The good folks at data mining company Sageworks responded to a recent blog posting with some of their own information related to housing along with the recent drop in in sales associated with each…

Thanks to them.

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Slowed Sales Related to Housing

October 30th, 2008 | by: Melinda Crump

One of the arguments the higher tax advocates make is that “even Warren Buffett” wants to pay more taxes.   They reference this quote he made in an interview:

To help pay for the rescue, the government should raise taxes on the wealthy, Mr. Buffett suggested. “I’m paying the lowest tax rate that I’ve ever paid in my life,” he said. “Now, that’s crazy.”

They also cite his comment that he pays a lower tax rate than his secretary.   She makes $60,000 per year, compared to his net worth of more than $44 billion dollars.

Seems unfair.

But remember this important distinction: Mr. Buffett’s wealth is nearly all derived from Berkshire Hathaway stock.    He receives almost no ordinary income.   For this reason, he pays the 15% tax rate on capital gains plus a little more from other income.   He has admitted he pays a federal income tax rate of just 17.7%.   That is roughly the same rate that families making just over $15,650 per year pay to the federal government.

There is a big difference between wealth from income and wealth from investments or inheritance.    Most of the richest among us likely have all their wealth tied up in stocks (taxed at 15%) or tax-free municipal bonds.   It’s likely many of the most wealthy in America pay very little in actual federal income tax.  

As I have argued, the income tax grabs at just that; income.   It goes after those making a monthly paycheck.   Not those like Mr. Buffett who have their money in low-tax stock portfolios.  There is a massive difference between the wealth of people such as Warren Buffett, Bill Gates and the rest of the Forbes 400 and the successful businessperson making a few hundred thousand dollars per year.    But yet that businessperson will be much more impacted by the increase on income taxes than the uber-rich.

If Warren Buffett thinks he should pay more in taxes, he should and can.   I am quite sure the government would be happy to have any check he wants to send them.   It won’t bounce.   He is giving away a few billion to the Bill and Melinda Gates Foundation, which is wonderful, but it’s also another deduction from his taxes.   A few billion from Buffett into the Federal Income tax coffers would certainly reduce the burden on many of the “ordinary” income tax payers that are supposed to be helped by taxing those who have worked the hardest to make it in America.

It’s hard to argue anything with Warren Buffett.   He’s clearly one of the smartest, savviest and most patient investors the world have ever seen.  I’ve had the privilege of interviewing him in Omaha and I found him warm and genuine.  But with all due respect, Mr. Buffett is wrong on this issue.

Will 70 become the new 62?   Americans are living longer and retiring younger.  Pension fund problems to come mean that trend may reverse quickly.

We continue as a nation to retire younger.   More workers are making smart investment and retirement decisions and that’s helping say “so long” to the working world at an earlier age. The Bureau of Labor Statistics shows that the average “exit” age from the workforce has dropped from 66.9 in 1950-55 (the study is done in 5 year increments) to 62.0 years in 2000.   Five years earlier.   Good work!

As we retire younger, we live longer.  Our lifespan continues to hit a record in America.   The accounts vary,  but on a whole its safe to say the American lives to be an average of about 75 years old.   Women live to an average age of 80, men drag the average down.   And this upward trend is going to continue.  The Center for Disease Control estimates that the average lifespan in America will increase by another 2 years by 2015.  Even men may live to be 80 someday.

The good news: work less, live longer.

The bad news: work less, live longer.

Many Americans still rely on pension funds for their retirement.   Those pension funds count on their investments doing well to help fund the growing population of retirees.    With the Dow down more than 40% this year and bonds also taking a hit, look for underfunded pension plans to become the next big story in this already weak economy.

To understand the issue facing non-governmental companies, consider this:

According to a new report from Mercer, large corporations saw their pension plans lose a collective $70 billion off their combined funded status during the volatile first quarter. Adrian Hartshorn, a principal in Mercer’s financial strategy group, pointed out that pension plans sponsored by S&P 1500 companies are now only 98% funded.

That “new” article is from April.   Well before the stock market took a nosedive.  The figures have become worse.   A story from Pension & Investments online reports:

“The U.S. market is down over a third, and that’s good compared to the emerging markets that are down over half this year alone—so that 61 percent in equity may not be doing that well,” [S&P analyst Howard] Silverblatt said in the report. “When you calculate it all out at the current market returns, or even assuming a nice Q4 rebound, you get a number that is worse than the $219 billion in underfunding reported in 2002.”

