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    Wealth De-redistribution

    Can Luxury Taxes Diffuse the Medicare Time Bomb?


    By Jane Burns

    February 10, 2007


    Once I had a friend, let’s call him Hewitt, who came from money so old that a New York City park bore a family name of his mother. Hewitt had grown up in a lovely Upper Eastside apartment overlooking Central Park, attended the best schools and summered in exclusive coastal enclaves. Hewitt’s parents’ expenditures on the family’s well-being and pleasure were sizable, but essentially a matter of private consumption. In public, Hewitt’s parents were circumspect. They dressed plainly—Hewitt himself wore chinos with mended holes—and drove a Chevrolet so elderly it was likelier to inspire pity than envy. I thought Hewitt and his parents were classy and smart; they knew how to make use of their money and they kept it to themselves.

    Thirty years later, I wonder what Old Money thinks when it reads in its house organ, The New York Times, about the latest extravagances in Greenwich mansions for hedge fund operators or gazes at the advertisements for jewels whose cost is many a U.S. family’s annual income. This, rather than the random coupling of genitals, is real pornography to me. I hope Old Money sees the folly in flaunting wealth while the U.S. savings rate in 2006 declined to negative 1 percent, according to the Commerce Department, meaning average Americans spent more than they earned last year. It was the lowest savings rate since a negative 1.5 percent in 1933 during the Great Depression.

    According to financial writer Ben Stein, those who fail to save and invest by under-consuming their earnings risk a nightmarish old age. “When you’ve got no money, people can see right through you,” Stein writes with co-author Phil DeMuth in their 2005 book “Yes, You Can Still Retire Comfortably.” They continue: “Even the bus driver treats you with silent contempt. Being poor is like being radioactive.”

    The point is made, although I think the authors do a disservice to bus drivers, who as working people likely understand a failure to save can result from a failure to earn that’s out of our control. “Working longer—at least in a job with comparable pay and benefits—is often not a choice for those who develop health problems or are laid off late in their careers,” according to the Economic Policy Institute.

    If we haven’t had the experience ourselves yet, we’ve heard the stories. Recently, an old friend—a hard-working, frugal guy with whom I’d fallen out of touch—suddenly died in his late 50s. I couldn’t believe it when his ex-wife told me that for the last four years he’d literally been scavenging tin cans. “He was just a guy with a house and a car,” she said. At least he’d died happy, finally getting a promising position two months earlier.

    When stories like that add up, they find their way into focus groups from which pollsters carry a message back to Washington: “Middle-class people want to be financially self-reliant, but it’s scary working without a net.”
    On Jan. 31, congressional Democrats held multiple hearings on middle-class financial woes. Whether to cure middle-class economic angst or exploit it, Sen. Charles Schumer (D-NY), chairman of the Democratic Senatorial Campaign, has written a new book on the subject featuring Joe and Eileen Bailey, a fictional, politically independent couple from Long Island with three kids in public schools and growing money worries. And at the Brookings Institution, two former U.S. Treasury secretaries, Robert Rubin and Lawrence Summers, and former Federal Reserve Board of Governors vice chairman Alan Blinder, have signed on to the Hamilton Project, which “aims to rebuild the social safety net without interfering with international trade and the free market,” according to the Washington Post.


    Chart shows the distribution of liquid net worth, IRAs and Keoghs, housing equity, and total net worth in the HRS. All values are in 1992 dollars. Liquid net worth is the sum of checking and saving accounts, bonds, stocks, and other assets, minus short-term debt. Total net worth is the sum of liquid net worth, IRAs and Keoghs, housing equity, other real estate, business equity, and vehicles. The number of observations is 5,292. Figures are weighted using survey weights.

    What is the “social safety net”? Traditionally it’s been unemployment insurance, health care for the poor and, for seniors, Medicare and Social Security, these last two being all that stands between many and worse than the nightmare Stein and DeMuth describe. In Bush’s first term, when he was pushing Social Security privatization (a.k.a. The Financial Services Full Employment Act), I discussed it with a Washington attorney named Michael Gordon. In 1974, as an aide to Sen. Jacob Javits, a moderate Republican from New York, Gordon had been the chief architect of the Employee Retirement Income Security Act, ERISA, created to protect workers with defined benefit pension plans. (Yes, we are talking ancient history here.)

    Gordon, who passed away three years ago, told me the cure for funding federal social safety nets was a dedicated 1 percent sales tax on luxury items, but Congress wouldn’t touch it. In 1990, Democrats, working out a deficit reduction deal with George H. Bush, had slapped a 10 percent tax on payment above certain levels for boats, cars, jewelry, furs, and private planes. Sales fell, spectacularly in yachts, and killed jobs. Most of those luxury taxes were repealed in 1993, followed by the one on cars in 1996.

