American Shareholders Association

Obama Tax Plan: The Opposite of Supply Side Economics

Peter Ferrara has a good analysis of the Obama tax increase plan in the WSJ today.  Here's a snippet:

Barack Obama's tax plan is the opposite of supply-side economics. He proposes to raise marginal rates for just about every federal tax. He also proposes a raft of tax credits that taxpayers can receive if they engage in various government-specified activities...The latest Congressional Budget Office data shows the bottom 40% of income earners already pays no income taxes. Indeed, they receive a net payment from the federal income tax system -- meaning from the taxpayers -- equal to 3.8% of all federal income taxes, because of the refundable tax credits under current law. The middle 20% of income earners, the true middle class, pays 4.4% of federal income taxes...Overall, the bottom 60% of income earners pay less than 1% of federal income taxes on net. When "tax credits" primarily go to this group in the form of checks from the government (rather than a reduction in their tax burden) it is simply an abuse of the language to call the spending a tax cut...Consequently, to say, as the campaign does say, that the candidate's tax plan is a tax cut on net -- and that it would limit taxes to 18.2% of GDP -- is grossly misleading. The Obama tax plan would sharply increase real taxes. It also would come nowhere near to paying for the massive increases in federal spending he has proposed, including the spending that is disguised in the form of refundable tax credits.

ASA Releases Joint Letter on Union "Shareholder Terrorism"

ASA today, along with sixteen other free market organizations, released a letter calling on the Department of Labor to stop unions from engaging in terrorist tactics at company shareholder meetings.  Here's a snippett:

Unions often invest in businesses using their general funds, empowering them to introduce shareholder resolutions.  To gain support for these resolutions, they routinely exercise influence over a much larger pool of shares held in their pension funds.  Most pension funds delegate proxy voting authority to investment managers.

News Roundup: Oil and Cap Gains

A couple of good reads I wanted to recommend this morning, both from the new-look Washington Times:

• Richard Rahn has a good article "speculating" on the price of oil a decade from now
• Thomas Sowell analyzes why Obama's plan to hike the capital gains tax is a bad idea

Person Thomas Sowell

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Happy Birthday, Social Security: Thanks for Nothing

Today is the 72nd birthday of Social Security.  For shareholders, it's a bittersweet day.  While we're happy that our older relatives are getting taken care of, we resent paying into a system which will likely leave us with pennies on the dollar. 

Imagine paying 12.4% of your wages and self-employment income (up to about $100,000 of such income) into a system that won't be there for you when you retire.  Imagine the opportunity cost of what could be done with that $12,400 or so in annual contributions.  That's like doubling your 401(k) savings.

So, happy birthday, Social Security.  But do you have to eat our lunch with your cake?

Obama "Clarifies" Tax Hike on Shareholders

I'll give the Obama people credit for honesty.  They've come out with specifics on their shareholder tax hike.  Austin Goolsbee and Jason Furman have an op-ed in the WSJ.  The Obama campaign website has a new section.  Here are the details:

• The top capital gains rate will rise from 15% to 20%
• The top dividends rate will rise from 15% to 20%
• The corporate income tax rate will remain unchanged at 35%
• The ordinary income tax rate will rise from 35% to 39.6%
• The small business tax rate will rise from 37.9% to a minimum of 44.5% and a  maximum of 54.9%--they're still not clear on this point
• Private equity partners will see their capital gains and dividends taxed as ordinary income--that 39.6% rate

Letter to the Editor of the Washington Post on Obama and Small Business Taxes

Wearing my ATR hat, I got a letter to the editor printed in the Washington Post today.  Here's the link and the content:

Howard Kurtz wrote an analysis ["McCain Paints Obama as a Tax Hound," Aug. 9] that dismissed claims, made in a campaign ad for Sen. John McCain, that Sen. Barack Obama would raise taxes on small business.

According to the latest Internal Revenue Service data, $706 billion of pass-through business income was reported in 2006. Of this, two-thirds was earned in households making more than $250,000 -- households on which Obama has said he will raise taxes.

