Category Archives: Economy

Life in a Fragile Bubble: Trump, The American Dream and The Coastal Elite

Life doesn’t get any easier. As miserable as I was as a child, I now understand why all the adults fancied the idea of returning to those years so much. Not only did life move slower then, it also was a long, arduous climb up a mountain with the promise of fields of splendor on the other side. It seemed childhood was for fun and games but life itself truly started past the peak of that mountain—the entry into adulthood.

I could have been born in Africa or Syria, and not even had the privilege of a childhood. But my privilege is who I am, and it shaped how I feel today—this lack of ability to wake up at 6am and work out and commute an hour or more to work and sit at a desk all day completing tasks to help a company grow that may or may not work and smiling and small-talking and politicizing and head back towards home and spend an hour or more in commute and arrive home exhausted to a husband I rarely see and have no time to be a wife to and repeat this five days a week so that when Saturday arrives all I want to do is sit and stare at a television or sleep or avoid doing any of things that need to be done at home, and all this is before I have the responsibility of children in my household which would undoubtedly add a whole new layer of exhaustion and love and sense of failure and questions of purpose—another peak I’m slugging along towards now, trembling at seeing what is on the other side, and equally terrified to never see it. Continue reading

Is Income Inequality Necessary?

As we get into the thick of election season, it becomes apparent we have two Americas — the Trump ‘merica, and the Sanders America. Everyone else falls somewhere in between. Trump’s success stems from his “I don’t give a shit” mentality, offering solace to those angry over years of political correctness getting them nowhere – he wants to “make America great again.” Sanders offers a voice to those who see corruption – legal or not – causing greater inequality and the downfall of our country.

Who’s right?

I’m bi-economical. I’m a socialist and a capitalist – but neither at the same time. Socialism sounds great, until you realize how that limits the opportunity to work hard and get ahead. Capitalism, however, requires inequality. It provides the opportunity to get rich, but that opportunity is light years away for those who didn’t inherit wealth, or work hard and due to a mix of luck and tenacity and good timing make enough money to catapult them into the upper echelons of society. Old money versus new money.

There is no right, persay, but we can look at which countries are happier than others, and how that relates to inequality across their residents. In this Gallup Poll and the World Top Incomes Database, the point is made that in countries with the biggest income gaps between rich and poor, the middle class find themselves unable to afford some simple luxuries like private schools and a house in a good neighborhood.

 

Obama decried income inequality this week in his final State of the Union address. The standard Democrat message — support a thriving middle class  — was front-and-center in the speech.

“Companies have less loyalty to their communities. And more and more wealth and income is concentrated at the very top,” he said. These trends have “made it harder for a hardworking family to pull itself out of poverty, harder for young people to start on their careers, and tougher for workers to retire when they want to.”

Many blame Silicon Valley as a leading source of furthering income inequality. A 330-page report by the World Bank released on January 14 notes that “the economics of the internet favor natural monopolies, the absence of a competitive business environment can result in more concentrated markets, benefiting incumbent firms. Not surprisingly, the better educated, well connected, and more capable have received most of the benefits – circumscribing the gains from the digital revolution.”

I know that income inequality is at play in America because I’m in the top 5th of income earners and am in the fourth quintile (of five) of all U.S. households in terms of my networth, and still I am unable to afford a home in a good neighborhood or to send my “future” children to private school, should I want to. If I feel this way, I can only imagine how the rest of America feels, outside of the .01%.

Paul Graham, a prominent super-rich Venture Capitalist went on recently about how we need income inequality. “You can’t prevent great variations in wealth without preventing people from getting rich,” he wrote in an essay that went viral online last week, “and you can’t do that without preventing them from starting startups.”

Starting in the 1980s, a gap has been widening between what the best-paid Americans earn and what everyone else in the country earns. Economists Barry Z. Cynamon and Steven M. Fazzari shared in a new paper that “Rising income inequality is now a significant barrier to economic growth and full employment.”

I’m worried. I’m worried about the future of America. History has proven that income inequality, when let go for a long time, causes big problems, even civil wars. And in 2016, lower pay for the poor is causing an even wider income gap.

