The Independent Investor: Why the Tax Cuts Are Unpopular Among Americans
Despite spending big money and all the marketing they can muster, the Republicans are still not able to convince most Americans that the tax cut benefits anyone but the rich and the corporations they own. Maybe, we are not as dumb as they think we are.
An April poll by Gallup indicated that 51 percent of Americans disapproved of the tax cut, versus 39 percent who approved of the cut. Another poll, conducted by NBC News/Wall Street Journal, found that 36 percent of the people they polled thought the tax cut was a bad idea, while only 27 percent believed it was a good idea.
Normally, you would think that a tax cut that benefits "all Americans" and "especially the middle-class working man," according to president Trump and his party, would be greeted with great enthusiasm. Even more confusing are polls that indicate that more of us (by a slim majority) believe that middle-class taxes are fair.
I believe there are a couple of conflicting cross-currents that are shaping our view of taxes. For one thing, the tax bill was cobbled together quickly and passed unilaterally to give the president legislative victory before the end of his first year. As a result, few really know what's in it, or how all the changes will impact the individual taxpayer.
We've been given, for example, a new set of tax brackets for individuals, but, at the same time, most of the itemized deductions have been removed. There are also more questions than answers regarding who can file and benefit for the new 20 percent pass-through tax rate. Most accountants I have talked to still have no idea how to plan for their client's taxes this year and don't know when they will.
Given that the federal tax code has experienced its most significant changes in decades, it will take time to analyze its ramifications. As such, the majority of individual taxpayers are still uncertain if the new law will help or hurt them over the long run.
The controversial limit of how much state taxes can be deducted from your federal bill (capped at $10,000 from all sources) will most likely mean that in states with income taxes many taxpayers will either experience a minimal benefit from the tax bill, or in some cases, be paying more taxes. Given that large segments of the country's population live in these states, their disenchantment with the tax bill is understandable.
Democrats (all of whom voted "no" for the bill) have been quick to point out that the tax bill was nothing more than a vast re-distribution of wealth from the middle class and low-income Americans to the wealthy, rich CEOs and big corporations. What's more, whatever benefit the average Joe might receive now will expire by 2025. At that point, not only will your tax rate go back up, but there will be no itemized deductions to ease the blow!
These accusations just fuel the anger of 6 out of 10 Americans, who feel upper-income people pay too little in taxes as it is. In addition, prior to the tax cut, a large majority of Americans had already believed that corporations pay too little in taxes. Now they pay even less. It also doesn't help much that our congressmen and senators stand to make a huge windfall personally from the tax cut, as does the president and his family.
As we head into the mid-term elections, there is a growing expectation that the Democrats will retake the House, if not the Senate. If so, many of these tax cuts could be reversed. You can bet those lawmakers from income tax states will certainly be pushing for major revisions.
In the meantime, Corporate America isn't helping the GOP cause. Instead of using their windfall tax profits to invest in America and hire more workers, they are using the money to reward their shareholders by raising their dividend payouts to historical levels. In the first three months of 2018, dividends have increased by $18.8 billion — that's a 13.9 percent increase over last year. At that rate, dividend payout increases could total more than $56 billion this year.
In addition, corporations have also announced $159 billion in share buybacks. Analysts expect that figure to rise to $800 billion by the end of the year. That would be a 10 percent increase over last year.
Between buyback and dividend increases, roughly 23 percent of the $1.5 trillion in tax cuts have already been spoken for. Remember too, that these dividends and buybacks go directly into the pockets of the wealthy, who are already enjoying outsized benefits from the tax cuts.
It just proves a point, that we Americans are not as dumb as we look. We know a bad deal when we see one and for most of us, this dog won't run.
The Independent Investor: The Facebook Fallacy
After a grueling two-day inquisition before both houses of Congress, Mark Zuckerberg, the founder of Facebook, has left the building. The question is how much did anyone really learn about the privacy issues of this social media behemoth?
As most readers are aware, the present controversy erupted when it was revealed that a Trump-campaign related firm, Cambridge Analytica, harvested personal data from millions of Facebook users. It spawned a huge controversy over privacy, cybersecurity and Big Data companies in general.
