As we saw from last weeks posting, Adam Smith provided 10 principles for a desirable tax policy. Let us take a moment and review these policies.
1. The tax policy must promote equality
2. The tax policy must be convenient. This means the costs and means of collecting taxes must be low and the administrative costs to taxpayers must also be low.
3. Certainty meaning the taxpayer can readily predict when, where and how a tax will be levied. The taxpayer also needs to be aware of the tax consequences of a particular type of transaction.
4. Economy meaning the tax policy has nominal collection costs and nominal compliance costs to taxpayers.
5. The tax system should be simple
6. The tax policy should be neutral in terms of its effect on business decisions
7. The tax should not reduce economic growth and efficiency
8. The tax should be easily understood by taxpayers.
9. The tax should be structured to minimize noncompliance.
10. The tax policy should enable the government to predict the amount and timing of revenue production.
Taxation is necessary in order for governments to provide basic protection, security, and services to the public they serve. With these guidelines as our guide we can now determine what method of taxation is best for the United States. I will first compare the present progressive income tax against the guidelines. We will then look at two alternative methods of taxation being considered and compare them against the guidelines. I will conclude by offering my opinion of which method I believe is best.
Progressive Income Tax:
As we saw from last weeks posting, the present progressive income tax system has become corrupt. However, how does it fair against Adam Smith’s guidelines?
1) Equality – Many mistake equality with fairness. They believe the present system promotes equality since it taxes lower income individuals at a lower rate. This is not equality but is fairness. Equality would mean everyone is taxed at the same rate where as fairness understands that certain individuals need a break so they can more easily provide for their basic needs. Our present system does not promote equality.
2) Convenient – The fact that the present system requires that we take time out or our busy lives and prepare a tax return is not convenient. Many individuals also have to pay someone to prepare their return since it is not easily understood.
3) Certainty – Since taxpayers cannot predict their tax rate until the end of the year, because it is dependant on their taxable income, the present system provides little certainty other than the fact we will have to pay something.
4) Economy – The IRS is the collection agent for the federal government and is a large blotted bureaucracy and the fact that many taxpayers have to pay a professional to prepare their annual tax return does away with any belief that the present system is economical.
5) Simple – The tax code is huge and written in highly technical language by politicians. Many tax professionals and lawyers have difficulty interpreting it. What is simple about that system?
6) Neutral – The effect of taxes enters into many business decisions. One example is an individual’s decision to purchase a home. Individuals who currently rent can take the same money they presently pay for rent and purchase a home so they can receive a tax deduction for interest on the mortgage plus a deduction for property tax and insurance. For many this becomes their primary reason for buying a home. However, the current housing crisis has shown that some people should continue to pay rent until their financial position improves and they can afford a home. Taxes should not be a consideration instead the financial condition of the individual should.
7) The progressive nature of the present system punishes achievement. This punishment of achievement slows economic growth. In addition, the costs of collection and compliance make the system inefficient.
8) The complexity of the tax code coupled with constant changes to the code makes it difficult for both tax professionals and non-tax professionals to understand.
9) The complexity of the tax code means that it is easy for a taxpayer to be in noncompliance without even knowing it. Tests have been conducted where several tax professionals prepared the same tax return and they all came up with a different result. All these tax preparers believe their return is in compliance but they cannot all be in total compliance.
10) The government collects revenue quarterly through withholding and estimated tax payments. However, between January 1 and April 15 as returns are filed they issue refunds and tax credits to individuals who qualify for them. This situation makes it virtually impossible for the government to predict the amount of revenue they will receive.
It should be obvious that the present tax system fails to meet even one of Adam Smiths guidelines. For this reason, many believe the time has come for a reform of our tax system. Two proposals are currently on the table so let us see how each of these proposals holds up against Mr. Smiths guidelines.
The Flat Tax:
Under a flat tax system, every taxpayer is taxed at the same rate. Since this is viewed by some as placing an undue burden on lower income individuals, the proposal also includes a $10,000 personal exemption for each family member. This means the first $40,000 of income for a family of four is exempt from any income tax. Any income over the amount of exemptions would be taxed at a flat rate of 15%.
Presidential candidate Steve Forbes ran in 1996 essentially on a platform of the flat tax. Steve Forbes did not win the nomination but he did bring national attention to this tax alternative and still promotes its benefits in Forbes magazine. Now let us see how the flat tax plan holds up against Mr. Smith’s guidelines.
1) Equality – Since all tax payers are taxed at the same rate, this plan is more equitable than the current plan. It is also fair because of the deductions for exemptions.
2) Convenient – Everyone would file his or her taxes on a simple form each year. There would no longer be the need of hiring an accountant to determine what deductions a taxpayer could take since all they will need to do is count how many exemptions they have.
3) Certainty – Since we will begin the year with knowledge of how many exemptions we have, taxpayers will easily be able to determine their taxable income.
4) Economy – The simplicity of the form means compliance and collection costs will be low.
5) Simple – Again, a simpler form that taxpayers will be able to fill out doing simple math with a calculator.
6) Neutral – Individuals and businesses will easily be able to predict their tax liability and factor it into business decisions.