If raising the tax rate on two-thirds of small-business income isn't a tax hike on small business, what is?

The tax rate on two-thirds of small-business income would skyrocket under the Obama plan. The current tax rate on this income is 37.9 percent. The Obama plan, thanks to uncapping the Social Security tax base, would shoot this small-business rate all the way up to a Carter-level 54.9 percent.

RYAN ELLIS

Tax Policy Director
Americans for Tax Reform

Government Spent $100 Billion More Than It Stole in July

You might have seen the latest budget deficit numbers which show a $100 billion budget deficit in July.  The most interesting snippet of the story is the following, though:

Year-to-date outlays were $2.47 trillion, up 8% over the same period, and revenues were $2.09 trillion, 1% lower...

So revenues are basically flat (down one percent, which is pretty darned impressive given the economic environment).  The problem isn't there.  The problem is that the government continues to spend at a rate well in excess of inflation, population growth, wages, GDP--whatever.

It's the spending, stupid.

Are Corporations (and Their Shareholders) Paying Enough Taxes?

You might have heard about the GAO study that came out yesterday which said that 23% of large U.S. corporations paid no income tax from 2001 to today.  A few thoughts on this:

• Many of these companies were paying foreign income tax on foreign operations.  It's unfair to expect a U.S. company to pay income tax to two countries on the same income.  We should adopt what the rest of the world does and move to territoriality
• According to the GAO study, the lion's share of the deductions against corporate profits were not any accounting trickery, but bread-and-butter items like wages, interest, and other ordinary and necessary business expenses.  Does anyone propose denying corporations the ability to deduct regular expenses of running their businesses?  How about the fact that wage earners, corporate bond owners, and other businesses face a concomitant tax liability on the other side of this corporate tax deduction?
• The latest CBO data shows that corporations paid $370 billion in income tax in 2007.  This doesn't count the hundreds of billions of dollars in payroll tax and excise tax.  To put that number in perspective, total tax revenues were that level back in the Carter Administration.  I think corporations (and their shareholders) are doing their part (especially when one considers the double taxation of capital gains and dividends)

Democrat Platform Tax Plank: What It Says, and What It Means

The Democrats have leaked their draft tax plank.  Tax Prof Blog has it up.  Here's some relevant portions:

For families making more than $250,000, we’ll ask them to give back a portion of the Bush tax cuts to invest in health care and other key priorities

Translation: If you make more than $250,000, your top marginal tax rate will rise to 36% or 39.6%.  Your capital gains rate will rise from 15% to 20% (or 28%).  Your dividends rate will rise from 15% to 39.6%

We recognize that Social Security is not in crisis and we should do everything we can to strengthen this vital program, including asking those making over $250,000 to pay a bit more

Translation: If you make more than $250,000, your top marginal tax rate on wage and self employment income will rise to 51.3% or 54.9%, depending on your bracket.  You're probably paying 35.9% or 37.9% today, so good luck with that.

Another "Tax More, Get Less": Chicago is All Wet

Roth CPA has a good story on how Chicagoans are no longer buying bottled water at the same levels as before.  Is this a newfound love for tap water?  People addicted to Diet Coke?

Nope--it's taxes. 

Maybe hometown boy Obama ought to think about this when he's considering hiking the capital gains tax to 28% and the dividends tax to 40%.

The Laffer Curve Even Comes in Menthol

Maryland this year doubled its cigarette tax from $1 to $2 a pack.  So tax revenues doubled as people sheepishly ignored incentives, right?

If you said, "wrong," you must have half a brain.

In fact, cigarette sales are down 25% in Maryland.  Hmm...if you change tax rates, people change behavior.  They might seek out other jurisdictions.  They may even stop producing the activity that generates the tax.

If some of that sounds familiar, it should be--it's called the Laffer Curve.

Obama Campaign: More Regs Good for Shareholders?

Austin Goolsbee of the Obama campaign said yesterday that new regulations (and, therefore, more costs that reduce capital for shareholders) are actually good for Wall Street.  If you believe that, you also might believe that Obama's 28% capital gains rate and 40% dividends rate will be great for your portfolio.

