THE BUSH-ERA TAX CUTS LIVE ON
With the President’s signature, most of them will remain in place through 2012.
A holiday gift for taxpayers? After a 277-148 passage in the House and an 81-19 approval in the Senate, President Obama signed the 2010 Tax Relief Act into law on December 17, extending the Bush-era tax cuts.1 Here is the impact of the new legislation:
Current federal income tax rates are preserved for everyone. The federal income tax brackets will remain at 10%, 15%, 25%, 28%, 33% and 35% for 2011 and 2012.2
Unemployment insurance extends for 13 more months. This is retroactive, so the federal extension of long-term jobless benefits applies from December 2010 through December 2011.2
A payroll tax holiday occurs in 2011. The payroll taxes that employees pay will drop from 6.2% to 4.2% next year. (There will be no payroll tax cut for employers in 2011, only employees.) As envisioned, this will result in a savings of about $1,000 next year for a wage earner bringing home $50,000. This replaces the Making Work Pay credit.3,4,5
Estate taxes will be milder than at any time in the past 80 years. For 2011, the federal estate tax drops to 35%. The estate tax exemption rises all the way to $5 million. President Obama had earlier characterized these parameters as too generous, but he and Congressional Democrats ultimately accepted them.2
Tax breaks for middle-class and working-class families won’t sunset. As a result of the new law, the child credit, the child and dependent-care credit, the EITC, and a $2,500 tax credit for higher education expenses will all be around in 2011.5,6
No marriage penalty. The new law wards off the comeback of the marriage penalty so that married couples may take a more generous standard deduction.6
Taxes on capital gains and dividends top out at 15%. Passage of the 2010 Tax Relief Act means rates will top out at 15% through 2012.7
Businesses may expense 100% of their investments in 2011. In fact, qualified investments made after September 8, 2010 and before January 1, 2012 are eligible for this bonus depreciation. In addition, 50% expensing will be available for qualified property placed in service during 2012, and so-called “long-lived” property and transportation property may be eligible for 100% expensing if it goes into service prior to 2013.7
The tax break for IRA gifts to charity returns. The IRA charitable rollover, as it was informally called, was much beloved by non-profits and IRA owners, but it went away in 2010. In basic terms, it allowed someone 70½ or older donate up to $100,000 in IRA assets annually to one or more qualified charities. This opportunity is back for 2011 – and the especially good news is that Congress included a special rule in the new tax bill allowing IRA gifts made in January 2011 to count for 2010.8
An AMT patch, of course. Congress decided it might as well take care of that. It passed an AMT (Alternative Minimum Tax) fix as part of the 2010 Tax Relief Act, thereby exempting about 20 million middle-income households from a potential $3,900 average leap in federal income taxes.6
What’s the price tag of all this short-term tax relief? It is sizable. The federal deficit is projected to increase by about $858 billion over the next two years as a consequence.5
Citations.
1 - edition.cnn.com/2010/POLITICS/12/17/tax.deal/ [12/17/10]
2 - online.wsj.com/article/
SB10001424052748703296604576005430598327972.html [12/7/10]
3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10]
4 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10]
5 –startribune.com/politics/112046564.html? [12/16/10]
6 –businessweek.com/ap/financialnews/D9K5IEN81.htm [12/17/10]
7 –tax.cchgroup.com/downloads/files/pdfs/legislation/bush-taxcuts.pdf [12/16/10]
8 – online.wsj.com/article/
SB10001424052748703395904576025610771041244.html [12/17/10]
9 – montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [12/18/10]
Tuesday, December 21, 2010
Tuesday, December 14, 2010
What Could A Payroll Tax Cut Mean For Social Security
Would it send the wrong signal at the wrong time?
A claim too good to be true? If the recent agreement on taxes forged between President Obama and Congressional Republicans becomes law, payroll taxes would be lowered by 2.0% in 2011. According to the Joint Committee on Taxation, that would cost the federal government $111.7 billion. The White House claims this drop in tax revenue would have no impact on Social Security’s solvency.1,2
In response, some legislators and analysts are raising their voices, worried that the proposed payroll tax holiday could be a harbinger of unpleasant things to come for America’s retirement program.
How could you pull this off without hurting Social Security? Good question. As Social Security (and Medicare) rely on payroll levies for a great deal of revenue, chopping those taxes down from 6.2% to 4.2% in 2011 would seem to be ruinous.3
The federal government’s answer to that question: reimburse the loss to the Social Security Trust Funds using general revenue. That idea worries Social Security advocates, and it also begs a question.
The “what if” some analysts fear. What if the planned payroll tax cut becomes permanent? It could happen, especially with Republicans in control of the Senate. The EGTRRA cuts were conceived as temporary cuts, and they are starting to seem more permanent with each passing year.
Last week, Sen. Mike Johanns (R-NE), Sen. Bob Corker (R-TN) and Rep. Ted Deutsch (D-FL) all told NPR that they felt Republicans would try to make the payroll tax reduction permanent during 2011. Deutsch warned that a move to fund Social Security with general revenue will hearten "those who [want] to move away from our longstanding, successful Social Security program to privatization and to benefit cuts. It will enable them to make those arguments in a way that they've never been able to make them before."3
Nancy Altman, co-chair of the advocacy group Social Security Works, thinks a lasting cut in payroll levies could end up making Social Security’s shortfall twice as large as it is now. She warned NPR that with the probable extension of EGTRRA and JGTRRA, “we see now that it's very hard once a tax cut is in place to repeal it,” and told USA TODAY that “it's unfathomable that this is going to last only one year.”3,4
P.S.: the 2011 tax break might be less prevalent than assumed. The federal government says a 2% payroll tax cut could provide tax breaks as large as $2,000 in 2011 for American workers. But as Bloomberg Businessweek reported on December 10, any Congressional vote might happen too late for some employers to act. Last year, the IRS notified payroll departments about 2010 tax tables on November 20. We are well past that date.2,3
Incidentally, the envisioned payroll tax cut is for workers only, not businesses. The payroll tax would stay at 6.2% for employers in 2011.2
Citations
1 – online.wsj.com/article/
SB10001424052748703296604576005430598327972.html [12/7/10]
2 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10]
3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10]
4 – content.usatoday.com/communities/theoval/post/2010/12/social-security-backers-blast-obamas-payroll-tax-cut/1 [12/10/10]
A claim too good to be true? If the recent agreement on taxes forged between President Obama and Congressional Republicans becomes law, payroll taxes would be lowered by 2.0% in 2011. According to the Joint Committee on Taxation, that would cost the federal government $111.7 billion. The White House claims this drop in tax revenue would have no impact on Social Security’s solvency.1,2
In response, some legislators and analysts are raising their voices, worried that the proposed payroll tax holiday could be a harbinger of unpleasant things to come for America’s retirement program.
