market tax would be to level the playing field between wage earners, on one hand, and founders and investors on the other. Superwealthy holders of publicly traded securities could no longer escape tax on their vast wealth.
Sunday, February 05, 2012
Significant and Silly at BuzzFeedBy DAVID CARR
February 5, 2012
Significant and Silly at BuzzFeedBy DAVID CARR
When a Web site called BuzzFeed broke the news on the night of the Iowa caucuses that John McCain was endorsing Mitt Romney, more than a few readers scratched their heads and said, “What is a BuzzFeed?”
They’re about to find out.
BuzzFeed is the creation of Jonah Peretti, a graduate of the MIT Media Lab with an expertise in content that is likely to be “liked.” He took those skills to The Huffington Post, where he was the wizard in back of the curtain, brewing a bubbling cauldron of tatty celebrity news and goofy cat shots behind a front page of serious news and commentary. Using search optimization, he knew what people wanted almost before they did.
Mr. Peretti started BuzzFeed as a laboratory at first, making it less about what people were searching for and more about what they might share. He developed technologies that allowed BuzzFeed to determine very quickly what media content was being posted and shared — items that were contagious, the kind of thing that ends up on one person’s Facebook page and then suddenly, many other people’s. When The Huffington Post was sold to AOL last year, Mr. Peretti left and began working on BuzzFeed full-time.
With its mix of oddities, listicles and Web memes, BuzzFeed was at first something like The Huffington Post without the pretension of producing news and commentary. But in December, Mr. Peretti hired Ben Smith, the highly regarded blogger and columnist for Politico, to be his editor in chief. Right after he started in January, Mr. Smith broke the news of Mr. McCain’s endorsement of Mr. Romney for the New Hampshire primary. The message was clear: BuzzFeed was a player in news. (Mr. Smith still writes his weekly column for Politico.)
Soon afterward, BuzzFeed raised $15.5 million from Kenneth Lerer’s Lerer Ventures, New Enterprise Associates, Hearst Interactive Media, Softbank and RRE Ventures. Mr. Smith immediately began hiring reporters, including Matt Buchanan from Gawker Media; John Herrman from Popular Mechanics; Rosie Gray from The Village Voice, and Doree Shafrir from RollingStone.com. BuzzFeed wasn’t just hiring brand names to serve as lustrous hood ornaments connoting credibility, the way Tina Brown and Arianna Huffington have. The hires at BuzzFeed were more like maypoles: young writers native to the Web who become pivot points for contents because they are bathed in both the ethos and practice of social media.
After a week in which Facebook announced an initial public offering that could end up in valuing it at $100 billion, it’s clear that the social Web — Facebook, Twitter and their ilk — will rival search — Google, Bing and their ilk — as a force for helping people find content. The average person’s Facebook feed, just like BuzzFeed, is a mix of the comical and the consequential, functioning as a kind of human-enabled RSS feed that belies the traditional architecture of media outlets.
In a sense, Mr. Peretti is reverse-engineering the HuffPo formula. At The Huffington Post, he used search optimization to create a gaudy funhouse behind a serious front page. At BuzzFeed, the funhouse was the point of it all. The main headers on the home page told the story: “LOL,” “cute,” “win,” “fail,” “omg,” “geeky,” “trashy” and “wtf?”
But with the addition of Mr. Smith and his new hires, BuzzFeed is growing some serious news muscles under a silly, frilly skin, and added the header “2012” for election coverage. (More traditional news verticals will be rolled out in the coming months.) It’s gone well so far, with comScore showing 10.8 million unique visitors in December, more than double that of the same month in 2010.
Its business model, in part, capitalizes on the mix of high and low content; instead of banner ads, BuzzFeed works with companies like Pillsbury to create content ideal for sharing, including “10 Things You Never Knew You Could Do With a Crescent Roll.”
If it is successful, BuzzFeed will generate the kind of traffic that will rival behemoths like, yes, The Huffington Post. Mr. Peretti says that BuzzFeed makes a profit some months, but given the level of investment and growth — there are now 78 people in its Flatiron offices — the burn rate on that new chunk of capital is significant. “It’s fun to watch them make all these hires,” said Choire Sicha, the founder of The Awl site and a veteran of the New York Web scene. “But it’s important that they don’t overspend. Web ad rates are what they are and that isn’t going to change.”
