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As you know, we've posted the worst ten votes the United States Senate has taken this year on taxes.
The Club for Growth did one better and turned it into a scorecard. Click here to see the gory results.
Despite the mainstream media's harping on the bogus uninsured health number this week (and simultaneously burying the improved poverty data), the good news continues to pour in.
Yesterday, the Commerce Department reported that second-quarter real GDP growth was up a solid 4%.
Today, the Personal Income and Outlays data came out, and the news is even better. Per-capita real disposable personal income (which is income after inflation, population growth, and taxes) was up 2.36% since this time last year. Nominal wages are up 6.8% year-over-year. Income from dividends is up a robust 14.5%.
On this Labor Day, be sure to remember that things in America are doing quite well, despite the housing market flu.
The Bureau of Economic Analysis today announced that second-quarter GDP was up 4% (preliminary). When averaged together with the first quarter's 0.6%, GDP growth in the first half of the year is approximately 2.3%, or in line with Federal Reserve and other mainstream estimates of economic growth.
One sign that the Federal Reserve (which has instituted a de facto price rule under Bernanke) may not cut the fed funds rate is the persistent inflation threat. The implicit price deflator, which measures inflation in GDP, grew at an annualized rate of 2.7%. While that would be within the 2-3% inflation target the Fed has set, it represents only a modest decelleration from the first quarter's 4.2% rise. For the first half of the year, inflation within GDP averaged 3.5%, which is quite high. Excluding food and energy, the price deflator was 1.6% in the second quarter (within the target 1-2% range here), but 2.4% for the first half of the year. Given the non-Fed Funds liquidity moves of the Fed in recent weeks, the odds of a fed funds rate cut are no better than even.
On the housing side, the bubble continued to lose steam in the second quarter. Residential fixed investment declined 11.6%. That might sound like a bad annualized number (and it is) until one considers the three immediately-preceeding annualized quarters (looking backward): -16.3%, -17.2%, and -20.4%. When the history of this housing price swing is written, it's likely to say that the mania peaked in 2003-2004, the bubble pricked in the beginning of 2006, the worst was over by the end of that year, and things stabilized during the second half of 2008.
Government expenditures hit a more normal range with Katrina spending downturns being out of the picture. Real federal spending grew at 5.9%, mostly being driven by the War on Terrorism.
Corporate profits have continued their decelleration. For the year, they are on pace to average 3.8%, compared to 11.5% in 2005 and 13.2% in 2006. This will translate into lower corporate tax revenues. They are on pace to see growth of only 4.4%, compared to 27.8% in 2005 and 15.5% in 2006. Dividend growth is also down to about 3% (off from the double-digit pace of prior years), which should impact non-withheld personal income taxes.
Wages and salaries are up a healthy 6.8% year-over-year (quarterly), which actually represents faster growth than overall compensation (a rarity these days with exploding health care costs).
Check out the worst ten Senate votes--this time, limited to the area of taxes, where there were more than enough.
Americans for Tax Reform (the parent organization of ASA) today revealed the worst ten votes in the House of Representatives so far this year. Click here to read the carnage.
The Wall Street Journal today has an editorial where it makes the case--yet again--that an increasing share of income taxes in the United States are being bourne by the wealthiest Americans. Since 1980, the percentage of income taxes paid by the richest 1% has grown from 19% of all taxes paid to 36%. How about since the "for the rich" Bush tax cuts? Since 2003, the 1% cohort's payment is virtually unchanged, from 36.9% to 36%, a rounding error.
An interesting new report is out from the Spectrem Group this week on IRA rollovers. The auto-features that are increasingly-prevalent in defined contribution pension plans are continuing to work.
One of the biggest problems with 401(k) plans is that people have the unhealthy tendency to cash out their balances when they switch jobs. One of the "auto-features" that plans have been putting in place is automatically rolling vested balances into a "conduit IRA" if the balance is $5000 or greater. Studies have shown that once a balance has been rolled over, the chances of it being cashed out prior to retirement go down dramatically.
In 2007, 7.4 million people rolled over their defined contribution pension into an IRA. The value of these preserved retirement assets was nearly $500 billion. These numbers are up dramatically from even a few years ago, and should continue to increase as average plan balances grow and auto-rollover features become more popular.