How could you pull this off without hurting Social Security? Good question. As Social Security (and Medicare) rely on payroll levies for a great deal of revenue, chopping those taxes down from 6.2% to 4.2% in 2011 would seem to be ruinous.3
The federal government’s answer to that question: reimburse the loss to the Social Security Trust Funds using general revenue. That idea worries Social Security advocates, and it also begs a question.
The “what if” some analysts fear. What if the planned payroll tax cut becomes permanent? It could happen, especially with Republicans in control of the Senate. The EGTRRA cuts were conceived as temporary cuts, and they are starting to seem more permanent with each passing year.
Last week, Sen. Mike Johanns (R-NE), Sen. Bob Corker (R-TN) and Rep. Ted Deutsch (D-FL) all told NPR that they felt Republicans would try to make the payroll tax reduction permanent during 2011. Deutsch warned that a move to fund Social Security with general revenue will hearten "those who [want] to move away from our longstanding, successful Social Security program to privatization and to benefit cuts. It will enable them to make those arguments in a way that they've never been able to make them before."3
Nancy Altman, co-chair of the advocacy group Social Security Works, thinks a lasting cut in payroll levies could end up making Social Security’s shortfall twice as large as it is now. She warned NPR that with the probable extension of EGTRRA and JGTRRA, “we see now that it's very hard once a tax cut is in place to repeal it,” and told USA TODAY that “it's unfathomable that this is going to last only one year.”3,4
P.S.: the 2011 tax break might be less prevalent than assumed. The federal government says a 2% payroll tax cut could provide tax breaks as large as $2,000 in 2011 for American workers. But as Bloomberg Businessweek reported on December 10, any Congressional vote might happen too late for some employers to act. Last year, the IRS notified payroll departments about 2010 tax tables on November 20. We are well past that date.2,3
Incidentally, the envisioned payroll tax cut is for workers only, not businesses. The payroll tax would stay at 6.2% for employers in 2011.2
Citations
1 – online.wsj.com/article/
SB10001424052748703296604576005430598327972.html [12/7/10]
2 – businessweek.com/news/2010-12-10/u-s-tax-vote-may-be-too-late-to-cut-payroll-levy.html [12/10/10]
3 – npr.org/2010/12/10/131969824/some-worry-payroll-tax-cut-threatens-social-security [12/10/10]
4 – content.usatoday.com/communities/theoval/post/2010/12/social-security-backers-blast-obamas-payroll-tax-cut/1 [12/10/10]
Monday, December 6, 2010
REAL Debt Reform
If you want to watch something alarming, look at the U.S. Debt Clock (http://www.usdebtclock.org/), which calculates, second-by-second, America's rising debt (approaching $14 trillion), federal spending (nearly $3.5 trillion a year) and budget deficit (roughly $1.3 trillion). Second-by-second the numbers increase, and you can also watch (more slowly) the inexorable rise in the average debt per U.S. citizen--currently more than $44,000, perhaps more by the time you read this and check for yourself.
The Debt Clock also lists the largest budget items and THEIR growth, and you can quickly see that they are not where most of the politicians have focused their attention and public statements. While incoming Congressional leaders talk about ending earmarks and cutting foreign aid, the back-breaking line items on the federal budget are Medicare/Medicaid, Social Security, Defense and war expenditures. At the bottom of the Debt Clock screen are some truly frightening statistics: add up all the future unfunded liabilities for Social Security, the federal prescription drug program and Medicare liability, and you get a future cost of $111.5 trillion. That's a little over $1 million per taxpayer.
Like any debtor who gets in over his head, the U.S. Congress faces painful choices. They can either make very difficult decisions now--and possibly alienate voters--or kick the can further down the road and leave a bankrupt country or crushing debt for our children or grandchildren to pay. The problem is great enough that a coalition of the very rich, including Bill Gates and Warren Buffet, are doing something unheard of: they are publicly arguing that Congress should end the tax cuts for them and others of the wealthiest Americans.
Is there a way to get both political parties talking about the hard choices? On December 1, a bipartisan National Commission on Fiscal Responsibility and Reform, made up of 18 prominent Republican and Democratic leaders, released "The Moment of Truth," a set of recommendations that would, if enacted, achieve a $4 trillion reduction in government debt. The group includes the chairmen and ranking members of the Senate and House Budget committees, the chairman of the Senate Finance Committee, a former White House budget director and a vice chairman of the Federal reserve board. To achieve their deficit reduction goals, the commissioners put everything on the table--Social Security, Medicare, tax rates, government spending, even the elimination of popular tax deductions.
