American Shareholders Association

Getting S-CHIP and Paying the AMT the Same Year?

The Wall Street Journal today pointed out the ridiculous fact (first pointed out by the Heritage Foundation here) that 70,000 families will qualify for government-sponsored health insurance and have to pay the alternative minimum tax (AMT).

By definition, AMT taxpayers are upper-middle class.  Why are these people receiving government health insurance and displacing private coverage?

NTU's John Berthoud Passes Away

National Taxpayers Union President John Berthoud died at home yesterday.  Below is an excerpt from NTU's statement:

Pete Sepp, Vice President for Communications, shared his surprise, "John Berthoud's death today was as sudden as it was shocking and saddening to all who knew him. His colleagues found him in peace at his home today. All of our staff, just as the entire policy community in Washington, are doing the best they can to cope with an irreplaceable loss."

Speaking as someone who worked with John in the policy world, he will indeed be missed.

Club for Growth Calls Out Giuliani on Taxes

The Club for Growth issued an open letter to Rudy Giuliani yesterday on taxes. 

Giuliani has refused to sign ATR's "Taxpayer Protection Pledge" which commits the signer to oppose marginal income tax rate increases and net reductions in deductions and credits (without further lowering marginal rates).  Every GOP Presidential nominee since Ronald Reagan has signed this Pledge.

The Club has been very pro-Giuliani this year, but Rudy refused to rule out Social Security tax increases in an AP interview yesterday:

"I am opposed to tax increases, but I would look at whatever proposal they [a bipartisan commission on Social Security reform] came up with and try to figure out how we can come up with a bipartisan way to do it," Giuliani said, adding that potential solutions must come from both parties.

In response, the Club asked Rudy in the open letter:

...we were surprised and concerned to read the allegation in a recent Associated Press article that you indicated you would not rule out raising Social Security taxes in order to deal with the program’s insolvency.  Such an allegation, if true, together with your refusal to sign Americans for Tax Reform’s anti-tax pledge, casts doubt on your commitment to opposing all tax increases.

The political world awaits his answer.  This comes on the heels of Fred Thompson's refusal to sign the Pledge (after telling David Broder he's open to a Social Security tax increase).

It now seems pretty clear: don't the sign the Pledge, and one must assume you want to raise taxes.

House Passes HillaryCare 2.0: Veto Can Be Sustained

The U.S. House of Representatives passed last night a stong down payment on HillaryCare 2.0.  This bill raises the federal excise tax on tobacco by $0.61, expands S-CHIP by $35 billion, enrolls 25-year old "children," and signs up children and adults from households with income up to $82,000.

The margin of passage was 265-159.  House Democrats needed 291 votes to overturn a Presidential veto, which is a guarantee. The White House released a "Statement of Administration Policy" on S-CHIP which says the President will veto the bill in its current form.

Unfortunately, 45 Republicans voted for this flawed legislation. 

GM Strikes Deal, Sells Out to UAW

The financial press is moderately positive toward the deal struck by General Motors and the United Auto Workers last night.  It's a disaster for shareholders, even if it might help GM shareholders.

In order to get health care costs off their books, GM gave away the store to the UAW.  Specifically:

• A "voluntary employee benefit administration" (VEBA), controlled by the union, will now provide health care for GM's retirees and employees.  GM will make a one-time contribution of $35 billion, and the company and workers will make regular contributions going forward.  Even if the UAW is only able to skim 1% off the top, that leaves them $350 million to engage in political gamesmanship.  The investment of these funds also gives them leverage to try to hijack corporate boards
• Early reports indicated that newly-hired employees would be transitioned from the union-dominated defined benefit pension plan and onto a worker-controlled 401(k) plan.  There's no sign of this in the final agreement, though all the details haven't yet been revealed
• There are 3000-4000 part time employees at GM who will now be full-time, dues paying union member employees.  This increases the number of full-time union members at GM by about 5% overnight
• GM agrees to quotas on union-plant production

It used to be, "what was good for GM was good for America."  Not anymore.