7) Under this plan, even if a taxpayer’s income increases, his of her tax rate will not. This removes the disincentive that exists under the current progressive system to make more income because the tax rate increases. In addition, for those interested in fairness, these ambitious individuals will still pay more tax dollars, just at the same rate.
8) Easy to understand as long as you can count and do simple math and we have calculators for that.
9) Easy to comply with – Simply fill out the form, make out the check, and mail it to the IRS
10) Easy for the government to predict revenue – Employers will send quarterly reports showing the income of their employees as well as the number of exemptions they are claiming. The government will be able to predict taxable incomes for each taxpayer and can budget accordingly.
It is clear that the flat tax eliminates many of the problems that exist in the present system. This is primarily due to its simplicity. It also does not punish achievement so proponents of this program believe it will promote economic growth something drastically needed in these recessionary times.
One of the drawbacks is that there will be no withholding or refundable tax credits. This will eliminate tax refunds and mean that individuals will have to actually write a check for their taxes each year. However, this will make individuals aware of their real tax liability, something that is missing in today’s system.
Unfortunately politicians looking to earn votes could also corrupt the flat tax system. They could accomplish this by adding deductions or tax credits to the code just as they have done with the present system. In the legislation for the new flat tax language would have to be added requiring a super majority of a 2/3 vote to make changes to the code.
The $10,000 personal exemption also needs to be indexed to inflation so that it will increase during inflationary times. If this is not done, individuals will pay a higher percentage of their income during these times as incomes usually increase with inflation.
The Fair Tax:
The fair tax is essentially a national sales tax. For those disenchanted with the current corrupt system it seems to be a viable option. In fact a best selling book, The Fair Tax written by Neil Boortz outlines the specifics of the plan. However, how does this tax proposal hold up against Adam Smith’s guidelines?
1) Equality – The tax is paid at the point of sale with no regard to the income level, race, gender, etc. of the consumer.
2) Convenient – For the taxpayer since the tax is levied automatically at the point of sale but the merchant becomes the tax collector for the government and will be required to fill out reports to remit taxes collected for the government. However, since most state and local governments already have sales taxes, these merchants are already required to keep records of taxable sales so the additional recordkeeping requirements are minimal.
3) Certainty – Consumers will be aware of the tax that will be added to their purchase. For merchants the taxes collected become a liability that is remitted to the government monthly or quarterly.
4) Economy – For the consumer, the recordkeeping costs are zero and the rate of tax is a fixed rate based on the amount of the sale. For the merchant there will simply be one additional form to prepare in addition to those already required by the state and local governments.
5) Simple – the consumer has nothing to fill out. The merchant has an additional form to fill out.
6) Neutral – the merchant will no longer have to pay an income tax and becomes a tax collector for the government. The consumer knows what his liability will be and pays it at the point of sale.
7) Consumers will have additional disposable income due to no longer paying an income tax or having withholding taxes taken from their paychecks. This additional income will more than pay for the additional cost due to the additional sales tax on purchases. In addition, since merchants will no longer pay income taxes, they will be able to pass on savings to consumers since they factor income tax liability into their costs when determining the selling prices for their goods under the present system.
8) The tax is easy to understand for consumers since they simply pay it at the point of sale. For merchants they collect an additional tax at the point of sale and remit it to the government just as they do with state and local sales taxes they already collect.
9) The tax is easy to comply with for consumers since they will have no choice but to pay it at the point of sale. The merchant will collect the tax and hold it until required to pay it. They are already accustomed to doing this with their state and local sales taxes so they already keep records for the collection and remittance of taxes collected.
10) The ability of the government to predict revenue collection will not be as easy since it will depend on the level of consumer spending. However, the government already collects data to estimate consumer spending so they could use this figure to estimate revenue collection for use in their budgetary process.
It is clear that the fair tax would be simple and convenient for the taxpayer since they simply pay it each time they make a purchase. The merchant will have an additional report to fill out but they are already accustomed to filling out similar forms for their state and local governments. In addition, these merchants will no longer be required to fill out a corporate tax return so they will most likely save money on their recordkeeping requirements.
My choice of plan:
One thing is clear. The present progressive income tax system fails to meet any of Adam Smith’s guidelines. If Adam Smith were here today, he would be leading the way for tax reform; after all, he led the tax revolt that was the main cause of the American Revolution that led to the founding of this country.
That leaves us to decide on either the fair tax plan of flat tax plan. Both plans represent a marked improvement over the current plan. The flat tax would be easier to implement since there is already a constitutional basis for it. All that congress would have to do is rewrite the current tax code. However, what would prevent opportunistic politicians from corrupting this plan just as they did the current one.
One way to prevent such corruption of the system would be to include language in the legislation requiring a super majority of 2/3 approval by the congress of any changes to the code. However, if one party were to gain such a majority with a person of their party in the White House, they could swiftly corrupt the tax code. That is why I recommend going the additional step and introducing a constitutional amendment requiring a super majority vote of 2/3 of state legislatures on tax issues so that no matter what party is in charge in Washington, tax changes will be difficult to implement.
