The Feds have a gift for prudent savers

James C. Sandefer

If you aren’t a good test taker don’t get queasy, this is the easiest one you’ll ever take because it only has one question. What is the federal government’s gift to you for being a responsible, live-within-your-means, prudent saver? The answer is nothing for most folks. But the Wall Street executives who work for companies that received stimulus money have raked in obnoxiously high bonuses. Those getting nothing for being prudent, taxpayers, are also footing the bill. Once again the Feds offer a textbook example of what happens for people who are greedy, arrogant, and imprudent versus what happens to those who demonstrate personal fiscal responsibility.

Almost daily for the past few months someone representing the government looks into a TV camera and tells us how spending trillions of dollars is keeping interest rates down while concurrently supporting the economy, social service programs, and bolstering housing prices. What they fail to mention is how those same low rates have inflicted collateral damage on those saving their money. Many economic analysts say it’s a predictable redirection of wealth from savers and retirees living on minimal, fixed incomes to those who intentionally bought more house than they could afford with the assumption that the values would climb forever, lived extravagant lifestyles using every cent they could squeeze out of home equity loans, and maxed out the limits on multiple credit cards. All of this occurred right under the unwary eyes of the federal watchdogs that were charged with and assumed to be monitoring the action (e.g., House Financial Services Chairman Barney Frank and crew).

As recent as 2007, the average yield on a one-year federally insured bank CD was ranging between four and five percent. Today the average yield on a one-year CD has plummeted to less than one percent. Of course, going along with this slap to senior savers is the fact that none of them will receive a Social Security cost of living increase, but odds are mounting that they will see an increase in the cost of their annual Medicare premiums.

It’s become customary practice — a wise one — that when the U.S. economy falters, the Fed cuts very-short-term rates, the only ones it controls, to stimulate business. But this time the Fed hasn’t confined its rate-suppression activities to the short-term markets.

Another frightening ploy by the Fed is their buying of billions of dollars in virtually worthless mortgage notes in what they defend as a responsible attempt to hold down mortgage rates and stabilize or increase home prices. That’s not working out too well as confirmed by the recent announcement by the Federal Deposit Insurance Corporation that they’re basically broke and can’t back the loans should most or all of them default within a close time span.

It gets better, and you may be old enough to recognize the replay scenario, but this one has a different twist at the end. Within the economic stimulus package the federal government began promoting Build America Bonds (BABs). Under this program the Treasury pays 35 percent of the interest costs of project-related bonds issued by state and local governments. Sounds good at first glance, but these BABs are taxable securities, not the traditional tax-exempt kind of bonds typically offered by state and local governments.

Since the inception in April of this year, almost $40 billion of BABs have been issued since the program began in April. According to economic and market experts, this reduction in the supply of new, tax-exempt municipal bonds has played a primary factor in smothering yields on traditional state and local bond offerings thereby giving the Feds an even greater role in controlling which localities receive stimulus dollars and how the money is spent.

But the day is coming, probably sooner than later, when the federal government will lose control of the mechanisms for keeping rates artificially low, and the reason is summed up in one phrase: The Chinese government. As we’ve been witnessing for years, the major financier during this recession ahs been China and they’re rapidly approaching a point where they want to be paid back. If you happen to be a market watcher, then you may have noticed the steep decline of our dollar compared to other world currencies. This isn’t a positive signal for things to come, and an acceleration of this decline would cause potentially insurmountable pressure on the Fed to release their grip on interest rates meaning they would immediately rise to shelter the dollar from a global collapse.

In the meantime, be sure to hold a pleasant thought for the Feds who’ve provided a gift for those of you presumably wise and responsible enough to maintain a lifetime of prudent saving. And that thought might be: Thanks for nothing.

In Washington tax season is year-round

James C. Sandefer

President Obama habitually insists that he won’t raise taxes on households making less than $250,000. But he never says that only high-income folks will be the ones subject to higher taxes. That implies many of us will be hit with some form of new tax.

As confirmation of such an assumption, a growing number of Democrats have warned that lawmakers must get the deficit under control soon. Among their considerations is the creation of a value-added tax (VAT) and they plan to add it to the federal income tax. That means every taxpayer will be paying more when making virtually any purchase from a pair of socks to an online college course. There’s no limit.

For the purpose of clarification, a VAT is a consumption tax and comparable to a national sales tax. Such a tax has frightening implications or everyone including the manufacturer of a product, the business that sells it, and the consumer who buys it. Everyone pays a portion of the additional cost whether you want to or not.

While such a tax most likely won’t be levied before the end of the year, merely the serious discussions involving it raise concern and offers further confirm that the administration cannot pay of everything they’ve been promising without additional taxpayer/consumer contributions. There’s nothing a sitting politician likes better than a new tax, not even a hip-pocket campaign contributor because they can die or actually come to their senses and pull the plug on their cash supply. Taxes are another story; once implemented they tend to live on forever.