Mr. Peretti says he is not, and won’t be, competing with The Huffington Post, in part because that would be awkward since he and Mr. Lerer were among the founders of that site. Sitting in the coffee area of BuzzFeed’s offices on West 21st Street in Manhattan, he pointed out that there is nothing more viral than news that no one else has, so it makes sense to create some. With Mr. Smith sharing the table, he said that BuzzFeed is a natural response to a changing ecosystem.
“As the world has realigned from being about portals and then search and now social, how do you build a media company for a social world?” he said. “And a big part of that is scoops and exclusives and original content, and it’s also about cute kittens in an entertaining cultural context.”
As the consumer Web has matured, readers have become minipublishers, using social media platforms to share information they think will entertain and enlighten their friends. No longer is it just about so-called sticky content that keeps readers around, or even clicky content that causes them to hit a link; it’s also about serving up content that is spreadable.
Hit the right note, and your readers become like bees, stopping by your site to grab links and heading back out on the Web to pollinate other platforms. That behavior has tapped into something visceral, a kind of game in which the person finding something delicious gains social capital for sharing it.
“I can remember when I first had lunch with Jonah, he talked a lot about the social Web,” Mr. Smith said. “I left thinking he had just filled my head with jargon, and then it gradually dawned on me that it is actually where I am just living.”
Before he went to BuzzFeed, Mr. Smith was a force on Twitter, with about 60,000 followers. He was known as a reporter who not only broke news on Twitter but also served as a signal tower, providing links for the news made by others.
Now he is overseeing an editorial world where there are still articles like “The Cutest Boys With Dogs” (not to be confused with “30 Cats Sitting Like Humans”) and “50 Things You Will Never See in Real Life,” which includes a picture of a Chihuahua wearing double cheeseburgers for shoes. That odd numerology is an update of the ancient dark arts in publishing. For some reason, putting a number on something makes it irresistible. For decades, women’s magazines have been telling you about “101 Sure-Fire Ways to Lose Weight” and “18 Secrets to Winning His Heart.”
But those numbers riffs now sit side by side with serious news about fraudulent mortgage foreclosures. “I am hiring people who don’t just want to waste their time reporting other people’s work,” he said. “No one is going to care if we come up with a story that is almost as good as someone else’s scoop four hours earlier.”
Mr. Peretti already had a team of editors who knew how to take commodity content and refashion it into something new, but he wanted more. News is the killer app, and does not depend on search optimization: The Web immediately points at your site when you have an actual scoop. That’s where Mr. Smith and his team of digitally enabled journalists come in.
So now Mr. Peretti has high and low, news and fun, all ready for sharing. “People are now used to having everything mixed together in a Facebook newsfeed,” Mr. Peretti said. “A story about the Arab Spring will be next to a picture of your sister’s new baby. Why not have a publishing site that embraces those colliding worlds?”
Significant and Silly at BuzzFeedBy DAVID CARR
When a Web site called BuzzFeed broke the news on the night of the Iowa caucuses that John McCain was endorsing Mitt Romney, more than a few readers scratched their heads and said, “What is a BuzzFeed?”
They’re about to find out.
BuzzFeed is the creation of Jonah Peretti, a graduate of the MIT Media Lab with an expertise in content that is likely to be “liked.” He took those skills to The Huffington Post, where he was the wizard in back of the curtain, brewing a bubbling cauldron of tatty celebrity news and goofy cat shots behind a front page of serious news and commentary. Using search optimization, he knew what people wanted almost before they did.
Mr. Peretti started BuzzFeed as a laboratory at first, making it less about what people were searching for and more about what they might share. He developed technologies that allowed BuzzFeed to determine very quickly what media content was being posted and shared — items that were contagious, the kind of thing that ends up on one person’s Facebook page and then suddenly, many other people’s. When The Huffington Post was sold to AOL last year, Mr. Peretti left and began working on BuzzFeed full-time.
With its mix of oddities, listicles and Web memes, BuzzFeed was at first something like The Huffington Post without the pretension of producing news and commentary. But in December, Mr. Peretti hired Ben Smith, the highly regarded blogger and columnist for Politico, to be his editor in chief. Right after he started in January, Mr. Smith broke the news of Mr. McCain’s endorsement of Mr. Romney for the New Hampshire primary. The message was clear: BuzzFeed was a player in news. (Mr. Smith still writes his weekly column for Politico.)
