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1929 and 2008: Why Distribution of Wealth Matters
10.24.08 | Taxes | 3 Comments | by Fred Siegmund

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There are many comparisons in recent newspapers between the crash of 1929 and the crisis of 2008. The media of today has not settled on a consistent title for America's current events but "crisis" appears to be the most common caption among the newspapers I see.

Many books and articles have been published on the stock market crash of 1929, but one book in particular stands out as short, only 197 pages, readable and relevant for today's debacle. It is The Great Crash by John Kenneth Galbraith.

After using newspaper and other accounts, he describes what happened in journalistic fashion with a final chapter titled Causes and Consequence. The first cause on his numbered list is "The Bad Distribution of Income."

Allow me a brief quote.

In 1929 the rich were indubitably rich. … The proportion of personal income received in the form of interest, dividends and rent – the income broadly speaking of the well-to-do – was about twice as great as in the years following the Second World War.

This high unequal distribution of income meant that the economy was dependent on a high level of investment or a high level of luxury spending or both. The rich cannot buy great quantities of bread. If they are to dispose of what they receive it must be on luxuries or by way of investment in new plants and new projects.

Mr. Galbraith was writing 50 years ago about events of nearly 80 years ago, but it is helpful for man of his distinction to confirm what is the underlying cause of America's crash of 2008: the bad distribution of income.

The growing inequality of income is well documented in the Federal government's publication of the Current Population Survey.

In their table of Selected Measures of Household Income Dispersion the highest 10 Percent of household income continue to gain income share year by year on the bottom 10 percent, but also the bottom 20, 50 and 80 percent of households.

The wealthy pay the same price for bread, eggs and milk as everybody else which is why they have extra money to speculate in Wall Street's new and exotic investment derivatives: hedge funds, collateralized debt obligations, mortgage and asset backed securities, principal only strips, credit default swaps and so on.

In the mean time, heavily taxed wages are going up slowly — but not as fast as prices, a reality documented by the Bureau of Labor Statistics. More of us are reaching credit card limits and home equity loan limits.

Refinancing mortgages for cash, or lower interest rates, did provide a boast to buying power, but these too are running low.

A mass society needs mass participation, which the unequal distribution of income limits. The crisis of 2008 tells us the wealthy have failed to return their savings and tax cuts back into the economy in a constructive way to create long lived assets and jobs. They have failed themselves and the country.

It is time for the wealthy to pay more tax.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Why Are Dividends and Income Taxed So Differently?
10.16.08 | Taxes, Work | 2 Comments | by Fred Siegmund

In 2007, someone starting out in their twenties with a modest $30,000 a year salary will be expected to pay $5,091.25 in federal income and payroll taxes. For a single person who earns the same $30,000 as dividend income, the total federal tax would be $1,062.50.

For a married couple starting out where both earn a $30,000 a year salary, they pay federal tax of $10,182.50. For a married couple who earns the same $60,000 as dividend income they pay $2,125 in total federal tax. There is no payroll tax on dividend income.

This extraordinary favoritism toward corporate dividends has been going on since 2003. It not only debases work but changes America's saving and consumption. A couple starting out in their twenties will be unlikely to have dividend income, but their very high taxes make it difficult to save anything, or buy a house.

Those with dividend income since 2003 are likely to be older with years of saving and a nest egg of savings and dividend income. Likely as well, they already own a home. Their lucrative tax breaks have generated savings for them and loanable funds for banks and financial intermediaries.

Apparently, they all forgot that savers earn a return only if borrowers can pay back their loans. The millions of sub-prime mortgages and the rapid and large number of foreclosures and defaults make it clear those who are starting out and many others cannot afford to buy a home, or borrow all those loanable funds.

There was a comment in one of my previous posts where a reader suggested Congress and the Bush administration has been pushing sub-prime loans to boast home ownership for political reasons. I am sure that is correct and recent testimony and discussion in the Wall Street Journal confirms that view.

It is the same Congress and Bush Administration that promoted tax breaks for dividends and ignores the income inequality their policies help to generate. It makes no difference what any one says about fairness in taxes.

America has to raise taxes on the wealthy and give tax relief to working Americans, or the economy will continue to flounder and decline.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
3 Reasons the Economy Isn't Worrying Me
10.06.08 | Money Management | 0 Comments | by junger

Every time you turn on the news, you hear it:

CRISIS! RECESSION! DEPRESSION!

You can't seem to go anywhere without someone talking about the flailing economy, high gas prices, and their retirement savings causing them worry.

It's the reality of the situation today — but it doesn't need to be.

While Wall Street's problems have turned into Main Street's (who do you think is funding that $700 billion bailout?), the current economy doesn't need to worry you. It isn't worrying me.

Here are three reasons the economy isn't worrying me.

I'm Investing For the Long Run

My retirement accounts have dropped significantly over the past year, especially from their recent highs. But I'm not worried. That money isn't going to be touched for another 40 years or so.

But what if you're nearing retirement? You don't have as much time for the market to rebound — that's for sure. But if you're close to cashing out, you should have a very conservative asset allocation. If you're 58 and you're 100% in stocks, you're in trouble.

Make it a priority to evaluate and adjust your asset allocation once a year. Don't try and time the market — pick a day (April 15 is an easy one to remember) and do it no matter what's happening.

I Have Money Saved Up

One of the most important things to have in an unsteady economy is a strong cash position. No, that doesn't mean you should sell your stock and buy gold (in fact, don't do that). It means you need to have the leverage to avoid depending on financial institutions and credit cards when everyone is tightening their belts.

