Tag Archives: savings

Pie in the Sky Thinking

Pie in the Sky

There’s no intellectual exercise quite so ethereal as listening to members of the Something For Nothing Crowd pontificate on the glories of Self Reliance, by which they often mean that what is their’s is theirs and what is yours is negotiable.  What they really don’t want to do is pay taxes, having been convinced that they are already burdened with excessive liability for the care and consideration of others.

Basic Numbers

Someone hasn’t told them the average annual federal income tax rate for 2011 was about 8.4% [TaxFound] Or, that the average payroll tax rate for the same year was 6.7% nationally. [TaxFound]  But, let’s assume that a working person earning about $50,000 is liable for about 15.4% in taxes, and 7% in payroll taxes.  We’ll not assume, as some have, that a working person is liable for both employer and employee taxes.  Let’s also assume that the family has two children – that would be about average.  What we don’t want to do is to be misled by the brackets because we haven’t considered the standard deductions.

If our “average” family in Nevada with a median household income of $52,800 has a standard deduction of $11,400 and four personal exemptions of $3,650 each.  (If the kids are under 17 years of age then there’s a another $1,000 exemption for each.) That leaves a total of $26,800 in taxable income for the Feds.  So, the family isn’t going to pay that 15.4% rate, instead they’ll probably pay something like 7.51%. [TaxCalc]

Nevada property tax rates range from 1.77 in Eureka County to 3.66 in Mineral and White Pine counties.  Remember that the tax rate is applied to the taxable value times 0.35 to get the assessed value, and the tax is that assessed value times the tax rate. [NVenergy]

If we take the Nevada average median household income ($52,800) and break out the taxation, the family isn’t paying any 15.4% it’s more like $12.6%. There’s no state income tax, and the “average” take home pay is approximately $42,342.05. [TaxCalc]  This assumes that the median household income is the adjusted gross income of $42,500.  Now we can start playing with our food – the pie in the sky.

The average interest rate on the average home mortgage in the western states is about 3.86% for a thirty year fixed rate home loan.  The median home value is $197,600 in Nevada. [Zillow]  Using a standard mortgage calculator this yields a monthly payment of $927.

The subtraction begins. Take home pay of $42,342 means a monthly income of $3,528.50; and if we subtract $927 in mortgage payments there’s $2,601 left for other household expenses.

For the sake of the argument let’s propose that the family has one car, which means  ownership costs of $517.00, and operating costs in the western region of $236.00 per month. [IRS] Subtract another $753 from the monthly budget. Now we have $1,848 left for the remaining expenses.

Basic utilities in Las Vegas run about $175.56, and in Reno about $130.00; let’s call it in the middle and estimate monthly utility bills of $150.00; now we have $1,698 in the check book.

Now for the groceries.  A family of four can just get by on about $146 per week and eat healthier on about $289 on the higher end. [USDA pdf] Let’s settle for the “moderate” plan which will cost our average family of four about $1,062 per month if the kids are over 6 years of age.  Now there’s $636.00 left.

There’s the health insurance costs, and we’ll assume that our average family is also among those for whom the employer sponsors the health insurance plan.  Employers sponsored insurance for some 149 million people in the U.S. and the average employee annual contribution was an annual $4823, or about $401. [Kaiser]  There’s $235 left over.  (Clothing, entertainment, restaurant meals, appliances, home insurance, books, toys, etc.) The average U.S. family spends about $1,604 for clothing or about $133 per month; and $2482 for “entertainment” which encompasses sporting events, recreation, television, radio, sound equipment, rentals, pets, toys, hobby and play equipment, … [BLS] for about $206.00 per month.  Our average family is now in the hole, to the tune of $104.00.

Here’s where the PIE IN THE SKY begins.

“People should pay for their own kids to go to college!” There should be College Savings Accounts. There are.  And the proceeds must cover:

“According to the College Board, the average cost of tuition and fees for the 2014–2015 school year was $31,231 at private colleges, $9,139 for state residents at public colleges, and $22,958 for out-of-state residents attending public universities.

The College Board reports that the average cost of room and board in 2014–2015 ranged from $9,804 at four-year public schools to $11,188 at private schools. Colleges also provide room and board estimates for living off campus based on typical student costs.”