Health Care Spending Slows for Employers; HSA Growth Continues

A new report this week is out by Hewitt Associates, which does HR consulting for large companies.  They report two interesting findings:

• The rate of growth in health premium spending by companies slowed from 7.9% in 2006 to 5.3% in 2007
• 20% of larger companies are either already offering an HSA, or plan to do so in the near future

Is this a coincidence?  Hardly.  HSAs are not a panacea, but putting more cost-consciousness into health consumption is beginning to have an effect.  Going forward, it's our only hope for constraining the growth of both government and private health care spending.

ATR's Grover Norquist Weighs in on S-CHIP

Grover did an op-ed on the subject in today's National Review Online.

Treasury Department Gets It Wrong on Social Security

After a string of terrific policy proposals from the Treasury Department, they came out with a stinker yesterday.  In the first report in a series on Social Security reform, Treasury says, "Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax revenues."

The first problem with this statement is it diagnoses the wrong ailment.  The problem we face is not that the Social Security system is insolvent (though it is).  The real problem is that younger workers are getting a lousy rate of return (in some cases even a negative rate of return) on their Social Security taxes paid.

The second problem is that the statement isn't true.  There's a third alternative to the dour, Greenspanian method of benefit cuts and tax increases.  Large personal accounts for younger workers allow for higher rates of return to fix the problem. 

Given the choice of benefit cuts, tax increases, or more wealth, I'll take more wealth any day.

Congress Poised to Pass HillaryCare 2.0 This Week

There's a good op-ed by Peter Ferrara in National Review Online today detailing the awful provisions of Congress' S-CHIP expansion.  In it, he describes the $0.61 per pack cigarette tax increase, the $35 billion in new federal spending, and the enrollment of 25-year old "children" and "poor people" making $82,000 per year.

He also lays out a very good alternative to S-CHIP expansion that conservatives should be for.  Specifically, he wants to avoid the fighting on refundable credits as spending, and instead get back to a broader, successful message of block-granting.

The conservative alternative to socialized medicine should be to block-grant Medicaid and S-CHIP to the states.

Bush Threatens Veto of Hillarycare 2.0

President Bush has come out with a full-throated opposition to Democrat plans to socialize health care using the vehicle of S-CHIP.  This is really nothing more than a down payment on HillaryCare 2.0, which Ms. Rodham came out with earlier this week.

Glad to see the President is not going wobbly.

Rangel Commits Truth in Wall Street Journal

In an interview with the Wall Street Journal, House Ways and Means Chairman Charlie Rangel (D-NY) continued his "shouting from the rooftops" campaign to raise taxes.  Specifically, he said that:

• In 2009, he wants to de-fund the only private sector element within Medicare
• He wants to start plotting now with Hillary Clinton, Nancy Pelosi, and Harry Reid on how to raise taxes and raise spending in 2009
• He's for a revenue-neutral reduction in the corporate tax rate, but before you get too excited he wants to use some of the revenue raisers for "national priorities" (i.e. more spending paid for by tax increases)

Investors have been sufficiently warned.  The 15% capital gains and dividends tax rate, the 35% small business and entrepreneur rate, tax-free death, and small business expensing are all on the chopping block.

General Motors Proposes 401(k) Pension for Younger Unionized Workers

Bloomberg today reported that General Motors has proposed shifting younger unionized workers into a 401(k) pension, and away from the defined benefit pension model that is bankrupting the company and costing workers jobs.

Last year, GM froze the defined benefit pension plan for salaried workers not covered by the union collective bargaining agreement.  The salaried 401(k) plan has a 4% match on 8% employee deferrals.  One would have to imagine the hourly worker match is at least that generous, and probably more so to entice the union to bite.  Considering how much GM is spending per employee on their DB pension now, I would consider something like a 2-for-1 match up to 5% of deferrals (the employee defers 5% and gets a 10% match).  In the crazy world of pensions, that might actually save them money.

In any event, this is great news and more evidence that the DB pension is dying a slow death.

New Video from Center for Freedom and Prosperity on International Tax Harmonization Schemes

Last week, CF&P did a video with Dan Mitchell on the corporate income tax. Today they have one on international tax competition:

Inflation Slows Down in Face of Fed Rate Cut

The Bureau of Labor Statistics today released their monthly report on inflation.  For the past twelve months, the consumer price index (CPI) has grown at a 2% rate, within the comfort zone of the Federal Reserve.  "Core" CPI (which excludes food and energy) has grown at a 2.4% rate in the last year, which is higher than desirable. 