Since the late ‘70s, most of the growth in workers’ earnings has gone to the people who have made the most money. To be precise, the wages of the top 1 percent of workers have grown 138 percent since 1979, while the wages for the bottom 90 percent grew only 15 percent during that period. Yikes. This especially hurts our social security system, which underestimated income inequality, making higher income earners pay a much smaller percentage of their income in social security tax than lower income earners.

This is a huge problem since the number of seniors will double by 2060. If we think income inequality is bad now, it will only continue to get worse.

I find my idealistic side wishing we could get rid of money altogether, but my realistic side worried about creating a decent life for my future family. Where I live, it certainly feels like the only way to do this is to have a household income in the 1% ($400k+) per year, and even that is really just “upper middle class” here. Achieving that is very challenging. It’s much more likely that I’ll be priced out of Silicon Valley as I decide to have a family, and I’ll drop into a lower household income level to be able to afford a middle class lifestyle somewhere else.

 

Middle Class? Not So Fast. A Tale of a Downwardly Mobile Society

With election season starting to heat up, so is reporting on the so-called “middle class.” Apparently, 9 in 10 Americans consider themselves “middle class” (I’m no math genius but something tells me medians and averages don’t work that way.) Given most Americans are middle class in their minds, and middle class today isn’t what it used to be, in short, everyone is freaking out.

Ok middle-class math, why does America hate you so much?

“The middle-class label is as much about aspirations among Americans as it is about economics. But a perspective that was once characterized by comfort and optimism has increasingly been overlaid with stress and anxiety.” — Telegram

I see. So most Americans aspire to be middle class, as everyone has been sold this dream of working hard to get the basics in American life — a decent house, backyard, education, healthcare, maybe vacation once a year. No one is expecting to afford regular Gucci on a middle class income. We were just all told work hard and you too can be middle class, and quite frankly upwardly mobile from your parents lifestyles. Yet, even if you’re doing exactly the same thing your parents did, you’re actually worse off today. No wonder we’re all anxious.

“A recent report from economists at the Federal Reserve Bank of St. Louis concluded that “families that are neither rich nor poor may be under more downward economic and financial pressure than common but simplistic rank-based measures of income or wealth would suggest. The study, conducted by William R. Emmons and Bryan J. Noeth, found that one reason many Americans viewed themselves as struggling was that their real incomes had not advanced significantly beyond their parents’ even when they reached higher educational levels, while those who matched their parents’ achievements were actually worse off.”

The New York Times published an article this week titled “Middle Class, But Feeling Economically Insecure.” That headline, brilliant, sums the middle class anxiety up to a T.

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Update: Tax Benefits only the Rich Enjoy

One of my readers, Jake, posted a thoughtful response to my post 10 Tax Breaks Only the Rich Enjoy noting that my explanations were factually inaccurate. I thought he had some really good points, so I wanted to address each below. I also want to clarify that I do not necessarily have anything against rich individuals who worked their way up to obtain wealth. The problem is that once a family has money they can maintain that money within their family for generations, with many “trust-fund babies” not having to earn their wealth. Also, I have a problem with tax loopholes that are designed to only benefit the wealthy yet that are useless to the middle class.

(Side note: I think that federal and state income tax should be adjusted for cost of living per county. It is obscene that a San Francisco household should have to pay the same effective tax rate to someone in Fresno where cost of living is much lower. $300k in AGI for a married couple is a lot in many regions of the country and in others it is squarely in the middle class. Thus, income tax brackets should be adjusted for cost of living. I’m not sure if this could work, but it would make a lot more sense then the current tax system.)

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Jake wrote: “Sorry, but most of this applies to the 0.01% of income earners, not the 1%. Additionally, a lot of what you outline is misleading. I’ll address each section.”

While many of these tax breaks are most beneficial for the .01%, the .05% and yes even the 1% get more out of many of these tax breaks than people with middle class incomes. The super, super rich get the best tax breaks of all.

RE: The Rich paying 0% on Capital Gains Tax

Jake: I don’t know how you got 0% capital gains tax. Not only do the rich have to pay capital gains tax, but they pay it at a higher rate because of their income.