HSA Covered Lives to Double in 2008

According to a new study by Information Strategies, Inc., the number of HSA covered lives will double from 6 million in January 2008 to 12 million in January 2009.

That would represent a market penetration of about 7% (the market being defined as under-65 private health insurance enrollment).  Put another way, by January of next year 1 out of 14 people in America with private health insurance coverage will have an HSA.

Comparison data from January 2008 can be found at AHIP.

401(k) Auto Enrollment Doubles, Is Now in 43% of Plans

Some interesting nuggets from the latest Deloitte 401(k) survey:

• Seven in ten plans have at least a 70% participation rate
• Auto-enrollment is now in over four in ten plans--double the prior year
• Six in ten plans offer lifecycle funds, and among plans with default investments, 70% have lifecycle plans as their default investment
• Nearly four in ten plans have an auto-escalation feature
• About one-quarter of plans have a Roth deferrral option

In short, the Pension Protection Act is doing its job.  As auto-enrollment becomes the norm, plan participation rates should approach 90% or so.

Jack Kemp on McCain vs. Obama on Taxes

You've read it before, but it bears repeating (this time by Jack Kemp):

• If you would like the capital gains tax rate to rise from 15% to 28%
• If you would like the dividends tax rate to rise from 15% to 40%
• If you would like the small business tax rate to rise from 38% to 55%
• If you would like the death tax rate to rise from 0% to 55%

Then you should definitely vote for Obama.

Sitting in on the "Rogue Congress"

I had a chance today to attend the American Spectator/ATR Conservative Newsmaker breakfast on the House side.  We heard from Congressmen Mike Pence (R-IN) and others.

Later, all the bloggers and a couple of hundred tourists packed the House floor to hear a dozen Congressmen give speeches about bringing the House back in session to vote on H.R. 6566, the "American Energy Act."

Meanwhile, the WSJ lampoons the "Gang of Ten" (including 5 GOP senators) for pushing a left-wing energy bill.

If You Subsidize Unemployment Benefits, You Get...More Unemployed People

The headline today is that initial unemployment claims hit a six-year high of 455,000.  In the USA Today coverage, though, this little nuggett is buried:

The latest snapshot of layoff filings is worse than analysts expected. Economists were expecting claims to drop to around 430,000.

The new layoff figures were distorted by an outreach program to notify people that they could qualify for additional benefits under a new law.

When people went to state claims offices to apply for extended unemployment benefits, state officials discovered that some were eligible — but had not filed — for their initial unemployment benefits, a Labor Department analyst said. That accounted for some of last week's increase, he said.

So, if you fund more unemployment benefits, you get more people claiming them.  Hardly a surprise.  This report seems to indicate that about 25,000 people are now on the unemployment rolls who otherwise would be finding a job.  Further evidence that the whole concept of "umemployment insurance" is dubious at best and stupid at worst.

401(k) Fee Disclosure: Much Ado About Nothing?

There's an interesting piece in SmartMoney on the Department of Labor's 401(k) fee disclosure rules getting rolled out.

My hunch is that this is something industry insiders, politicians, and the financial press care about more than your typical 401(k) investor.  How can the auto-provisions of the Pension Protection Act be so necessary (since they assume a general neglect in retirement planning), and at the same time there be so many people clamoring to see an annual fee statement?

The answer is that the two worldviews are mutually incompatible.  Furthermore, we know the PPA worldview is the correct one.  According to internal Fidelity research obtained by ASA, low-income worker participation in 401(k) plans goes from 60% to 90% when auto-features are introduced.

So what's the interest of those wanting to increase disclosure?  For the politicians, a lot has to do with the big lie that defined benefit pensions are cheaper and more safe than defined contribution pensions.  For many reasons, this is false.  But there you have it.