The Congressional Budget Office today projected that the budget deficit for FY 2007 would be $158 billion, or 1.2% of GDP. The historical average deficit has been closer to 2% of GDP, so the level is quite nominal. Assuming reasonable levels of spending and tax revenue growth, President Bush will almost certainly be leaving his successor a budget deficit of less than 1% of GDP, and a balanced budget should be in the cards by the time the tax cuts expire in 2011.
It will be very difficult for opponents of tax relief to justify a massive tax hike in the face of budget surpluses.
Michael Knoll of the University of Pennsylvania has published a study claiming that raising the capital gains tax rate for carried interest from 15% to nearly 40% would not result in a large revenue gain for the government. What's interesting is that he does so not on dynamic scoring grounds (the fact that capital gains tax increases alter behavior and always result in less revenue, not more); rather, he points out a rather obvious fact:
40% of private equity money comes from individuals and corporations. If they were to pay higher fees in order to keep these higher-taxed general partners retained as the investor, these fees would deductible as an ordinary and necessary business expense. Thus, much of the higher taxes on the general partner would be lost by the lower taxes of the limited partner. This itself assumes that all parties react statically to this massive tax change, itself a dubious proposition.
At most, Knoll projects a revenue gain of $3.2 billion per year--about 7% of the cost of the AMT patch, which is what Democrats now say they want to use this tax increase for.
In today/s Wall Street Journal, Alan Auerbach has a rather detailed piece on capital gains taxation. From reading the article, his plan seems to include:
More below...
Continue reading "The Alan Auerbach Capital Gains Tax Hike" »
Calpers (the California Public Employee Retirement System) is managing to get some out-sized gains for their rapidly-aging population of retirees and near-retirees. In the 2006-2007 fiscal year, Calpers' portfolio grew 20.1%.
Outpacing even that very healthy gain was the private equity and alternative investment component, which grew at an even faster 23.3% (27.6% in the teacher portfolio).
So much for private equity tax increases only hurting the rich. These alternative investments are providing every teacher, cop, nurse, and fireman in California with enough savings for a decent retirement. In fact, Calpers is now 100% fully-funded for the first time since the dot-com crash.
By raising the tax rate on capital gains earned by partnership managers, these gains will disappear, and retirement security along with it.
Over the last several days, there have been new tax increase wrinkles from Democrats, all reported in the Wall Street Journal:
While Wall Street sleeps, Washington positions a strike in the Fall...
There's a good op-ed by Todd Zywicki in yesterday's Wall Street Journal positing that the high taxes second earners face in households has been the primary contributor toward increased bankruptcies since 1980. Since married-filing-jointly households pay tax on their marginal income at their highest rate, often the first dollar of a second earner's income is taxed at very high levels.
Most dual-income Americans are in the 25% federal income tax bracket. A typical state income tax is 5%. Throw in the 15.3% FICA tax, and this second earner is paying a whopping 45.3% tax rate on the first dollar of income. Talk about an incentive not to work, stabilize household income, and avoid bankruptcy.
Suppose there was a flat tax of (say) 20%? The combined federal-state level would drop all the way down to 25%, nearly cutting the marginal tax rate in half. This level is easily-attainable given that personal income tax and payroll tax revenues are only about 15% of GDP.
Ryan Ellis appeared at the 60 Plus Association's annual Social Security birthday party and spoke about the need for younger workers to get personal accounts. The C-SPAN link is here. Below is the speech:
My name is Ryan Ellis. I am Executive Director of the American Shareholders Association. We represent the interests of the the 51% of households and 70% of voters who own shares of stocks, bonds, mutual funds, and EFTs. The handouts and remarks I have today can be found on our website, www.americanshareholders.org
• Today, Social Security celebrates its 72nd birthday. I’m here today to talk about where Social Security is going in the United States, and what we might learn from the rest of the world.
• First off, I am not here to save the Social Security system. I am here to reform Social Security so that younger workers can get a better rate of return on what they pay in. As you can see in the handout, “Social Security by the Numbers,” younger workers are getting a raw deal in today’s Social Security system. They can expect an average annual rate of return on their Social Security taxes of 0% or even less. They’re paying one-eighth of their income into this failing system, and many times have no extra money left over at the end of the month to actually save for the retirement Social Security promises, but cannot afford to pay. If we are not given another option, we will face a 50% Social Security tax increase, or a benefit cut when we retire of one-third, or some combination of the two. What a crock.
