Thursday, October 09, 2008

This is what I think Obama's Tax Policy will end up being

I've been a CPA for almost 6 years know, and in the financial services industry on and off for the last 15. Based on those experiences, I can say I have a good understanding of both items. Well this article about Congressional changes on pension plans show that there is no limits to the obtuseness of both Democratic Congressmen and academics. A brief passage:
“With respect to the 401(k), it appears to be a plan that is not really well-devised for the changes in the market,” Rep. George Miller, D-Calif., said.

“We’ve invested $80 billion into subsidizing this activity,” he said, referring to tax breaks allowed for 401(k) contributions and savings.

With savings rates going down, “what do we have to start to think about in Congress of whether or not we want to continue and invest that $80 billion for a policy that is not generating what we … say it should?” Mr. Miller said.

Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds, suggested Teresa Ghilarducci, an economics professor at The New School for Social Research in New York.

When workers collected Social Security, the guaranteed retirement account would pay an inflation-adjusted annuity under her plan.

“The way the government now encourages 401(k) plans is to spend $80 billion in tax breaks,” which goes to the highest-income earners, Ms. Ghilarducci said.

That simply results in transferring money from taxed savings accounts to untaxed accounts, she said.
Where do I start on this? Needless to say, this really got me riled up. How this is so wrong:
  1. The idea of retirement accounts and the corresponding tax deductions was to encourage people to save. Savings means capital for economic growth. The U.S. has one of the worst savings rate in the industrialized world. This would encourage consumption and deter investment. We complain now how all these Sovereign Wealth Funds are buying up all the companies and real estate in the U.S. They will own a lot more once Americans are deterred from saving.
  2. The other part of 401(k) plans is that the taxpayer gets a deduction now, all growth in the account is tax free, but the catch is that all withdrawals from the account are taxable as income. Phasing out or eliminating the deduction for 401(k) plans would result in double taxation for many taxpayers.
  3. Does Representative Miller mean that only 401(k) plan deductions be taxable? What about contributions by employees to big fat unionized defined benefit plans? If we are talking about taxing contributions to retirement accounts as a subsidy, shouldn't we throw in defined benefit plans, SEPs, IRAs, SIMPLE, Keogh plans as well?
  4. The individual 401(k) limit is $15,500 if under the age of 49 and $20,500 if over 50 for 2008. An individual in the top bracket would get a reduction of income tax to the amount of $5,425 - but they would have to make at least $357,700 filing joint for the maximum bang. If someone is in that bracket, they are paying roughly north of $100,000 in federal income tax. I don't think this is such a huge "loophole for the rich"
  5. Teresa Ghilarducci is a retard. Period. "Congress should let workers trade their 401(k) assets for guaranteed retirement accounts made up of government bonds" Hmmm.. hasn't Ghilarducci heard of social security? In case she hasn't it is essentially a guaranteed retirement account made up of government bonds (in theory, but I bet congress would raid your retirement account like it does social security). It is going insolvent in the next couple of years.
  6. Government bonds have underperformed the stock markets historically. This plan would impoverish savers by limiting their returns to fixed income securities, even if you include this recent meltdown. Even though investors "lost" $2 trillion in the past month due to the stock market turmoil - most investors are in for the long term. They are paper losses until one sells. To reiterate - over the long run, stocks outperform bonds.
This is just wrong wrong wrong on so many levels.... cradle to grave! We're on the road to serfdom and the pedal is to the metal. Someone has to straddle this road and scream "stop"!

1 comment:

Anonymous said...

Excellant post. My points of contention to the Miller / Ghilarducci porposal are as follows:

- A Miller / Ghilarducci proposal would have a return of 3%. The long term return on the S&P 500 from 1950 to 2007 was 11.8%. The returns from the proposed plan are obviously inferior. A knee jerk reaction to recent cyclical movements in the equities markets is a call to panic and not to reason. Most market experts warn against investment decisions based on panic, which this one clearly is.