Soon afterward, BuzzFeed raised $15.5 million from Kenneth Lerer’s Lerer Ventures, New Enterprise Associates, Hearst Interactive Media, Softbank and RRE Ventures. Mr. Smith immediately began hiring reporters, including Matt Buchanan from Gawker Media; John Herrman from Popular Mechanics; Rosie Gray from The Village Voice, and Doree Shafrir from RollingStone.com. BuzzFeed wasn’t just hiring brand names to serve as lustrous hood ornaments connoting credibility, the way Tina Brown and Arianna Huffington have. The hires at BuzzFeed were more like maypoles: young writers native to the Web who become pivot points for contents because they are bathed in both the ethos and practice of social media.
After a week in which Facebook announced an initial public offering that could end up in valuing it at $100 billion, it’s clear that the social Web — Facebook, Twitter and their ilk — will rival search — Google, Bing and their ilk — as a force for helping people find content. The average person’s Facebook feed, just like BuzzFeed, is a mix of the comical and the consequential, functioning as a kind of human-enabled RSS feed that belies the traditional architecture of media outlets.
In a sense, Mr. Peretti is reverse-engineering the HuffPo formula. At The Huffington Post, he used search optimization to create a gaudy funhouse behind a serious front page. At BuzzFeed, the funhouse was the point of it all. The main headers on the home page told the story: “LOL,” “cute,” “win,” “fail,” “omg,” “geeky,” “trashy” and “wtf?”
But with the addition of Mr. Smith and his new hires, BuzzFeed is growing some serious news muscles under a silly, frilly skin, and added the header “2012” for election coverage. (More traditional news verticals will be rolled out in the coming months.) It’s gone well so far, with comScore showing 10.8 million unique visitors in December, more than double that of the same month in 2010.
Its business model, in part, capitalizes on the mix of high and low content; instead of banner ads, BuzzFeed works with companies like Pillsbury to create content ideal for sharing, including “10 Things You Never Knew You Could Do With a Crescent Roll.”
If it is successful, BuzzFeed will generate the kind of traffic that will rival behemoths like, yes, The Huffington Post. Mr. Peretti says that BuzzFeed makes a profit some months, but given the level of investment and growth — there are now 78 people in its Flatiron offices — the burn rate on that new chunk of capital is significant. “It’s fun to watch them make all these hires,” said Choire Sicha, the founder of The Awl site and a veteran of the New York Web scene. “But it’s important that they don’t overspend. Web ad rates are what they are and that isn’t going to change.”
Mr. Peretti says he is not, and won’t be, competing with The Huffington Post, in part because that would be awkward since he and Mr. Lerer were among the founders of that site. Sitting in the coffee area of BuzzFeed’s offices on West 21st Street in Manhattan, he pointed out that there is nothing more viral than news that no one else has, so it makes sense to create some. With Mr. Smith sharing the table, he said that BuzzFeed is a natural response to a changing ecosystem.
“As the world has realigned from being about portals and then search and now social, how do you build a media company for a social world?” he said. “And a big part of that is scoops and exclusives and original content, and it’s also about cute kittens in an entertaining cultural context.”
As the consumer Web has matured, readers have become minipublishers, using social media platforms to share information they think will entertain and enlighten their friends. No longer is it just about so-called sticky content that keeps readers around, or even clicky content that causes them to hit a link; it’s also about serving up content that is spreadable.
Hit the right note, and your readers become like bees, stopping by your site to grab links and heading back out on the Web to pollinate other platforms. That behavior has tapped into something visceral, a kind of game in which the person finding something delicious gains social capital for sharing it.
“I can remember when I first had lunch with Jonah, he talked a lot about the social Web,” Mr. Smith said. “I left thinking he had just filled my head with jargon, and then it gradually dawned on me that it is actually where I am just living.”
Before he went to BuzzFeed, Mr. Smith was a force on Twitter, with about 60,000 followers. He was known as a reporter who not only broke news on Twitter but also served as a signal tower, providing links for the news made by others.