So, the two children of our average family are to attend a public college, as in-state residents, and the bill will probably be $18,943 for one of them.  We’ll look at a “529 Plan.”  If our average parents started a savings account for a child aged 1, at a rate of $100.00 per month then the parent would be able to cover $37,087 out of a predicted $40,687 in expenses. [Putnam]  Our average family already has to be below average in the entertainment category in order to break even, and now the critics want the family to (a) go into more debt, or (b) shave the meals, the insurance, and other expenses to the minimum in order to save an amount per month necessary to pay for college (IF the interest on the savings account stays around 6%) for one child.

“And they should pay for their own retirement!..”  With these numbers there is nothing but Social Security into which the average person has already paid as a part of the Social Security and Medicare payroll taxes.  There certainly isn’t anything left over for “extras.”  Nor is there any comfort in letting any portion of the contributions fall into the hands of the operators of the Wall Street Casino – who have an interesting way of securing the profits from their Free Enterprise, and ditching their losses on the American public.

“And they should pay if they want to use the roads, a few toll roads would keep the taxes down…”

and we should add this to the transportation expenses

And they don’t need that big screen TV and cable…”  it’s looking like all those entertainment expenses are down to basic cable already.  As for the size of the screen, that depends on the family capacity to incur debt or whether they were able to find a big screen on which someone else couldn’t make the payments?

“And,  Health Savings Accounts?”  Great, if you happen to be unmarried, well to do, and very healthy.  Not so good if you happen to be our average married couple with two children, two children who are as good as the kids next door at getting sick from the latest pestilence they are shareing in the neighborhood. Not to mention their dental bills.

Not to put too fine a point to it, but all that Self Reliance, Rugged Individualism, Pure American Can Do Drivel, is just that Drivel. It sounds good over the loud speaker, sounds auspicious from the television pundits, and makes good high flying rhetoric from the politicians. There’s just one problem. IT DOESN’T WORK IN THE REAL WORLD.  Only in Pie In The Sky Place.

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Income in America – The Hurrier We Go The Behinder We Get?

The average worker’s pay in the state of Nevada is $35,206 per year. The average CEO pay is $5,130,077.  That’s a ratio of 146-1 in favor of the CEO, a figure which rockets up to 299-1 if CEO compensation is compared to our minimum wage earners.   [Paywatch]  If we look to the 89101 Zip code specifically, the median annual compensation for a CEO is $736,318 or 21 times the earnings of the average worker.  The range in that area goes from $396,391 to $1.059,652. [SalWiz]  If we look north, the average CEO compensation in the 89501 Zip code is $732,846, with a range of $394,522 to $1,054,657. [SalWiz]  The problem isn’t that some individuals are paid more than others — the core issue is that there are economic pressures which continue to put a drag on our economic recovery, and some of these are the result of wage and tax policies which favor financialism over good old fashioned capitalism.

The first argument launched from the conservative side of the spectrum is that these numbers are necessarily flawed, and therefore of little utility in debate about wages, salaries, and compensation in general.  However many issues the Center on Executive Compensation , allied with the U.S. Chamber of Commerce, and the National Association of Corporate Directors, may have with the methodology, and with the proposed SEC rules on ratios, [Blmbrg]  the points remain — (1) Multinational and other large corporations really don’t want to disclose their CEO pay packages, and (2) They really don’t want the issue of executive compensation tied into the discussions of tax equity and fairness.

This is an interesting line because corporations generally have no problem reducing almost any issue by quantification, be it allocation of purchasing orders or labor costs and productivity.  One easily reached conclusion is that the quantification called for by the SEC under the terms of the Dodd Frank Act isn’t something the corporations want to do.

The second common assertion is that these are the “job creators,” and therefore should be immune from any additional taxation, and certainly from any increase in the taxation of capital gains.  We are continually told that any attempts to adjust the inequities via minimum wage increases or tax policy will have dire effects on small business.  Testing this contention requires looking more carefully at the old common ‘wisdom’ that small companies are the driving force in job creation.  There’s some evidence this may not necessarily be the case.

While it’s still true that businesses with 49 employees or less create the most jobs, the trend since 1990 indicates that large employers (over 500 employees) added 29% more workers between 1990 and 2011, while those with 50 or less added 10.9% more. [NYT BLS]  In short, what the large corporations do in terms of compensation of CEOs and employees is important, and become more so as additional jobs are the result of hiring decisions made by large firms.