To implement the Fair Tax proposal we must first repeal the 16th amendment so we do not end up with an income tax in additional to the fair tax. However due to its simplicity to collect and enforce, I believe this is the best proposal on the table. However, tax reform is so necessary that I do not believe the nation can wait for the amendment process to be completed. Therefore, I recommend initial implementation of the flat tax followed by introduction of the amendment to repeal the income tax. I understand that upon passage of the amendment the flat tax will be unconstitutional so the legislature will need to address this issue by changing from the flat tax to the fair tax. This action should then be followed by passage of another amendment to the constitution requiring a super majority vote of state legislatures on federal tax issues.
Political obstacles:
The main obstacle we will face in implementing tax reform is that the current tax system has become firmly ingrained on our governmental system and society. Politicians have grown accustomed to using the tax code as a political tool to earn votes. It will require a major outcry from the people and possibly the replacement of some legislators to implement this reform.
Our tax code has also become firmly ingrained in our society. Many have additional tax withheld every payday so they can receive a large refund check at the end of the year. However, since the IRS pays no interest on the money they hold until the tax return is filed, this makes little sense. I would advise these individuals to place this extra money in a savings account and earn interest on it until their taxes are due.
Perhaps the toughest obstacle to overcome will be the fact that the present tax code has become a welfare system with the introduction of refundable tax credits. Some politicians will accuse supporters of any tax reform that does not include these credits of not caring for the poor. This could not be further from the truth. The reason for tax reform is to spur economic growth. This economic growth will create additional jobs and business opportunities resulting in fewer people needing to be on welfare. It would be better to create opportunities for individuals to become self sufficient instead of keeping them on the government dole.
I encourage each of you who read this to go to the links provided on this blog and contact your senators and congressperson. If they are not supportive of the needed tax reform, tell them you will support candidates who do in the next election. The tax tea parties we witnessed on April 15 show the public support for tax reform. Washington needs to listen to the people who elect them. If they do not, the people need to invite them to become spectators and elect people who will listen.
Sunday, April 26, 2009
Saturday, April 18, 2009
The Corruption of the Tax System
The primary source of revenue for The United States Government is the income tax. Like many other government programs, the income tax started with good intentions but politicians interested in votes have changed it through the years into the corrupt system it is today. In this posting, we will look at the history of the income tax, some major changes that have occurred through the years, and why I believe the current system is corrupt and in need of change.
History
Both the Federal Union and the Confederate States of America enacted the first income tax in the United States in 1861 in order to finance the Civil War. After the war was over, this tax was repealed since it was no longer necessary. Interestingly, the courts held that the Civil War income tax was not in violation of the constitution. This may have been due to its temporary nature and the modest reach of the tax due to its broad exemptions and low rates.
In 1894, a new Federal Income tax was enacted but this time opponents were able to successfully challenge its constitutionality in court. In Pollock v. Farmers Loan and Trust Co., the U.S. Supreme Court found that the income tax constituted a tax on real and personal property and would require apportionment. Since the legislation enacted in 1894 did not provide for apportionment, the law was ruled unconstitutional.
After ratification of the Sixteenth Amendment to the U.S. Constitution in 1913, the Pollock ruling was essentially overturned, opening the door for a federal income tax. The revenue act passed by congress in 1913 set up the first constitutionally legal income tax in the United States.
This first income tax allowed personal exemptions of $3000 for individuals and $4000 for married persons. The rates ranged from a low of 2% and a high of 6%. The tax also only applied to individuals with income in excess of $500,000.
Major Changes
The amount allowed for personal exemptions has not changed much throughout the years. In 2008 taxpayers received 3500 if they are single and 7000 if they are married. However, the rates have increased substantially to a high of 38%. The income threshold has also been lowered substantially.
The current tax code also allows individuals to deduct certain expenses off their taxable income. These deductions are designed to make the tax code fairer as well as encouraging of certain activities. For example, the tax code allows individuals to deduct medical expenses that are in excess of 7.5% of their taxable income. The code also allows individuals who suffer a casualty loss in excess of 2% of their income a deduction. This is designed to give individuals who have major health problems, or a major casualty loss, a break on their taxes.
To encourage charitable behavior the code also allows a deduction for both cash and non-cash charitable contributions. This is designed to encourage charitable giving. In order to encourage home ownership the code also allows homeowners to deduct the interest, taxes, and insurance on their homes. However, taxpayers are not allowed to deduct more than their income, at least not until the invention of the Earned Income Credit.
The Earned Income Credit (EIC), like many other government programs, started with good intentions. The idea was to give lower income individuals; primarily those just entering the workforce, a credit to help them get started. It was never intended that individuals would continue to receive the credit years later. However, politicians in charge of writing the tax code saw an opportunity to buy the votes of lower income individuals by expanding this program and adding additional refundable tax credits such as the additional child tax credit. Today, individuals making around $20,000 per year with two children can earn tax credits of as much as $5,000 as well as getting back any withholding tax they had withheld.
On the upper end of the tax code we have added the Alternative Minimum Tax (AMT). The idea here was to insure upper income individuals, who normally have higher deductions, paid some tax. This was accomplished by taking phasing out some of their deductions such as the home mortgage deduction or the deduction for charitable contributions.
The squeeze on the tax code caused by both the AMT and EIC mean that the burden of taxes in the United States lies heavily on the wealthy. According to the latest IRS figures, 86% of income tax is paid by the top 25% of income earners. The top 50% of earners pay 97% of the taxes with the top 1% paying 39%. There are also 40% of Americans who pay absolutely no income tax and many of these 40% also receive refundable tax payments.