Now he is overseeing an editorial world where there are still articles like “The Cutest Boys With Dogs” (not to be confused with “30 Cats Sitting Like Humans”) and “50 Things You Will Never See in Real Life,” which includes a picture of a Chihuahua wearing double cheeseburgers for shoes. That odd numerology is an update of the ancient dark arts in publishing. For some reason, putting a number on something makes it irresistible. For decades, women’s magazines have been telling you about “101 Sure-Fire Ways to Lose Weight” and “18 Secrets to Winning His Heart.”
But those numbers riffs now sit side by side with serious news about fraudulent mortgage foreclosures. “I am hiring people who don’t just want to waste their time reporting other people’s work,” he said. “No one is going to care if we come up with a story that is almost as good as someone else’s scoop four hours earlier.”
Mr. Peretti already had a team of editors who knew how to take commodity content and refashion it into something new, but he wanted more. News is the killer app, and does not depend on search optimization: The Web immediately points at your site when you have an actual scoop. That’s where Mr. Smith and his team of digitally enabled journalists come in.
So now Mr. Peretti has high and low, news and fun, all ready for sharing. “People are now used to having everything mixed together in a Facebook newsfeed,” Mr. Peretti said. “A story about the Arab Spring will be next to a picture of your sister’s new baby. Why not have a publishing site that embraces those colliding worlds?”
Disruptions: Facebook Users Ask, ‘Where’s Our Cut?’ By NICK BILTON
February 5, 2012, 11:00 am
Disruptions: Facebook Users Ask, ‘Where’s Our Cut?’ By NICK BILTON
David Paul Morris/Bloomberg NewsMark Zuckerberg, chief executive officer and founder of Facebook, spoke at a Facebook conference in September.FacebookTwitterLinkedinShareShareCloseRedditTumblrDiggE-mail
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SAN FRANCISCO — By my calculation, Mark Zuckerberg, Facebook’s founder and chief executive, owes me about $50.
Without me, and the other 844,999,999 people poking, liking and sharing on the site, Facebook would look like a scene from the postapocalyptic movie “The Day After Tomorrow”: bleak, desolate and really quite sad. (Or MySpace, if that is easier to imagine.) Facebook surely would never be valued at anything close to $100 billion, which it very well could be in its coming initial public offering.
In the company’s S-1 filing, submitted to the Securities and Exchange Commission this week, Facebook boasts about its statistics: annually, people “like” one trillion things; 91 billion photos are uploaded; half a billion people use Facebook on mobile phones; and hundreds of millions are annoyingly “poked.”
So all this leaves me with a question: Where’s my cut? I helped build this thing, too. Facebook laid the foundation of the house and put in the plumbing, but we put up the walls, picked out the furniture, painted and hung photos, and invited everyone over for dinner parties.
So why am I asking for money from Facebook and not Google? Although there have been hundreds of technology-related I.P.O.’s over the last decade, Facebook is the first real social-media public offering, where the content on the site is entirely created by its users. (The closest, LinkedIn, had additional business models, including premium payment subscriptions.) “The idea that a business benefits from social interaction is not so strange or new. A lot of cafes and small restaurants will let people hang out because they attract other people,” said Yannis M. Ioannides, a professor of economics at Tufts University. “What is unusual and new is that Facebook takes access to information about these people to make its business more powerful.” He added: “The proprietor of a cafe doesn’t use personal information about me and my friends to make money.”
Mr. Ioannides suggests that Facebook and other social Web sites could create a two-way financial street. Facebook, for example, could pay the people who create content on the site. The company could then make money by matching the content with advertising, as it does now. As an alternative for more private individuals, people could pay to use Facebook if it promised not to sift through their personal information. This way, everyone wins.
I for one would feel more comfortable with Facebook looking through my phonebook, wallet and underwear drawer if I knew I was going to get paid for it.
Jaron Lanier, one of the deepest thinkers on the impacts of technology on society and an “innovator in residence” at the Annenberg School at the University of Southern California, worries about companies like Facebook and Twitter not paying their users while the people lucky enough to work for them become rich from free user-generated content. Mr. Lanier says that as more money flows to those who build these networks, society distorts and divides. Those without the skills needed in this new economy — other than to tweet and post pictures — can fall further behind economically.
