The Perils of Being a Watch Doggie
The story you are about to read is true. The names have not been changed to protect the innocent. This is the city: Honolulu, Hawaii. I live here. I’m a doggie. This is the Case of the Persecuted Watchdog. A few months ago, the Boss wrote an article called, “State Auditor Facing a Whack Job?” The article spoke of an apparent feud between the Speaker of the House and the State Auditor, and of a report that a committee organized by the Speaker put out that tried to cast doubt on the Auditor’s competence. We also spoke of a House special investigative committee that was formed to look into some unflattering things the Auditor found at the Department of Land and Natural Resources, and at the Agribusiness Development Corporation. According to House Resolution 164 that established the committee, the purpose and duties of the investigating committee were to follow up on the audits, to examine the recommendations made, and for “purposes of improving the operations and management of these state agencies, their funds, and any other matters.” But, as Honolulu Civil Beat reported on Thursday, the Auditor seems to be in the crosshairs of the investigation as well. The committee voted to subpoena Edwin Young, the former auditor of the City & County of Honolulu, ostensibly to talk to the committee about federal Yellow Book standards on auditing. This riled Rep. Dale Kobayashi, who observed that Mr. Young chaired the Speaker’s committee “to go after the auditor.” The committee also voted to subpoena one Randal Lee, who wasn’t involved with DLNR and ADC at all but who was a consultant to the State Auditor for an audit of the Honolulu rail project. Kobayashi wondered aloud what Mr. Lee had to do with the audit findings regarding DLNR and ADC, and suggested that the committee obtain an opinion from the Hawaii attorney general as to whether the committee was acting within its proper scope. Rep. Della Au Bellatti, the committee chair, pointed to language in the authorizing resolution (quoted above) arguably allowing it to look into “any other matters.” We share Rep. Kobayashi’s concern that the House investigation is going off track. The law requires that the resolution establishing an investigating committee state the committee’s purposes, powers, duties and duration, as well as the subject matter and scope of its authority. It’s tough to conclude that those three words, “any other matters,” give the committee unlimited scope and authority to do whatever the heck it wants. Let’s face it. Watchdogs are there to find things that certain people don’t want to be found. When those things are found, those people are unhappy and might want revenge on the watchdog. Watchdogs are very useful to society. That’s why I am one. But no watchdog expects to be everyone’s friend. Each one has enemies, some more powerful than others. When the Tax Foundation sued the State over the excessive “rail skim,” for example, certain politicians vowed that the Foundation would never get one cent from the Legislature in state aid. (We wouldn’t take it anyway.) To survive, watchdogs have to watch out for each other. If one gets beaten up, none of us are safe. That is why we are very concerned about the sudden turn in the House investigation, and we think any citizen who values honesty and transparency in our government should be concerned too. This is a true story. The end of the story has not yet been written. We too will be following the investigation, or trying to, and will continue to bark like crazy if it keeps going off track. Ours is a tough job but someone has to do it. The name’s Watch Doggie.