Corruption:
Politicians have been successful in using the tax code to transfer wealth from wealthy individuals to poorer individuals though the AMT. They have also been able to set up a hidden welfare system in the tax code using refundable tax credits.
Adam Smith, one of our founding fathers, issued 10 principles of a desirable tax policy.
1. The tax policy must promote equality
2. The tax policy must be convenient. This means the costs and means of collecting taxes must be low and the administrative costs to taxpayers must also be low.
3. Certainty meaning the taxpayer can readily predict when, where and how a tax will be levied. The taxpayer also needs to be aware of the tax consequences of a particular type of transaction.
4. Economy meaning the tax policy has nominal collection costs and nominal compliance costs by taxpayers.
5. The tax system should be simple
6. The tax policy should be neutral in terms of its effect on business decisions
7. The tax should not reduce economic growth and efficiency
8. The tax should be easily understood by taxpayers.
9. The tax should be structured to minimize noncompliance.
10. The tax policy should enable the government to predict the amount and timing of revenue production.
Interestingly the American Institute of Certified Public Accountants (AICPA) adopted these 10 guidelines on July 2, 2001. Unfortunately, lawmakers in the United States have failed to follow the guidelines of Adam Smith and instead have used the tax code to solidify their political power and are even proposing further tax increases on the wealthy and additional refundable tax credits such as an education tax credit. If the United States is to continue being an economic super power, the ability to use the tax code for political gain must be taken away from politicians. This will require an overhauling of the current tax code. Next week we will look at some of these alternative tax proposals.
History
Both the Federal Union and the Confederate States of America enacted the first income tax in the United States in 1861 in order to finance the Civil War. After the war was over, this tax was repealed since it was no longer necessary. Interestingly, the courts held that the Civil War income tax was not in violation of the constitution. This may have been due to its temporary nature and the modest reach of the tax due to its broad exemptions and low rates.
In 1894, a new Federal Income tax was enacted but this time opponents were able to successfully challenge its constitutionality in court. In Pollock v. Farmers Loan and Trust Co., the U.S. Supreme Court found that the income tax constituted a tax on real and personal property and would require apportionment. Since the legislation enacted in 1894 did not provide for apportionment, the law was ruled unconstitutional.
After ratification of the Sixteenth Amendment to the U.S. Constitution in 1913, the Pollock ruling was essentially overturned, opening the door for a federal income tax. The revenue act passed by congress in 1913 set up the first constitutionally legal income tax in the United States.
This first income tax allowed personal exemptions of $3000 for individuals and $4000 for married persons. The rates ranged from a low of 2% and a high of 6%. The tax also only applied to individuals with income in excess of $500,000.
Major Changes
The amount allowed for personal exemptions has not changed much throughout the years. In 2008 taxpayers received 3500 if they are single and 7000 if they are married. However, the rates have increased substantially to a high of 38%. The income threshold has also been lowered substantially.
The current tax code also allows individuals to deduct certain expenses off their taxable income. These deductions are designed to make the tax code fairer as well as encouraging of certain activities. For example, the tax code allows individuals to deduct medical expenses that are in excess of 7.5% of their taxable income. The code also allows individuals who suffer a casualty loss in excess of 2% of their income a deduction. This is designed to give individuals who have major health problems, or a major casualty loss, a break on their taxes.
To encourage charitable behavior the code also allows a deduction for both cash and non-cash charitable contributions. This is designed to encourage charitable giving. In order to encourage home ownership the code also allows homeowners to deduct the interest, taxes, and insurance on their homes. However, taxpayers are not allowed to deduct more than their income, at least not until the invention of the Earned Income Credit.
The Earned Income Credit (EIC), like many other government programs, started with good intentions. The idea was to give lower income individuals; primarily those just entering the workforce, a credit to help them get started. It was never intended that individuals would continue to receive the credit years later. However, politicians in charge of writing the tax code saw an opportunity to buy the votes of lower income individuals by expanding this program and adding additional refundable tax credits such as the additional child tax credit. Today, individuals making around $20,000 per year with two children can earn tax credits of as much as $5,000 as well as getting back any withholding tax they had withheld.
On the upper end of the tax code we have added the Alternative Minimum Tax (AMT). The idea here was to insure upper income individuals, who normally have higher deductions, paid some tax. This was accomplished by taking phasing out some of their deductions such as the home mortgage deduction or the deduction for charitable contributions.
The squeeze on the tax code caused by both the AMT and EIC mean that the burden of taxes in the United States lies heavily on the wealthy. According to the latest IRS figures, 86% of income tax is paid by the top 25% of income earners. The top 50% of earners pay 97% of the taxes with the top 1% paying 39%. There are also 40% of Americans who pay absolutely no income tax and many of these 40% also receive refundable tax payments.
Corruption:
Politicians have been successful in using the tax code to transfer wealth from wealthy individuals to poorer individuals though the AMT. They have also been able to set up a hidden welfare system in the tax code using refundable tax credits.
Adam Smith, one of our founding fathers, issued 10 principles of a desirable tax policy.
1. The tax policy must promote equality
2. The tax policy must be convenient. This means the costs and means of collecting taxes must be low and the administrative costs to taxpayers must also be low.