“The value comes from the people; none of it is self-created,” Mr. Lanier said in an interview. He warns that if society doesn’t devise economic solutions to social networks, there could be “serious social blowback.”
Sure, $50 might not seem like a lot of money right now, but if Facebook continues to grow as it has in the past, its $4 billion in annual revenue could be in the tens of billions of dollars in a few years. If that happens, I should be expecting a dividend.
So, Mr. Zuckerberg, feel free to message me on Facebook, and I’ll give you my address so you can send me a check — unless, as I suspect, you already know where I live.
Disruptions: Facebook Users Ask, ‘Where’s Our Cut?’ By NICK BILTON
David Paul Morris/Bloomberg NewsMark Zuckerberg, chief executive officer and founder of Facebook, spoke at a Facebook conference in September.FacebookTwitterLinkedinShareShareCloseRedditTumblrDiggE-mail
SAN FRANCISCO — By my calculation, Mark Zuckerberg, Facebook’s founder and chief executive, owes me about $50.
Without me, and the other 844,999,999 people poking, liking and sharing on the site, Facebook would look like a scene from the postapocalyptic movie “The Day After Tomorrow”: bleak, desolate and really quite sad. (Or MySpace, if that is easier to imagine.) Facebook surely would never be valued at anything close to $100 billion, which it very well could be in its coming initial public offering.
In the company’s S-1 filing, submitted to the Securities and Exchange Commission this week, Facebook boasts about its statistics: annually, people “like” one trillion things; 91 billion photos are uploaded; half a billion people use Facebook on mobile phones; and hundreds of millions are annoyingly “poked.”
So all this leaves me with a question: Where’s my cut? I helped build this thing, too. Facebook laid the foundation of the house and put in the plumbing, but we put up the walls, picked out the furniture, painted and hung photos, and invited everyone over for dinner parties.
So why am I asking for money from Facebook and not Google? Although there have been hundreds of technology-related I.P.O.’s over the last decade, Facebook is the first real social-media public offering, where the content on the site is entirely created by its users. (The closest, LinkedIn, had additional business models, including premium payment subscriptions.) “The idea that a business benefits from social interaction is not so strange or new. A lot of cafes and small restaurants will let people hang out because they attract other people,” said Yannis M. Ioannides, a professor of economics at Tufts University. “What is unusual and new is that Facebook takes access to information about these people to make its business more powerful.” He added: “The proprietor of a cafe doesn’t use personal information about me and my friends to make money.”
Mr. Ioannides suggests that Facebook and other social Web sites could create a two-way financial street. Facebook, for example, could pay the people who create content on the site. The company could then make money by matching the content with advertising, as it does now. As an alternative for more private individuals, people could pay to use Facebook if it promised not to sift through their personal information. This way, everyone wins.
I for one would feel more comfortable with Facebook looking through my phonebook, wallet and underwear drawer if I knew I was going to get paid for it.
Jaron Lanier, one of the deepest thinkers on the impacts of technology on society and an “innovator in residence” at the Annenberg School at the University of Southern California, worries about companies like Facebook and Twitter not paying their users while the people lucky enough to work for them become rich from free user-generated content. Mr. Lanier says that as more money flows to those who build these networks, society distorts and divides. Those without the skills needed in this new economy — other than to tweet and post pictures — can fall further behind economically.
“The value comes from the people; none of it is self-created,” Mr. Lanier said in an interview. He warns that if society doesn’t devise economic solutions to social networks, there could be “serious social blowback.”
Sure, $50 might not seem like a lot of money right now, but if Facebook continues to grow as it has in the past, its $4 billion in annual revenue could be in the tens of billions of dollars in a few years. If that happens, I should be expecting a dividend.
So, Mr. Zuckerberg, feel free to message me on Facebook, and I’ll give you my address so you can send me a check — unless, as I suspect, you already know where I live.
Friday, February 03, 2012
At 102%, His Tax Rate Takes the Cake By JAMES B. STEWART
At 102%, His Tax Rate Takes the Cake By JAMES B. STEWART
Meet Mr. 102%.
James Ross, 58, is a founder and managing member of Rossrock, a Manhattan-based private investment firm that focuses on commercial real estate and distressed commercial mortgages. “I realize I am very fortunate, and in fact I am a member of the 1 percent,” Mr. Ross wrote in an e-mail. His résumé is studded with elite institutions: Yale, Columbia Law School and stints at the law firms Cravath, Swaine & Moore in New York and Holland & Hart in Denver. Since his company fits the category of private equity, he even has carried interest, the kind of incentive compensation that enabled Mitt Romney to pay such a low tax rate.