A few companies have noted in their earnings this quarter that their pension funds have taken a hit.   The overall tally isn’t known yet, but we can look back to get a idea as to who may be suffering most.  Look to this article from 2004.   It lists the most underfunded pension plans of that year, with airlines and auto-related companies near the top of the chart.   For most of 2004 the S&P 500 hovered between 1,100 and 1,200.   It closed at 848 today, a nearly 50% drop from when concerns about pension fund problems began to appear.

This is not just a private company issue.  It will also impact states and localities.    George Will recently wrote an excellent piece on the pension “timebomb” to come.   As part of it he notes:

Credit Suisse estimates that state and local governments have a cumulative $1.5 trillion shortfall in commitments for retiree health care.

Will wrote that piece back on September 11th.   Given that the real market pain didn’t start until the credit-freeze of mid-September, its likely that figure has grown significantly.    The FT reports:

In the nine months to the end of September, the average state pension fund lost 14.8 per cent, according to Northern Trust, a fund company. The loss has grown since, as financial markets slumped further in October. The previous highest loss for state funds was 7.9 per cent for the full year in 2002.

California’s Calpers, the US’s biggest pension fund, last week reported a loss of 20 per cent of its assets, or more than $40bn, between July 1 and October 20 this year.

No doubt many of the current obligations are met and we haven’t heard of any pension funds saying they couldn’t make payments to their retiree beneficiaries.   But with stocks down big, the number of retirees expected to grow, and states facing other problems with declining state income, property and sales tax revenues it raises real questions about future solvency.

Many pensions are backed by the Pension Benefit Guarantee Corporation.    It insures the pensions of 44 million workers.   Just last week it agreed to take up the obligations of bankrupt lumber company Pope & Talbot.

But the PBGC is facing its own problems.   The agency last week said it lost $5 billion dollars in stock investments and expects a deficit of $10 to $12 billion this year.   It has $68 billion in assets and $83 billion in liabilities.

No one is talking about the PBGC having its own funding problems.   Yet.   It doesn’t take much to see though that the trend is in the wrong direction, with more major companies facing funding shortfalls and other potential problems.  It not wrong to wonder where the ending is.  And the agency isn’t helping us understand.  Despite repeated calls for an interview with the Agency’s director they continue to decline.  We will keep calling.

There are two main takeaways here.

First, many Americans and politicians have an erroneous view that stocks are for “rich people” and not them.   Wall Street remains a mysterious world, operated largely behind closed doors by mad scientist math wizards.   The pension problem proves nothing could be farther from the truth.   The teachers, cops and other government workers who trust their retirement to companies such as CalPERs may suddenly take a keen interest in equities.

The other reality is that many Americans will have to work longer than planned.    Companies and governments may not have the ability to cover costs for people retiring at 62 and living another twenty years.   The math of early retirement + living longer / awful stock markets simply will not add up.

Time to take just a moment from the market and economic news to talk about one side note … the passing of one of my favorite musicians, Merl Saunders.

Saunders was a keyboardist extraordinaire, and not only played with his own band but also worked with some of the greatest jam bands of all time.    His music never failed to lift spirits, and maybe we could all use some of that these days.

Here’s a link to a website and a streaming version of his song “My Problems Got Problems”  (appropriate!)

Farewell, Merl!

This article was sent to me by a friend in the investment business.   It is from the American Funds investment firm and was written at the depths of the bear market and lousy U.S. economy. Note the date: November, 1974!

Some good advice, and indeed we have been here before and will likely be here again in many of our lifetimes.

“Successful selling against the tide”
Perspective on the market’s upheaval, offered by Jim Fullerton, former chairman
of the Capital Group — on November 7, 1974

Click here to read the article.

The Milken Institute in California had a debate on the economy and economic politics today between businessman Leo Hindery and Stanford professor Michael Boskin.    The video is on the Milken website.

I know Leo well and have interviewed him many times.  He’s a very smart guy and successful businessman.

I am not as familiar with Michael Boskin, so I was researching him and came across his personal website.   On it, he has posted his analysis of the possible tax implications of the Obama-Biden plan.    Boskin is an advisor to John McCain, so keep that in mind when reading it, but since he’s a professor at one of the most prestigious schools in the country, one would have to believe he knows his numbers.  Those numbers are scary, and not much better in other states with high state income tax rates.

From Boskin’s piece: (link to the full piece attached)

Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003 and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102K of earnings.  The result is a remarkable reduction in work incentives for our most economically productive citizens. The top 35% marginal income tax rate rises to 39.6%; adding the state income tax, the Medicare tax, the effect of the deduction phaseout and Obama’s new Social Security tax increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.3%.