    Middle-class Americans may be worried today, but it’s hard to imagine a 1 percent luxury tax, much less 10 percent, passing Congress or even being proposed. Distrustful of government and its powers to tax, we live in a different time. It is hard to picture an undiminished Medicare, which is the financial time bomb, not Social Security. As more middle-class Americans add medical charges to their credit card balances and home foreclosures and personal bankruptcies mount among the indebted, it can only be hoped that those upon whom financial fortune has smiled will consume with class.

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    Last edited by FRED; 02-10-07, 05:37 PM.
    Ed.

  • #2
    Re: Wealth De-redistribution

    ironically, the implication of michael hudson's piece is that we'd all be better off if those with money evidenced LESS class and spent wildly on consumption of real goods instead of plowing money back into the financial sector.

    Comment


    • #3
      Re: Wealth De-redistribution

      Originally posted by Jane Burns

      Middle-class Americans may be worried today, but it’s hard to imagine a 1 percent luxury tax, much less 10 percent, passing Congress or even being proposed. Distrustful of government and its powers to tax, we live in a different time. It is hard to picture an undiminished Medicare, which is the financial time bomb, not Social Security. As more middle-class Americans add medical charges to their credit card balances and home foreclosures and personal bankruptcies mount among the indebted, it can only be hoped that those upon whom financial fortune has smiled will consume with class.
      Jane, I believe you started a discussion of something of eminent importance, but ended it with what I take as in incredulous conclusion; to me it is a laughable conclusion. Alternatively it carries some meaning that flies way over my head.

      What is inately wrong with a 10% luxury tax in a country that is drowning in national and personal debt? BFD* if the yacht makers go out of business. If the future of this country ultimately comes down to worry over jobs being lost from industries making and selling luxury cars, jewelry, furs, and private planes, somebody need to pass legislation that will insure there are a lot more rich people than there are poor. It is a waste to write that this country needs to do something that will make the majority of the population productive of something in the way of goods that we can utilize ourselves or sell abroad.

      What is clear to me is that taxes must go up (and not just taxes on those who piss away money on luxury goods), and profligate spending by regular people and government must do down.

      If one wishes to address Medicare as the looming bull in the china closet, I don't think one can do that without addressing the entire health care system of the country. I received what to me was a laughable email from John Cronyn, Rep. Senator from TX, the other day promoting his amendment "to encourage health in the workforce." If passed, it ain't gonna do squat for what is ailing the health care system in this country.

      Originally posted by From Cronyn's website
      This amendment will provide incentives that make it easier for people to live more active, healthier lifestyles,” Sen. Cornyn said. “The benefits of this initiative are tremendous, including better health, fewer illnesses, improved productivity and reduced health care costs. It will also save taxpayers money. So I hope my colleagues will join me in supporting this important initiative.”
      Cronyn's amendment will correct an inequity, as he sees or his lobbyists see it, "in the tax code, allowing employers to deduct the cost of both on an off-site fitness centers on a pre-tax basis" Cut down tax revenue, and in some magical manner this will make people who eat too much, exercise too little, drink too much beer, and smoke suddenly become interested in gaining better health, experiencing fewer illnesses, becoming more productive, while assuming reduced health care costs will result, all just because the government wants to allow some employers to pay the government less taxes. What BS!

      Momentum builds for universal health care
      By William L. Watts & Carolyn Pritchard, MarketWatch
      Last Update: 12:02 PM ET Feb 10, 2007
      http://www.marketwatch.com/news/stor...o&dist=myyahoo

      If one expects to be alive for the next 20-50 years or have offspring who may be, one should read this article. What is might presage is something beginning, mind you I say "beginning," to happen in the way of seriousnes about the problems with health care in the United States.

      Some quotes.

      "What business and labor seem to be agreeing on more and more is that everyone needs to be covered and it can't be done with a system designed in the 1940s if America is to be competitive in a 21st century global economy," said Sen. Ron Wyden, and Oregon Democrat who has introduced legislation that would sever the link between employers and health insurance, requiring all Americans to buy health policies directly from insurers.
      The notable thing in error here is the good senator's requirement of all Americans having to buy policies from insurers. As long as the health care system has any expenditures that go into the pockets of others in the way of profits, it can never get out of the hole it is in and the hole that is growing by the hour.