3. Certainty meaning the taxpayer can readily predict when, where and how a tax will be levied. The taxpayer also needs to be aware of the tax consequences of a particular type of transaction.
4. Economy meaning the tax policy has nominal collection costs and nominal compliance costs by taxpayers.
5. The tax system should be simple
6. The tax policy should be neutral in terms of its effect on business decisions
7. The tax should not reduce economic growth and efficiency
8. The tax should be easily understood by taxpayers.
9. The tax should be structured to minimize noncompliance.
10. The tax policy should enable the government to predict the amount and timing of revenue production.
Interestingly the American Institute of Certified Public Accountants (AICPA) adopted these 10 guidelines on July 2, 2001. Unfortunately, lawmakers in the United States have failed to follow the guidelines of Adam Smith and instead have used the tax code to solidify their political power and are even proposing further tax increases on the wealthy and additional refundable tax credits such as an education tax credit. If the United States is to continue being an economic super power, the ability to use the tax code for political gain must be taken away from politicians. This will require an overhauling of the current tax code. Next week we will look at some of these alternative tax proposals.
Thursday, April 16, 2009
Tax Day Becomes Tea Party Day
April 15 in The United States is a day many have come to dread. To most of us it is known as tax day but prior to the income tax, April 15 had another meaning in our countries history. April 15, 1865 was the day that President Lincoln was tragically assassinated.
Since the implementation of the income tax, April 15 has come to mean panic, late nights, and a night when some post offices have even stayed open until midnight. Panic because most of us want to delay the pain of paying taxes and spend late nights doing our taxes because we have procrastinated. With the introduction of e filing, the post offices no longer stay open until midnight but I personally remember dropping off my taxes at the post office just prior to midnight on April 15 because I was among the procrastinators. .
However, April 15, 2009 will be a tax day many will never forget. It is the time when tax day became tea party day. Ever since the inauguration of President Obama, republicans and many democrats have been shocked by the out of control spending of their government. These people are not crazy or dangerous. No, they are ordinary people who get up early every morning and come home late at night in order to provide for themselves and their families. They work hard for their money and understand the importance of living within their means. They also understand that when you borrow money it eventually has to be paid back.
What has these individuals in shock is the fact that with the level of debt being incurred by our government, they know that not only they, but also their children and grandchildren will be called upon to repay the debt. By attending the tea parties they were sending a message to their government. They are telling their senators, representatives and President Obama to stop the insanity. If these elected officials do not stop, they will join the growing numbers of unemployed people after the next election.
The tea parties were just the beginning. The participants in the tea parties now need to become proactive. They need to keep pressure on lawmakers and the president by communicating their concerns. If these concerns continue to be ignored, they will support candidates who share their concerns and kick the bums out of office.
The battle lines have been drawn. It will not be easy but it is time to fight this political battle. The future of our country is now in our hands. We are the voters and we have the ball. Now is not the time to fumble the ball but now is the time to go for the end zone and end this insanity.
Next week, how did our tax code become so corrupt?
Since the implementation of the income tax, April 15 has come to mean panic, late nights, and a night when some post offices have even stayed open until midnight. Panic because most of us want to delay the pain of paying taxes and spend late nights doing our taxes because we have procrastinated. With the introduction of e filing, the post offices no longer stay open until midnight but I personally remember dropping off my taxes at the post office just prior to midnight on April 15 because I was among the procrastinators. .
However, April 15, 2009 will be a tax day many will never forget. It is the time when tax day became tea party day. Ever since the inauguration of President Obama, republicans and many democrats have been shocked by the out of control spending of their government. These people are not crazy or dangerous. No, they are ordinary people who get up early every morning and come home late at night in order to provide for themselves and their families. They work hard for their money and understand the importance of living within their means. They also understand that when you borrow money it eventually has to be paid back.
What has these individuals in shock is the fact that with the level of debt being incurred by our government, they know that not only they, but also their children and grandchildren will be called upon to repay the debt. By attending the tea parties they were sending a message to their government. They are telling their senators, representatives and President Obama to stop the insanity. If these elected officials do not stop, they will join the growing numbers of unemployed people after the next election.
The tea parties were just the beginning. The participants in the tea parties now need to become proactive. They need to keep pressure on lawmakers and the president by communicating their concerns. If these concerns continue to be ignored, they will support candidates who share their concerns and kick the bums out of office.
The battle lines have been drawn. It will not be easy but it is time to fight this political battle. The future of our country is now in our hands. We are the voters and we have the ball. Now is not the time to fumble the ball but now is the time to go for the end zone and end this insanity.
Next week, how did our tax code become so corrupt?
Sunday, April 5, 2009
Happy Palm Sunday
Today is Palm Sunday. Most all Americans know the meaning of Easter from Sunday school, church, or even the movies. However, Palm Sunday is also a significant day in the Christian faith and actually provides proof of who Jesus was. So on this Palm Sunday lets explore the significance of this day.
First, let us review the story of Palm Sunday. Jesus was journeying from the area of Galilee to Jerusalem. During his journey, Jesus stopped to perform many of his miracles. Among these miracles was the raising of Lazarus from the dead. As you can imagine, the word of someone being raised from the dead must have caused quite a stir even in ancient times when they did not have the benefit of television, radio, or the internet. So, as Jesus approached Jerusalem a throng of people were waiting.
