Student Loan Forgiveness, Who Should Pay? An Alternative Solution

Suppose you go to the mall and purchase a widescreen monitor for a $1,000 paying for it with your newly minted Visa credit card. Unfortunately upon installation, you find it is defective and is not worth the fuel cost to return it to the merchant. Who pays the credit card balance? Will the U.S. taxpayer pick up the tab? NO! The cost will be borne by either the merchant, wholesaler, manufacturer, or you.

That is essentially what has happened to many college graduates who borrowed thousands to earn a college degree that, in many cases, entitled them to nothing more than a job selling jockey shorts at Montgomery Ward (I go back a long way).

Month-after-month, President Biden has delayed loan repayments for college tuition incurred at colleges ranging from the bottom to the top of the nation’s post-secondary institutions. Now he has proposed forgiving loans up to $20,000 for those making less than $125,000, and once again postponed payments for the rest. Estimates of the taxpayer cost of these actions have ranged from $300-$500 billion depending on the assumptions of the estimation model.

Why are the real beneficiaries, the colleges, sitting on the sidelines cheering on this costly proposal? A study by the New York Federal Reserve (https://tinyurl.com/4da9mc8b) concluded that 60 cents of every federal loan dollar simply landed in the coffers of colleges in the form of higher tuition revenue. As a result of this linkage, colleges have raised tuition five times the rate of inflation since 1980. At the same time college endowments soared to roughly $691 billion in 2022.

I propose that the cost of the student loan program be shared by the taxpayer, the university, and the student. The program will work very similar to unemployment pay systems in most states. Each semester, colleges will pay an experienced based fee that rises and falls with the past students’ repayment, or experience rating. Just as construction firms in Nebraska, due to higher historic layoff rates, pay more than four times the unemployment tax rate of non-construction firms, colleges with a history of student loan defaults and delinquencies will pay higher fees into the fund. This program will thus shift a portion of the cost of student loan defaults to those that helped create it---the colleges.

Transferring a portion of the cost of student loan defaults and delinquencies to the colleges will cause the institutions to 1) improve their educational processes to boost potential financial success in the labor market post-graduation, 2) improve the student selection process by including future economic viability of graduating students, 3) charge lower or higher tuition, depending on the salary outlook of particular majors, 4) insure that students receive true value or marketable skills from their studies. In the end, this program will slow the growth in tuition for all (even non-borrowers), and reduce taxpayer costs.

Ernie Goss

California Punishes High Income Earners: Iowa Leads, California Follows in Tax Competitiveness

In a 2022 ballot initiative, California progressives are pushing for passage of their deceptively entitled Clear Cars and Clear Air Act. In what represents a race to the bottom in economic performance, and in higher income taxes, the initiative raises the state’s top income tax rate by 1.75% to a non-competitive 15.1% surpassing New York City’s 14.8%. Despite a $100 billion 2022 state budget surplus, supporters of the $3.0 billion to $4.5 billion tax boost plan to use 80% of the booty to subsidize zero emission vehicles in the state.

Passage of the 2017 federal tax reform bill, which limited the deduction of state and local taxes on federal income returns to $10,000, made these California and New York taxes prohibitively high and incentivized the migration of individuals from high to low-income tax rate states. Furthermore, Covid-19 encouraged workers and entrepreneurs to work remotely and allowed them to exit cold, income tax hostile states for the warm environs of low-income tax rate states.

For example, the year after passage of the 2017 federal tax reform bill, real estate mogul, Barry Sternlicht, enhanced his net after tax income, and suntan, by moving operations of his Starwood Capital from high-tax Greenwich, Connecticut to no-tax Miami Beach, Florida. Likewise, Elon Musk, CEO of Tesla, moved company headquarters from high-tax California to no-tax Texas. Contrary to California, other states wasted no time in lowering income tax rates to hold on to workers, and/or encourage entrepreneurs to locate in their states. In the 2022 Iowa legislative session, Governor Kim Reynolds, and the Iowa Legislature, took the bold step of reducing the state’s income tax to a flat rate of 3.9%, thus joining 10 other states with some form of flat rate income tax.

For 2021, the 10 highest income tax states, and their top rates were: *California 13.3%, Hawaii 11.0%, New Jersey 10.75%, Oregon 9.9%, Minnesota 9.85%, *District of Columbia 8.95%, New York 8.82%, Vermont 8.75%, Iowa 8.53% and Wisconsin 7.65%.

How did these states perform economically compared to all states, and to no-income tax states? Data since passage of the 2017 federal tax reform and 2021 support the wisdom of lowering, not raising the top income tax rate. GDP growth numbers and migration numbers are listed in Table 1. The data show a clear economic advantage for states with a lower top income tax rate.

More Inflation, Less Consumer Confidence: Markets Take a Dive

Today's releases of the May 2022 consumer price index and consumer sentiment were much worse than expected. I have graphed both measures below. This is the highest inflation recorded in 41 years, and the lowest consumer sentiment recorded since the index was launched in 1952.

The U.S. recession ended in the second quarter of 2020, yet the Biden Administration in 2021 pushed a $1.9 trillion stimulus spending program through Congress, and a $1.0 trillion infrastructure spending program.

To support this overspending, the Federal Reserve increased the U.S. money supply by 40% between 2020 and 2022. Note that the explosion in inflation and downturn in consumer sentiment preceded the Russian invasion of Ukraine.

The Federal Reserve is very apt to get more aggressive in raising short-term interest rates beginning next week. I expect the prime interest rate to rise from its current level of $4.0% to 6.0% by the first quarter of 2023. Ernie Goss

Did Your Home Earn More than You Did in the Past Year?

