Thursday, December 28, 2017

Death and (No) Taxes for Super-Rich: Give Gains to Charitable Foundations

Recently George Soros transferred more than $18 billion of his accumulated wealth to a private foundation that he controls. By doing so, he escaped paying taxes on the appreciated value of the assets forever. Here's how it works:

The super-rich who head corporations, such as Soros and Warren Buffett, can take a reduced yearly salary and pay income tax rates equivalent to that of middle-income Americans. However, they continue to have access to corporate private jets and other tax-deductible benefits unavailable to most middle-income Americans.

Meanwhile, the value of their shares of their companies grows. But instead of selling the appreciated shares and incurring capital gains taxes, the super-rich give the shares to private foundations and the income is forever untaxed.

For example, in 2017, Buffett donated 18.63 million Berkshire "B" shares valued at $170.25 per share with a tax basis of roughly $58.71 to the Gates Foundation. As a result, in 2017 alone, Buffett will avoid paying capital gains taxes of $141 million to Nebraska, and $463 million to the federal government. In the end, Mr. Buffett intends to donate more than $50 billion in appreciated stock to private foundations.

Buffett has ridiculed the current tax system, which taxes his secretary at a higher rate that what he pays. To rectify this injustice, he proposed that the capital gains tax be raised to 50%. But elevating the rate would have no tax impact on his accumulated stock wealth.

In the end, the current U.S. tax law allows death with (almost) no taxes for the super-rich. A potential remedy is to limit the amount of appreciated stock that may be gifted without taxes.

As stated by novelist F. Scott Fitzgerald to fellow writer Ernest Hemingway, "You know Ernest, the rich are different from you and me." To which Hemingway responded, "Yes they have more money." To be an even bigger wiseacre, Hemingway might have added "and the ability to die without taxes, Scott."
Ernie Goss

Tuesday, October 17, 2017

Is Trump's Tax Reform for the Rich? Top 1% Pay Seven Times the Rate of Bottom 50%

In September, President Trump unveiled his tax reform plan to a chorus of boos from the big government tax and spend devotees.

For example, New York Democrat Senator Schumer, Grand Poobah of the big spenders, tweeted, ""GOP #TaxReform plan & what @SpeakerRyan says about it are 2 diff things. Says plan is for middle class but 80% is for wealthy-Get real Paul."

According to the Tax Foundation, the latest income tax data show that the top 50% of income earners paid 97.3% of income taxes, with the bottom half of income earners paying only 2.7%.

Furthermore, the top 1% of income earners paid an individual income tax rate of 27.1%, which was more than seven times higher than that of the bottom 50% who paid an income tax rate of only 3.5%. Thus, a tax reform package that differentially supports low and middle income taxpayers would further distort a tax system that already punishes educational achievement, innovation, and entrepreneurship, all of which lead to income growth.

On top of this, the element of the President's tax reform package garnering the most criticism from supposed defenders of low and middle income taxpayers is the elimination of the deduction for state and local income taxes. Currently the benefits of this deduction go largely to high income earners, and it encourages state and local taxing units to raise taxes. Eliminating this deduction would cost taxpayers with incomes over $200,000 an average of $7,000, but an average of only $100 for taxpayers making less than $200,000.

To bolster passage of his plan, Trump might channel Nobel prize winning economist Milton Friedman who said, "I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it's possible."
Ernie Goss

Thursday, September 21, 2017

Could A Stock Market Swoon Damage Your Retirement Plans? Baby Boomers At Risk

Nine years of record low interest rates, an improving economy, and few high yielding investment alternatives, have propelled the U.S. stock market to record highs. For example, the current price-earnings (P/E) ratio of the Standard & Poor's 500 (S&P) stocks collectively is 24.5. This indicates that stock investors are paying $24.50 for each dollar of earnings, which is well above the average P/E ratio since 1950 of 17.85. If the S&P were to decline to its 1950-2017average P/E, S&P stock prices would plummet by 27.2%.