You can read the full 49-page report here: http://www.cbsnews.com/8301-503544_162-20024235-503544.html. The report lists, on page 10, some of the considerations that went into the decisions, which you may or may not agree with: "We all have a patriotic duty to make America better off tomorrow than it is today;" "Don't disrupt the fragile economic recovery;" "Cut spending we cannot afford--no exceptions;" "Demand productivity and effectiveness from Washington;" "Don't make promises we can't keep;" "Keep America sound over the long run."
The plan would cut government discretionary spending and impose spending caps, including annual limits on war spending, impose 15% reductions in Congressional and White House budgets, a three-year freeze on annual Congressional pay raises, and eliminate all Congressional earmarks (9,000 in FY 2010, costing close to $16 billion).
The commission also recommends lowering tax rates and eliminating many deductions. There are actually several alternatives in the final proposal (pages 25-27), depending on which deductions are eliminated. One possible plan is to bring us down to three tax brackets of 12%, 22% and 28%--replacing five brackets ranging from 15% to 39.6% that is due to take effect in 2011. Corporations would pay at a flat rate somewhere between 23% and 28%, and lose most of their special subsidies and tax loopholes.
To get there, the Commission proposes that Congress eliminate all itemized deductions (everybody would take the standard deduction) and replace today's mortgage interest deduction with a 12% tax credit for mortgage loans up to $500,000. Capital gains and dividends would be taxed at ordinary income rates (rather than the preferential rates under current law) and the dreaded AMT would be eliminated altogether.
More controversially, charitable donations, which are currently deductible for itemizers, would only qualify for a 12% tax credit, and only then to the extent that the gift exceeded 2% of a taxpayer's adjusted gross income. The Commission also proposed replacing the current melange of retirement plans (Roths, IRAs, 401(k)s, 403(b)s, defined benefit plans etc.) with one type of tax-favored retirement account for everybody; the maximum tax-preferred contribution would be $20,000 or 20% of income, whichever is lower.
The commission proposes to raise the age at which you could receive full Social Security benefits by indexing it to life expectancy. The Normal Retirement Age, which reaches 67 in 2027, would go up to age 68 by the year 2050, and 69 by 2075. The Early Retirement Ages, when people could opt for lower annual benefits, would go up to age 63 by 2050 and 64 by 2075. The taxable maximum wage cap on Social Security taxes, currently $106,800, would grow more rapidly than it has in the past, reaching $190,000 in 2020, versus roughly $168,000 under current law.
Finally, the current federal gas tax would be increased by 15 cents per gallon, a figure which is still significantly lower than most European countries. Among a variety of Medicare reforms, the Medicare physician payment formula would be changed to reward quality of care and outcomes, rather than the quantity of visits or procedures. And the government's civilian workforce would gradually be cut by ten percent.
If 14 of the 18 members of the Commission had voted to endorse the recommendations, then the full report would have been sent to Congress for a vote. As it is, only 11 endorsed their own recommendations.
Endorsing: Senate Majority Whip Richard Durbin (D-IL); Senate Budget Committee Chairman Kent Conrad (D-ND); House Budget Committee Chairman John Spratt (D-SC); former Federal Reserve Board vice chairwoman Alice Rivlin, Republican Senators Tom Coburn (OK); Mike Crapo (ID) and Judd Gregg (NH), plus Ann Fudge of Young & Rubicam, and Dave Cote of Honeywell International. Co-chairs Erskine Bowles (former Clinton White House Chief of Staff) and former Republican Senator Alan Simpson also voted for the proposal.
Opposed: Senate Finance Committee chair Max Baucus (D-MT); Rep. Xavier Beccera (D-CA); Rep. Jan Schakowski (D-IL); Rep. Dave Camp (R-MI); Rep. Paul Ryan (R-WI), Rep Jeb Hensarling (R-TX) and Andy Stern of the Service Employees International Union.
Nevertheless, even the dissenting members of the Committee believe it will change the debate in Washington, and focus Congressional attention on the hard choices rather than the easy sound bites. Let's hope so for the sake of our children and grandchildren.
Sources
Market News: http://imarketnews.com/?q=node/23235
Associated Press: http://www.kansascity.com/2010/12/01/2491715/deficit-reduction-committee-issues.html#ixzz16yaiKLmB
Wall Street Journal: http://online.wsj.com/article/SB10001424052748704594804575648503541856136.html
Tax us more: http://abcnews.go.com/ThisWeek/billionaires-buffett-gates-tax-us/story?id=12259003
Votes pro and con: http://www.miamiherald.com/2010/12/03/1955486/debt-commission-majority-endorses.html
The Debt Clock also lists the largest budget items and THEIR growth, and you can quickly see that they are not where most of the politicians have focused their attention and public statements. While incoming Congressional leaders talk about ending earmarks and cutting foreign aid, the back-breaking line items on the federal budget are Medicare/Medicaid, Social Security, Defense and war expenditures. At the bottom of the Debt Clock screen are some truly frightening statistics: add up all the future unfunded liabilities for Social Security, the federal prescription drug program and Medicare liability, and you get a future cost of $111.5 trillion. That's a little over $1 million per taxpayer.
Like any debtor who gets in over his head, the U.S. Congress faces painful choices. They can either make very difficult decisions now--and possibly alienate voters--or kick the can further down the road and leave a bankrupt country or crushing debt for our children or grandchildren to pay. The problem is great enough that a coalition of the very rich, including Bill Gates and Warren Buffet, are doing something unheard of: they are publicly arguing that Congress should end the tax cuts for them and others of the wealthiest Americans.
Is there a way to get both political parties talking about the hard choices? On December 1, a bipartisan National Commission on Fiscal Responsibility and Reform, made up of 18 prominent Republican and Democratic leaders, released "The Moment of Truth," a set of recommendations that would, if enacted, achieve a $4 trillion reduction in government debt. The group includes the chairmen and ranking members of the Senate and House Budget committees, the chairman of the Senate Finance Committee, a former White House budget director and a vice chairman of the Federal reserve board. To achieve their deficit reduction goals, the commissioners put everything on the table--Social Security, Medicare, tax rates, government spending, even the elimination of popular tax deductions.