Practical Matters

## As a practical matter, income inequality only becomes a problem when such a large portion of wealth is tied up in the hands of so few that the savings capacity of individual workers is reduced.  Obviously, at the theoretical level, the more workers save the more money becomes available for investment.  Practically, the more workers are able to save the less reliance there is on social safety net programs, and the more savings accounts of all varieties are available for (a) consumer spending — such as in retirement, and (b) investment by the banks and mutual funds which hold them.

One way to observe this in the real world is to look at what people are doing with their 401(k) accounts.  Now that housing isn’t the most apparent source of income, individuals and families are increasingly tapping their retirement accounts to meet necessary expenses.  In 2011, for example, Americans withdrew about $57 billion from their retirement accounts while home equity loans were down by 38%. [Blmbrg]*

At the consumer debt level, the Federal Reserve’s report on Household Debt Service and Financial Obligations ratios shows consumer debt which bottomed at 4.97 in the first quarter of 2012 is now back up to 5.14.  People who are borrowing aren’t saving, and if they aren’t saving then those funds are not available for investment.

Our debt levels are back up and our personal savings rates are headed back down.  The Federal Reserve chart shows an increase in personal savings during recessionary periods, a spike in December 2012, and then back down we went.

Personal Savings RateNothing says “squeezing the middle’ quite like watching (a) dipping into retirement accounts, (b) increasing consumer debt, and (c) declining personal savings.

## Income inequality becomes a problem when the funds which should be invested in the expansion or improvement of capital projects is diverted into ‘manufacturing’ financial products which add wealth to their holders and traders, but do not add assets, fixed or short term, to corporate enterprises.  Look at the following chart showing the trends in how banks earn their income:

US investment banking fee composition

(See Capital Markets Outlook – Deloitte Israel, Global Investment Banking Review – Thomson Reuters, both in pdf)

Trading in “equities” is earning a larger portion of banking revenues in recent days, from 17% to 48%, while loans have contracted since 2005.  And bonds, the old staple of the investment banking sector? Improving, but not as well as the equities column of the ledger.

If the tax on capital gains is only 15% then what incentive does an investor have to invest for the long term in manufacturing capacity?  For that matter, if funds are in the hands of institutional investors what incentive is there for long term investment instead of seeking short term gains?  In 1995 institutional investors held 140.8% of our GDP, in 2011 that number had increased to 211.2%.  In 1995 institutional investors held $11,223 billion in financial assets, by 2011 that figure stood at $24,220 billion. [OECD pdf]  And then there’s this chart — notice the increase in the column representing investment funds compared to that of pension funds:

Investment Institutions by typeIt isn’t a stretch to conclude that recent trends indicate there are more institutional investors and those investors are increasingly in the form of ‘investment funds.’  The small chart below shows the the increase in the number of hedge funds since 2000:

Hedge Funds






And, as we might guess, the smaller, newer funds are doing well, but they’re also more likely to ‘blow up.’ [FTAlphaville]  It’s necessary to remember that what’s good for the hedge funds and asset managers (short term gains) is not necessarily good for the rest of the economy (long term stable prosperity).   The focus of the money managers is, predictably, money. Money becomes the ultimate measure of wealth, not the fixed and other assets of other enterprises.

If we’re looking for the barriers to economic growth in the U.S. some attention needs to be paid to (1) the growing income inequality which puts pressure on individual and family saving capacity; (2) tax policy which rewards investment for the sake of ‘money’ rather than investment for the sake of long term corporate viability; (3) the role of institutional investors and their agendas in the financial markets; and (4) the declining role of retirement funds for their original purpose (retirement) and in the overall institutional investor landscape.

We’ll do better when we can return to the traditions of capitalism — in which wealth is measured not only by bank accounts, but by what those bank accounts can provide for the businesses and industries who build them.

* See also: Angry Bear Blog “Americans Raid 401(k)s” May 8, 2014; EPI, “The State of U.S. Retirement,” March 12, 2014; Naked Capitalism, “Even Harsh Frontline Program on Retirement Investments Understates How Bad They Are,” April 24, 2013.  CAP “What Can We Do About Retirement Fees Straining Middle Class,” April 15, 2014.


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