Commentary Roundup: Drilling and "No New Taxes"

Larry Kudlow has a good analysis of the "guerrilla Congress" and "drill now":

As Sen. John McCain and the Republican leadership nationalize the drill, drill, drill message, the Republican party might conceivably be riding a summer political rally. The question of offshore drilling, along with expanded domestic energy production, has suddenly become the biggest political and economic wedge issue of this election. Is there a Republican tsunami in the making?

Richard Rahn has a piece on why a tax increase isn't necessary to solve our fiscal challenges:

Even though income tax rates by the end of the Reagan administration (1988) were less than half the rates of 1968, tax revenue as a percentage of GDP was actually a bit higher. Budget deficits have averaged about 3 percent of GDP for the last 40 years, and the government debt as a percentage of GDP (approximately 37 percent) is close to its historical average for the last half-century. As the numbers show, those who say disaster is upon us and we must increase taxes are just plain wrong!

Presenting at Wednesday Meeting On "Shareholder Terrorism" Union Tactics

I'm presenting this morning at the Wednesday Meeting on a joint letter ASA is organizing to be sent to the Department of Labor.  It has to do with unions hijacking the pension funds they manage in order to play political games.  Needless to say, this doesn't help the people dependent on these pensions, and the shenanigans hurt overall shareholder wealth for the rest of us.

If you belong to an organization that can sign onto this letter, please let me know.

Text after the jump.

New Addition to Shareholder Lexicon: The "Universal HSA"

John Goodman of NCPA has come out with a new idea: the "universal health savings account (HSA)."  The concept is to combine the best features of the flexible spending account (FSA), health savings account (HSA), and health reimbursement arrangement (HRA).  Each has upsides and downsides:

• HSAs are portable and can accumulate assets over time.  However, they must be paired with a high-deductible health plan, which might scare some people off
• HRAs can be paired with any type of plan and can accumulate assets over time, but the money is not portable when an employee leaves a job
• FSAs can be paired with any type of plan.  However, they are not portable and cannot accumulate assets beyond one year

The "universal HSA" would be portable, be able to accumulate assets (as current HSAs can), but could be paired with any type of health insurance plan (not just a high-deductible one). 

There's a tension between those who want to use HSAs as the carrot to get people to adopt the stick of the high deductibe on the one hand, and those who want to allow almost anyone to have an HSA (besides Goodman, the "large HSA" idea at Cato comes to mind).  Honest disagreement, but interesting nonetheless. 

Actuaries to Younger Shareholders: Drop Dead

The American Academy of Actuaries yesterday came out in support of raising the Social Security normal retirement age up from 67 to as high as 70.

While this may help shore up "the system," it makes Social Security a worse deal for younger workers.  A median-income 25 year old today can expect a real rate of return on their Social Security taxes of less than 1% annually.  Workers and children younger than that can actually expect a negative rate of return.

Raising the retirement age will worsen this rate of return for younger workers, pushing more of them deeper into negative territory.  They'd literally be better off putting their FICA taxes underneath a mattress.

News Roundup: Tax Cuts and Energy

A couple of commendable posts to read today:

• Congressman Jim Saxton (R-NJ) has a good op-ed on the emerging consensus behind tax cuts and economic growth
• Phil Kerpen from Americans for Prosperity has a good piece on energy that's worth a read

Another Analysis of the Obama 50%-Plus Tax Rate

Here's Michael Boskin's take (subscription required).  After crunching the numbers his way, he comes up with a labor tax rate of 62.3%, and an investment tax rate of 58%.  Both of these are inclusive of the 10.3% California income tax.

Obama Calls for Windfall Profits Tax: A Tax On Everyone's 401(k)

Obama has released an ad calling for a new "windfall profits tax" on oil companies.  He'd use the money to give a gasoline welfare check of $1000 to everyone.

Not sure why people accuse him of being a demagogue (insert sarcasm font here).

What he and his supporters fail to see is that taxing oil companies means (according to CBO) that wages will go down to pay for $0.60 on the new tax dollar, and capital gains and dividends will go down to pay $0.40 on the tax dollar.  People might get their $1000, but it will come at the expense of their paycheck and their 401(k).