The momentum is definitely on the side of very low inflation, though.  The compounded annual quarterly rate, which measures inflation trends, is growing at only 0.2% CPI, and 2.4% core CPI.

This comes on the heels of the Federal Reserve's decision to cut the federal funds rate to 4.75%, down 50 basis points.  The big gamble the Fed is taking is that the rising price of gold and other commodities is not a signal of inflationary pressures in the economy.  If the Fed is wrong about that (and history is not on their side), we're in for a very inflationary 2008.

If, however, the Fed is correct that lending illiquidity is a greater danger than inflationary pressures, then this move will be universally-lauded.  Only time will tell which argument is the correct one.

Obama Comes Out with Dreadful Tax Plan

Senator Barak Obama (D-IL) today came out with a dreadful tax plan as incoherent as it is bad policy (click here to watch the speech).  In brief, his plan would:

• create a refundable tax credit of $1000 for those making less than $50,000 per year, supposedly to credit payroll taxes paid.  These "refundable credits" are not tax cuts at all (since they go to non-taxpayers), but are actually a form of welfare
• exempt seniors with $50,000 of income or less from having to pay income tax.  That's just what we need--old people collecting welfare (Social Security) and thinking it's free
• replace the mortgage interest deduction with a 10% mortgage tax credit for all types of filers.  Homeowners in the 15% bracket and above just get very upset at you, senator
• Obama has a great deal for you--the IRS will fill out your tax return.  Any takers?  Anyone...
• raise the capital gains and dividends tax rate to 28%, from today's 15%.  Enjoy the stock market while it lasts, folks
• close $1 trillion (presumably over 10 years) in "corporate loopholes."  That's a pretty neat trick considering the corporate income tax is only going to raise $3.8 trillion over the next ten years.  So Barak thinks he can find 26% in savings ($1 trillion divided by $3.8 trillion)?

The lunacy continues...

Charlie Rangel Shows a Little Tax Increase Leg

A couple of interesting stories today demonstrating that House Ways and Means Chairman Charlie Rangel (D-NY) is being as transparent as one could be about his intent to raise taxes.

The Washington Post has a good column by Robert Novak talking about Rangel's plan that you have heard here: largely-repeal the AMT, and pay for it by increasing the top marginal tax rate (including on capital gains), largely by a combination of higher statutory rates and a surtax on those making more than $200,000.

CQ has a piece in which Rangel says that he wants to raise taxes, but refuses to say what they will be (except in the aggregate--$1 trillion over 10 years).  The reason?  He doesn't want his big-spending government pals to spend the money.

Hillarycare 2.0

Hillary Clinton this weekend revealed her kinder, gentler massive takeover of the health care system by the government.  Click here to read her campaign's take on it. 

Some of the gory details include:

• "Play or Pay" tax increases on employers
• An individual mandate to purchase coverage
• Price controls on prescription medicines and health insurance premiums
• Bush tax cuts expire and go toward expanded government health care program

Different century, same socialized medicine.

U.S. Migration and Shareholders

A couple of interesting articles today on migration within the United States.  The first is in the National Review Online's Greg Kaza, who writes about how frustrated Blue Staters moving to Red States (and voting Democrat) are making both their old and new states Purple.  What these people don't understand is that when you're fleeing high-tax jurisdictions, it might not be the best idea in the world to vote for tax hikes and tax hikers in your new place of residence.  It's like taking a plague to another village.

The second piece is in Kiplinger's.  Here Richard Sammon reports that the 2010 census gives the GOP a glimmer of hope.  Several mostly Blue states--Louisiana, Minnesota, Missouri, Iowa, Illinois, Michigan, Pennsylvania, Massachusetts, New Jersey, Rhode Island, Ohio (2), and New York (2)--could be losing Congressional seats.  Meanwhile, mostly Red states--Texas, Georgia, Florida, Utah, Arizona, Nevada, Washington, and Oregon--will be picking up the these districts.  This will mean a probable shift in the Electoral College of about 10-15 votes for the GOP Presidential candidate, and a structural advantage in the House to + 10-15 GOP Congressmen.  The key question here is whether the GOP will continue to squander their basic advantage--social issues and entrepreneurism--with Hispanics due to Southern Prostestant bigotry.  If so, the GOP advantage would be muted or even non-existent.  Liberal northeastern whites would simply be supplanted by Democrat-voting (by default) southwestern Hispanics.