I watched as much of the hearings as I could stomach. What was clear to me was most of our so-called legislators had no idea how Facebook works. While some were obviously coached by their aides, even the answers to their questions drew blank or embarrassed stares. How they expect to regulate something they don't understand is beyond me, but then again, I guess it happens all the time.
It could be any one of us up there grappling to understand an entity that has become so entangled in our everyday lives. The truth is only a handful of Americans truly "get" what Facebook is even though they have been upfront with us since the get-go.
So, let's start by asking a simple question — how does Facebook make money? And yes, Joe, Facebook is a for-profit company. In one word, the answer is advertising. How much is that worth? At last count, the company is capitalized at roughly $543 billion. Clearly, Facebook is not some kumbaya, social network where everything is free no matter how touchy-feely it may look.
Helping two billion people worldwide "connect" is an admirable accomplishment from a social point of view, but it is also a darn good revenue generator. Let's be clear, Mark Zuckerberg has never said it wasn't. He has reminded everyone countless times that "building a mission and building a business go hand in hand."
Selling ads has generated over $39 billion for the company. So, what makes advertisers flock to Facebook when they could just as easily spend their money on tv or radio ads? One word: the product.
"What product?" you may ask.
That's easy. You're the product — along with all the countless billions of bytes that represent the information you have so generously spewed out over years and years of posting personal information about yourself and everyone in your universe. How much of that information you want to share with the world and advertisers is completely up to you.
Through the years, the thousands and thousands of Facebook employees have given you almost every option they could think of to "opt out" of sharing that information. Instead, if you are like me, we blithely pump out more and more personal information to the outside world without a care of how or who is using it. That is until the bad guys start to take advantage of our stupidity.
Suddenly, when that happens, we all feel betrayed by the very entity that tries to protect us when the fact is, in my opinion, that we all have been too lazy to read the material, examine and control who we are sending information to, and doing all that is required to use this social network in a rational way.
We are like the guy who uses 1-2-3-4 as his password on all his accounts. He is then hacked and subsequently sues the company for not providing enough password protection.
You may even admit to the worth of my argument but still insist that you would fulfill your obligations if the safeguards weren't so complex and difficult to use. That's like saying I would practice gun safety if I could figure out which end the bullet came out. The meaning here is you have no business using social media if you don't understand its ramifications to you, your family, and your friends.
No matter how much social media companies try to protect us, who can protect us from ourselves? If you post photos of walking your dog day in, day out at a specific, isolated location, and then someone mugs you there, can you guess why?
The point is that we are Facebook's product. It has always been the case. Yes, we are a lucrative product to them, but it is we who determine what we want to give away. So far, most users have been willing to give away the farm. Are you one of them?
The Independent Investor: Free Trade Vs. Fair Trade
In today's world, talk of tariffs is part of daily news headlines. Politicians use terms like "free" and "fair" almost interchangeably in discussing trade to justify their position for or against tariffs. Maybe it's time to review the difference between the two concepts.
While they may sound similar, free trade and fair trade are often at opposite ends of the pole. Free trade is a world where the gloves are off. It allows international cut-throat competition where the marketplace can drive the cost of products way below the price where anyone can make any money. Free trade makes things cheaper including the money we earn to produce those goods.
Fair trade, on the other hand, is in the eye of the beholder. What may seem fair to you or me, maybe the opposite from someone else's point of view. That's because fair trade places all kinds of restrictions on producers of goods and services. Overall, fair trade tends to make goods more expensive. That's because it costs more money to guarantee a minimum wage or make sure that a coal mine or steel mill's working conditions are safe.
However, throughout history and into the present day, both concepts are abused quite often. Take our country's attitude toward trade. After World War II, for example, North America was the only continent left standing. Europe, Asia and everywhere in-between had been decimated by warfare. Our allies needed help and free trade seemed to be the best answer to rebuilding the world in the shortest time possible.
It was the age of Japanese transistor radios, cheap autos from Europe, and U.S. industrial and food products that could be purchased with extremely easy terms. America opened its arms to anything the world could export to us. The purpose was to rebuild and increase economic growth worldwide for both the winners and the losers. All we required was an adherence to democracy.