People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.7 cents, a reduction of one-third in the after-tax wage! Despite the rhetoric, that’s not just on “rich” individuals. It’s also on a lot of small businesses and two-earner middle aged middle class couples in their peak earnings years in high cost-of-living areas.

Think about that - 37.7 cents of your earned dollar!   If those numbers are accurate it would go to my previous posting about tax rates and work effort.    That’s quite a cut.

Do remember this analysis is based on a state with high income taxes.   That 37.7 cents would not be quite as bad in states with lower (or no) taxes, but no doubt that 55.4 cents would still come down dramatically.

We will reach out to the Obama camp to get their comment on these staggering figures.

Thanks for all the comments on previous posts.   Now I have a question for you…

I was speaking with an economist today and we were debating this question: at what tax rate do hard working Americans either give up or simply refuse to work any harder knowing that the prospect of more pay - but more hours - will bring higher taxes with it?

If you are trying to get ahead at work, get a promotion and make more money … but know that it will also come with longer hours and more time away from home … how much would taxes have to be all-in (federal, social security/medicare), state, local and property) for you to say “no thanks” to the higher pay?

I’m guessing on average most of you on average probably pay a marginal tax rate around 35% or so right now.

So what’s the “I give up” point: 40%?  50%   Higher?

Let me know using the “comments” section.

Unscientific I know but trying to figure out at what point economic motivation ends.

This time it’s different.

How often have you heard that statement, especially around everything from the economy, to stocks to the New York Mets’ World Series prospects.

Most folks in my line of work in financial journalism are busy proclaiming that the economy is doomed, credit is over and no one will buy their kids toys this Christmas.   There are certainly many, many negative data points to back up the doom & gloom discussion.    Credit is tough.     Layoffs are happening.   We are for all intents already in a recession.

But whither the spender.   The great wild card is going to be the spending desire of the American shopper.   I recently looked at a chart showing retail sales over the years, and with the exception of a few months in 1974-75 and 1979-81, retail sales on the whole have rarely gone down on an absolute basis.   The point: people like to spend, and do, even in tough economies.

Which is why I found this article in The Atlantic Monthly so interesting.   It’s title is “The Case for Debt,” and it details how for the last 80 years the American consumer’s appetite for debt and spending has been sorely underestimated:

Studying “Middletown” in the 1920s, Robert S. Lynd and Helen Merrell Lynd deplored the “rise and spread of the dollar-down-and-so-much-per plan,” which extended credit for such extravagances as cars, electric washing machines, and “$200 over-stuffed living-room suites … to persons of whom frequently little is known as to their intention or ability to pay.” In 1943, Jesse Rainsford Sprague, a defender of installment buying, nonetheless worried that the “temptations of easy credit” were luring young people to take out bank loans, rather than save, for vacations. Of one stenographer, he noted, “Had the young lady spent less on lip rouge and blood-red fingernail paint, she might have been in a position to pay cash for her holiday.”

“As the result of the consumer credit explosion, the total private debt is certainly greater than the combined private debt of man throughout history. Never have so many owed so much,” declared Hillel Black in Buy Now, Pay Later, published in 1961—more than a decade before using bank credit cards like MasterCard and Visa became common.

The article also notes how interest costs have fallen over time — and thus while debt levels have surged, the ability to handle that debt has become easier.

The article is not advocating taking on debt.  But it does help lay out a more bullish case for the economy and retailers than some of the most dire scenarios.    Never underestimate the shopper!  People have been doing so for generations, and gotten it wrong.

Thanks to some of our smart viewers and readers for pointing this out…not sure why we haven’t thought about this before but this is why I rely on all of you so much to help us find good ideas….

As we’ve discussed, under the Obama-Biden tax plan many Americans will get a tax credit at the end of each year.  You can analyze the amount on the popular “tax cut calculator” on his website.

Here’s the problem.

The sweeping tax cuts President Bush pushed through a few years ago are set to expire in 2010 and fully end in 2011.   Those cuts lowered the tax rates for most Americans by 3% (36% - 33%, 28% - 25%, etc).

The question now becomes, what happens to those tax cuts?   If they are allowed to expire and not renewed by Congress any tax savings for much of that “95%” Obama talks about would be wiped out.

Let’s examine.

The calculator notes that a family of 4 making $50,000 - $75,000 per year would see a savings of $1,000 on their taxes.

But if the current tax cuts expire and are not renewed, most tax rates would go back to where they were before, or up 3% across most tax schedules.

So while tax calculations can be tricky, a rough estimate would be that the same family of four making $60,000 who “saved” $1,000 under this new plan would then see an increase of $1,350 bucks on their taxes ($0 on the first $15,000 and then an increase from 15 to 18% on the rest) after 2010.    That’s a net increase in taxes of $350 dollars.