Look at a guy like Warren Buffet — when everyone is panicking, he goes and invests $5 billion into Goldman Sachs. Having the cash when no one else does gets you the best deals.

If you've got cash, you don't have to worry about everyone else's financials.

I've Got a Few Income Streams

In a market where the unemployment rate is at 6.1%, it's more important than ever to have a few different sources of income.

While an emergency fund prepares you for the uncertainties of the future, having more than one way to make money softens any potential job hazards. In addition to my day job, I do some consulting work and own a number of Web sites.

You don't put all of your eggs into one basket when you're investing in the stock market, right? It makes as much sense to only depend on one source of income.

(For the entrepreneurial types, this is the perfect time to start a business. You're required to depend on what you have — no small business loans, etc — and are forced to focus on the fundamentals.)

Why isn't the economy worrying you? Let us know in a comment below.
U.S. Households See Net Worth Drop $1.7 Trillion
06.05.08 | Money | 1 Comment | by junger

Americans $1.7 trillion poorer — CNNMoney.com

Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings.

Meanwhile, the amount of equity people have in their homes fell to 46.2%, the lowest level ever.

The net worth of U.S. households fell 3% to $56 trillion at the end of March, according to the Federal Reserve's flow of funds report, which was released Thursday.

Wowzas, right?

Some of this is obviously inflated, since falling housing prices (which were off the scale during the bubble) made up $305 billion of the decline. But the news isn't that encouraging.

At the same time, there are now more than 1 million homes in foreclosure.

Are you a part of the net worth decline? Even if your home value has dropped, is your net worth (outside of real estate) doing the same?

Leave a comment and tell us.
Taxes and Your Love Life: Why it Matters
04.25.08 | Taxes | 2 Comments | by Fred Siegmund

The federal income tax used to have what came to be known as the marriage tax. If two single people earned $25,000 each and then got married, they paid more tax on $50,000 of combined income than they paid as two single people.

Quite a few years ago, Congress began tinkering with the tax rate schedules to eliminate the marriage tax. In 2007, a couple with two $25,000 incomes and the standard deduction will pay $4,092.50 in tax by filing jointly as a married couple with $50,000 of joint income. If they file separately as a married couple, they will each pay $2,046.25, which combined also equals $4,092.25. If they were both single they still pay the same combined tax.

The numbers tell the story. Congress decided that two single people who get married should pay the same tax on their combined income. But should a single person pay the same tax as a married couple with the same income?

If a single person earns the same $50,000 dollars as the couple above, he or she pays $6,736.25. The single person pays $2,643.75 more tax than the married couple with the same income.

Congress seems to be telling us that it is right that married couples keep more income since they have more expenses for food, medicine and so on. One difference of the tax comes with the personal exemption and the size of the standard deduction. The single person gets $3,400 exemption and $5,350 deduction for $8,750, but a married couple gets double that at $17,500. The single person has taxable income of $41,250 compared to $32,500 for the couple.

However, if we eliminate the difference in exemptions and deductions for the single person so that both have taxable incomes of $32,500, the single person still pays more: $456.25 more. The single person pays additional tax because they encounter the 25% tax rate much sooner than the married couple.

The difference gets more important at more modest incomes. A single person earning $25,000 pays $2,046.25 in federal tax while a couple filing jointly would pay only $750.00.

Those are critical dollars that might take the rent money, especially when both have $1,912.50 social security taxes on top of their income taxes. Now Congress seems to be telling us that people of modest incomes must scrimp and save: maybe double up and share living quarters.

Maybe now there is a single person tax? You be the judge.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
Are You On a Fixed Income?
03.24.08 | Money | 1 Comment | by junger

The other day, I was watching a news report on how the stock market's up and downs are affecting senior citizens — specifically, those on a fixed income.

It got me thinking — am I on a fixed income? What does it mean to be on a fixed income?

Here's what Wikipedia has to say:

Fixed income refers to any type of investment that yields a regular (or fixed) return.

For example, if you borrow money and have to pay interest once a month, you have issued a fixed-income security. When a company does this, it is often called a bond or corporate bank debt (although 'preferred stock' is also sometimes considered to be fixed income). Sometimes people misspeak when they talk about fixed income, bonds actually have higher risk, while notes and bills have less risk because these are issued by Government agencies.

The term fixed income is also applied to a person's income that does not vary with each period. This can include income derived from fixed-income investments such as bonds and preferred stocks or pensions that guarantee a fixed income. When pensioners or retirees are dependent on their pension as their dominant source of income, the term "fixed income" can also carry the implication that they have relatively limited discretionary income or have little financial freedom to make large expenditures.

So, if your investments are paying out a certain amount of income over a given time period, you're on a fixed income.

But what if you're on a salaried paycheck? Aren't you getting a fixed amount of income every paycheck?

For the most part, I know how much money will be coming in to our bank account every month because our paychecks are consistent. Isn't that being on a fixed income?

For hourly workers, salespeople who work on commission and 9-5ers with inconsistent part time work, each month, your budget's "intake" column probably looks different. You don't necessarily know how much money you are earning until the month is over.

So if you're a salaried, non-commissioned worker, you're probably on a fixed income. Live like it.

It might seem a bit counterintuitive, like when I say I live paycheck-to-paycheck (even though technically this isn't true). Knowing how much money you have to spend, save and invest each month puts you on a fixed income — and helps you prepare to achieve your goals.

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