The really rich do not pay capital gains tax at a higher rate. How can this be? Most people who aren’t extremely wealthy have to work and work for pay. When we work, we generate income. This income is what defines our capital gains tax rate. The top capital gains rate for the wealthy is 20%. So how are some getting away with not paying any capital gains tax?

The super rich do not need to generate income. If an investor is in the 10% and 15% tax bracket for income, then s/he pays 0% in capital gains tax. This means that if someone has enough money to sustain them via investment growth and dividends, s/he never has to earn income and can stay in the lowest income tax bracket, thus withdrawing any dividends and gains on investments at a 0% capital gains tax rate.

Thus, my point is that capital gains tax rate should be the same for everyone, not based on income levels, so that way no one can cheat the system.

RE: Mitt Romney paid just 15% federal income taxes despite making way more money than someone in the top brackets

Jake: Yes, Mitt Romney paid 15% in federal income taxes, but most Americans making 50-75k paid 7.8%. Someone that makes 100-200 paid 12.1%. The kicker? The bottom 50% of income earners paid 0% in income taxes. It puts Romney’s 15% in context. These are facts.

This isn’t about the bottom 50%. Yes, in our society people who make money pay tax to support services for people who are unable to make enough money to live, true. But the actual problem here is not about the bottom 50%. It’s the fact that the middle class is disappearing due to loopholes like this only available to the super rich. If you make $100,000 a year (single filer) you will pay 21.18% of all of your income to federal tax. If you make $200k, you’ll pay 24.93% of your income to federal tax. At $300k a year, that’s 27.62% to federal taxes. But if you’re super rich and in one of these jobs where the loopholes are available, you can pay much less while earning much more.

RE: Home deduction tax benefit is much better for the rich than the middle class

Jake: “Yes, the rich enjoy the home interest deduction along with 67% of America. The rest of Americans can also deduct the full amount, while the PEASE limitation reduces the amount that the rich can deduct.”

True. However, the way taxes work, the wealthy are getting a much bigger benefit to purchase property over the middle class. If the wealthy haven’t taken advantage of the former loopholes, basic math tells us that the deduction for the rich is going to be greater than that for the middle class. “One of the unfortunate and largely unintended effects of structuring tax benefits as deductions or exclusions is that they tend to provide much bigger tax benefits to those in the highest tax brackets. For a wealthy taxpayer in the highest tax bracket—now 39.6 percent—a $10,000 itemized deduction, such as one for mortgage interest, results in $3,960 in tax savings. For a taxpayer in the 15 percent bracket, however, that same deduction is worth only $1,500.” (source) Yes, the PEASE limitation is helping this a bit, but the mortgage interest deduction still percentage-wise much greater benefits the wealthy over the average middle class person.

RE: Giving to charity to preserve family wealth

Jake: “This just doesn’t make sense. How can you knock giving to charity?”

Answer: Because “giving to charity” is not always actually giving to charity. For example, the Walton family, heirs and heiresses to the Walmart fortune, are using this loophole very smartly to preserve their wealth over generations. With a fortune worth $115.7B, the family is set for at least a few generations, and tax laws help them ensure this.

How is this possible? The Waltons and many other super rich families use a charitable trust that allows the donor to pass money on to heirs after an extended period of time without having to pay estate tax! If a donor locks up assets in charity  trusts (CLATs) for a long period of time an amount set by the donor is giving away each year but whatever is left goes to a beneficiary TAX FREE. Just one of the charitable trusts would result in $2.2B for Walton heirs, without owing any tax on it. (source). While most people won’t have to pay estate tax anyway (your estate needs to be worth more than $1M before estate taxes begin to be levied), it is the super rich that the estate tax is designed for – to ensure that people aren’t just living off their family’s wealth and never paying a cent to support the government or working a day in their lives.

RE: Deduction for private jets

Jake: ‘Not many 1%’ers own private jets. That’s for corporate CEOs, professional atheletes and entertainers….many of the 0.01%”

True. This is probably relevant only to the top elite only. Nonetheless, it’s still a tax break the super rich enjoy.