Jesus told his disciples to get a donkey for him to ride into Jerusalem on. This seems odd, for the Messiah and promised King of the Jews to ride into town on a donkey. However, the method of his entry was a code designed for the Jews in town to understand, but not the Romans occupying the city.
In ancient times when a king approached a city, if he was on a horse, he was coming to wage war. However, if he approached the city on a donkey, he was coming in peace. By coming on a donkey, Jesus was signifying that he was not coming to wage war, but to bring peace. However, the people living in Jerusalem greeted him with cries of hosanna and were waving palm branches, which also are code. These actions by the people signified that they did not understand the true reason for Christ’s entry into Jerusalem and mistakenly thought he was coming to overthrow the Roman government.
The true reason for Christ’s entry into Jerusalem on Palm Sunday was to sacrifice his life for the sins of man. He was to be the ultimate Passover lamb. In fact, he entered into the city through the sheep gate, which is also the same gate through which lambs were brought into Jerusalem to be used as Passover lambs. It will not be until the second coming of Christ as described in Revelation 19 that Jesus will come on a horse to wage war and establish his kingdom on earth. However, even then he will actually be coming to end the battle of Armageddon. So, his war will actually be a righteous war with the purpose of ending global annihilation by the armies of man. Another way of expressing this is that the first coming of Jesus was to save the souls of men and his second coming is to save the planet from destruction by man.
Jesus response to the reaction of the throng as reported in Luke is that he wept. He wept because the people did not understand what was going on and, as we would later see the same throng that was elated by his triumphal entry would turn on him and call for his crucifixion. However, there is one more significant fact about Palm Sunday that provides irrefutable proof that Jesus is indeed the promised Messiah.
In Daniel 9:25, the exact date of the Messiah’s triumphal entry into the city of Jerusalem is predicted. In this verse, Daniel talks of 7 weeks followed by 62 weeks after the decree is issued to rebuild the walls of Jerusalem. In Bible code, a week equals 7 years. By doing some simple math we can determine that Daniel is talking about 483 years after the decree is made.
Archeologists have actually found the decree and converting the date to our present calendar, they have determined the date to be March 14, 445 B.C. Since they used a lunar calendar in these times using a 360 day year, accounting for leap years, they have determined that the date of the triumphal entry of the Messiah into Jerusalem would be April 6, 32 A.D. This happens to be the date the first Palm Sunday occurred and since history does not record any other triumphal entries into Jerusalem on this date, Jesus must be the promised Messiah.
As Easter Sunday, or as I like to think of it, resurrection day approaches, I encourage you to take a moment and think of the significance of Palm Sunday. Do not be like the Jews of the time of Christ and miss the true meaning of the triumphal entry. The price for our sin is death. The Bible is not speaking of just physical death, which we all will experience someday, but it means eternal separation from God. Jesus paid the price of death for our sins by dying on the cross and rising from the dead in victory three days later. His victory means we can escape our destiny of eternal separation from God by simply accepting his gift of salvation as payment of our debt. If you have not already done so in your life, I encourage you to take a moment to pray. All you need to do is acknowledge that you have sinned, that you believe Christ came and paid the death penalty for your sins, and that you accept his payment for your debt.
After you have done this, I encourage you to click on the link “Spiritual Help”. Go to the link about how to know God. They will not hound you or put you on some eternal mailing list. They only want to send your some information about what to do now.
Once again, I want to wish everyone a happy Palm Sunday.
First, let us review the story of Palm Sunday. Jesus was journeying from the area of Galilee to Jerusalem. During his journey, Jesus stopped to perform many of his miracles. Among these miracles was the raising of Lazarus from the dead. As you can imagine, the word of someone being raised from the dead must have caused quite a stir even in ancient times when they did not have the benefit of television, radio, or the internet. So, as Jesus approached Jerusalem a throng of people were waiting.
Jesus told his disciples to get a donkey for him to ride into Jerusalem on. This seems odd, for the Messiah and promised King of the Jews to ride into town on a donkey. However, the method of his entry was a code designed for the Jews in town to understand, but not the Romans occupying the city.
In ancient times when a king approached a city, if he was on a horse, he was coming to wage war. However, if he approached the city on a donkey, he was coming in peace. By coming on a donkey, Jesus was signifying that he was not coming to wage war, but to bring peace. However, the people living in Jerusalem greeted him with cries of hosanna and were waving palm branches, which also are code. These actions by the people signified that they did not understand the true reason for Christ’s entry into Jerusalem and mistakenly thought he was coming to overthrow the Roman government.
The true reason for Christ’s entry into Jerusalem on Palm Sunday was to sacrifice his life for the sins of man. He was to be the ultimate Passover lamb. In fact, he entered into the city through the sheep gate, which is also the same gate through which lambs were brought into Jerusalem to be used as Passover lambs. It will not be until the second coming of Christ as described in Revelation 19 that Jesus will come on a horse to wage war and establish his kingdom on earth. However, even then he will actually be coming to end the battle of Armageddon. So, his war will actually be a righteous war with the purpose of ending global annihilation by the armies of man. Another way of expressing this is that the first coming of Jesus was to save the souls of men and his second coming is to save the planet from destruction by man.