Yet Mr. Ross told me that he paid 102 percent of his taxable income in federal, state and local taxes for 2010. “My entire taxable income, plus some, went to the payment of taxes,” Mr. Ross said. “This does not include real estate taxes, sales taxes and other taxes I paid for 2010.” When he told friends and family, they were “astounded,” he said.
In the midst of a national debate over tax rates and policy, I lifted the veil last week on my income tax rates for 2010, a year in which I paid 37 percent of my adjusted gross income (total income minus things like retirement contributions) in federal, state and city income taxes and 74 percent of my taxable income (after deductions like state and local taxes).
I was dismayed by the comparison to Mr. Romney — who paid 13.9 percent of his adjusted gross income of $21.7 million and 17.5 percent of his taxable income of $17.1 million — as well as by the possibility that I paid a higher tax rate than just about anyone. So I invited readers to send me e-mails disclosing their tax rates and circumstances.
I was deluged with submissions, including many people who pay a higher rate than I do. But at 102 percent, Mr. Ross was in a category of his own.
That doesn’t mean Mr. Ross pays more in taxes than he earns. His total tax as a percentage of his adjusted gross income was 20 percent, which is much lower than mine.
That’s because Mr. Ross has so many itemized deductions. Since taxable income is what’s left after itemized deductions like mortgage interest, charitable contributions, and state and local taxes are subtracted, it will nearly always be smaller than adjusted gross income and demonstrates how someone can pay more than 100 percent of taxable income in tax. Mr. Ross must hope that his interest expense will pay off down the road and generate some capital gains.
Still, all of Mr. Ross’s itemized deductions are money out of his pocket, which is why he’s had to draw on his savings to pay his taxes. Robert Willens, a tax expert and New York attorney, made the argument that taxable income, therefore, may be a better basis for measuring the tax burden.
In any event, by either measure Mr. Ross pays a higher rate than Mr. Romney.
“I had no idea I was paying such a high rate,” he told me when we spoke this week. “I had trouble believing this was possible. I called my accountant, and I said, ‘Do you realize I’m paying every penny I have in taxable income? I’m dipping into savings to pay my income tax.’ He said, ‘It’s unfortunate, but at your income level’ ” — with high earned income and large itemized deductions that Mr. Ross can’t take advantage of — “ ‘that’s just the way it is.’ ”
Mr. Ross’s plight illustrates something that came through in nearly every response and cuts across nearly all income levels: the disparities of the tax code don’t just pit rich against poor or middle class. It taxes people within the same income brackets at grossly unequal rates. “I cannot help but reflect on the unfairness of the current tax regime,” Mr. Ross wrote. “Why should I pay 102 percent of my taxable income in taxes when others, with far greater wealth than mine, pay a fraction of that?”
I asked Mr. Willens if such a thing were possible, and he said it was. “It’s entirely within the realm of possibility,” he said. “I can’t recall any clients quite that high, but I’ve had people come close.”
How could Mr. Ross pay so much? I thought I was the victim of a perfect storm of punitive tax policies, but Mr. Ross’s situation is worse.
Like me, he lives and works in New York City, which all but guarantees a high tax rate. Nearly all of his income is earned income and thus fully taxable at top rates. (He said that’s not always the case, but given the recent dire condition of real estate, in 2010 he had few capital gains and his carried interest didn’t yield any income.) Unlike me, he can’t make any itemized deductions, which means his adjusted gross income exceeds $1 million, the level at which New York State eliminates all itemized deductions, except for 50 percent of the value of charitable contributions. Mr. Ross said he gave 11 percent of his adjusted gross income to charity.
That means Mr. Ross can’t deduct any interest expense on the money he borrows to finance his real estate investments, which is substantial, nor can he deduct any other expenses or other itemized deductions except for part of his charitable contributions. This means he pays an enormous amount in state and local taxes. Since those are among the deductions that are disallowed when computing the federal alternative minimum tax, Mr. Ross is in turn especially hard hit by the A.M.T.
