Browsing the blog archives for April, 2012.

Hold on to your IRA

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According to a U.S. government report, the Social Security “trust fund” will run out of cash in 2033, three years earlier than the most recent forecast. Anyone paying attention to this demise understands the importance of saving for his or her own retirement. Most Americans include an individual retirement account (IRA) or 401(k) a part of their savings strategy because 401(k)s allow workers to defer the taxability of what they earn today until they take it as income during retirement years. But with $16+ trillion of government debt, some in Washington are looking at the $18 trillion currently sitting in IRAs as part of the fix.

At least two plans are under consideration, one which calls for a reduction in the amount of annual contributions exempt from current taxation from $50,000 to $20,000. The other ends deferred taxation altogether in exchange for an 18% tax credit placed in the retirement account. Washington wants the tax revenue now, and reports suggest that this type of change would increase government revenue by as much as $458 billion annually. Additional details are available at: www.nypost.com/p/news/business/plunder_CrD9s6MElVsEIJj2IVgHuK.

There are many problems with this proposal. First, if the federal government is going to tax income, then it seems reasonable that Americans should be able to defer income from working years to non-working years. The current 401(k) allows you to do that, at least to some extent.

Second, anyone who thinks that the 18% tax credit given will actually survive future attacks on “the rich” is fooling himself. Future leftists will refer to this as another loophole to be closed because wealthy retirees (i.e., those who lived frugally and saved during their working years) just don’t need it.

Third, disallowing Americans to defer taxation on retirement contributions is a disincentive to saving. This means less capital available for business expansion today and lower personal income levels in the future.

Finally–and most importantly–this type of proposal targets REVENUES as the problem when SPENDING is the real issue. Every dollar Washington SPENDS is a tax; it must come from taxpayers today, taxpayers tomorrow if it is borrowed, or all of us if it is financed by printing more currency. Our federal government has a spending problem. Tax overhaul is necessary, but not the core problem.

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Argentina…the next Venezuela

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Don’t look now, but Argentina wants to be the next Venezuela. Leftist President Cristina Kirchner has been leading the charge since her election in 2007.

It started with a mix of populism and protectionism. For example, Kirchner reinstated el impuestazo (The Big Tax) in 2009, doubling the value-added tax (VAT) on imported electronics. Her administration also recently lowered taxes paid by Argentine companies that assemble products in a region known as Tierra del Fuego, the frozen southern tip of the country.

Now Kirchner has taking things to the next level. A few days ago she formally proposed to nationalize the country’s largest oil-and-gas company, YPF, a firm currently controlled by a Spanish majority (57%) owner. Declaring that petroleum is of “national public interest,” Kirchner seeks to acquire 51% of the company for the government from YPF shares. To add insult to industry, the government would not even pay the market price for these shares; the final value will be determined (arbitrarily) by a “federal tribunal.” Kirchner sent her proposal to Congress where her political party holds a majority, so passage is predicted.

The philosophical argument for nationalization is subtle: Some industries are “too important” to be left to the whims and mismanagement of the private sector. But this line of reasoning is not limited to nations like Venezuela and Argentina. The K-12 industry in the U.S. is controlled and delivered by federal and state governments because “the children are too important to be pawns in the profit game.” Privatization efforts with regard to the USPS are blocked because only the federal government can be trusted with something so vital as the mail. Obamacare is an attempt to shift healthcare further in the same direction in part for the same reason: “Life and death is too important to be left to insurance and pharmaceutical companies, physicians, and other profiteers.”

But the profit motive is our friend. It pressures grocery stores, auto repair shops, and movie theaters to deliver the goods and services people really want. It is public ownership that creates the problem because those who produce and deliver the products and services are working for the bureaucracy, not the customer. It might sound attractive at first glance, but nationalization is never productive. I don’t always like everything the folks at my health insurance company do, but I certainly trust them more than somebody from Washington.

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Alternatives to Obamacare

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I have criticized Obamacare on Constitutional, moral, and economic grounds. However, I am often asked about the alternatives. I’ll discuss 4 options here, although the possibilities are endless:

1.Single payer. Everyone pays more in taxes and the federal government provides every American with insurance. Personal control over health care decisions would erode under such a system and rationing would be necessary to contain costs. Support for a single payer plan is not strong, so we’ve move to the next option.

2. Do nothing. Problems aside, the current system isn’t “broken” as the left often depicts. Most Americans have insurance and most who do not either choose not to or are eligible for federal assistance. Non-payers are a problem and the rest of us must pick up the tab to some extent. Most of us have a number of treatment and physician choices, and the U.S. still provides the best treatment in the world. While most Americans want to do something about the current system, a lack of agreement can result in retention of the status quo. This is not the worst alternative.

3. Market-oriented reforms. For example, consumers can be permitted to purchase health insurance across state lines would make the market more competitive. Health care savings accounts allow us to set aside money from each paycheck tax-free and draw from the account when we need it. Giving everyone a tax break for health insurance premiums–not just those to go through their employers–can encourage consumers to buy their own policies when their company-sponsored plans don’t meet their needs. Proposals such as these improve the current system but they don’t address the core problem of overinsurance (see #4). Besides, the left always opposes such proposals because they still require Americans to pay for their own health care.

4. End all deductions for health insurance premiums. This might sounds odd, but overinsurance is one of the biggest problems we face in health care. When health insurance pays your bills, physicians respond more to insurance companies than the patients. Besides, we don’t really care what a procedure really costs or if it is necessary as long as “insurance pays for it.” As a result, the system is overused and consumers don’t demand the service and value they otherwise would if had to pay the entire bill. I’m not saying that health insurance is a bad idea, but it should be purchased to cover major expenses only.

Think about it this way. What if your employer provided car repair insurance that capped the amount you paid for auto maintenance to $50 per visit to the mechanic. We would no longer care how much the repair shop actually charged and we’d insist that they complete all sorts of “preventive maintenance” while the car’s in the shop. Who cares long as someone else is paying?

If average Americans received increased wages instead of health insurance and paid for doctor visits out-of-pocket, providers would become more competitive and value-oriented. Of course, this proposal suffers from the same problem as #3; the left won’t support it because it doesn’t require the “rich” to pay the health care bills of the “poor.”

There is an irony here. The left tells us that a lack of universal catastrophic insurance is the problem, but they offer us comprehensive insurance covering everything from routine visits to the doctor to viagra as the solution. If catastrophic insurance is really the problem, then why not implement option #4 and provide a universal health care benefit for standard treatment in excess of $10,000 per year to all Americans? This could be financed by a small payroll tax. Problem solved…

I’m not really in complete support of this proposal, but I think it has some merit and I want to call the left’s bluff. If this issue is really about protecting average Americans from financial ruin because of a medical catastrophe as they say–and not about wealth redistribution as I believe–then they should line up in favor of such a proposal. I doubt I’ll get many takers.

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