RE: Fake-Out Agricultural Tax Credits

Jake: Anyone who owns a home can do this (67% of America), not just the 1%

Each state has its own rules on how individuals who own property can take tax credits for agricultural use. The point is not whether anyone who owns a home can take these credits, but how the credits are much more valuable for people who own expensive homes and properties. Another example of this – in NJ, fake farmers are costing the state millions of dollars. The Farmland Assessment Act of 1964, intended to preserve agriculture in NJ, is being used by millionaires, developers and anyone with at least five acres of land to slash their farmland tax bills by 98% — all they need to do is produce $500 in goods per year to qualify for tax breaks. For instance, one person used a cow to eat the home’s front lawn for a few months and then sold the animal, enabling the individual to take the tax break on their five acres.  Even Bruce Springsteen takes this tax credit. While he pays $138k a year in taxes on his own home, he owns an additional 200 acres which he has a farmer come and grow a few tomatoes so he doesn’t have to pay a lot of tax on this land (only $4639 per year.) (source)

Thus this tax loophole doesn’t benefit 67% of America who own property, but only the super wealthy who own more than five acres of property (rules vary per state but generally this is designed to help the super rich fake farmers only.)

RE: Rental Property Tax Benefits

Jake: Anyone with a rental property can do this type of exchange, not just 1 percenters.

Again, you’re spot on Jake. Anyone can take advantage of the tax loophole which enables them to purchase rental property and do a like kind exchange to trade it for property worth the same or more without paying taxes. Now, only the rich can afford to do this enough for it to make a big difference. For example, as someone with $300,000 networth, I invest in real estate via REITs. When I sell a REIT I must pay capital gains tax on this REIT, even if I want to purchase another REIT. I cannot just trade this without paying any tax. Also, I could own rental property and do a like kind exchange, but with $300,000 total in networth I’m not going to be able to purchase enough property for this to really help. Since wealthy real estate investors can do this over and over again (there is no limit for how many times they can trade property without paying tax and taking deductions for depreciation of their owned properties on sale) in the long run they will only pay capital gains rates on the property sold last.

But if you’re really rich, you never have to sell this property when you’re alive! You can pass this on to your children tax free. The basis which your children will pay tax on upon sale of the asset is determined not by how much you paid for the property in the first place, but instead how much it was worth on the day you die. Assuming you were a very smart investor and used like-kind trades throughout your life, you could have significantly grown your real estate value over time, enjoyed depreciation deductions, and then pass on the property tax free to heirs who can sell it for the amount it’s worth on the day of your passing. Most people cannot afford to keep so much of their networth locked up in investment property, but the super rich can.

So, Jake, as you see, much of my points have to do with how these tax benefits mostly help the super rich. This may not be the 1% but at 1% you start to experience some of these benefits. Once you have a certain amount of money in your family, though, you can maintain it for many, many generations through these loopholes.

 

OMG: 36% of Americans Have NO Retirement Savings

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The concept of “retirement” always seemed a bit funny to me — after all, why save up all of your recreational time for the years when your body is expediting its rate of decomposition? Retirement wasn’t always a thing just as engagement rings were not always a thing (read a good recap of how retirement came to be on The New York Times.)

It turns out that when you’re older, keeping your mind and body busy with work can help you live longer (no really, it’s proven that retirement has a detrimental effect on health in old age.) Research from the Institute of Economic Affairs and the Age Endeavor Fellowship found that both mental and physical health can suffer — increasing the likelihood of clinical depression by 40% and having a diagnosed physical condition by 60%. That said, not everyone has the luxury of working until they kick the bucket, even if they wanted to, and even if it would be better for them statistically speaking. Between disabilities caused by your body slowly falling apart and the fact that many employers just don’t like old people, most employees stop work well in advance of the time their soul peaces out.

For “us millennials” we have this opportunity to determine what we want in our retirement or non-retirements, to at the least have a choice that many boomers now don’t have because of the great recession. Continue reading

Investing in China ETFs: It’s Complicated

Whether or not you believe in any specific countries’ ability to economically eclipse the U.S., it’s common investor knowledge that one should diversify internationally in case sh*t hits the fan in America.