Unemployment Hits 5.7%: Good News and Bad News

In a good news/bad news thing, the Department of Labor today announced that the unemployment rate ticked up from 5.5% to 5.7%.

The bad news is that the higher rate (and the July shedding of 51,000 jobs) is a continuing sign of economic weakness.

The good news is that this is still an historically low rate (anything under 6% is considered good).  Also, the unemployment rate going up is usually a lagging indicator of economic weakness--meaning we might be almost out of the woods.

Obama Calls for Higher Taxes On Energy Company Shareholders

Obama today called for a tax increase on energy companies.  Since corporations don't pay income taxes--people do--this is actually a tax increase on shareholders and company employees.  A good rule of thumb is that 60% of every corporate tax hike results in lower wages, and 40% results in lower capital gains and dividends.

Also, how exactly does this help decrease gas prices?

Pearls of Wisdom from Milton Friedman

Milton Friedman passed away two years ago to the day.  He left behind a legacy of inspiration for economists and conservatives alike.  Central to his ideology was the belief that: "[the] greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government."

Death of Doha

Prior to Doha, the World Trade Organization (WTO) successfully conducted eight trade rounds.  The Doha round’s failure marks a monumental setback for arguably the most important key to economic growth: free trade.  The downfall of Doha will unquestionably lead to the downfall of global prosperity.  I can just hear the moans of David Ricardo as he rolls over in his grave and gets sodomized by isolationists.  The WSJ notes the dire effects of Doha’s failure:

In 1990, trade represented about 40% of world GDP, according to the World Bank. By 2004, trade exceeded 55% of world GDP, and the global economy had expanded by 50%. The five fastest-growing countries from 1990 to 2004 were Albania, Bosnia and Herzegovina, China, Ireland and Vietnam, and all of them had annual double-digit increases in trade. Meanwhile, the countries that traded the least -- Iran, many African countries -- have stagnated.

Doha's failure is a lost opportunity, but it could become much worse if it galvanizes even part of the world to resort to the tariffs and currency devaluations that led to and exacerbated the Great Depression. It was precisely the bitter memory of that era that led the world's postwar statesmen to build the GATT, the European Common Market, and the rest of free-trade system we now take for granted at our peril.

GDP Growth Up Again: Recession Still the Dog That Didn't Bark

GDP growth up 1.9% in the second quarter of 2008.  Still nowhere near two consecutive quarters of negative GDP growth (the rough definition of a recession).

However, in a bit of bad news, GDP growth for the fourth quarter of 2007 was revised down to slightly negative (minus 0.2%).  That ended a string of 24 consecutive quarters--six full years--in which the economy expanded.

Individual Investors Bullish on Equities

This from a new survey by Schroders:

The semiannual survey of investors from the asset management firm found that more individual investors (with at least $100,000 in investable assets) are investing in domestic and international equities...According to the results, more than half of the surveyed investors (62%) believe the U.S. economy is in a recession, but remain hopeful about their annual returns. Almost all surveyed investors (94%) expect a positive annual rate of return on their investments over the next 12 months, with more than half (55%) expecting an annual rate of return of at least 5%.

McCain Weakens Tax Promises

In a recent interview on ABC’s “This Week,” John McCain recanted from his once adamant anti-tax increases rhetoric. When faced with the question of whether or not he would consider payroll tax increases as a potential Social Security fix, McCain simply replied that “[there] is nothing that’s off the table.” The obvious implication is that McCain wants all parties to believe he is willing to negotiate. However, with conservatives already doubting McCain, he chose the wrong issue to “make nice” with liberals over. Cooperation and negotiation are fine, but tax increases and economic contraction should not be on the table.  Read more on this issue here.

More Pay for Bureaucrats?

The federal employee unions are pushing a public advocacy campaign to increase pay for bureaucrats.  Of course, the funding for this has to come from taxpayers.

You may not have heard they already have a better 401(k) plan than you.  Did you know that they also get paid 50% more than you?