We accepted free trade, while allowing our partners to re-build on the foundation of fair trade. The purpose was to allow agriculture, industrial production, and the consumer to recover in war-torn regions. We deliberately looked the other way as countries like France, Germany or Japan set tariffs on our cheap imports to protect their own struggling dairy or textile businesses.
Over the years, we all got used to this kind of lopsided arrangement. After all, America was the leading economic power in the world by a wide margin. We could afford to carry the world's weight on our shoulders.
Fast forward to today. Yes, we are still No. 1, but China is a close second. Europe over the past 50 years has forged their own powerful economic union and yet some of our trade deals have failed to keep up with these changing economic circumstances. Part of that problem, I believe, has been the U.S. practice over the past several decades of exchanging economic benefits for geopolitical influence.
How many times in the past have we given massive amounts of foreign aid in the form of trade deals, or gone along with outrageous tariffs on American imports just to achieve some dictator's promise to forsake communism or socialism and follow our brand of democracy? Clearly there is, and has been, a long list of unfair trade practices by just about every country in the world, including our own. I do not believe free trade exists in the world today. But recognizing that our steel and aluminum industry may need some relief from some other country's dumping practices is not the end of the world.
It appears to me that the present turmoil in the financial markets simply reflects something new and different and to some, a therefore dangerous turn of events. Because it has been so long since our country has stood up for itself in the trade arena, those invested in the status quo fear any change at all — even if it is to our benefit.
I commend the president for addressing this issue. Could he have found a better way to do it? Sure, but then again, I'm not the person sitting in the hot seat. Getting a better deal at the trade table is long overdue for this country, even if in the short-term, it might upset a few apples in the cart.
The Independent Investor: Financial Planners Held to Higher Standard
The Department of Labor's fiduciary rule looks "iffy" at best, thanks to a March court ruling. The 5th Circuit Court of Appeals says the agency exceeded its authority in insisting that financial services firms act as fiduciaries when giving advice to most tax-deferred savings accounts. However, some financial advisers are ignoring the courts and are going the extra mile for their clients anyway.
Over the last couple of years, I have written several columns on this issue. A "fiduciary" is someone who puts your best interests above his own and that of his company's. It is a concept that the financial community does not want to see implemented and has gone to great lengths to squash all attempts to do so.
President Barack Obama, recognizing the enormous lobbying power of the financial sector, tried to do an end-run around the financial community, the SEC, and Congress by urging the Department of Labor to implement a fiduciary rule. He almost succeeded, and then came Trump. Although our "populist" president talked a good game during the campaign, he quickly succumbed to the influences of Wall Street and ordered the DOL to "review" its regulation. The rest is history.
However, while brokers and other wealth management advisers, (as well as the annuity and insurance industry) are breathing a collective sigh of relief, one entity, the Certified Financial Planning Board (CFP), is ignoring the decision and going the other way.
The CFP Board, according to its website, is "a non-profit organization acting in the public interest by fostering professional standards in personal financial planning through its setting and enforcement of the education, examination, experience, ethics and other requirements for CFP®certification." Currently, there are 69,500 members, which represent barely 20 percent of financial advisers. However, they represent the creme de la crème of CFPs so now you know where to go when shopping for a financial planner.
The CFP Board just announced that starting next year, their members will be required to give advice under a new "best-interest" standard in all aspects of financial advice. I asked Zack Marcotte, a 28-year-old, registered investment adviser, who is sitting for his CFP certification this year, what that means to you, the investor.
"The new rule just makes it that much more important that you look for a Certified Financial Planner when evaluating financial professionals. What this all boils down to is if something is recommended to you, it's because it's best for you and not meant to line someone's pockets."
Under the old rules, a financial planner was required to act as a fiduciary when he or she was involved in doing a specific financial plan for their clients. However, financial planners can sell their clients a whole shopping list of services from insurance to brokerage services that were not part of their fiduciary duties. And there was the rub.