• There is a better way. If younger workers could instead voluntarily opt to have their Social Security taxes—10 percent of their income—held in a personal account they own and control, they would be able to save at least as much as Social Security promises, but cannot afford to pay them. These accounts could be held in the Social Security trust fund, and would work the same way as the federal employee retirement plan. Workers could choose from a limited menu of diversified stock and bond index mutual funds, or would simply be defaulted into a “lifecycle” fund that slowly moves from stocks to bonds as the worker ages.
• Younger workers already know how to do this. There are 47 million IRA owners holding $4.2 trillion in savings. There are 55 million 401(k)-style pension participants holding $4.1 trillion in their nest eggs. Younger workers are consistently more likely than their older neighbors to say that saving more for retirement is a high priority for them.
• The rest of the world is figuring this out. Chile started the march toward Social Security personal accounts in 1980. Nations such as the United Kingdom, Australia, India, and even Russia have followed. As you see in the document “The International Tidal Wave of Social Security Personal Accounts for Younger Workers,” there are now 31 countries with nearly 2 billion people that have personal account options within their Social Security systems.
• In many cases, these personal accounts were put in place at the behest of Labor and other Leftist governments in power in these countries. In Australia, for instance, it was the Leftist government that put in place personal accounts in 1988. They viewed it as a way to distribute more wealth to the poor, and they’re correct.
• Helping younger and poorer workers build a Social Security retirement nest egg does not require tax increases, nor does it require benefit cuts. What it does require is a willingness to do here what the rest of the world is figuring out: personal accounts as a voluntary component of the Social Security system is no more radical than the shift to 401(k) pension plans and IRAs. Younger workers in the United States are more than ready, and it’s time for policymakers to lead.
ASA has released two new studies on Social Security reform for today's 72 anniversary press conference:
American Shareholders Association Executive Director Ryan Ellis will appear on C-SPAN2 to discuss Social Security personal accounts for younger workers on Tuesday, August 14th at 10:00AM.
The Consumer-Driven Health Care Institute reported today that HSA growth continues to explode. They look to the following sources:
Don Luskin has a good op-ed in the Wall Street Journal today making a good case for the capital gains tax being one of the more stupid taxes on the books. Other competitors include the AMT, the death tax, depreciation tables, the corporate income tax, the dividends tax, and the double-tax on international income.
Proving that tax competition is alive and well, the government of Northern Ireland has petitioned the British parliament to cut the Northern Ireland corporate income tax rate to 12.5%, to match the rate found in the Irish Republic. Since Northern Ireland is part of the United Kingdom (which has a 30% top corporate rate, falling to 28% in 2008), it finds itself at a competitive disadvantage.
Maybe we ought to try a little tax competition here. At a combined federal-state level of 39%, the United States has the second-highest corporate income tax rate in the OECD. The European average is 25%, and falling.
So, the next time you raise a pint of Guinness, remember: this refreshing beverage was brought to you thanks to corporate income tax competition.
President Bush today endorsed a plan put forth by Treasury Secretary Hank Paulson to reduce the corporate income tax rate from 35% to 27%, revenue-neutrally. There are two good reasons for this move:
Also, here is a link to my CNBC appearance on the subject from July.
Today is the 20th anniversary of the best 401(k) plan in the world, the federal employee "Thrift Savings Plan" (TSP). There is an article commemorating it by Stephen Barr in today's Washington Post.
The TSP works like any other 401(k) plan. Federal employees can defer (so far, no Roth option) up to $15,500 ($20,500 if age 50 or older) in 2007. If they defer 5% of salary, they get a 4% match.
TSP investments can be funded in one of five standard funds (G for government bonds, F for GSE bonds, C for an S&P 500 Index fund, S for a Russell 2000 small-cap fund, and I for an international index fund. Recently, "L" funds have been offered that mix and match these funds on an evolving schedule tied to retirement age.