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![]() Where Is the Value from Taxes? On October 13th, the Grassroot Institute of Hawaii published the result of a poll of about 1,000 Hawaii residents. They found, not surprisingly, that people don’t like our high state taxes: Maybe I’m too cynical after being at the Tax Foundation of Hawaii, but my initial reaction to this poll was, “Well, of course people don’t want to pay taxes. Tell us something we don’t know!” If you think about it, taxes have a lot in common with gifts to a charity – setting aside the very real difference that failing to donate to a charity will not land me in the slammer. In both cases you part with your money and you get nothing in terms of any immediate return. But people are willing to give to charity, or to the government, if they think that they receive value when they do so. “If I give to this charity,” I think, “maybe a kid with terminal cancer will get to go to Disney World before he meets his maker. Or it might help put a mouthful of food in some emaciated person in Somalia, or Mongolia, or Kakaako. Or it might help educate us, the electorate, and the politicians who write our tax laws, how these laws actually work.” The better I feel about what the charity is doing, the more likely I am to give. By the same token, I think that when I pay taxes I’m paying for education for my kids, or necessary oversight of public health, or care of our parks and forests. The more value I think I am getting for the tax dollars I have to pay to the government, the less likely I am to complain about having to part with those dollars. Folks who sell things for a living are intimately familiar with the concept of a “value proposition.” If your customer doesn’t understand or can’t appreciate the value of buying your product or service, or of giving you money, then they won’t do it if they have a choice. If they don’t have a choice, they won’t be happy about being forced to contribute. So, part of your salesperson’s job is to make the value proposition obvious enough to your customer that your customer will say yes and open up that wallet. So now let’s pose a challenge. There are going to be lots of people running for office next year, more than usual because of the redistricting that is happening because of the recent U.S. census. Look at the graphic included with this column. The message it’s screaming is that the electorate does not understand the value proposition associated with paying the taxes we pay to get the state government we have. So, the challenge to these people running for office is: Present us, the electorate, with not only your own value proposition but also the value proposition relating to the government that you want to hold office in. Where is the value that our government brings to the people contributing to it? And what are you, as a prospective politician, going to do to bring your constituents that value? Are you going to get more things done with less? Are you going to drain the swamp? Are you going to help create an environment that will help us make ends meet? Give that some thought and give us some ideas! And, for those who do get elected, we need you to turn those good ideas into action. Tax Planning with the Rich and Famous
Occasionally, all of us wonder what it’s like to be rich and famous, or at least act like it. “Those people,” you might think, “have at their disposal so many ways to flummox the tax authorities if they want to. Panamanian bearer shares corporations. Dutch sandwiches. Entities from the Isle of Man, the Caymans, or Bermuda perhaps.” It turns out, however, that there are some very potent tax planning devices easily and legally available to Americans. They’re called Individual Retirement Accounts, or IRAs. IRAs come in two basic flavors. The first, the conventional IRA, is an account that you fund with pre-tax money. You take an income tax deduction when you put money into it, meaning that money escapes tax for the time being. That money stays in the account and grows, assuming it’s invested wisely. The tax needs to be paid whenever that money comes out of the account. It can come out when you are quite a bit older, perhaps when you are retired and aren’t making tons of other money so the tax bite won’t be bad as it would have been if you paid the tax on it when you earned the money back in the days when you were working. For most people, there is a limit of $6,000, varying by year, that can go into an IRA of either flavor. But there are exceptions. If you are self-employed, for example, the annual limit can be quite a bit higher. The second flavor is the Roth IRA. This account is funded with money you already have paid tax on. But it gives you tax-free growth and tax-free distributions for the rest of your years. And then, when you die, your heirs get to live off a Roth IRA’s tax-free money for up to ten years. Again, there are annual limits on how much you can throw into this kind of account. Finally, if you have a conventional IRA but you really want the benefits of a Roth, it’s possible to convert. The price, however, is that tax needs to be paid on the money that goes from the conventional to the Roth IRA, the same as if the money simply had come out of the conventional IRA as a distribution. If you are in a situation where your business has operating losses and the losses are just sitting on your income tax return gathering dust (which is not a terribly uncommon situation given the COVID-19 pandemic and the related lockdowns and restrictions in 2020) then converting your conventional IRA to Roth might simply result in absorbing the losses and not payment of lots more tax. The interesting thing is that there isn’t a limit on conversion, as long as the tax gets paid. Perhaps the most extreme example is tech investor Peter Thiel. According to an article from ProPublica, Thiel parlayed a modest investment in a Roth IRA by having the IRA buy some shares in startup companies, one of which was PayPal. PayPal exploded in value, some of the PayPal shares were sold to invest in other startup companies, like Facebook Inc., and the cycle continued. That Roth IRA is now worth $5 billion. Not a penny of tax will be charged when the money comes out, as long as he doesn’t touch the account until he is aged 59-1/2. Sure, he was one lucky (or brilliant, or both) fellow to be able to pick the winners successfully. But the point is that IRAs are available to ordinary people as well, and can yield decent tax benefits for ordinary people as well. Tax is an extremely complicated beast, but it does have occasional features that can help many of us. It’s up to us to learn what they are and use them for our own advantage if appropriate. |
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