According to recent reports, Bush wants to send checks to people who are barely scraping by so that they can buy another tank of gas and continue supporting Cheney’s retirement plan (more on the cuts). He wants his tax cuts to become “permanent” even though his own Fed Chairman said that it would do nothing to curb the current problems. Tax cuts set to expire in 2010 will do nothing to help the economy today. In other words changing how something is to be taxed two years from now won’t help you make next month’s mortgage payment if your rate got “pimped”
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Alan Greenspan has been a long time neutral voice concerned merely with the financial fitness of the country. He has run the Federal Reserve Board with pragmatism without letting politics get in the way of his recommendations on interest rates. He bucked George HW Bush’s request to lower interest rates when it would have been in GHWB’s favor to have lower rates. Indeed GHWB blamed Greenspan for his election loss to Bill Clinton in 1992.
Greenspan urged Clinton to lower the national debt, lower the deficit. Clinton did and one of the best economies that we have seen in years, some might say since before Jimmy Carter, followed. Mr Greenspan cautioned against “exhaulted exuberance” in the stock market, he saw stocks that could not reasonably be priced the way they were without some kind of correction. The “tech bubble” popped not too long after.
He has been right more times than not, he is even arguably a financial genius. Why is it then that he is backing Dubya’s Social Security private accounts? Perhaps senility is setting in, perhaps he wants to be reappointed to his position on the board which expires in 2006, perhaps he is letting his politics get in the way of rational thinking. (more…)
Over the last few years we have heard time and again that GW is going to cut the double taxation on dividends by making them tax free for investors. While that sounds like a good idea to some, let’s look at the realities of ‘tax-free’ dividends:
- Only individuals investing directly in stocks will benefit.
- There is no real incentive for companies to pay dividends
- The tax code is more complex due to no subtraction for this expense
If you own stocks through your company retirement plan, 401(k), SIMPLE, SEP, or Traditional IRA, all withdrawals from those plans are considered Ordinary Income just like a paycheck. No benefit from investing in tax free bonds exists now and certainly no benefit will exist in the future regarding dividends without an serious overhaul of the tax code- an overhaul that is not coming no matter what anyone says. Additionally, if you are invested in a ROTH IRA all your withdrawals are tax free as long as you meet the basic rules of the ROTH since you pay tax on the money when you earned it in your paycheck. No benefit of the ‘tax-free’ dividend will be seen by you.
The way dividends currently work at the corporate level, the corporation pays tax on its net earnings. Net earnings include the amount of dividends paid out. In other words, the corporation does not subtract what is arguably an expense from its earnings. This is the main reason Subchapter S corporations are popular with small corporations; taxes are only paid on one, level the individual share holders. The S Corp itself pays no taxes (well there are a couple different ones they do pay but not generally on regular income) but passes the income and expenses to its shareholders who then report the income and expenses on their personal tax return.
A corporation owning a certain percentage of another companies stock can subtract a portion of that dividend income. Of course this is only if they have followed all the rules regarding how long they have held the stock and how much of the stock they actually own. There are somewhere between 3 and 5 different percentages of stock that qualify for the ‘Dividends Received Deduction’.
Reclassifying this as an expense – not retroactive of course, that would be a serious headache – would allow corporate books to be less complex, reduce the record keeping and tax preparation burden on corporations, would not discriminate against lower income individuals who might only own stock within a retirement plan in favor of higher income individuals who might tend to hold stock directly, and even give corporations a real incentive to pay dividends to their shareholders (case in point Microsoft has horded over $30 billion in cash)
Real tax reform must be sensible and make sense. This is only area of Federal Income taxation that I’m personally aware of where income is taxed twice. If you want to change it Mr Bush do it the right way.
Private Social Security accounts have been subject of some debate. George W Bush wants ‘younger’ workers to be able to contribute to private accounts. That’s all well and good but it raises questions about the current Social Security recipients. The Social Security system was designed to be pay as you go… meaning that while some people are drawing out of the system others are contributing. This is the biggest problem facing the system today… fewer people working, more retiring and living longer are putting a strain on the system. The Social Security trust fund is ‘seperate’ from the general budget by law. Unfortunately SS funds may only be invested in government debt instruments, meaning that the Federal government has borrowed the money from the SS trust fund for use in the general budget. Of course the higher drain on the system due to more retirees means that the federal government will have to redeem the notes held by the Social Security Administration. This puts a tremendous strain on a budget already strained by war, increased spending and tax cuts.
While I wrote a paper once upon a time supporting the concept of private accounts, another angle needs some attention and consideration. Private accounts can be discussed at another time. The maximum monthly SS benefits for someone retiring at 70 is $2,111. That’s $25,332.00 yearly.
So here’s the idea: allow people to opt out. Not opt out of paying in, out of receiving. Let’s assume that an individual at or near retirement age has managed a decent retirement account- whether it be in a company sponsored pension plan or some kind of personal account. Give this person a break for not drawing on SS benefits. Give them a break for managing their personal or company plan and having a sufficient amount to pay for their own retirement. Make the break voluntary and reversible. Make the break scaled so that one can get a partial break for an account that isn’t quite enough to cover a full retirement. The break would have to be somewhat equivilant to what someone would make now… perhaps no tax on up to $100,000.00 when it is all personally funded and it is a married couple. This would give a fantastic break to those currently drawing a personal retirement, ease the stress building on the Social Security system like the magma slowly rising in Mt. St. Helens, and helps not only the so-called wealthy, but also those whose only retirement is SS benefits and most importantly, it can be done today not at some nebulous point 30 – 50 years in the future that hurts those receiving benefits today.
Now, I haven’t run the numbers. Partly because it takes time to do that, but also partly because no matter what numbers I might come up with, the ‘right’ numbers will be complex to figure. They have to allow for the amount the government doesn’t have to pay out balanced against the reduced tax revenues.
It’s time to start looking for real and sensible answers to tax reform and the precarious state of the SS system.