      President Bush has proposed ending the tax deductibility of employer-provided health insurance, replacing it with a standard deduction of $15,000 for individuals and $7,500 for individuals. That would give workers who buy their own insurance the same tax treatment as those with employer-provided coverage.
      This is the same crap. People who are not mental giants, including myself, are gonna be allowed to go to the market place and purchase something about which they know damned little for their potential significant benefit, i.e. getting health care when one needs it, from an industry, the insurance industry, looking to make a profit. It will not work.

      Just having turned 65 last summer, I was bombarded literally with flyers from perhaps 15 companies suggesting I either send back a card or call an 800-number to get information about a supplemental policy that covers some things Medicare doesn't. Only one company actually sent me anything that could be considered educational about what coverage it was willing to sell me. It was a whole lot more information that I really cared to read, and I expect many with a bit less education than I would find it unfathomable. All the other companies seemed to want me to talk to someone on the telephone and make my decision to purchase their policy based on that converation. There undoubtedly are a lot of suckers who bite that hook after a simple phone converstion with a company whose real motive is profit. If that weren't true, why do they almost all stay in business while imparting so little information to the people to whom they sell their profit motivated product. It is pure bullshit.

      Same crap for the Medicare drug plan. Lots of flyers with no information asking you to call or to be called in order to decide. Interestingly, I went to a doctor a couple of weeks ago because my blood pressure was up. Hadn't been to one for nine years before that and 20 years before that. I got put on what the company touts as the most widely prescribed anti-hypertensive drug in the world. Went to Walmart with my Medicare drug card, and got the prescription filled for $3 less than it would have cost me had I not been paying for my Medicare drug plan--some $50 for 30 pills. Am I glad I signed onto the drug, you betcha. If one "chooses" not to sign up for the drug plan when first elegible, and later decides to sign up, the penalty is a premium increase of 1% per month for each month from the time one could have joined until one does join. Nothing quite exceeds the freedom to choose, does it?

      What is the answer to all the problems with the unending increases in the cost of health care and the likely on-going increase in the number of people who have no health insurance?

      There is not but one workable answer, whether or not anything I have written supports that answer, and it is a single payer universal health plan funded by taxes sufficient to support it. The government will run it. What doctors make must be capped and the same for all allied health care workers, suppliers, pharmacies, etc. All profit motivated entities now associated with health care must be removed: insurance companies, hospitals for profits, advertising, lawyering. What the government will pay drug and equipment producers must be reduced. If one wants to become a doctor, the reason will be one has the intelligence to do so and the serious inclination to meet the challange of being one as well as the lofty goal of helping one's fellowmen and women.

      Like it or not, there is no other long-term answer to the problem. You better get used to it, because if this country is to continue as a viable nation, it is going to happen.


      *Big Freakin' Deal
      Last edited by Jim Nickerson; 02-11-07, 02:49 AM.
      Jim 69 y/o

      "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

      Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

      Good judgement comes from experience; experience comes from bad judgement. Unknown.

      Comment


      • #4
        Re: Wealth De-redistribution

        re: a nation of yacht builders, let me rcommend a quick reread of this post about plutonomy:
        http://www.itulip.com/forums/showthr...ight=plutonomy
        i suppose there will be growing employment not just for yacht makers, but in the manservant and scullery maid sectors.

        re: healthcare- i think the likelist solution is to do it like california or massachussetts. the proposed systems are a bit of a hodge-podge, allow the insurers to continue to exist [thus more politically acceptable] but use pooled, community rating to undercut the problems of pre-existing conditions and cherry-picking clients/adverse selection. it turns out a huge part of the overheads at the insurers is involved in screening potential clients and denying claims. once those overheads are removed and all insurers are forced to use the same pooled ratings, competition between them should drive down overheads.

        national healthcare has to sold as a global competitiveness program.

        Comment


        • #5
          Re: Wealth De-redistribution

          Since the topic of Universal Healthcare has been brought up. This is something that has a political solution, if there is a collective will to do it. Look at the single Payer solutions, and write your congress people to do something about it. To read up on single payer, go to

          What is Single Payer?
          Physicians for a National Health Program

          People complain that this would be like a Canadian System with long waiting lines. But this is not really true see Canadian and American health care systems compared

          Comment


          • #6
            Re: Wealth De-redistribution

            The chart
            U.S. Household Distribution of Liquid & Total Net Worth: 2006
            has a mean Total Net Worth of $227,483 in 1992 dollars.
            I multiply that by the number of Households = 110 million, to get the ‘Total Net Worth’ for the country = 25.0 Trillion in 1992 $ = 36.0 Trillion in 2006 $. Using 13.0 Trillion for ‘current GDP’, 36.0 Trillion = 2.77 GDP.

