Income taxation is progressive. Following the edict “from each according to his ability,” rates go up the higher your taxable income. Just how progressive is a subject of tax policy; as of this writing the current top tax rate is 39.6 percent, but has been as high as 92 percent (1952–53). Of course, how much tax you pay is defined not just by the rate but by how much of your income is taxable.
Tax policy is fiscal policy. The federal government can—and has—used tax policy to stimulate the economy, as was most famously done in the Reagan years with a dramatic lowering of top, or marginal, rates and average tax rates paid. The top income tax rate was lowered from 70 percent to 50 percent in 1982 and again to 33 percent in 1987. It has varied between 33 percent and 39.6 percent ever since. It is felt that a lower top rate does two things: first, it gets wealthier and higher-income people to invest in the economy, thus providing jobs and creating more tax revenue downstream; second, it reduces the amount of effort made to avoid taxes!
The IRS does not create tax law. Congress creates tax law; the IRS merely enforces it. Also, doing the most you can within the law to avoid taxes is considered a good thing; it is neither the intent of Congress nor the IRS that you pay taxes that you don’t owe. Evasion is when you knowingly try to get around taxes that you do owe, and that’s where severe consequences can result.
Why You Should Care
Current tax policy and laws naturally determine how much of your income—all forms of it—you’re entitled to keep. Most view taxes as a necessary evil, and are resigned to pay whatever their accountants say they owe. With a deeper understanding of taxes and how they might affect your current financial situation, you can take charge and plan your taxes so as to minimize them. That is also a good thing, and encouraged by the IRS. Just as you would budget a business or your personal finances, it pays to put some energy into saving money on taxes—taxes of all types, from all jurisdictions. Don’t be afraid to do this.
48. CREDIT PROTECTION
The dangers of unfair credit practices, or “lawlessness” in this area, are obvious—it’s too easy for unknowing or unsuspecting people to be “sold” on the idea of borrowing money to buy something under unreasonable terms. The federal government has passed an assortment of laws over time to make credit practices more consistent, fair, and understandable. In making things fair, they help the economy function more efficiently, as people can trust lenders to a greater degree—and vice versa.
What You Should Know
Federal laws serve mainly to clarify the responsibilities of creditors and debtors in consumer credit relationships, although the most recent 2009 legislation goes a bit farther by providing ground rules for what credit card companies can and can’t do. Here are four of the most important laws governing credit and credit fairness:
TILA—Truth in Lending Act. This act hit the books in 1968, and since that time has had a handful of revisions. TILA is mostly about disclosure, and for all types of consumer lending, requires written disclosure upfront of lending terms, cost of credit (annualized percentage rate, or APR), fees, and so forth. TILA has been amended more recently to require specific disclosures for adjustable-rate mortgages and reverse mortgages. TILA also allows a three-day “rescission” period to cancel any loan, and a three-year “extended right to rescind” if disclosures aren’t made properly.
FCBA—Fair Credit Billing Act. This 1986 law covers the fair disclosure and billing of credit card accounts, and covers such topics as how to dispute a charge and cardholder liability in the event of unauthorized use (setting a maximum liability of $50).
FCRA—Fair Credit Reporting Act. The FCRA of 1970 covers your rights to review, fix, or authorize others to use your credit report and score. Key features include the process to dispute and resolve reporting, the requirement to give you a free credit report once a year, and a score (not necessarily free) when you want it. You also have some control over who can use the score, including the ability to opt out of using your credit rating as a factor in insurance and credit company solicitations.
FDCPA—Fair Debt Collection Practices Act. Finally, this 1977 law covers what collectors can and can’t do, including hours and means of contact, and disclosure of your debt problems. It’s not hard to find out more about these laws by simple online search. The Federal Trade Commission consumer protection site also helps; see: www.consumer.ftc.gov/topics/credit-and-loans.
A few years ago, Congress passed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. This is a broad credit cardholder’s “bill of rights” limiting the ability of credit card companies to raise interest rates without adequate notice or triggers, and dealing with a host of other consumer-unfriendly practices in the credit card industry. As a user of credit and especially if you have a lot of credit cards, you should understand this new law.
Why You Should Care
While most credit problems are corrected by getting spending habits under control and making required payments, mistakes or aggressive creditor practices do happen, and sometimes it makes sense to consider your legal options. Like any game, it helps to know the rules and how to cry “foul.” You should learn what questions to ask and how to communicate with creditors, but don’t expect the law to mitigate the effects of bad habits.
49. BANKRUPTCY LAW
Everybody makes mistakes. In the old days, if you ran out of money or your debts exceeded your assets, you would be sent to debtors’ prison—or worse. What would happen if debtors’ prison existed today? Very simply, people wouldn’t take risks, and they wouldn’t spend money. If people didn’t take risks, we wouldn’t have the conveniences and technologies we have today. And people wouldn’t spend money at all for fear of that cold, dark debtors’ prison.
The bankruptcy process and set of laws around it are designed to clean up people’s financial mistakes in a fair and equitable way. While bankruptcy certainly isn’t good for the individual or company going through it, it stops short of being a draconian, desperate measure. So yes, bankruptcy is a bad thing, especially for the individuals and companies involved. But the way the process is set up actually helps the economy.
What You Should Know
Bankruptcy happens when an individual or corporation declares its inability to pay its creditors (voluntary bankruptcy), or when a creditor files a petition on behalf of a debtor to start the process (involuntary bankruptcy). The U.S. Constitution puts bankruptcy under federal jurisdiction, and a uniform Bankruptcy Code sets the rules, with some state amendments. Bankruptcy proceedings occur in federal court.
The most often used and discussed chapters in the Bankruptcy Code are Chapters 7, 11, and 13:
Chapter 7: used by both individuals and corporations; leads to a simple and total liquidation of assets to pay creditors.
Chapter 11: mostly occurs in the corporate sector, and leads to a reorganization and recapitalization of the company, usually with creditors receiving some portion of their debts in a predetermined order of priority.
Chapter 13: for individuals; does not liquidate all assets but rather creates a payment plan to discharge the bankruptcy individually.
Bankruptcy usually allows certain property, such as personal effects and clothing, to be exempt from liquidation; these rules can vary by state. Chapter 7 rules allow only one bankruptcy filing in eight years, and during that eight-year period your credit rating and your ability to borrow will be severely impaired. Specific rules cover spousal property. In Chapter 13, the debtor doesn’t forfeit assets, but must give up a portion of future income over the next three to five years. In Chapter 11, the business continues to run while creditors and debtors work out a deal in bankruptcy court. Eventually a plan is presented to the debtors, who must approve it.