Cut on one side, greater increase on the other.

Other media have also noted the same thing about the cuts.   In an article earlier this year CNN says:

Allowing the cuts to expire would add $1,900 to the tax bill of a family of four with an annual income of $60,000, Bush said. All told, he added, 43 million families with kids would have to pay an average tax increase of $2,323.

Online magazine Slate noted:

I know there’s a lot of hype to the contrary, but look at the numbers. If you and your spouse have a taxable income of $60,000 a year, you’ve had almost a 24 percent income tax cut since President Bush took office. (And ditto if your income was just $20,000.) Meanwhile, the folks who make $350,000 a year got a cut of only about 12.5 percent; those who make $1 million a year got an even smaller cut.

We don’t know for certain about the future of those cuts, but it’s not looking like they will stand based on previous Congressional efforts to “torpedo” them.

Clearly each tax filer’s situation is different with unique deductions.  But since the calculator on Obama’s website is also a rough estimator, I think it’s fair to ask the question of Congress - what happens to the Bush tax cuts?

If they aren’t extended, then many of those people thinking they are going to get a tax cut are in for an unpleasant surprise after 2010.

A friend of mine in software sales told me that a quote in his office is that “there are earners, and there are burners.”   Less conversationally some call it the “20/80 rule.”   20% of a company brings in most of its revenue and, in a sense, pays for the other 80% to be employed.   Those 20% don’t mind the hard work, long hours and time away from their kids because (hopefully) they are compensated for it.   It’s the trade they are making.

We may have to change that “20/80 rule” to the “5/95 rule.”

Some starting figures brought to light today from Carnegie Mellon University Professor Adam Lerrick regarding the current tax burden on America’s earners and how that burden will dramatically increase in coming years:

In 2006, the latest year for which we have Census data, 220 million Americans were eligible to vote and 89 million — 40% — paid no income taxes. According to the Tax Policy Center (a joint venture of the Brookings Institution and the Urban Institute), this will jump to 49% when Mr. Obama’s cash credits remove 18 million more voters from the tax rolls. What’s more, there are an additional 24 million taxpayers (11% of the electorate) who will pay a minimal amount of income taxes — less than 5% of their income and less than $1,000 annually.

In all, three out of every five voters will pay little or nothing in income taxes under Mr. Obama’s plans and gain when taxes rise on the 40% that already pays 95% of income tax revenues.

Consider that.    49% of Americans will pay nothing in taxes to the Federal government.   In total, three out of every five voters will pay nothing or next to nothing.   The Federal government collects around $1.1 trillion per year in income tax revenue.   This means that less than half of America’s top earners will have to cover those expected revenues.   The key is that these are earners.

Professor Lerrick continues by rightly noting that under the proposed Obama-Biden tax increase on those who contribute the most to the American tax rolls, eventually the incentive to earn more diminishes, forcing the government to look down the income scale for that lost tax revenue:

What next? A core group of Obama enthusiasts — those educated professionals who applaud the “fairness” of their candidate’s tax plans — will soon see their $100,000-$150,000 incomes targeted. As entitlements expand and a self-interested majority votes, the higher tax brackets will kick in at lower levels down the ladder, all the way to households with a $75,000 income.

Calculating how far society’s top earners can be pushed before they stop (or cut back on) producing is difficult. But the incentives are easy to see. Voters who benefit from government programs will push for higher tax rates on higher earners — at least until those who power the economy and create jobs and wealth stop working, stop investing, or move out of the country.

The question Professor Lerrick asks is a good one.   At what point do the country’s top earners simply throw their hands up in the air and give up?   Many two-income households who are in the lower end of that top earning group may have to revisit their expenses.  When you factor in the cost of child care, many families may find its simply easier to have the lower earner in the family quit, drop the child care costs and move into a smaller home.    If, in a sense, the entire income of the lower earner in the family is simply going to the Federal government, why work?

Remember we are talking about income taxes on families that make more than $250,000 per year.  They make it.   We are not talking about wealth taxes.   Income taxes go after paychecks.   Those are people and families who are working each day, commuting, getting on planes and missing time with their familes.   The couple making $250,000 per year in income is working for that money.   We are not talking families with massive trust-fund fortunes because their grandfather invented some widget that was sold for hundreds of millions of dollars.   Those familes are likely fully invested in municpal bonds and thus making millions in tax free interest every year and paying nearly nothing in income taxes.

The message is clear: penalize the earners and they will have less incentive to earn and more incentive to burn.