- The Miller / Ghilarducci proposal would mandate 5% savings. But a worker making $50,000 to $100,000 a year can today save up to a 15,500, versus $5,000 under the Ghilarducci plan. This would have a disastrous effect of those nearing retirement who desperately need to step up their savings. Also, the Miller / Ghilarducci assumes $5,000 a year is enough to fund retirement for the average American. As the cost of living in the tri-state area is higher than average, this proposal would penalize those living in higher income states, such as New Jersey, New York, and California.

- ALL current contributions to a 401K plan, once vested, goes to the participant or their family. Under the Miller / Ghilarducci proposal, when the participant dies, the family only gets half of the contribution. This is not only unfair, but financial disruptive to the surviving family, especially in the later years of their lives.

- Ghilarducci claims that the government could run retirement plans more cost efficiently. I am very surprised to hear that. The cost of the Vanguard SP500 fund is 19 basis points (0.19%). How will the government beat that? With all due respect, when is the US Government ever more efficient than US businesses in a highly competitive market?

- No offense, but I do not want the US Government managing my retirement. This is from the same management that brought us a Social Security plan that is targeted to go bankrupt by 2041, a FannieMae FredieMac program that will cost the US taxpayers at least $200 billion, the $13 billion bailout of Amtrack and other wonderful programs too numerous to mention. If Miller / Ghilarducci want a government mandated plan, there is already one in place. It’s called Social Security, the largest retirement plan in the world. Creating a second government plan will not fix the problems with the first plan.

- Ghilarducci claims that the 401K plans are unfair. I do not agree. Individuals that are not part of a 401K plan can contribute tax differed income to IRA plans if they chose. Also, 401K plans are capped at $15,500 for 2008, so an employee making more money can not possibly contribute more than the lower level employee in the same 401K plan. This seems fair to me.

- Ghilarducci claims that the tax savings on the current 401K plan is regressive. What Ghilarducci fails to take into account is that the US Tax plan is progressive, which causes regressive savings. So the savings is merely a by product of the US Tax code. Please also remember that only 41% of American’s pay taxes. So the Miller / Ghilarducci proposal requires the middle class to shoulder even more of our nation’s economic burden.

- Each year, more families fall into the Alternative Minimum Tax status. Under this, middle class families can not deduct property taxes, state taxes, and local taxes from their federal taxes. The 401K savings is one of the few deductions that the middle class family paying taxes under AMT have. Lower income families have the ability to deduct these state and local taxes. So the Miller / Ghilarducci proposal causes further tax penalties on the middle class. The combined Obama/Bidden tax plan, AMT, and Miller / Ghilarducci would create a perfect storm four our middle class.

- By moving retirement funds away from the capital markets, the Miller / Ghilarducci proposal could cause a decline in the equity and bond markets and reduce the amount of available funds for capital expansion and development. My estimates are that this would be about $300-$400 Billion a year that would be pulled from our capital markets. The Miller / Ghilarducci proposal does not consider those impacts on our markets and our economy.

- An unintended consequence of the Miller / Ghilarducci proposal would be the negative impact on small businesses. By mandating that ALL companies pay in $2,500 per employee, small businesses would see their costs rise. If you couple that with the Obama / Bidden proposal to increase taxes on small businesses and mandate the payment of health benefits, this could create a perfect storm for small businesses. The direness of this is greater in our current economic environment, where we need small businesses to lead us into a recovery, which they have historically done. The Miller / Ghilarducci proposal could prevent that from happening and prolong our recession.

-Applying the Miller/Ghilarducci's proposal to the current 401K planning model pushes the estimated retirement of a middle class worker back at least 3-5 years. If the government wants a fair retirement plan, the answers could be much simpler:

If the government wants a fair retirement plan, the answers could be much simpler:

- First of all, keep the current 401K Plan with its current tax benefits

- Raise the annual tax deduction for IRA contributions from non-401K recipients to the same level of 401K plans, currently $15,500

- Allow spouses of 401K recipients that do not have a 401K plan to contribute up to the lesser of $15,500 or the gross income of that spouse in IRA investments

- Fix Social Security. Benchmark payments to the cost of living rather to wages and limit payments to those that need it. Don’t fix social security by breaking a plan that works and creating another one that won’t.

Those are my gribes,