You can read the full 49-page report here: http://www.cbsnews.com/8301-503544_162-20024235-503544.html. The report lists, on page 10, some of the considerations that went into the decisions, which you may or may not agree with: "We all have a patriotic duty to make America better off tomorrow than it is today;" "Don't disrupt the fragile economic recovery;" "Cut spending we cannot afford--no exceptions;" "Demand productivity and effectiveness from Washington;" "Don't make promises we can't keep;" "Keep America sound over the long run."
The plan would cut government discretionary spending and impose spending caps, including annual limits on war spending, impose 15% reductions in Congressional and White House budgets, a three-year freeze on annual Congressional pay raises, and eliminate all Congressional earmarks (9,000 in FY 2010, costing close to $16 billion).
The commission also recommends lowering tax rates and eliminating many deductions. There are actually several alternatives in the final proposal (pages 25-27), depending on which deductions are eliminated. One possible plan is to bring us down to three tax brackets of 12%, 22% and 28%--replacing five brackets ranging from 15% to 39.6% that is due to take effect in 2011. Corporations would pay at a flat rate somewhere between 23% and 28%, and lose most of their special subsidies and tax loopholes.
To get there, the Commission proposes that Congress eliminate all itemized deductions (everybody would take the standard deduction) and replace today's mortgage interest deduction with a 12% tax credit for mortgage loans up to $500,000. Capital gains and dividends would be taxed at ordinary income rates (rather than the preferential rates under current law) and the dreaded AMT would be eliminated altogether.
More controversially, charitable donations, which are currently deductible for itemizers, would only qualify for a 12% tax credit, and only then to the extent that the gift exceeded 2% of a taxpayer's adjusted gross income. The Commission also proposed replacing the current melange of retirement plans (Roths, IRAs, 401(k)s, 403(b)s, defined benefit plans etc.) with one type of tax-favored retirement account for everybody; the maximum tax-preferred contribution would be $20,000 or 20% of income, whichever is lower.
The commission proposes to raise the age at which you could receive full Social Security benefits by indexing it to life expectancy. The Normal Retirement Age, which reaches 67 in 2027, would go up to age 68 by the year 2050, and 69 by 2075. The Early Retirement Ages, when people could opt for lower annual benefits, would go up to age 63 by 2050 and 64 by 2075. The taxable maximum wage cap on Social Security taxes, currently $106,800, would grow more rapidly than it has in the past, reaching $190,000 in 2020, versus roughly $168,000 under current law.
Finally, the current federal gas tax would be increased by 15 cents per gallon, a figure which is still significantly lower than most European countries. Among a variety of Medicare reforms, the Medicare physician payment formula would be changed to reward quality of care and outcomes, rather than the quantity of visits or procedures. And the government's civilian workforce would gradually be cut by ten percent.
If 14 of the 18 members of the Commission had voted to endorse the recommendations, then the full report would have been sent to Congress for a vote. As it is, only 11 endorsed their own recommendations.
Endorsing: Senate Majority Whip Richard Durbin (D-IL); Senate Budget Committee Chairman Kent Conrad (D-ND); House Budget Committee Chairman John Spratt (D-SC); former Federal Reserve Board vice chairwoman Alice Rivlin, Republican Senators Tom Coburn (OK); Mike Crapo (ID) and Judd Gregg (NH), plus Ann Fudge of Young & Rubicam, and Dave Cote of Honeywell International. Co-chairs Erskine Bowles (former Clinton White House Chief of Staff) and former Republican Senator Alan Simpson also voted for the proposal.
Opposed: Senate Finance Committee chair Max Baucus (D-MT); Rep. Xavier Beccera (D-CA); Rep. Jan Schakowski (D-IL); Rep. Dave Camp (R-MI); Rep. Paul Ryan (R-WI), Rep Jeb Hensarling (R-TX) and Andy Stern of the Service Employees International Union.
Nevertheless, even the dissenting members of the Committee believe it will change the debate in Washington, and focus Congressional attention on the hard choices rather than the easy sound bites. Let's hope so for the sake of our children and grandchildren.
Sources
Market News: http://imarketnews.com/?q=node/23235
Associated Press: http://www.kansascity.com/2010/12/01/2491715/deficit-reduction-committee-issues.html#ixzz16yaiKLmB
Wall Street Journal: http://online.wsj.com/article/SB10001424052748704594804575648503541856136.html
Tax us more: http://abcnews.go.com/ThisWeek/billionaires-buffett-gates-tax-us/story?id=12259003
Votes pro and con: http://www.miamiherald.com/2010/12/03/1955486/debt-commission-majority-endorses.html
Monday, November 29, 2010
You, Too, Can Balance the Federal Budget
Want to have a little mindless fun? Try balancing the federal budget in ten minutes or less.
Believe it or not, you can actually do this on an interactive web site created by the New York Times. (You can find it here: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html) There are two graphics at the top of the page: one is the projected shortfall in 2015 (a scary $418 billion), and the other is a more long-term (and scarier) deficit in 2030 ($1.345 trillion).
To reduce those numbers, you make hard choices. You can cut foreign aid in half, eliminate all farm subsidies, cut the pay of civilian federal workers by 5 percent, reduce the federal workforce by 10 percent, reduce the military to pre-Iraq War size and reduce troops in Asia and Europe, reduce the number of troops in Iran and Afghanistan to 30,000 by 2013 (or make more modest cuts), raise the Social Security retirement age (there are two options), modify estate taxes, reduce or eliminate the Bush tax cuts, or impose a national sales tax and/or carbon tax.