Jesus response to the reaction of the throng as reported in Luke is that he wept. He wept because the people did not understand what was going on and, as we would later see the same throng that was elated by his triumphal entry would turn on him and call for his crucifixion. However, there is one more significant fact about Palm Sunday that provides irrefutable proof that Jesus is indeed the promised Messiah.
In Daniel 9:25, the exact date of the Messiah’s triumphal entry into the city of Jerusalem is predicted. In this verse, Daniel talks of 7 weeks followed by 62 weeks after the decree is issued to rebuild the walls of Jerusalem. In Bible code, a week equals 7 years. By doing some simple math we can determine that Daniel is talking about 483 years after the decree is made.
Archeologists have actually found the decree and converting the date to our present calendar, they have determined the date to be March 14, 445 B.C. Since they used a lunar calendar in these times using a 360 day year, accounting for leap years, they have determined that the date of the triumphal entry of the Messiah into Jerusalem would be April 6, 32 A.D. This happens to be the date the first Palm Sunday occurred and since history does not record any other triumphal entries into Jerusalem on this date, Jesus must be the promised Messiah.
As Easter Sunday, or as I like to think of it, resurrection day approaches, I encourage you to take a moment and think of the significance of Palm Sunday. Do not be like the Jews of the time of Christ and miss the true meaning of the triumphal entry. The price for our sin is death. The Bible is not speaking of just physical death, which we all will experience someday, but it means eternal separation from God. Jesus paid the price of death for our sins by dying on the cross and rising from the dead in victory three days later. His victory means we can escape our destiny of eternal separation from God by simply accepting his gift of salvation as payment of our debt. If you have not already done so in your life, I encourage you to take a moment to pray. All you need to do is acknowledge that you have sinned, that you believe Christ came and paid the death penalty for your sins, and that you accept his payment for your debt.
After you have done this, I encourage you to click on the link “Spiritual Help”. Go to the link about how to know God. They will not hound you or put you on some eternal mailing list. They only want to send your some information about what to do now.
Once again, I want to wish everyone a happy Palm Sunday.
Accounting Rules Are Important
The big financial news this week was the G20 summit in London. This is understandable since most of the world’s leaders were present including President Obama. In the news this week it was also reported that the stock market actually appreciated in value during the month of March but it is difficult to determine why this rise in the markets occurred in light of rising unemployment and declining consumer confidence. So we must ask ourselves this question, exactly what caused the gains in the market for the month of March? One contributing factor may be the change by the Financial Accounting Standards Board (FASB) to FASB 157. For the non-accountants out there let me take a moment to explain FASB 157 and why it was implemented in the first place.
The purpose of financial statements that are prepared and audited by accountants is to provide a fair representation of the company’s financial position. The balance sheet provides a snapshot of the company’s financial health as of a certain date, usually the end of the accounting period. This financial report is called a balance sheet because the total assets on the report must equal the total of liabilities plus equity.
In order to insure the accuracy of the balance sheet as well as the other components of the company’s financial statement, companies routinely conduct independent audits. In fact publicly traded companies are required by law to have such audits. The purpose of these audits is to provide independent validation of the company’s financial statements. For the balance sheet, this means validating the value and existence of the company’s assets, liabilities, and equity.
FASB 157 focuses on the valuation of liquid assets such as marketable securities held by a company. The purpose was to insure stockholders of a company that the corporation was not over valuing the marketable securities on its balance sheet in order to inflate the equity or value of the corporation as this could cause the stock value of the corporation to be over valued on the market. When a bank issues a mortgage to an individual or business, the loan represents a marketable security on their books. They can either hold onto the security or sell it to someone else. For example, I have lived in my present home since 2003 and three different institutions have owned my mortgage. Since these mortgages fall under the definition of marketable securities, banks have been required to use FASB 157 and adjust the value of these assets to their market value each accounting period.
However, when the market for a security becomes inactive, what should the basis be for valuing the security? This was the purpose behind this weeks attempt by FASB to clarify FASB 157. Under the previous interpretation, an inactive market was treated the same as a distressed market. Under this interpretation the values of the securities in this inactive market were essentially worthless and banks were required to write them off. For banks that had invested heavily in the sub-prime market, this write down was devastating, causing some banks to fail, and placing many others on the verge of failure.
The government, desirous to preserve the integrity of the banking industry, responded with the bailout bill back in September. The intent of this bailout was to provide distressed banks with coverage for the massive write-offs they were required to take. However, there was no over sight as to how the banks handled the money and was later revealed, the banks that received this government bailout actually used to money for other purposes such as remodeling offices and the paying of bonuses. These banks still finding themselves in financial jeopardy are even discussing with the government their need for additional bailouts. We must now ask the question, why should we even think additional bailouts when they did not work the first time.
This weeks ruling by FASB makes it possible for banks to use their own judgment in valuing these distressed assets leading to fewer write-downs and reduced losses. It is believed that this change in an accounting rule will lessen the need for more government intervention through bailouts. The increases on Wall Street seem to reflect the markets pleasure with this change.