However for long-term investors, it is almost a certainty that the S&P would rebound to its old high. But how long will it take? Should the S&P P/E ratio drop to its 1950-2017 average, retired baby boomers who will be age 70.5 and older in 2018, and other retirees in need of funds for living, would be required to withdraw funds from their non-Roth retirement accounts at these low stock prices. The question then becomes, how long will it take for the S&P to return to its 2017 record high level?

In August 2000 with the S&P at 1517.7, the stock index plummeted 31.4% over the next 13 months. It then took the S&P 81 months to climb back to its August 2000 level. And six months later in November 2007, the S&P once again began falling ultimately slumping to 735.1 by February 2009. Thus, between August 2000 and February 2009, or 102 months, the S&P fell by 51.6%. During this bear or down market, individuals that made mandatory or voluntary withdrawals from their retirement accounts dominated by stocks likely suffered significant financial hits.

With U.S. stock prices at current record highs, recent empirical evidence indicates those required to make significant withdrawals from their retirement accounts over a short-time horizon should evaluate re-balancing their investment portfolio to be less dependent on stock prices. As investment guru Ben Graham advised, "Diversify, Diversify!"
Ernie Goss

Thursday, August 17, 2017

Marijuana Legalization's Impact on the Mile High State: Munchie Industry Soars, Others Not So Much

Since 2013, when marijuana was legalized in the state, Coloradans have toked up, tuned in, and chowed down. Between 2013 and 2017, Colorado has increased employment by 9.2%, well above the nation's 6.4%. On the other hand, since 2013 Colorado wages expanded at approximately three percentage points less than that of the U.S.

Two factors contribute to Colorado's stronger job growth, but weaker wage growth. First, Colorado added jobs in lower wage industries. Second, Coloradans cut their average work week. For the two years following legalization, per capita spending in the low wage food and beverage industry expanded by 3.4% for the U.S., but almost double that for Colorado at 6.7%. Additionally between 2013 and 2017, the average hourly work week fell by 3.9% for Colorado, but climbed by 1.5% for the U.S.

To support greater spending on food and beverages with fewer work hours and lower wage growth after the state legalized marijuana, per capita welfare benefits in Colorado climbed by almost 10% versus 7.8% for the U.S.

But Colorado's growth in tax revenues from the pot trade from $52.6 million the year after legalization, to $85.3 million in 2015, to $120 million in 2016 is likely to encourage even more states, beyond the current eight, to make recreational use of cannabis lawful even with potentially mixed economic impacts.
Ernie Goss

Wednesday, July 26, 2017

U.S. Economy Rebounds, Wages & Salaries Do Not: 10 of 23 Occupations Lost Ground

In Nebraska, a state with a 3.0% unemployment rate, Bryan Health, a Lincoln non-profit hospital, recently posted 200 job openings for cafeteria workers to respiratory therapists. On the same day the U.S. Bureau of Labor Statistics announced that the nation's unemployment rate sank below 5.1% for the 22nd straight month. Surprisingly, this "white hot" labor market, has yet to push wage growth above a snail's pace.

The U.S. economy exited the 2007-09 recession in July 2009. Since then, U.S. workers, on average, have only increased their inflation-adjusted salaries by $1,000, slightly less than 2%. Notably, wages and salaries of American workers, adjusted for inflation, have actually declined for 10 of 23 occupations.

Who were the big losers?
Between 2009 and 2016 annual inflation adjusted pay fell for:
**Architects and engineers by$6,074 or 7.4%.
**Lawyers by $8,578 or 5.9%.
**Social workers by $2,976 or 5.9%.
Who were the big winners?
**Between 2009 and 2016 yearly inflation adjusted pay climbed for:
**Computer programmers by $10,483 or 14.0%
**Welders by $5,824 or 16.0%.
**Registered nurses by $5,636 or 8.4%.

More Vocational Skills Needed
Between 2001 and 2009, compounded annually, worker productivity, or output per hour, expanded yearly by 2.6% and wages climbed by 3.1%. From 2009 to 2016, productivity growth dropped to an annual compound rate of 0.9% and wage growth fell to an annual compound rate of 1.9%.