Congress to Spend $500 Billion More Than It Steals in Taxes

The MSM is beside itself today that the White House Office of Management and Budget is projecting a deficit of nearly $500 billion.  A few thoughts:

1. The deficit is an uninteresting number which is the difference between two very interesting numbers: the tax burden, and the level of spending.  Considering that taxes are at historical levels, the problem is clearly spending
2. Would you rather have a balanced budget with spending at 40% of GDP, or a 3% of GDP deficit with spending at 20% of GDP?  Clearly the latter is better for the economy.  Again, it's spending
3. Expressed as a percentage of GDP (3.3 percent), the deficit is not very large

New Video on Obama's 50 Percent Plus Tax Rate

Aussies Retire with Over $500k Elite Ignores Obvious Social Security Angle

The Australians have a semi-personalized Social Security system known as "superannuation."  According to Employee Benefit News, the average Australian will retire with $550,000 in assets.  That would be enough to finance a pension of around $60,000 per year.

Here's the disappointing U.S. application of this good news by lefty academics:

Jane White, president of Retirement Solutions, proposed a new, Australian-flavored retirement strategy at a recent panel discussion held at The New America Foundation, a Washington, D.C. think tank.  White recommended a system that requires most employers to offer a 401(k) with a 9% employer contribution if they do not already offer a defined benefit plan. Under her proposal, new and small companies would be exempt from the 401(k) requirement, and employees would receive a matching contribution from the government. The system would prohibit cashing out 401(k) funds during a job change.

Pamela Perun, policy director of the Aspen Institute's Initiative on Financial Security, suggested another alternative retirement system for U.S. workers. The "Super Simple" system would be universal, user-friendly and designed to increase the retirement assets of low- and middle-income workers, Perun explained. The system would require workers and employers to make small contributions to pensions, which would be locked up until retirement.

What you don't see there is the obvious application: Social Security personal accounts.  Rather than compelling employers and employees to come up with money they don't have, we might look at converting part or all of the 10.6% OASI payroll tax into Aussie-style personal accounts.

Presenting on Private Equity Taxation In the Big Easy at NCSL

I'm on the ground today in New Orleans, where I'm at the National Council of State Legislators convention.  I'll be presenting a Power Point on private equity taxation, along with Steve Moore of the WSJ.  Interested to see what the audience reaction will be.

Auto-Enrollment Will Help Workers Replace Their Income

A new report by Hewitt Associates claims that under current trends, less than one in five workers will be able to save enough to replace 100% of their pre-retirement income.  Two-thirds are expected to have less than 80% financed, which is the general goal.

Auto-enrollment will help.  If employees consistently contribute 8 percent of their income to their 401(k) plans, they can expect to replace nearly 100% of their pre-retirement income.  It just goes to show you--a little shareholding can go a long way, and auto-enrollment is the key for most workers.

Auto-Enrollment Continuing to Bear Fruit

Auto-enrollment is continuing to bear fruit.  According to a new report by EBRI, auto-enrollment doubles the participation rate within plans, with the strongest upside being seen in low-income workers.  Interestingly, this effect happens independent of there even being an employer contribution.

Insurance Industry Again Seeks To Destroy 401(k) Plans

You might have heard about the Schumer-Kohl bill that would ban debit cards from being used in conjunction with 401(k) plans.  File this under wrong-headed micromanagement, and another sop to the insurance industry (which would much rather that retirees annuitize their nest eggs)

AP Totally Misses the Point on Social Security

In an article in search of a purpose, David Lieb of the AP accuses McCain of being a hypocrite for taking Social Security benefits while pointing out that the system is a "disgrace" for younger workers.

Huh?

McCain says that younger workers won't get their benefits (which is true).  So why does that mean he can't collect his?  It's not his fault that younger workers are getting screwed.

Hell in a Handbasket: Life Under a Democrat Congress

Democrats running for office this year complain a lot about  America and the cost of living. What might surprise you is that most of the backsliding in the American way of life has happened while Democrats control the  U.S. Congress. Below are a few key examples:

Inauguration Day 2001 (01-20-2001)