Total assets in the TSP are now $224 billion, with $1.6 billion coming in every month. Federal employees over age 50 and with at least 20 years experience have an average nest egg of $160,000. That would be enough to purchase an annuity of about $16,000 per year for the rest of their lives. This would be on top of their defined-benefit federal pension, and maybe Social Security. Younger workers have socked away even more money, and will continue to do so as their dubious Social Security "benefits" get less and less secure.
Even better news is in the average account balance. In 2000, the average balance was about $47,000. Today, the average balance is about $73,000. Thus, in only six years, the average account grew by 50%.
There's a good article in today's Washington Post about the change to "automatic pilot" options in 401(k) plans. Martha Hamilton writes about them here.
To review, the "old" 401(k) world was one of "opt-ins": you had to enroll in the plan, decide on your deferral level, decide what you wanted to invest in, rebalance every year if necessary, escalate your deferral percentage as your income went up, and roll the account balance over after you left the job. If you reached retirement age, you also had to manage all the distributions.
For some people (myself included) that world is perfect. I like taking a hands-on approach to my savings and investments. For others, though, they'd rather have someone else fly the plane. The Pension Protection Act of 2006 encourages such autopilot features as:
Interesting article in Investment News about the rapid growth of 529 College Savings Plans (which are like uncapped Roth IRAs for college savings). This is just another sign that investors will put money away when they have tax law certainty (the Pension Protection Act of 2006 made the changes to 529 plans permanent). The full article can be found here. Below is an excerpt:
One year after the passage of the landmark Pension Protection Act, which made federal tax breaks for Section 529 college savings plans permanent, the programs are approaching “critical mass,” according to the head of the College Savings Plan Network. “As new contracts are being implemented, you’re looking at the next version of products and enhancements, at a lower price, with more choice and proliferation of information and knowledge,” said Jackie Williams, chairwoman of the Lexington, Ky.-based organization for state administrators and executive director of the Columbus-based Ohio Tuition Trust Authority.
The American Shareholders Association today sent a public comment letter to the Securities and Exchange Commission. In it, ASA urged the SEC to allow full mobility of company ticker symbols between exchanges. The full letter can be found here. Below is an excerpt.
In recent years, some publicly-traded companies have left the NYSE to be listed on NASDAQ or other exchanges. However, an antiquated rule permits the NYSE a monopoly over all ticker symbols of three characters or fewer. As a result, a company may have to acquire a totally new ticker symbol to migrate to another exchange. Shareholders, employees, and potential investors come to know certain stocks – companies – by these short character names/acronyms; thus companies pay a high price if they elect to switch marketplaces. The inconvenience and transition costs involved amount to an unfair restraint of trade, and I call on you to prevent this anticompetitive tactic by the NYSE. Any company should be able to choose its own ticker symbol (up to five characters), and be listed with that symbol on the exchange of their choice.
Bruce Bartlett has a very good piece on the history of capital gains taxation in today's Wall Street Journal (subscription required). In it, he has a good rendition of Irving Fisher's famous "fruit of the tree" analogy for capital gains:
The great economist Irving Fisher came up with an analogy that precisely delineates the basic difference between income and capital. Think of a fruit-bearing tree. The tree both grows and yields fruit on an annual basis. The tree is effectively a capital asset, the fruit is the income, and growth of the size of the tree -- which will yield more fruit in the future -- is like a capital gain.
The fruit can be taxed without hurting the tree or diminishing its capital -- its ability to grow and bear more fruit in the future. But taxing a capital gain is like sawing off limbs of the tree. That diminishes its capital value and inhibits the tree's ability to produce fruit; that is to say, future income.
The Investment Company Institute released an interesting study this week on the state of the 401(k). There are some interesting findings:
John C. Bogle: Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor
Richard Yancey: Confessions of a Tax Collector: One Man's Tour of Duty Inside the IRS
Harvey Mackay: Dig Your Well Before You're Thirsty : The Only Networking Book You'll Ever Need
Grover Norquist: Leave Us Alone: Getting the Government's Hands Off Our Money, Our Guns, Our Lives
Paul Craig Roberts: Supply-Side Revolution: An Insider's Account of Policymaking in Washington
Julian E. Zelizer: Taxing America: Wilbur D. Mills, Congress, and the State, 1945-1975
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