And more. With each box you check (each cut you make or tax you raise), you see how much progress you're making on the overall budget deficit in 2015 and 2030. The choices are not easy ones, and you quickly discover that the "fixes" most often debated on both sides of the aisle in Congress won't make much of a dent.
Unfortunately, there isn't a button on the web site that you can push to make these deficit reduction provisions actually happen in the real world. But having an easy, interactive tool like this will undoubtedly help raise awareness, among the people who don't deal with these budget numbers on a daily basis, about the kind of measures that will have to be taken if we don't want to leave our children and grandchildren with a ton of federal debt to pay off. You'll probably remember this little game next time you hear a politician talking tough about eliminating debt in Washington.
Believe it or not, you can actually do this on an interactive web site created by the New York Times. (You can find it here: http://www.nytimes.com/interactive/2010/11/13/weekinreview/deficits-graphic.html) There are two graphics at the top of the page: one is the projected shortfall in 2015 (a scary $418 billion), and the other is a more long-term (and scarier) deficit in 2030 ($1.345 trillion).
To reduce those numbers, you make hard choices. You can cut foreign aid in half, eliminate all farm subsidies, cut the pay of civilian federal workers by 5 percent, reduce the federal workforce by 10 percent, reduce the military to pre-Iraq War size and reduce troops in Asia and Europe, reduce the number of troops in Iran and Afghanistan to 30,000 by 2013 (or make more modest cuts), raise the Social Security retirement age (there are two options), modify estate taxes, reduce or eliminate the Bush tax cuts, or impose a national sales tax and/or carbon tax.
And more. With each box you check (each cut you make or tax you raise), you see how much progress you're making on the overall budget deficit in 2015 and 2030. The choices are not easy ones, and you quickly discover that the "fixes" most often debated on both sides of the aisle in Congress won't make much of a dent.
Unfortunately, there isn't a button on the web site that you can push to make these deficit reduction provisions actually happen in the real world. But having an easy, interactive tool like this will undoubtedly help raise awareness, among the people who don't deal with these budget numbers on a daily basis, about the kind of measures that will have to be taken if we don't want to leave our children and grandchildren with a ton of federal debt to pay off. You'll probably remember this little game next time you hear a politician talking tough about eliminating debt in Washington.
Monday, November 22, 2010
Federal Money Supply
A warning shot
You may have heard recent controversy over the U.S. Federal Reserve Board buying Treasury bonds--$600 billion in all--and wondered what all the fuss was about. You may even have wondered why one branch of the government is buying bonds from another one.
The headlines say that this is a "stimulus" measure, which basically puts more money into the U.S. economy without costing the taxpayers anything. This is true, up to a point; buying Treasury securities means the central bank is essentially creating new money. Other analysts say that creating new money is inflationary, which also tends to be true. However, the Stratfor Global Intelligence service has pointed out that creating $600 billion over eight months is not dramatically more than the Fed's normal actions in managing the money supply, and with $8 trillion in circulation (the M2 money supply figure, which does not include CDs and institutional money market fund balances), dollars are not going to suddenly become dramatically more plentiful. And in a $14.3 trillion economy, the stimulus is not likely to turbo-charge the next round of employment figures. It probably won't even show up in GDP.
So what gives? Looking at the global economic picture, right before the G20 economic summit, Stratfor notes that export nations like Japan and Germany have linked their recovery hopes to selling more to U.S. consumers. The more they sell, the more they drive up the difference between U.S. imports and exports--or, in economic terms, widening the current account deficit and diverting money from our economy into theirs. To do this most effectively, they need their currency to be weaker than the dollar so that their manufactured items look like a bargain. Stratfor notes that Japan has been openly intervening in currency markets to drive down the yen. Germany, meanwhile, doesn't have to: it has benefited from a weakened euro--the result of well-publicized debt problems in Greece, Spain, Portugal and most recently Ireland. An article in the November 5 issue of the Wall Street Journal says that not only Japan, but also Brazil and South Korea have taken actions to depress their currencies against the dollar.
Seen in this light, the Fed's action can be seen as a warning to the other nations that the U.S. is capable of protecting its currency and export industries from these raids on its economy. The $600 billion purchase probably won't affect the value of the dollar, but they show that the Fed is well aware of the actions of the other countries. As U.S. representatives negotiate to stop currency manipulation at the G20 summit, the rest of the world knows that if there is no agreement, the U.S. is capable of fighting back. Sure enough, The Wall Street Journal quoted finance ministers and economists from Brazil, France, South Korea and Germany, all criticizing the purchase and calling for a cease fire in the currency wars.
Should we worry about inflation as these negotiations drag on? At a time when the worst-case economic scenario is deflation, a few small nudges in the inflation rate might not be the worst thing to befall the U.S. economy; today's rate is well below the 2% target informally set by the Fed. Should we worry about a falling dollar? If you're traveling abroad, or buying a foreign car, then you might have to pay a bit more if the dollar weakens against the currency of the nation you're traveling to or where the car was made. But foreign stocks, bonds and mutual funds are always a little more valuable--in dollar terms--whenever the dollar declines in value, so your international holdings could get a small boost in return.
But the most likely scenario is that the Fed's demonstration will keep everybody at the negotiating table. And you'll continue to hear the conventional interpretation: that this is all about stimulus back home--which, to the extent that it keeps other countries from raiding our economy, it is.
Sources:
Stratfor analysis: http://www.stratfor.com/memberships/175231/geopolitical_diary/20101103_washingtons_warning_shot_currency_front
U.S. money supply: http://en.wikipedia.org/wiki/Money_supply
Size of the U.S. economy: http://en.wikipedia.org/wiki/Economy_of_the_United_States
Wall Street Journal articles about the Fed's repurchase: http://online.wsj.com/article/SB10001424052748704353504575596203544367856.html
and: http://online.wsj.com/article/SB10001424052748704327704575614853274246916.html?mod=WSJ_article_MoreIn_Economy
You may have heard recent controversy over the U.S. Federal Reserve Board buying Treasury bonds--$600 billion in all--and wondered what all the fuss was about. You may even have wondered why one branch of the government is buying bonds from another one.