In many cases investing in a good general international index fund, like Vanguard’s Total International Stock Index Fund (VTISX), checks off the global diversification box. Yet for others taking educated bets on particular regions may be ultimately more lucrative. Given China’s fast-growing economy, I wanted to do a bit of research into investment opportunities for the average investor to take advantage of China’s potential reward. Of course, investing in a young market has its many risks. My goal is to educate myself on these so I can invest wisely in the country (I already own a small amount of HAO — China Small-Cap ETF, but nothing too significant yet.)

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Holy Cow: 1 in 5 Millennials Living with Parents

Today The New York Times posted a piece “The Boomerang Kids Won’t Leave.” Apparently one in five people in their 20s and early 30s lives at home today. And 60 percent of young adults receive financial support from their parents. Despite the challenges I’ve faced in my career, I know I’m extremely fortunate to have been able to… boomer… without the rang.

Nearly 45 percent of 25-year-olds, for instance, have outstanding loans, with an average debt above $20,000. Student loan debt is frightening. I’m a privileged spoiled brat. My parents paid for all of my overpriced, mid-tier private school BFA and a ridiculous amount of expensive art supplies along with the typical library of never-look-at-again textbooks. While I picked up a very part-time job in college at my school (because I didn’t like feeling that spoiled) the reality was the little money I made barely covered, well, not much at all.  Continue reading

Game of Thrones: An Allegory of America’s Class Warfare

downloadOne of the best shows on TV today – Game of Thrones – is successful not only due to its typical onslaught of T&A HBO is known for (which is has plenty of, mind you), it’s because the show itself is an allegory of the age-old problem with societal inequality. Specifically, Game of Thrones walks the fine line between showing different families and individuals at war for wealth and power in a fantasy world, and one where us modern folks can relate by looking at what we’d sacrifice for the success and longevity of our own families.

I’m not the only one who sees the underlying commentary of humanity as a whole in the series, and beyond all the humping there’s a warning for us all: as long as wealth remains within families, there will always be conflict and violence. Peace is not possible, even for the peaceful.

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America’s Most Stressed Generation

In today’s latest bit of depressing sociological discovery by The New York Times, reporter Catherine Rampell highlights what personal finance bloggers have been saying for years – college degrees are the high school diploma of years ago, but the cost for the degree isn’t fairly matched with the proper career and salary.

The article features a law firm in Atlanta that has a policy to only hire employees with college degrees, even for the $10 per hour “runner” job that really shouldn’t require a college education to perform. Due to diploma inflation and weak job markets, it’s easy to make the cut off for consideration in any role a degree. The firm agrees the education isn’t really necessary for the positions, but the social life gained in college to joke about school sports teams is. How sad.

In 2005, when I graduated college, the job market was better than it was today. I still had a very hard time finding a job, but refused to settle for an administrative position which took the four years of schooling I had just completed and rendered them useless. Luckily, I had the fortune of changing jobs frequently early in my career and moving up with each transition. These poor college grads working at this law firm are loyal to a fault, and are excited for small raises being promoted from one position that shouldn’t require a college degree to another. These are the same people who need to go back to school to get an MBA or professional masters degree in order to make any sort of reasonable living. The bachelors degree just gets them a very basic job. Continue reading

80 is the new 65: The Fairytale of Retirement

Have you heard? A new survey came out that shows 25% of middle class Americans say they plan to delay retirement until at least 80. Given the average lifespan of a human is 78 years, that’s basically saying a good chunk of Americans are sure they are going to have work every day until they die.

The Wells Fargo retirement survey also shows that on average, Americans have only saved 7% of the retirement money they hoped to put aside. Yikes. One-third of those surveyed in their 60s had saved less than $25k for retirement.

Of course the study is by Wells Fargo, a bank, designed to scare you into investing your money (with them) so you’ll have enough saved for retirement. But the facts are striking — with the disappearing middle class and lack of salaries keeping up with inflation, it’s tough for most Americans to imagine a real retirement for many years to come. Continue reading