According to the U.S. Bureau of Labor Statistics, average hourly wages rose from $30.02 in April of last year to $34.95 in April of this year, a gain of 5.8%. Over that span of time, the average worker’s wage/salary increased from $54,807 to $57,484 after accounting for hours worked. Unfortunately, this wage/salary gain was well below the 8.3% increase in consumer prices. Not only did the average worker suffer a 2.5% loss in inflation-adjusted wages, the worker lost ground to the homeowner.

Take two individuals for example, Karen Walker, a retail manager living in a rented apartment, and Jack Stone, an unemployed homeowner. According to the Case-Shiller Home Price Index, the median price of a U.S. home soared from $313,272 in February 2021 to $375,300 one year later.

Thus, Jack Stone, who stayed home and tended to normal home maintenance, earned $62,028 without leaving the comforts of home, except to cut the grass, and visit his bank to tap his home equity for living expenses. On the other hand, Karen Walker, the renter with no automobile, trekked to work via public transportation and earned approximately $11,000 less than Stone who stayed home and spent the day watching re-runs of Seinfeld.

Adding to Walker’s relative misery, Stone, owner of a three-year old Chevy Trailblazer, experienced a 2021-22 gain of roughly $6,000 as the resale value of the SUV jumped from $27,804 to $34,449. Thus, the unemployed Stone, via home and automobile ownership, was $18,000 wealthier at the end of the year than Walker who worked the full year, but owned neither home nor auto.

These income profiles show clearly how the easy money policies of the Federal Reserve, and the heavy federal spending during the pandemic widened the wealth gap between asset owners and non-owners. Ernie Goss

Fed Rate Hikes Hurt Nasdaq More Than S&P, 1985-2022

The Federal Reserve has effectively promised the nation another 1.5% - 2% in short-term interest rate hikes. How will this likely affect equity (stock markets)? Below, I have charted the Federal Reserve’s short-term interest rates (in red) versus the ratio of the Nasdaq Index to the S&P Index between 1985 and 2022. Growth companies such as Facebook (FB) and Google (GOOG) with earnings in more distant years, are more likely to suffer differentially since those far off earnings are worth less with higher interest rates resulting from higher inflation.

Note that in September 2007, three months before the beginning of the Great Recession, the Federal Reserve’s short-term interest rate was 5.4% and the ratio of the Nasdaq to the S&P was 1.73. As the recession ensued, Fed rates declined to 0.2% and the ratio of indices climbed to 1.98. As rates moved even lower, the ratio rose to 2.40 in September 2016.

Over the full period, the correlation coefficient was a strong -0.62, indicating that as short-term interest rates fall, the ratio of the Nasdaq Index to the S&P rises. With the Federal Reserve slated to increase short-term interest rates by as much as two to three percentage points, this ratio should drop dramatically. This analysis does not encourage buying either, but if you just gotta buy—buy the S&P Exchange Traded Fund (SPY), not the Nasdaq ETF (QQQ).
Ernie Goss

Biden’s Next Budget Punishes Success: Education, Innovation, and Productivity Are Discouraged

The IRS just performed its yearly financial appendectomy on the U.S. taxpayer. But apparently this year’s removal was not large enough for the Biden Administration. For fiscal year 2023, in terms of tax burdens, Biden has proposed making the U.S. number one among developed nations with $2.5 trillion in new taxes. Not to worry, he has guaranteed that these taxes will fall on what he terms as the “rich,” or workers and entrepreneurs who have achieved higher income via education, bright ideas, or just plain hard work.

For the current fiscal year, the federal government will spend $6.011 trillion, or 26.1% of the total U.S. economy. Since the beginning of the pandemic, federal spending has soared by 47.5%, while the economy has inched up by only 7.6%. Biden’s proposed budget will push spending as a share of the economy to its highest level since economists began the process of national accounting.

To pay for this indulgence, Biden will the raise the tax on each additional $1,000 of income that high income individuals earn from $429 to $573. On top of this increase, the administration proposes a complex tax on the unrealized capital gains of high-net worth individuals including hard entrepreneurial founders. Under this plan, high income taxpayers with a gain in company stock values, or in the entrepreneur’s net worth would pay taxes on the gain even though the stock, or company, has not been sold. Mr. Biden would also raise the combined state and local corporate income tax rate from 25.8% to 32.3% and well beyond the 22.8% average for the 37 nations of the OEDC.

Not only will these actions punish entrepreneurs and investors financially, it will create bookkeeping nightmares for taxpayers while enlarging the IRS bureaucracy to handle the new tax law.

Biden’s Budget Blooper (BBB): more leisure, less work; more bureaucracy, less entrepreneurship.

Ernie Goss

2017 Tax Reform and Remote Work Push Workers To Move to Low Income Tax Rate States

Iowa Governor Kim Reynolds and the Iowa Legislature took the bold step of reducing the state’s income tax to a flat rate of 3.9%, thus joining 10 other states with some form of flat income tax. Critics have questioned the economic development wisdom of what they judge as a radical change which is argued will undermine the state’s ability to fund needed public services.

However, the passage of the 2017 federal tax reform bill, which limited the deduction of state and local taxes on federal income returns to $10,000 incentivized the migration of individuals from high to low-income tax rate states. Furthermore, Covid-19 freed workers to work remotely also encouraged workers to move from high to low-income tax rate states.

Not surprisingly, the 10 states with the highest income tax collections as a percent of GDP, excluding Kentucky and Oregon, lost a total of 1.8 million in population to migration between 2017 and 2021.

On the other hand, the 10 states with the lowest income tax collections as a percent of GDP, excluding Alaska, gained a total of 1.2 million in population to migration between 2017 and 2021. Tables 1 and 2 lists the highest 10 and lowest 10 income tax rate states using 2017 tax data. Ernie Goss