01.07.08
Posted in Finance at 4:41 pm by Valentine
A few years ago, Steve Forbes ran for president on a “flat tax” platform, promising a greatly simplified income tax schedule with a 17% tax assessed on all earned income (with an initial exemption). Mike Huckabee is pushing an even more radical reform, replacing not only the income tax but also the payroll taxes for Social Security and Medicare with a 30% national sales tax on all new goods and services. The government would then rebate an amount equal to the tax on a poverty-level income, greatly reducing the burden on lower-income households.
There is no such thing as a free lunch. If this tax is to support our current level of spending, it must withdraw the same amount of money from the economy. Who might win under this proposal? What economic choices might be affected?
- Imported goods and services would be taxed, eliminating one of the major economic incentives for outsourcing (the avoidance of paying US taxes).
- Those who have been saving in Roth IRAs would be penalized. They paid income tax on that money up front in the expectation that it would be tax free when withdrawn for retirement. Existing savings in taxable accounts would be similarly reduced in value. If this idea catches on, spend your money quick!
- The distinction between tax-deferred accounts (e.g. 401k plans) and conventional investment accounts would disappear. Since taxation would be on consumption, all savings would be tax-deferred. In theory this should stimulate savings, however the elimination of tax-deferred accounts would also eliminate the penalties triggered by an early withdrawal of those funds. It could become very tempting for people to “borrow” against their retirement savings, just as many borrowed against their home equity in recent years.
- FICA taxes are effectively regressive, taxing wage income (up to a limit) but not investment income. The tax burden on low-income workers would likely be reduced under this proposal. At the other end of the scale, the wealthiest individuals generally spend only a small portion of their income. Thus their tax burden would also be reduced, with the remainder growing tax-deferred until it is ultimately spent. This suggests to me that “middle America” would likely bear the brunt of the costs of this plan.
Am I missing any major implications?
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09.21.07
Posted in Finance at 11:14 am by Valentine
Question: What do insurance representatives, financial advisers, mortgage brokers, and car salespeople all have in common?
Answer: They all directly profit if they can talk you into a bad deal.
Congress is in a tizzy over “deceptive practices” by mortgage brokers, but as usual they are missing the larger picture. The mortgage industry is only one of many dominated by commissions based directly on the profit generated from a deal. It is not unreasonable to reward a salesperson for drumming up business; those who are most successful at closing deals ought to benefit from their greater talent and efforts. Would you want to hire a real estate agent on salary, regardless of results? Yet there is a fine distinction between paying a commission based on the value of the deal and paying based on the profit of the deal. The latter encourages the representative to push customers into higher-margin products regardless of what best suits their needs. Read the rest of this entry »
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08.16.07
Posted in Finance at 3:33 pm by Valentine
Me: “R., don’t put that cup down on the bed or it will spill. Be careful to hold the cup or it will spill.”
[I walk out of the room for a moment. Thirty seconds later…]
R.: “Baba, the juice spilled! Help! The bed is all wet!”
The “subprime crisis” continues to rock the global financial markets, pressuring everything from consumer spending (Walmart has cut their earnings outlook) to corporate bonds (reportedly the core of the Sowood Capital Management strategy). A few thoughts… Read the rest of this entry »
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08.10.07
Posted in Finance at 10:50 am by Valentine
Boston.com is headlined with the news, “Stock prices fall again” with a subtitle of “Time to review your portfolio?” For most people, that is the worst possible advice. Too many small investors sell after a big drop in the market, then stay on the sidelines until the market is nearing its next peak. They chase the “hot” sectors, ensuring massive losses when those sectors ultimately cool.
Is your portfolio appropriately diversified? David Swensen recommends that no more than 30% of your portfolio be parked in a single asset class (e.g. US stocks, international stocks, real estate, bonds, TIPS). My own target allocation, with a focus on long-term growth, is roughly 40% US stocks, 20% international, 15% real estate, 25% bonds/TIPS/cash. Your own situation might easily be different, but one essential principle applies: if your portfolio was appropriately allocated in June, it is appropriately allocated today.