It is well-known within the industry that for many financial planners, the actual financial plan itself, is a loss-leader. The idea is to get you, the unsuspecting client, in the door, do the plan for a nominal fee, and make the big bucks by selling you annuities, life insurance, or brokerage services. That changes next year.
By raising the bar, all certified financial planners must act in the best interests of their clients when providing all financial advice. That is great news for consumers. The CFP will be required to recommend only using a brokerage product, annuity, or other insurance product, if it is in the best interests of their clients.
I believe that over time, more and more consumers will seek out only those, like young Zack, who are required by law to act as a fiduciary in all their financial affairs. Hats off to the CFP Board and to all those who have the true interests of their clients at heart.
The Independent Investor: Medicare Premiums and Your Income
We all know that Medicare is not free. Once we enroll in Part B and D, we start paying monthly premiums. What many consumers fail to realize is that how much you pay depends on how much you make.
For most of us, this is a moot point. We assume that we will be retiring at 65 years old (at the same time Medicare kicks in) but that assumption is no longer accurate. The reality is that Social Security, retirement, and Medicare can happen at different times in your life.
Take, for example, Social Security benefits. Every year the target date for full retirement creeps higher. It used to be 65, but now, for many, it is edging up to almost 67 over the next few years. When that occurs, workers will usually sign up for Medicare A but delay enrolling in Parts B and D until after they retire and are no longer covered by their company's health insurance program.
What most applicants don't know, until it is too late, is that your monthly Medicare premiums will be based on your last two years' annual income. But the actual logistics of that can be confusing. Here's why.
Your reported income follows a governmental processing chain where once the IRS processes your tax returns, they pass that information on to Social Security, which, in turn, feeds the data to Medicare, which then determines your premiums based on those numbers.
Let's say you are applying for Medicare B and D right now. For starters, most of us are just now filing our tax returns for 2017 (even though we are already approaching the second quarter of 2018). It will take months before the IRS gives Social Security your 2017 tax returns and even more time before that data gets to Medicare. Bottom line: there is a big-time lag between your current income and when it shows up in your Medicare premiums.
That means if you are retiring now and made less than $85,000 (as a single taxpayer or $170,000 filing jointly) in the calendar year 2016, your premiums would qualify at the base rate of $134 a month for Part B and $13 a month for Part D.
Above that income level, your premiums increase to $267.90 and $33.60, if you make over $85,000-$107,000 ($170,000-$214,000 jointly). They jump again above $133,500 or $267,000 jointly. And again, and again, until you can be paying as much as $428.60 and $74.80 per month when your income exceeds $160,000 or $320,000 jointly. If your spouse is also retired and on Medicare, then double that premium amount. For those couples making above $320,000 a year, for example, they will be paying $503.40 per month or $6,040.80 a year.
Social Security determines what you pay each year, based on your modified adjusted gross income (MAGI) as reported to the IRS. MAGI would include things like wages, dividends, rental income, capital gains and non-taxable Social Security benefits. If you earn more (or less) the following year, Social Security will adjust your monthly premiums. They call it your income-related monthly adjusted amount. That premium will be deducted from your Social Security income check or, if you are not taking Social Security yet, it will be billed to you.
Theoretically, your premiums should be adjusted every year with a lag. So, if you report a high-income number to the IRS for the two years prior to retirement, you can expect to pay a lot in Medicare premiums. What happens when your income drops, as it usually does once you retire?
You can petition for a Request for Reconsideration to reduce your Part B premium if you feel there is a compelling reason why you should not be paying a higher premium. The most common reason most petition is that income has dropped dramatically in retirement. Other reasons might include marriage, divorce or being widowed. The loss of income-producing property and changes or termination of a pension would also count.
Appeals work some of the time, but not all the time. It is a lengthy process and you still must pay your premiums while the petition makes its tortuous way through this process. It costs nothing to petition, however, and you might win in the end.
A much better approach, if you can manage it, is to reduce your income as much as possible two years prior to signing up for Medicare B and D. That is not always easy to pull off. You might reduce your hours and compensation, for example, if your employer is flexible, or, if your spouse works, and has family health coverage, you could retire, delay Medicare coverage for two years, and then apply. It comes down to what you can afford to give up now for future benefits in the years ahead.