The headlines say that this is a "stimulus" measure, which basically puts more money into the U.S. economy without costing the taxpayers anything. This is true, up to a point; buying Treasury securities means the central bank is essentially creating new money. Other analysts say that creating new money is inflationary, which also tends to be true. However, the Stratfor Global Intelligence service has pointed out that creating $600 billion over eight months is not dramatically more than the Fed's normal actions in managing the money supply, and with $8 trillion in circulation (the M2 money supply figure, which does not include CDs and institutional money market fund balances), dollars are not going to suddenly become dramatically more plentiful. And in a $14.3 trillion economy, the stimulus is not likely to turbo-charge the next round of employment figures. It probably won't even show up in GDP.
So what gives? Looking at the global economic picture, right before the G20 economic summit, Stratfor notes that export nations like Japan and Germany have linked their recovery hopes to selling more to U.S. consumers. The more they sell, the more they drive up the difference between U.S. imports and exports--or, in economic terms, widening the current account deficit and diverting money from our economy into theirs. To do this most effectively, they need their currency to be weaker than the dollar so that their manufactured items look like a bargain. Stratfor notes that Japan has been openly intervening in currency markets to drive down the yen. Germany, meanwhile, doesn't have to: it has benefited from a weakened euro--the result of well-publicized debt problems in Greece, Spain, Portugal and most recently Ireland. An article in the November 5 issue of the Wall Street Journal says that not only Japan, but also Brazil and South Korea have taken actions to depress their currencies against the dollar.
Seen in this light, the Fed's action can be seen as a warning to the other nations that the U.S. is capable of protecting its currency and export industries from these raids on its economy. The $600 billion purchase probably won't affect the value of the dollar, but they show that the Fed is well aware of the actions of the other countries. As U.S. representatives negotiate to stop currency manipulation at the G20 summit, the rest of the world knows that if there is no agreement, the U.S. is capable of fighting back. Sure enough, The Wall Street Journal quoted finance ministers and economists from Brazil, France, South Korea and Germany, all criticizing the purchase and calling for a cease fire in the currency wars.
Should we worry about inflation as these negotiations drag on? At a time when the worst-case economic scenario is deflation, a few small nudges in the inflation rate might not be the worst thing to befall the U.S. economy; today's rate is well below the 2% target informally set by the Fed. Should we worry about a falling dollar? If you're traveling abroad, or buying a foreign car, then you might have to pay a bit more if the dollar weakens against the currency of the nation you're traveling to or where the car was made. But foreign stocks, bonds and mutual funds are always a little more valuable--in dollar terms--whenever the dollar declines in value, so your international holdings could get a small boost in return.
But the most likely scenario is that the Fed's demonstration will keep everybody at the negotiating table. And you'll continue to hear the conventional interpretation: that this is all about stimulus back home--which, to the extent that it keeps other countries from raiding our economy, it is.
Sources:
Stratfor analysis: http://www.stratfor.com/memberships/175231/geopolitical_diary/20101103_washingtons_warning_shot_currency_front
U.S. money supply: http://en.wikipedia.org/wiki/Money_supply
Size of the U.S. economy: http://en.wikipedia.org/wiki/Economy_of_the_United_States
Wall Street Journal articles about the Fed's repurchase: http://online.wsj.com/article/SB10001424052748704353504575596203544367856.html
and: http://online.wsj.com/article/SB10001424052748704327704575614853274246916.html?mod=WSJ_article_MoreIn_Economy
Friday, November 19, 2010
Your Annual Financial To-Do List
Things you can do before and for the New Year.
The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2011? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.
Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2010 until 2011, this decision may bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.
Think about putting more in your 401(k) or 403(b). You can contribute up to $16,500 to these accounts in 2010, with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2010 contribution approached the annual limit? There is still time to put more into your employer-sponsored retirement plan.1
Can you max out your IRA contribution at the start of 2011? If you can do it, do it early - the sooner you make your contribution, the more interest those assets will earn. And if you haven’t made your 2010 IRA contribution yet, you can still do so through April 15, 2011.1
The 2011 contribution limits on traditional and Roth IRAs are unchanged from 2010. You can contribute $5,000 to your IRA next year if you are age 49 and below, $6,000 if you are age 50 and above.2
Consider a Roth IRA conversion before 2010 ends. Now anyone may convert a traditional IRA to a Roth IRA; there are no longer any income limits in the way. If you pull off a Roth conversion before 2010 ends, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This nice opportunity won’t be available if you make a Roth conversion in 2011.1
There are still MAGI phase-out limits for contributing to Roth IRAs. For 2010, those limits kick in at $167,000 for joint filers and $105,000 for single filers. If your MAGI will exceed those limits, you still have a chance to contribute to a traditional IRA in 2010 and immediately roll it over to a Roth.3
Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.
If you are retired and older than 70½, don’t forget the 2010 RMD. As your IRA custodian has undoubtedly reminded you, the one-year suspension of Required Minimum Distributions has been lifted. Retirees over age 70½ must take RMDs from traditional IRAs - and 401(k)s - by December 31. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.1,4
If you have turned or will turn 70½ at some point in 2010, you can choose to postpone your first IRA RMD until April 1, 2011. The downside of that is that you have to take two IRA RMDs next year – you have to make your 2010 tax year withdrawal by April 1, and your 2011 tax year withdrawal by December 31.1
Keep an eye on what happens with income, capital gains & estate taxes. We’re all watching and waiting here to see what Congress will do.