What does this mean for investors?  The Republicans are the party of the IRA, the 401(k), the 15% capital gains and dividends rate, and less regulatory meddling.  What's good for the GOP is good for the investor class.

More Than One in Three Employers Offer High-Deductible Health Plans

It's been a busy week on the health care front.  Earlier in the week, the Kaiser Family Foundation released a report on health premium growth over the past year.  Click here for my analysis of it. 

Today, a new report is out from Aon Consulting Worldwide.  A national survey of 470 employers found:

• 37% offer high-deductible health plans to their employees, up from 28% last year
• Six in ten employers have at least 10% of their employees choosing the high-deductible plan
• Of all employers offering high-deductible plans, 48% have an HSA, 48% have an HRA, and the remainder have both
• 42% of employers without a consumer-driven plan will be offering one in the future

Rahm Emanuel's Screwy Savings Plan

In today's Wall Street Journal, House Democrat Rahm Emanuel proposes a savings plan entitled, "Supplementing Social Security."  Below is a brief analysis:

• Interesting that he has no plan to actually fix the Social Security crisis for younger workers (which would seem to be a first step to "supplementing" it).  A 25 year old worker today faces a lifetime of paying a 10.6% Social Security tax on his first $100,000 of wages (today's dollars).  When he is 35, Social Security won't have enough cash to meet benefit obligations.  When he's 59 years old (eight years away from being eligible for normal retirement), Social Security will no longer have legal authority to pay full benefits.  After a lifetime of paying into a failing system, his benefits will have to be cut by a third.
• Emanuel laments the low national savings rate.  However, many are beginning to catch onto the fact that this metric makes no sense in the modern savings world.  Unrealized capital gains, and buildup in IRAs and 401(k)s are not counted.  How the heck else do people save these days?
• In a rare fit of sobriety, he correctly analyzes the Pension Protection Act's auto-features as being a very good thing for younger and poorer workers.  I also like his phrase, "simplicity trumps choice" when it comes to retirement.  It's too bad they didn't consider this in 1986 when his pals eliminated the IRA deduction for most people.
• The heart of his proposal is a mandatory "add-on" account to Social Security.  Employers and employees would be forced to defer at least 1% of salary (each) into these supplemental accounts.  The accounts would be managed like the federal employee "Thrift Savings Program."
• He alludes to another bad idea--making the Saver's Credit a refundable welfare program to save.

We've seen this game before.  Democrats like to pretend they're pro-saving, too.  But when you get past the bluster, what's left is government-mandated add-on accounts, and handouts for non-taxpaying poor workers.  Not only does that solve nothing, it makes the current hodgepodge of tax free savings worse.

A better approach is a combination of the following:

• Universal lifetime savings accounts (LSAs), retirement savings accounts (RSAs), and employer retirement savings accounts (ERSAs)
• Bring the individual tax rate on corporate-sourced capital gains and qualified dividends to 0%.
• Exclude corporate source gains and qualified dividends from corporate income.

401(k) Auto-Enroll Projected to Be Big Help

The Employee Benefit Research Institute (EBRI) today released a report which had some terrific findings for proponents of auto-enrollment features.  Specifically:

• The study assumes a default auto-deferral rate of 6%, with a default investment in a lifecycle fund
• The median replacement rate for 401(k) holders increases from 23% of the last working year's salary to a very healthy 52% of last working year's salary
• The lowest income quartile's 401(k) nest eggs will increase by 11-28% over what they otherwise would have been the case without auto-enrollment

Economists Predict Recession; People Want Tax Cuts

A quick note on two articles from today that are related to each other.  First, the Wall Street Journal reported that major economists have raised their predicted likelihood of a recession in the next year to 36%.  This is up substantially from August's 28% next-twelve-months probability.

What do people want Congress to do in the face of this increased recession likelihood?  Apparently, the answer is not "raise taxes and spend more money."  According to Roll Call, pollster Dave Winston briefed Senate Republicans about public attitudes.  What people don't want is tax increases, since they believe Congress will simply spend the money.  Nor do they want Republicans to simply rest on the laurels of the 2001 and 2003 tax cuts.  Rather, they want Congress to deal head-on with the economy, which includes new tax cuts.