This is the wrong time to suddenly decide that you have too much in stocks and too little in cash. Portfolio allocation is a long-term decision that should not be made on the basis of short-term market swings. If your allocation needs adjustment, then find a time when the market is not playing havoc with your emotions to make the change. Until then, pick up a beer, turn a baseball game on the radio, and pick up a copy of Hitchhiker’s Guide to the Galaxy. Oh yes, and DON’T PANIC!
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08.07.07
Posted in Finance at 11:46 am by Valentine
Many details and facts borrowed from Steven Syre’s article in the Boston Globe. I commend it to your attention.
In tumultuous financial times, there always seem to be a few rats that get shaken loose from the ship. The latest to suffer this fate is Jeffrey Larson, founder and principal of the Sowood Capital Management hedge fund. Once a key manager of the Harvard University endowment, Larson is an accomplished professional with years of experience in the capital markets. His fund promised “to generate superior risk-adjusted returns for clients by applying our collective skills and experience rather than relying on market conditions” (taken from the Google cache of the now-defunct Sowood front page). Larson thought he had a sure thing. He hedged every bet. Yet he lost an estimated $1.5 billion of his clients’ money, including roughly $350 million for his former employer and another $30 million for the Massachusetts State Pension. Read the rest of this entry »
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07.27.07
Posted in Finance at 1:01 pm by Valentine
I found this recent interview with Bill Miller to be interesting. Now I’m not a “great investor” by any stretch of the definition, but several of his comments reflect my own philosophy. Read the rest of this entry »
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07.19.07
Posted in Finance at 2:29 pm by Valentine
Welcome back! I’ve been enjoying my break for the last month, recharging my batteries so to speak, but there is so much to write about…
Most recently, Reuters reports on a poll: 40% of drivers will cut back on their driving if gas hits $3.50/gal.
Over the last two years we’ve already observed some moderation in the number of miles driven. Both the number of licensed drivers and the GDP have steadily increased, yet the miles driven have leveled off. The truncated summer peak you observe in the chart to the right suggests that people might be reducing their discretionary miles. Read the rest of this entry »
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05.17.07
Posted in Finance at 3:15 pm by Valentine
Is globalization good or bad for the country? For the individuals in it? This essay is well-written and in my opinion balanced, though some will see it as a liberal viewpoint. I think few will deny that the upper economic classes have reaped greater benefit than the lower classes. What should we do about it? Read the essay for one opinion…
http://economistsview.typepad.com/economistsview/2007/05/you_economists_.html
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05.01.07
Posted in Finance at 4:08 pm by Valentine
Donald Luskin, of the National Review, has a lot to say about Lou Dobbs. The article is worth reading, and he makes some intelligent points. Nevertheless, his tone throughout reminds me of a four-year-old child throwing a temper tantrum. I’m not suggesting that liberal commentators are any better behaved. I’d just like to send the whole lot for a “time-out” until they learn how to discuss instead of simply argue.
Quotes and Commentary: Read the rest of this entry »
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04.29.07
Posted in Finance, News at 2:08 pm by Valentine
A recent rumor suggests the Democratic leadership has reached consensus on a plan to “reform” the Alternative Minimum Tax. While I’ve never met a tax that was broadly popular, the AMT has received more than its share of bad press in recent years. Why so much angst?
Originally created in 1969 to answer a couple dozen millionaires who had creatively used massive deductions to eliminate their tax liability, the AMT is a parallel tax system with a higher exemption ($62,550 for the 2006 tax year), fewer allowable deductions, and a lower top tax rate. Those who might potentially be eligible must calculate their tax bill under both systems, with their actual liability being the greater of the two. (In strict usage, the term “AMT” refers only to the amount owed that is above and beyond the regular income tax.)
So, who is affected? Read the rest of this entry »
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