            At
            http://www.itulip.com/forums/showthr...=3133#poststop
            I compute the above trend overages of homes + stocks = 1.3 GDP
            (Note that the URL shown as
            http://homepage.mac.com/ttsmyf/RDandRJShomes.html
            is now
            http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html

            So, 1.3 GDP overages of homes + stocks is NEARLY HALF (47%) of ‘Total Net Worth’ for the country = 2.77 GDP! And we, the country, keep these overages well out-of-sight!!! Hell of a con, hell of a con.

            (I reckon all the above is a little rough, not a lot.)

            Comment


            • #7
              Re: Wealth De-redistribution

              Fred, or other readers,

              Is there any additional information about the delta between liquid net worth (LNW), retirement, and housing equity vs. total net worth (TNW)?

              I do see it is supposed to be other real estate, business equity, and vehicles, but I cannot see vehicles being a major contributor at the 70%+ levels.

              Then the ratio of other real estate vs. business equity would be important; TNW minus LNW, housing equity, and retirement (LNW/HE/IK) is roughly half of all assets listed.

              I wonder because a little poking around:

              http://http://www.sba.gov/advo/stats/wkp02co.pdf

              seems to indicate 13% to 14% of all households own one or more businesses. Assuming there around roughly 100 million households in the US, this would mean around 14M business owning households. The same document shows a median net worth in 1998 of $282.5K and a mean of $71.5K.

              This total wealth is about $1 trillion.

              In comparison, if I assume the 95% = 5M households, then TNW - LNW/HE/IK would be $310.5K which leads to a total of $1.55 trillion.

              Extending to the next categories (90%) = 5M households; TNW - LNW/HE/IK would be $170K which leads to a total of $0.85 trillion

              Again to 75% = 15M households; TNW - LNW/HE/IK = $86.2K, total of $1.29 trillion

              Lastly to 50% = 25M households; TNW - LNW/HE/IK = $48K, total of $1.2 trillion.

              Total TNW - LNW/HE/IK of top 50% thus equals (1.55 + 0.85 + 1.29 + 1.2) = $4.89 trillion

              Given that private equity worldwide in buyout funds is around $400B and VC investments total $150B (from 2000 to 2006), and that total small business owner net worth is only $1 trillion, it seems very possible that a large chunk of this (TNW - LNW/HE/IK) is actually also real estate related. The question could be commercial vs. residential, but I suspect that just as a rising tide lifts all boats, an ebbing tide has a similar behavior.

              Private equity: http://www.blackstone.com/news/speec...y_11.30.06.pdf

              VC: http://money.cnn.com/2007/01/22/mark...ion=2007012305
              Last edited by c1ue; 02-11-07, 04:42 PM.

              Comment


              • #8
                Re: Wealth De-redistribution

                Originally posted by jk
                re: a nation of yacht builders, let me rcommend a quick reread of this post about plutonomy:
                http://www.itulip.com/forums/showthr...ight=plutonomy
                i suppose there will be growing employment not just for yacht makers, but in the manservant and scullery maid sectors.

                re: healthcare- i think the likelist solution is to do it like california or massachussetts. the proposed systems are a bit of a hodge-podge, allow the insurers to continue to exist [thus more politically acceptable] but use pooled, community rating to undercut the problems of pre-existing conditions and cherry-picking clients/adverse selection. it turns out a huge part of the overheads at the insurers is involved in screening potential clients and denying claims. once those overheads are removed and all insurers are forced to use the same pooled ratings, competition between them should drive down overheads.

                national healthcare has to sold as a global competitiveness program.
                jk, I maintain that as long as there are profit motives in almost anything of which I can easily enumerate to do with health care some of the dollars that should be spent to provide health care are going into some people's pockets as profits. I am not talking about what is politically acceptable, for the most part things that produce profits for someone are what turns out to be politically acceptable. On these fora somewhere I believe Churchill is quoted in effect as saying Americans finally do the right thing after making everything else fail first. It has gotten to be the same old mess over and over. Ideally, and we are far from an ideal society, the government needs to stop screwing around and put into effect a national health care scheme. A single payer system is what is needed.

                Average Americans, or perhaps 95% of them are not capable of "shopping" for health care nor for what might be the best insurance plan. If competitive plans are marketed, then someone is going to get ripped off to one degree or another. It will be an on going waste of dollars that could be better spent.
                Jim 69 y/o

                "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                Good judgement comes from experience; experience comes from bad judgement. Unknown.