If Congress doesn’t extend the current law, the tax rates on long-term capital gains will go from 0% to 10% next year for those in the 10% and 15% tax brackets. Taxpayers in higher brackets will see their capital gains tax rates rise 5% in 2011 to 20%. In addition, dividends are scheduled to be taxed at marginal income rates of 39.6%. As it stands now, time is running out to take advantage of the current capital gains tax break.5
Income taxes are poised to return to pre-EGTRRA levels in 2011, with the lowest bracket set at 15% and the highest bracket set at 39.6%. (The so-called “marriage penalty” would also come back.) No one in Congress wants this on their legacy, so some kind of extension of the Bush-era tax cuts will almost certainly be worked out. We will have to wait and see if Congress extends the cuts for all or simply for the middle class.6
Estate taxes will undoubtedly return in 2011. Hopefully, Congress will prevent them from returning at the 2001 levels (a puny $1 million exemption and a 55% top tax rate).6
You may wish to make a charitable gift before New Year’s Day. If you make a charitable contribution this year, you can claim the deduction on your 2010 return.
You could make December the “13th month”. Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.
Are you marrying next year, or do you know someone who is? The top of 2011 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.
Are you returning from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.
Don’t delay – get it done. Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.
The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2011? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.
Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2010 until 2011, this decision may bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.
Think about putting more in your 401(k) or 403(b). You can contribute up to $16,500 to these accounts in 2010, with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2010 contribution approached the annual limit? There is still time to put more into your employer-sponsored retirement plan.1
Can you max out your IRA contribution at the start of 2011? If you can do it, do it early - the sooner you make your contribution, the more interest those assets will earn. And if you haven’t made your 2010 IRA contribution yet, you can still do so through April 15, 2011.1
The 2011 contribution limits on traditional and Roth IRAs are unchanged from 2010. You can contribute $5,000 to your IRA next year if you are age 49 and below, $6,000 if you are age 50 and above.2
Consider a Roth IRA conversion before 2010 ends. Now anyone may convert a traditional IRA to a Roth IRA; there are no longer any income limits in the way. If you pull off a Roth conversion before 2010 ends, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This nice opportunity won’t be available if you make a Roth conversion in 2011.1
There are still MAGI phase-out limits for contributing to Roth IRAs. For 2010, those limits kick in at $167,000 for joint filers and $105,000 for single filers. If your MAGI will exceed those limits, you still have a chance to contribute to a traditional IRA in 2010 and immediately roll it over to a Roth.3
Consult a tax or financial professional before you make any IRA moves. You will want see how it may affect your overall financial picture. The tax consequences of a Roth conversion can get sticky if you own multiple traditional IRAs.
If you are retired and older than 70½, don’t forget the 2010 RMD. As your IRA custodian has undoubtedly reminded you, the one-year suspension of Required Minimum Distributions has been lifted. Retirees over age 70½ must take RMDs from traditional IRAs - and 401(k)s - by December 31. Remember that the IRS penalty for failing to take an RMD equals 50% of the RMD amount.1,4
If you have turned or will turn 70½ at some point in 2010, you can choose to postpone your first IRA RMD until April 1, 2011. The downside of that is that you have to take two IRA RMDs next year – you have to make your 2010 tax year withdrawal by April 1, and your 2011 tax year withdrawal by December 31.1
Keep an eye on what happens with income, capital gains & estate taxes. We’re all watching and waiting here to see what Congress will do.
If Congress doesn’t extend the current law, the tax rates on long-term capital gains will go from 0% to 10% next year for those in the 10% and 15% tax brackets. Taxpayers in higher brackets will see their capital gains tax rates rise 5% in 2011 to 20%. In addition, dividends are scheduled to be taxed at marginal income rates of 39.6%. As it stands now, time is running out to take advantage of the current capital gains tax break.5
Income taxes are poised to return to pre-EGTRRA levels in 2011, with the lowest bracket set at 15% and the highest bracket set at 39.6%. (The so-called “marriage penalty” would also come back.) No one in Congress wants this on their legacy, so some kind of extension of the Bush-era tax cuts will almost certainly be worked out. We will have to wait and see if Congress extends the cuts for all or simply for the middle class.6
Estate taxes will undoubtedly return in 2011. Hopefully, Congress will prevent them from returning at the 2001 levels (a puny $1 million exemption and a 55% top tax rate).6
You may wish to make a charitable gift before New Year’s Day. If you make a charitable contribution this year, you can claim the deduction on your 2010 return.
You could make December the “13th month”. Can you make a January mortgage payment in December, or make a lump sum payment on your mortgage balance? If you have a fixed-rate mortgage, a lump sum payment can reduce the home loan amount and the total interest paid on the loan by that much more. In a sense, paying down a debt is almost like getting a risk-free return.
Are you marrying next year, or do you know someone who is? The top of 2011 is a good time to review (and possibly change) beneficiaries to your 401(k) or 403(b) account, your IRA, your insurance policy and other assets. You may want to change beneficiaries in your will. It is also wise to take a look at your insurance coverage. If your last name is changing, you will need a new Social Security card. Lastly, assess your debts and the merits of your existing financial plans.
Are you returning from active duty? If so, go ahead and check the status of your credit, and the state of any tax and legal proceedings that might have been preempted by your orders. Review the status of your employee health insurance, and revoke any power of attorney you may have granted to another person.
Don’t delay – get it done. Talk with a qualified financial or tax professional today, so you can focus on being healthy and wealthy in the New Year.
Tuesday, November 16, 2010
Could QE2 Lead to Bubbles?
Why some analysts are worried about the Fed’s latest monetary easing effort.
Is the glass half full? The Federal Reserve has committed to buying $600 billion worth of Treasury bonds between now and June, and it wants to purchase up to $900 billion in debt by the end of September 2011.1 This second round of quantitative easing has been dubbed QE2. In a nutshell, the effort would pour cash into the banking system to promote lending and inflation, and it has the potential to help stocks, the housing market and consumer spending.