Mr. Ross said he asked his accountant what he could do. “He said, ‘Fire everyone here and move to Florida,’ ” according to Mr. Ross. He employs 10 people in his New York office.
Mr. Ross may be a member of the 1 percent, but many people who responded and said they paid high tax rates weren’t. Eliana S. Rivero is a professor emeritus at the University of Arizona who told me she gets by on Social Security, a TIAA-CREF pension fund and a small amount of royalty income. She said she paid just over 26 percent of her adjusted gross income in income taxes.
“I reacted the way you did when Romney’s tax status was revealed: I went to my calculator,” Dr. Rivero wrote. “Much to my dismay and, yes, outrage, I pay almost double the tax rate he does. And I promise you, I am very far from the 1 percent crowd!!!
“I worked for 45 years in my chosen profession, helped educate quite a few of the present-generation college faculty, received several teaching and scholarly awards, and yet my government taxes me right and left for the moderate wages I earned but lets the wealthy get away with paying proportionately less than I do. I truly wouldn’t mind it so much if my taxes went to pay for schools and bridges and roads but when they go to wars and loopholes for the mega-rich, I see red!”
A disproportionate number of high-rate taxpayers appear to be self-employed and many are professionals, such as lawyers, doctors, dentists and architects with mostly earned income rather than dividends and capital gains. Some are in the upper 1 percent, but most aren’t. Architects, who as a group may be the most underpaid profession relative to their education, talent and responsibility, seem especially disadvantaged by the current tax code.
Daniel Kelley is an architect who wrote from Philadelphia. “My wife and I have a 20-year-old architecture firm employing 20 to 30 full-time professional people,” Mr. Kelley said. “In 2010, we paid 31.3 percent federal taxes on our adjusted gross income. We paid 37.5 percent federal, state, local taxes on our adjusted gross income. If our practice was in New York, I imagine the latter would approach 45 percent. Instead of tax breaks for people who make a living from their money, perhaps there should be reduced taxes for those of us who have small businesses and employ Americans. I don’t necessarily mind the very rich making money, but if they don’t pay a fair tax, then they are stealing from the rest of us.”
Journalists and authors were also well represented. Jeffrey Bennett, author of “Math for Life” and numerous other books, reported that he paid 26.8 percent of his adjusted gross income in federal taxes, topping my 24 percent rate, but because he lives in Colorado, his total federal and state burden is lower than mine though still far higher than Mr. Romney’s. Ironically, a chapter in Mr. Bennett’s book discusses the “insanity of our current tax policies,” he said. “And despite our high rate, you can mark us down in the category of people who believe our rate should be increased. After all, it’s either us paying it or our children, and it’s not right to pass it on down the line.”
And for those of you who questioned how I could be a business columnist and yet be such a sap, James Cramer, the host of “Mad Money” on CNBC and founder of the financial Web site TheStreet.com, disclosed that he paid a higher rate than I do. He forwarded an e-mail from his accountant estimating that he paid 45 to 50 percent of his adjusted gross income in income taxes in 2010. Mr. Cramer’s taxes are especially high — and complicated — because he lives in New Jersey and works in New York and New Jersey, so he pays income taxes in both high-tax states (and gets a credit on his New Jersey return for his New York taxes). Most of Mr. Cramer’s income is earned, and thus is fully taxed. Although he had capital gains, they were offset by losses. “The best way to have everyone pay their fair share is to tax all income (whether earned or unearned) at the same rates,” his accountant, Jeffrey Rosenthal, said.
One thing that emerged loud and clear is that a large swath of hard-working people are paying a high rate and are furious about it — not because they object to paying taxes, even high taxes, but because so many people, even billionaires, pay at a much lower rate than they do.
The tax code, Dr. Rivero wrote, “is written to favor the rich, who have not created all those jobs they were supposed to generate.”
The rich themselves are some of the most distressed. “None of the dialogue about taxes has anything to do with fairness,” Mr. Ross lamented. “Certain rich people are paying way more than their fair share and other rich people are paying a lot less. I’d like to see a conversation take place along nonideological lines where everyone is asked to pay their fair share, where everyone makes some payment, even if it’s one dollar. Everyone I know is so disgusted. People aren’t stupid. They know what’s going on. At the end of the day, the system is broken.”
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