                Comment


                • #9
                  Re: Wealth De-redistribution

                  Originally posted by Jim Nickerson
                  jk, I maintain that as long as there are profit motives in almost anything of which I can easily enumerate to do with health care some of the dollars that should be spent to provide health care are going into some people's pockets as profits. I am not talking about what is politically acceptable, for the most part things that produce profits for someone are what turns out to be politically acceptable. On these fora somewhere I believe Churchill is quoted in effect as saying Americans finally do the right thing after making everything else fail first. It has gotten to be the same old mess over and over. Ideally, and we are far from an ideal society, the government needs to stop screwing around and put into effect a national health care scheme. A single payer system is what is needed.

                  Average Americans, or perhaps 95% of them are not capable of "shopping" for health care nor for what might be the best insurance plan. If competitive plans are marketed, then someone is going to get ripped off to one degree or another. It will be an on going waste of dollars that could be better spent.
                  jim, some time ago i reluctantly concluded that a single payer system is the only thing that made sense. but i think a massachussetts-california style hybrid system would be an enormous step forward, and is much more feasible politically.

                  Comment


                  • #10
                    Re: Wealth De-redistribution

                    Originally posted by jk
                    jim, some time ago i reluctantly concluded that a single payer system is the only thing that made sense. but i think a massachussetts-california style hybrid system would be an enormous step forward, and is much more feasible politically.
                    I appreciate your thinking, and it may well turn out to be the first of some unknown number of steps--which I conjecture will eventually get around to the US once again proving Churchill's observation--after a long time of trying not to get it right, we will someday get it right.
                    Jim 69 y/o

                    "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

                    Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

                    Good judgement comes from experience; experience comes from bad judgement. Unknown.

                    Comment


                    • #11
                      Re: Wealth De-redistribution

                      The anti-tax camp is basically correct. You can't tax the middle class (or below) any more than they already are, and if you tax those above this level, investments (and perhaps people) will effectively flee the country in this new uber-globalized world.

                      Add to this the fact that no one wants to restructure entitlements or health care or acknowledge that the country's various wars (Terror, Drugs, Crime) are totally quixotic, and we appear to just be screwed.

                      The malinvestment baked into the politico-economic cake now has to be eaten.

                      Comment


                      • #12
                        Re: Wealth De-redistribution

                        Originally posted by Fred
                        the U.S. savings rate in 2006 declined to negative 1 percent, according to the Commerce Department, meaning average Americans spent more than they earned last year.
                        What is the definition of "the US savings rate"? Is it total savings as a percentage of total earnings? If so, then the inference above ("meaning") does not follow.

                        I just read an article in the Economist (I'll go and look it out later) which said that the overall negative savings rate is caused by the well off spending more than their income (because their financial assets allow them to do so) while the average Joe is actually saving.

                        Rather than show it algebraically, here are some purposely extreme numbers for purposes of exposition:

                        On our island:-

                        One person earns $1M/year. Is a net spender of $45,000. Savings rate: -4.5%

                        The other 20 people earn $50,000/year. After their spending, each saves $2,000 per year. Savings rate +4%

                        Now the population of 21 has total savings = -$5000 and a total income of $2M.

                        Thus the population as a whole has a savings rate of -0.25%

                        And yet, the average person is saving at 4%.

                        If the US population as a whole is spending more than saving, that doesn't mean that there's a majority (the "average") dis-saving at that rate.

                        Comment


                        • #13
                          Re: Wealth De-redistribution

                          I just read an article in the Economist (I'll go and look it out later) which said that the overall negative savings rate is caused by the well off spending more than their income (because their financial assets allow them to do so) while the average Joe is actually saving.
                          This may be possible, but how would the rich overspending their income jibe with the fact that their net worth is growing faster than 'average' people?

                          It would seem that this could only be the case were income to be narrowly defined to exclude investment gains, real estate gains, dividends, and so forth.

                          As for the average Joe saving - again this is difficult to reconcile with the reports of average wages rising 3% or 4%, but average debts increasing 11%.

                          Again, it is possible that the rich are growing debt as well as overspending income, but the total net worth growth would seem to make this an impossibility.

                          Another possibility is that the rich are minimizing their visible income via various types of tax strategies and/or offshoring. This would reduce their apparent savings, but would still be reflected in total net worth.

                          Comment


                          • #14
                            Re: Wealth De-redistribution

                            Originally posted by c1ue
                            It would seem that this could only be the case were income to be narrowly defined to exclude investment gains, real estate gains, dividends, and so forth.
                            I think income is: wages, bonus, dividends, rents, realized gains.

                            Unrealized gains in your stock portfolio or real-estate investments or home, is not income.

                            If I am unemployed and all I have in the world is $100,000 in a checking account, then I can spend $100,000 this year despite the fact I have no income.

                            Comment

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