Or is it half empty? Some economists are worried about the impact of this tactic. They fear it may create a stock bubble – an inflated equities market motivated by speculation and low interest rates instead of earnings. Likewise, some see a commodities bubble that could burst dramatically in the years ahead.
QE2 has already earned some prominent detractors. Bond market guru Bill Gross just called it “a Ponzi scheme” that will end the 30-year bull market in bonds (an event he has actually forecast for some time). Jim Rogers, the Quantum Fund co-founder who astutely called the worldwide bull market in commodities in 1999, recently labeled QE2 “petrol on the fire” of the commodities market and told an Oxford University audience that Fed chair Ben Bernanke “does not understand economics … all he understands is printing money.”2,3
Will more investors turn to stocks? The Fed’s bond-buying program implies lower long-term interest rates, lower bond yields and a weaker dollar. In an environment with lower bond yields, investors are predisposed to enter other asset classes such as real estate and stocks. If the stock and housing markets improve, that will certainly aid consumer confidence which, in turn, should aid consumer spending.
On Main Street, there are two speed bumps on the way to that rosy domestic outcome: a lack of customers and/or demand (especially in the housing market) and unemployment. The Fed’s strategy may have a tough time getting around those economic obstacles.
Why are other nations growing testy? QE2 could invite a trade war. A weak greenback means a big advantage for U.S. exports. Our products will be cheaper in other nations thanks to the increase in the money supply holding down the value of the dollar. Correspondingly, imported goods will cost us more and we will buy less of them. That’s terrible news for nations such as China, Germany, Russia, Japan, France, Great Britain and Hong Kong – all of whom are counting on exports to aid in their economic recoveries.
If U.S. interest rates are too low for too long, investors may try the emerging markets and/or the commodities markets seeking higher returns. So the commodities markets and the emerging markets could get even hotter.
If that happens, it would imply higher prices for oil, crops and raw materials in the United States, which would hamper our economy. Of course, many analysts think the commodities markets will keep advancing with or without influences like QE2 – the ongoing condition is simply too much demand and not enough supply.
Is this the “Hail Mary” play? With interest rates so low and one round of bond-buying already in the history books, the Fed doesn’t have many options left to jump-start the economy. Here’s hoping its latest move gives the recovery more traction.
Citations
1 – money.cnn.com/2010/11/03/news/economy/fed_decision/index.htm [11/3/10]
2 - blogs.wsj.com/marketbeat/2010/10/27/pimcos-bill-gross-qe2-is-a-ponzi-scheme/ [10/27/10]
3 - bloomberg.com/news/2010-11-04/bernanke-doesn-t-understand-economics-investor-jim-rogers-tells-oxford.html [11/4/10]
Is the glass half full? The Federal Reserve has committed to buying $600 billion worth of Treasury bonds between now and June, and it wants to purchase up to $900 billion in debt by the end of September 2011.1 This second round of quantitative easing has been dubbed QE2. In a nutshell, the effort would pour cash into the banking system to promote lending and inflation, and it has the potential to help stocks, the housing market and consumer spending.
Or is it half empty? Some economists are worried about the impact of this tactic. They fear it may create a stock bubble – an inflated equities market motivated by speculation and low interest rates instead of earnings. Likewise, some see a commodities bubble that could burst dramatically in the years ahead.
QE2 has already earned some prominent detractors. Bond market guru Bill Gross just called it “a Ponzi scheme” that will end the 30-year bull market in bonds (an event he has actually forecast for some time). Jim Rogers, the Quantum Fund co-founder who astutely called the worldwide bull market in commodities in 1999, recently labeled QE2 “petrol on the fire” of the commodities market and told an Oxford University audience that Fed chair Ben Bernanke “does not understand economics … all he understands is printing money.”2,3
Will more investors turn to stocks? The Fed’s bond-buying program implies lower long-term interest rates, lower bond yields and a weaker dollar. In an environment with lower bond yields, investors are predisposed to enter other asset classes such as real estate and stocks. If the stock and housing markets improve, that will certainly aid consumer confidence which, in turn, should aid consumer spending.
On Main Street, there are two speed bumps on the way to that rosy domestic outcome: a lack of customers and/or demand (especially in the housing market) and unemployment. The Fed’s strategy may have a tough time getting around those economic obstacles.
Why are other nations growing testy? QE2 could invite a trade war. A weak greenback means a big advantage for U.S. exports. Our products will be cheaper in other nations thanks to the increase in the money supply holding down the value of the dollar. Correspondingly, imported goods will cost us more and we will buy less of them. That’s terrible news for nations such as China, Germany, Russia, Japan, France, Great Britain and Hong Kong – all of whom are counting on exports to aid in their economic recoveries.
If U.S. interest rates are too low for too long, investors may try the emerging markets and/or the commodities markets seeking higher returns. So the commodities markets and the emerging markets could get even hotter.
If that happens, it would imply higher prices for oil, crops and raw materials in the United States, which would hamper our economy. Of course, many analysts think the commodities markets will keep advancing with or without influences like QE2 – the ongoing condition is simply too much demand and not enough supply.
Is this the “Hail Mary” play? With interest rates so low and one round of bond-buying already in the history books, the Fed doesn’t have many options left to jump-start the economy. Here’s hoping its latest move gives the recovery more traction.
Citations
1 – money.cnn.com/2010/11/03/news/economy/fed_decision/index.htm [11/3/10]
2 - blogs.wsj.com/marketbeat/2010/10/27/pimcos-bill-gross-qe2-is-a-ponzi-scheme/ [10/27/10]
3 - bloomberg.com/news/2010-11-04/bernanke-doesn-t-understand-economics-investor-jim-rogers-tells-oxford.html [11/4/10]
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