However, as an accounting professional, I have some reservations regarding this change. Since the goal of financial reporting is to fairly present the company’s financial position, we must question the fact that management of a bank will have the ability to value a large percentage of their assets using their own judgment. In order to preserve their jobs, executives in the bank may be motivated to present the rosiest of pictures for the financial status of the companies they manage. Stockholders in these companies should rightly question whether these assets are properly valued when analyzing the financial statements.
These assets did not become worthless due to some accounting rule. They became worthless because banks issued these risky mortgages without doing their due diligence to determine if the borrower had to ability to repay the loan or if the asset being held as collateral was properly valued. If these banks had done this, they may not have made these risky loans and would not find themselves in the position they are now in.
All decisions have consequences. These consequences may even be terminal for some banks and very painful for others. However, even though some banks may fail, the banking industry as a whole will not. The FDIC insures deposits at these failing banks up to $250,000 per account so the depositors need not worry. They will receive their money and can then deposit it in one of the more responsible banks that remain or in a new banking venture started by persons who are more responsible and ethical.
These irresponsible banks will go away eventually. The sooner they do, the quicker we can recover from this recession. I urge my fellow accountants working in the banking and financial industry, and auditors who audit these institutions to exercise due diligence. It is important that these accountants exercise professional skepticism when evaluating the models used by management in valuing their marketable securities. The stockholders of these companies are depending on these accountants to insure the fairness of the company’s financial position as reflected in the financial statements. Let us not disappoint them by letting management inflate the value of these assets.
The purpose of financial statements that are prepared and audited by accountants is to provide a fair representation of the company’s financial position. The balance sheet provides a snapshot of the company’s financial health as of a certain date, usually the end of the accounting period. This financial report is called a balance sheet because the total assets on the report must equal the total of liabilities plus equity.
In order to insure the accuracy of the balance sheet as well as the other components of the company’s financial statement, companies routinely conduct independent audits. In fact publicly traded companies are required by law to have such audits. The purpose of these audits is to provide independent validation of the company’s financial statements. For the balance sheet, this means validating the value and existence of the company’s assets, liabilities, and equity.
FASB 157 focuses on the valuation of liquid assets such as marketable securities held by a company. The purpose was to insure stockholders of a company that the corporation was not over valuing the marketable securities on its balance sheet in order to inflate the equity or value of the corporation as this could cause the stock value of the corporation to be over valued on the market. When a bank issues a mortgage to an individual or business, the loan represents a marketable security on their books. They can either hold onto the security or sell it to someone else. For example, I have lived in my present home since 2003 and three different institutions have owned my mortgage. Since these mortgages fall under the definition of marketable securities, banks have been required to use FASB 157 and adjust the value of these assets to their market value each accounting period.
However, when the market for a security becomes inactive, what should the basis be for valuing the security? This was the purpose behind this weeks attempt by FASB to clarify FASB 157. Under the previous interpretation, an inactive market was treated the same as a distressed market. Under this interpretation the values of the securities in this inactive market were essentially worthless and banks were required to write them off. For banks that had invested heavily in the sub-prime market, this write down was devastating, causing some banks to fail, and placing many others on the verge of failure.
The government, desirous to preserve the integrity of the banking industry, responded with the bailout bill back in September. The intent of this bailout was to provide distressed banks with coverage for the massive write-offs they were required to take. However, there was no over sight as to how the banks handled the money and was later revealed, the banks that received this government bailout actually used to money for other purposes such as remodeling offices and the paying of bonuses. These banks still finding themselves in financial jeopardy are even discussing with the government their need for additional bailouts. We must now ask the question, why should we even think additional bailouts when they did not work the first time.
This weeks ruling by FASB makes it possible for banks to use their own judgment in valuing these distressed assets leading to fewer write-downs and reduced losses. It is believed that this change in an accounting rule will lessen the need for more government intervention through bailouts. The increases on Wall Street seem to reflect the markets pleasure with this change.
However, as an accounting professional, I have some reservations regarding this change. Since the goal of financial reporting is to fairly present the company’s financial position, we must question the fact that management of a bank will have the ability to value a large percentage of their assets using their own judgment. In order to preserve their jobs, executives in the bank may be motivated to present the rosiest of pictures for the financial status of the companies they manage. Stockholders in these companies should rightly question whether these assets are properly valued when analyzing the financial statements.
These assets did not become worthless due to some accounting rule. They became worthless because banks issued these risky mortgages without doing their due diligence to determine if the borrower had to ability to repay the loan or if the asset being held as collateral was properly valued. If these banks had done this, they may not have made these risky loans and would not find themselves in the position they are now in.
All decisions have consequences. These consequences may even be terminal for some banks and very painful for others. However, even though some banks may fail, the banking industry as a whole will not. The FDIC insures deposits at these failing banks up to $250,000 per account so the depositors need not worry. They will receive their money and can then deposit it in one of the more responsible banks that remain or in a new banking venture started by persons who are more responsible and ethical.
These irresponsible banks will go away eventually. The sooner they do, the quicker we can recover from this recession. I urge my fellow accountants working in the banking and financial industry, and auditors who audit these institutions to exercise due diligence. It is important that these accountants exercise professional skepticism when evaluating the models used by management in valuing their marketable securities. The stockholders of these companies are depending on these accountants to insure the fairness of the company’s financial position as reflected in the financial statements. Let us not disappoint them by letting management inflate the value of these assets.
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