Luckily, there's no shortage of good ideas:

• The most pressing need is to make the expiring tax cuts permanent.  Failing to do so would result in capital gains, dividends, and small business tax increases that would definitely wreck the economy
• The corporate income tax is the highest in the industrialized world, behind only Japan.  At 39%, the U.S. rate is far higher than the European average of 25% (and falling)
• Capital, the formation of which is key to economic growth, is taxed multiple times in the current tax system.  This can be fixed by full business expensing, killing the death tax, zeroing out the capital gains and dividends tax, and expanding tax-free savings accounts
• The U.S. is the only country in the developed world that double-taxes the international income of its taxpayers.  This forces U.S. companies and wealthy individuals into offshore tax havens.  The U.S. should shift to a territorial tax system like the rest of the world has
• Dozens of countries, from Hong Kong to Estonia, have adopted a flat rate income tax.  Almost nothing would do more for economic growth than having a flat income tax rate in the teens

Cato's Dan Mitchell on the Corporate Income Tax

Kaiser Foundation Releases Good News on HSAs

Every year, people wait for the Kaiser Family Foundation's annual report on employer-provided health care.  The headline number is that there was a 6% increase in premium costs in 2006.  This is trumpeted by the mainstream media as bad news, but it's the lowest increase since 1999, and represents the 5th consecutive year of decline.

Coincidentally, the growth rate in health premiums peaked in 2003, the year before health savings accounts (HSAs) came into being.  Other findings:

• 10% of firms now offer a high-deductible health plan, up from 7% a year ago. 70% of firms offering an HDHP have them HSA-qualified
• 18% of large employers (<1000 employees) offer an HDHP.  This is greater than mid-size and small firms.
• 3.8 million workers (5% of workers with health care) have an HDHP
• The average HSA deductible for workers is $1923 (single) and $3883 (employee).  The average employer puts in $428 for singles and $714 for families
• HSA premium savings are 12% for singles and 14% for family plans, compared to traditional health insurance
• Companies with HSA plans pay a higher percentage of the total premium than companies without them

Charlie Rangel's Frankenstein Monster

There's a good article by Grover Norquist in the New York Sun today.  He wrote about how the alternative minimum tax (AMT) is a creation of Charlie Rangel (D-NY), even though he now claims to be its biggest enemy.  Below is an excerpt:

Rangel has been supporting a plan to eliminate the AMT--and raise taxes on everyone else to pay for it. Under the Rangel plan, small businesses and wealthy individuals would pay a "surtax," everyone would pay a higher capital gains rate, and everyone's pension would be taxed in the form of treating "carried interest" capital gains from private equity funds, which defined benefit pension plans increasingly use, as ordinary income.

Progress Reports on the Pension Protection Act

A couple of useful reports out this morning on the new investor class' growth in light of the Pension Protection Act's "auto" features:

1. Pensions and Investment Magazine has a piece about "PPA: One Year Later."  In it, they cite a TowerGroup report projecting that lifecycle fund investments will grow from 11% of all DC-pension assets today to 56% by 2011.  Elective deferrals will double from $103 billion to $204 billion.  In a separate study by Callan Associates, 85% of surveyed executives either have auto-features, or plan to have them in the next year.
2. Charles Schwab has released some data about 401(k) trends.  20% of Schwab clients auto-enroll, 45% auto-invest in lifecycle funds, and 95% have opt-in auto-escalation.

These add to the flurry of good news for investors.  Over time, the auto-features of PPA will accelerate the growth of the investor class.

The Most Damaging Bureaucrat Ever Retires

Funny note today from the Congressional Budget Office.  You probably have never heard of Paul Cullinen (and neither had I until this morning).  He may be the single most economically-destructive bureaucrat since the New Deal.  According to Congress Daily AM on National Journal:

The Portland, Maine, native came to Washington in 1979 and spent two years at the Social Security Administration before joining CBO. He was quickly thrust into a maelstrom assisting the Greenspan Commission, a nine-member panel charged with bringing solvency to a Social Security Trust Fund headed toward bankruptcy. Based on the panel's recommendations, Congress restructured the program in 1983, putting it on a path to surpluses in a fund that exceeds $1.5 trillion today.  His life became intense again in 1990, when Cullinan helped budget leaders from Congress and the White House hammer out plans for eliminating a $318 billion deficit.

