By Edward Leone Jr. DMD MBA RFC
Contact Information: leonee@vzw.blackberry.net
As the US Congress goes back into session, there are many issues left for this lame duck Congress to discuss. Among them getting much attention is the continuation of current tax rates (know as the Bush tax cuts). I get very upset when I read that continuing this tax rate or that tax rate at its current level will cost x number of dollars in lost revenue over the next ten years. How can anyone estimate the revenue gain when the tax rate is adjusted up given the propensity for the population to change revenue and expense patterns to avoid additional tax burdens? It is my opinion that tax rates are still too high and not distributed over a broad enough scope of the population and business to make them workable in an economic recovery. The other part of the formula which is recognized but not adequately discussed is government spending. In the year 2000, federal spending was a touch over 20% of GDP. Today it is rapidly approaching 24% of GDP. The gap in revenue which hovers around 20% of GDP is funded through borrowing and monetization. Borrowing is just the creation of a future tax and monetization is the incremental addition of more currency to the existing pool which creates another hidden tax know as inflation. We are also engaged in a strategy which keeps lowering the value of the dollar against other international currencies to make our exports cheaper. This trend is raising our energy costs dramatically since we import so much oil. Other countries are engaged in the same type of strategy. Where will this insanity end? Who will have the courage to face these issues and develop sensible solutions? Are we as a society ready to come to grips with these issues and do what is necessary to rebuild our economic stature to the benefit or our population and the global population? We must as a society, decide what businesses it is that we want our government to conduct. We must also examine the unintended consequences of programs which have been in existence for extended periods without good sound economic principles as a foundation rather that the political motive foundation which runs most of them and make appropriate adjustments or eliminate them. These are very challenging times. Unless the global economy grows, our slice of the pie is not likely to grow substantially. Unless government stops expanding its section of our piece of the economic pie crowding out private economic interests, we will fail to remain a leading global economic influence. Kiplinger has done a projection for the growth rate of several economies in 2011 as follows:
US 3% Euro Zone 1.3% China 9% Japan 1% UK 1.9% Brazil 4.6% Russia 4% Canada 2.5% India 8.3% So. Korea 3.9% Mexico 3.6%
On a potentially positive note for business, the very burdensome 1099 requirements instituted with the passage of health care reform legislation may be repealed with the passage of the safe food bill. Why can’t congress stick with legislative content reflective of a bills title?
The fix for Social Security will be a challenge for many citizens to navigate. According to the Employee Benefit Research Institute, employees participation in retirement plans at the work place fell to 39.6% in 2009. This is the lowest participation since 1993. Payroll tax revenues are also down due to high unemployment rates. The number of employers offering plans has decreased by about 10% over the last 10 years and surplus Social Security funds over and above what has been needed to meet the program’s obligations have been borrowed instead of invested. With a fix, benefits are likely to decrease, taxes will increase due to the need to replenish funds borrowed from the program, individual retirement savings being down will create a short fall in income for many retired persons and the return on fixed income investments is so meager that interest income is severely compromised while market risk is likely to increase. Look also for increases in payroll taxes as a part of any fix. I must apologize for so much negativity, but we need to begin some discussion on this matter and several others. We may in the future, be better off with a private system which does not pump money into inefficient and politically driven government hands, but instead takes that 12%+ of employee compensation contributed by the employer and the employee to be invested in a personal account owned by the employee. Please share your thoughts.
Regarding another government imposed issue, health care reform, according to Hewitt Associates consulting firm, the average cost for group health care plans will increase by 8.8% between 2010 and 2011. The employees’ share of premium costs along with deductibles and coinsurance costs will go up as a result of the trend toward cost shifting.
In the spirit of trying to be helpful, I read a great article on Investopedia written by Steven Merkel CFP ChFC. He talks about many commonly over looked to do items in estate planning which are simple for an individual to accomplish given the time and the dedication. These steps make estate transfer much easier for family upon the passing of the individual:
1. perform a physical item inventory
2. perform a non-physical item inventory
3. prepare a credit card and debt list
4. get these lists to your designated estate administrator
5. review IRA and other retirement accounts
6. review and up date life insurance and annuity contracts
7. make TOD (transfer on death) designations
8. up date your will and other estate planning documents
Pretty good advice for everyone!!
For the Record:
DJIA 11,092.00
NASDAQ 2,534.56
S&P 500 1,189.40
Suggested Reading: “Invest Like the Best” by James O’ Shaughnessy
Leonesmoneymonitormonthly's Blog 
Leave a comment