In order to expand wages at an acceptable pace, workers and industry need an increase in vocational skill levels. Whether it is truck driving, welding or plumbing, a higher percentage of American workers and industry need to upgrade their skill levels obtainable with on-the-job training or community college classes.
Ernie Goss

Tuesday, June 20, 2017

Student Debt and Defaults Soar as Colleges and Students Saddle the Taxpayer

Over the last 10 years, U.S. student debt has ballooned by 164%, or almost five times the growth of the overall economy. These "loans," which now amount to $1.4 trillion, or $33,000 for each of the 44 million student borrowers, have enabled colleges to raise tuition at a rate almost three times that of overall consumer prices over the same 10-year period.

But, shed no tears for the student borrower for ultimately there are three avenues for the student to foist these loans on to U.S. taxpayer's shoulders:

First, students are increasingly defaulting on these loans. Over the past 10 years, the number of student loan defaults has skyrocketed 400% to 4.7 million and the number of loans more than 90 days delinquent has soared by 250%. Furthermore, nearly one in three borrowers who exited defaults through rehabilitation defaulted for a second time within 24 months, and more than 40% of borrowers defaulted again within three years.

Second, programs of loan forgiveness and income-driven payment plans have proliferated. In 2007, President Bush signed a bill that subsidized student loan borrowers who took jobs in the public or non-profit sectors upon graduation. Student loan debt left over after 10 years of payments would be forgiven. Beginning in 2014, President Obama capped borrowers' monthly payments at 10% of their income, extended the repayment period from 10 to as long as 25 years, and offered to forgive any remaining balances when that time is up. The Government Accountability Office calculated that the government will lose $21 for every $100 in student loans issued to someone who takes advantage of an income-driven repayment plan.

Third, a federal student loan can be discharged in the event that the federal loan was used toward the cost of enrollment at an institution that closed due to loss of accreditation, loss of a majority of academic programs, or because the school violated state or federal law.

With U.S. worker wages growing less than 3% annually, workers can ill-afford the $10,000 per worker burden of student debt which has underpinned college overspending and student wastefulness. Ernie Goss

Wednesday, May 17, 2017

U.S. Incentives for Not Working Expand 3 Times That of Incentives to Work

Despite earning $5,000 per month, Chris Jones, a single father of two children under 10 years of age, living and working in Santa Fe, New Mexico, quit his tech support job at IT Solutions on September 1, 2016. It was a good financial move.

By quitting early Jones qualified for the earned income tax credit (EITC) and a host of other government support payments unavailable to him if he had worked the full year and earned $60,000.

By leaving the labor market, he now qualified for 2016 benefits of food stamps or SNAP of $2,044, EITC of $974, and New Mexico rental assistance of $1,636. Additionally had Jones continued to work, he would have paid an additional $3,120 in federal income taxes, $980 in state income taxes, $1,200 in social security taxes, after-school day care of $3,852, and family health insurance of $1,200.

In total, assuming a 40-hour work week, Jones would have earned a paltry net $9.60 per hour for the remaining four months of 2016 compared to his $31.25 per hour for the first 8 months of 2016.

Given the myriad of economic incentives for not working, it is not surprising that in 2016, the percentage of the population over age 15 in the labor force dropped to its lowest level since 1976.

As in the case of Jones, one of the chief reasons is that the financial incentives for not working, furnished by federal, state and local governments has soared. Meanwhile the economic inducements for working provided by business enterprises has expanded at a more modest pace.

Between 1990 and 2015, U.S. wages and salaries per worker advanced by 126.6%. Whereas, government transfer payments, including SNAP, Medicaid, EITC, and rent assistance provided to non-workers, or workers with a soft linkage to the labor market, more than tripled at 358.6% per capita. One of the goals of any 2016 tax reform coming from Washington should be closing this gap between the growth in wages and that of transfer payments.
Ernie Goss.