Wow.  So he was instrumental in both the Social Security tax increase (thereby creating a precedent for today's "reformers"), and in breaking the tax pledge for hundreds of Republican officials (by raising the top marginal income tax rate from 28% to 31%).  Quite a career.

CBO Releases Monthly Budget Report

The Congressional Budget Office today released their "Monthly Budget Report" through August.  Since this report is 11 months into the fiscal year, it's a good barometer of where the year will end up.  Highlights include:

• The budget deficit is likely to hit $158 billion, or 1.2% of GDP.  This is much lower than the 1.8% of GDP average seen since 1960.
• Spending growth in FY 2007 was a very low (adjusted) 2.8%.  While this may seem like good news, it has much to do with the one-time drawdown in Katrina spending.  Factoring that out, spending is actually up by a staggering 10%.  Spending is out of control, and we've likely seen the last of meaningful deficit reduction unless the Iraq occupation ends.  The biggest cost increase was in Medicare, which grew by about 12%.
• Tax revenue grew a healthy (though decelerated) 7.5%.  Leading the way was non-withheld personal income tax payments (small businesses and investors), which grew by 13%.

Ryan Ellis Appears on CNBC to Discuss Fred Thompson and the Tax Pledge

I was just on CNBC with Club for Growth President Pat Toomey and MSM figure John Harwood of the Wall Street Journal.  Click here to see the interview, or it's posted below:

The Laffer Curve Works with the Death Tax, Too

Tax Prof Blog did a good analysis of revenues from the death tax today.  What Paul Caron found is a pretty startling justification for lower rates.  During the 2001 to 2005 period (the last year of the IRS data), the top death tax rate fell from 55% to 47%.  In that time, the number of taxable estates declined from about 100,000 to about 45,000.  However, the amount of revenue collected was virtually unchanged: $23.4 billion in 2001 to $21.7 billion in 2005.  The Laffer curve is alive and well.

Source: Tax Prof Blog

Magic Johnson Doesn't Want to Raise the Capital Gains Tax

Just a quick note that the Wall Street Journal had a good article on a new coalition that has been formed to fight the tax increase on capital gains.  Click here for the full article (subscription required).  Below is an excerpt:

The private-equity industry is taking a new tack in its fight against a bid to raise taxes on fund managers, arguing the effort would harm investment firms owned by women and minorities, and discourage economic activity in neglected areas.

Minority and women business leaders today plan to announce a new group, the Access to Capital Coalition, to oppose a move in Congress to raise taxes on carried interest, a cut of profits that hedge-fund and private-equity managers receive. Among the high-profile business people enlisted in the fight: Former basketball star Earvin "Magic" Johnson, who now is chairman and chief executive of Johnson Development Corp., which invests in bringing businesses into urban areas.

Vanguard Releases New Study of DC Pension Market

Every year, Vanguard releases a study of the DC pension plans it oversees called "How America Saves."  It's a very useful snapshot of where trends are going in the 401(k)-style pension world.  A few highlights from this year's study, which can be found here:

• 64% of eligible employees enroll, but 74% do if there is an employer contribution
• The average employee deferral was 7.3% of pay (median is 6.0%)
• The median participant is a 45-year old male with $26,000 saved.  He defers 6 percent of his $62,000 salary and receives a 3% employer match
• 14% of post-age 50 employees took advantage of "catch-up" contributions
• 14% of plans had a "Roth deferral" (after-tax) feature
• 91% of plans with 97% of participants had an employer contribution, the most common form being a $0.50 on the $1.00 match up to 6% of salary
• 12% of plans have auto-enrollment, and about 7% have gone all-auto (escalation, rollover, etc.).  Two-thirds of these auto-enrolling plans use a lifecycle fund as the investment default
• 75% of plans offer lifecycle funds
• The average asset allocation was 70% stock/30% bond
• The average account balance was $76,000 (median was $26,000)
• Two-thirds of exiting participants (representing 90% of exiting dollars) did not cash out their 401(k) plan