Multiple members of President Obama’s administrative team raised the issue of a VAT several days ago during news various interviews noting that the only way to stabilize the current and projected debt dilemma is to reduce spending, reduce the growth in health care costs and add new revenue, and directly offered the VAT is a viable option that must be considered.

Team Obama has also proposed slamming shut all corporate tax loopholes and boosting the tax hit on upper-income households by simply allowing many, if not all, of the 2001 and 2003 tax cuts to expire for households earning greater than $250,000. Another proposal includes making those cuts permanent for all other taxpayers, and that would cost the Feds an estimated $2 trillion in lost tax revenue over a decade.

When you consider that the top 5% of taxpayers already foot the bill for most everything accomplished by businesses in the country it becomes a bit challenging to comprehend how they can pay an even greater share of their earnings to the federal government. More significant is the question, “Why would they want to?” At some point these people are going to shut the doors on their companies and various other ventures and retire. There’s no realistic incentive to hand over the majority of their earnings (more than 50%) to Uncle Sam. Would you work for fifty cents on the dollar, or less?

At first glance, imposing a VAT might appear appealing as a mechanism for lowering personal and corporate income tax rates. But that’s dependent upon the rate of the VAT. For example, a low rate in the mid single digits combined with the current unbridled government spending pace won’t come close to offering lawmakers a feasible option for lowering income tax rates.

For the moment the chances of enacting a VAT is relatively low. Democratic leaders in the House say it’s regressive and would worsen the tax burden on lower-income people. In effect, it would be like to shoving their constituents out the door of an airborne aircraft. Doing so would all but end their political careers during the 2010 election. And conservative Republicans view a VAT, which would be loaded on top of the current tax system, as another factor that could crush an already shaky economy. But at this point, the Feds are running out of options as the debt meter continues climbing.

Just when you thought taxes were as problematical as they could get, our friends in Washington may have come up with yet another outrageous idea for allowing us to help them claw their way out of this financial abyss.

Another oxymoronic tax scheme

James C. Sandefer

If you wanted to attract a greater number of international travelers to the United States, would you consider taxing them? Of course not, but that’s exactly what tourism officials and lawmakers are considering. These people want to charge those who visit our country an additional $10 for the experience.

Supposedly, all money collected under this program will be used for creating and funding a non-profit company with the sole intent of marketing the United States as “the” destination for global tourists, business travelers and students.

But there is a slight hitch; before a cent can be collected and spent on marketing, the company must identify a dollar-for-dollar match from the private sector. An estimated $100 million is needed. Here’s additional information that should bolster your confidence in the probable success of the venture; it will be a private-public partnership overseen by Congress and the Secretary of Commerce. Oh yeah, this has success written all over it.

True to form, the U.S. House of Representatives voted overwhelmingly for the Travel Promotion Act last week, which includes the $10 visitor privilege charge. The measure is now moving to the Senate where passage is also likely and anticipated to be enacted before the end of this year, according to a spokesman for the U.S. Travel Association.

So who does this tax impact? Visitors from countries not required to have entry visas for up to 90 days of travel in the U.S., primarily European countries such as Australia, Brunei, Japan, Korea, Singapore and New Zealand, will be required to pay the fee. But the Feds are giving them a break; travelers will only be required to pay the tax one time during a two-year period, and they can travel as often as they wish into and out of the United States. Gee, do you think these countries will reciprocate with a tax in kind?

And adding insult to stupidity, when this act is passed and implemented it will create yet another federal agency. The Department of Commerce defends and supports the action by saying it has trade and economic development units but doesn’t directly promote tourism, a much needed initiative for our country. Of course, let’s add some additional bureaucrats to the federal payroll. Don’t worry; if this idea goes into the tank the taxpayers can shore it up with a little more stimulus cash. Money is no object when all you have to do is print more of it. Does this mean we’re also going to streamline the background check and clearance procedure for people who opt to pay the $10? Hmm, I doubt it. Given the fact that many potential visitors already avoid the U.S. because of the already laborious security procedures, why would they start coming here in droves with the understanding they’re be paying more money and getting absolutely nothing more in return?

Statistically, the total number of international travelers to the United Stated is expected to drop to 51.4 million this year from more than 58 million in 2008, according to the Commerce Department. Yet, the Feds insist a $10 fee will have no impact on potential travelers. Did everyone on the federal payroll skip every basic math class from elementary school and beyond?

As anyone with a hint of common sense would anticipate, most European countries have already voiced opposition to the bill saying that it’s nothing more than a tax on tourists to discourage tourism and a ridiculous concept. As previously mentioned, many European countries are planning to impose comparable retaliatory fees on Americans who visit their countries.

Welcome to America, that’ll be $10 please; then take off your shoes and step through the metal detector.