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What Expenses Congress Should Cut

January 23, 2011 | Filed Under Finance, Retirement Savings, Tax Articles | Comments Off


The politics of spending has changed with the recent economic tide. There is an expectation among fiscally conservative voters; Republicans, Independents, Tea Partiers and even some Democrats, that the government tighten its financial belt, just as some Americans have been forced to do during this recession. The primary economic challenge in today’s economy is that our government spends too much money and it is money the government does not have. Nothing evidences this more than the $1.3 trillion annual deficit and a $14 trillion dollar national debt. The more insidious effects of this fiscal policy are (1) a debased dollar; (2) possible double-digit inflation; (3) massive unfunded liabilities such as Medicare and Social Security; and (4) a deterrent to hiring by employers.

Milton Friedman, a Nobel Prize winning economist, argued that the “real cost of government, the total tax burden, equals what government spends plus the cost to the public of complying with government mandates and regulations, as well as, the calculating, paying and taking measures to avoid taxes.” He added “anything that reduces that real cost, lower government spending, elimination of costly regulations on individuals and businesses and simplification of taxes” all mean tax reform. Tax reform is good for the taxpayer.

If Congress returned to the baseline spending before the supposedly “temporary stimulus bill” of 2009, $177 billion per year would be saved, according to the Congressional Budget Office (CBO). If spending went back to the 2007 baseline, the beginning of the first Pelosi Congress, $374 billion per year would be saved.
Other major sources for reduced spending include repealing ObamaCare and elimination of taxpayer funded bailouts, especially for Fannie Mae and Freddie Mac. Taxpayers have already contributed more than $127 billion to the bailout and they are on the hook for hundreds of billions more for Fannie Mae and Freddie Mac.

Entitlement programs comprise 56% of the annual budget and they are growing. They are the most difficult, but the most important programs to reform because the total unfunded liability tops $100 trillion for Social Security and Medicare alone. The federal government does not put these liabilities on the books, but serious budgeting requires that this ominous and looming problem be dealt with sooner rather than later.

Republican, Ryan Paul, the new chairman of the House Budget Committee, has designed a complete work on entitlement reform referred to as the “Roadmap of America’s Future”. This “Roadmap” combines a gradual slowing of Social Security benefit growth with optional personal accounts that seniors would own and control. He also converts the big 3 health care programs, Medicare, Medicaid and tax subsidies for employer sponsored health benefits, into capped contributions to individuals. This is a patient-driven approach, allowing individuals to take control of their own dollars. According to an analysis by the CBO, the “Roadmap” would reduce government spending by $370 billion a year by 2020.

There is some good news on the horizon. The New House rules enable Mr. Ryan to create the conditions for reform via enforceable spending caps on all domestic government spending, if Congress fails to produce a budget. He should use that authority to halt the current government spending binge.

Federal Reserve Rejecting State and Local Government Bailouts

January 23, 2011 | Filed Under Finance, Retirement Savings | Comments Off


In a recent Wall Street Journal article, Federal Reserve Chairman, Ben Bernanke “ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed has limited legal authority to help and little will to use that authority.” (Wall Street Journal: “Bernanke Rejects Bailouts”, Saturday/Sunday January 8-9, 2011).
This is the list of top 20 states with the most staggering debt and budget deficits for 2010:
1. California – last count was $42 billion dollar deficit;
2. Oklahoma – a drop in oil and gas prices caused this budget gap;
3. Arizona – this was one of the states worst hit by the housing crisis;
4. Illinois;
5. Hawaii;
6. New Jersey – the state has the third highest expected budget shortfall for fiscal year 2011, behind Arizona and Nevada:
7. New York;
8. Nevada – one of the states hardest hit by the housing crisis, but its legislature has already taken action to close its budget gap for 2011;
9. Colorado; and
10. Michigan – which entered the recession long before any other state due to the serious reduction in production in the auto industry. The unemployment rate is the worst in the nation at a record high of 14.7%.

Mr. Bernanke testified before the Senate Budget Committee stating “we have no expectation or intention to get involved in state and local finance.”
The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. Moreover, the Dodd-Frank financial regulation law enacted last year further ties the Fed’s hands by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers.
States may attempt to persuade Congress on enacting laws that will help bailout of the individual states: however, lawmakers also are setting financial boundaries and senior House Republicans say they will oppose any state requests for money. “If we bail out one state, then all of the debt of all of the states is almost explicitly put on the books of the federal government” House Budge Committee Chairman Paul Ryan said. Democrats seem to be wary of state bailouts as well.
In 2010, there were 5 municipal bankruptcy filings, down from 10 filings in 2009, according to a report from Bank of America Merrill Lynch. On a recent broadcast of “60 Minutes”, a banking analyst who recently turned to analyzing state and local finances, said the U.S. could see “50 to 100 sizable defaults” in 2011 amounting to hundreds of billions of dollars. This is a bleak outlook for many states with substantial budget deficits.

The New Estate Tax Law and Gift Tax Exemption

January 11, 2011 | Filed Under Finance, Investment, Retirement Savings, Tax Articles | Comments Off

As most people are aware, Congress passed a new estate tax law just prior to the end of calendar year 2010. Not only was the estate tax law changed, so was the lifetime gift tax exemption, as well as the generation skipping transfer tax exemption.

First, the estate tax exemption was increased to $5 million per person from the prior law, which was scheduled to sunset and be reduced to $1 million dollars. This is a $4 million dollar increase in the amount of wealth that an individual can die with, before the federal estate tax law applies to an estate. There is no way to describe this law change other than it is a windfall to taxpayers. Very few people have estates that are subject to estate tax and most of these people either reside on the east coast or west coast, due in large part to real estate values. Although this is a tremendous windfall to taxpayers, the counterargument is that the reduction in estate tax revenue to the federal government will hinder the government’s ability to decrease the federal deficit that is currently spiraling out of control.

The estate tax exemption is also now portable between spouses. This means that if spouse #1 dies and doesn’t need or use all of his or her $5 million exemption, the unused portion is portable or transferable to the surviving spouse. For example, husband dies and has an estate worth $3 million. His surviving widow can aggregate the unused $2 million exemption of her late husband and add it to her $5 million exemption, so she now effectively has a $7 million exemption. This provides for huge tax planning opportunities for wealthier people. Amounts passing to a US citizen spouse and to charity don’t count against the exemption amount.

Second, the lifetime gift tax exemption and the federal estate tax are once again unified; meaning both are set at a $5 million dollar exemption amount for 2011 and 2012 and are tied together. This concept is confusing for many people, so hopefully this will add clarity to the subject. Each year, you may gift up to $13,000 to any person (unlimited in number). This is referred to as the annual gift tax exclusion amount. If the amount of the gift is over $13,000, then it is subject to gift tax and reduces the amount of one’s lifetime gift exemption of now $5 million dollars. The reduction in the lifetime gift tax exemption also reduces the estate tax exemption because the system of gift and estate tax is designed to limit the amount of wealth that can be transferred either during lifetime or upon death. However, tremendous gift planning opportunities are available, without paying a gift tax, to reduce the size of an estate so that an estate tax will not apply upon death.

Lastly, the generation skipping transfer tax exemption, which is an additional tax imposed on transfers of assets to a “skip generation”; generally, one to grandchildren when the parents are still alive, is $5 million, up from $1 million in 2009. When this $5 million GST exemption is leveraged with advanced wealth transfer techniques, such as a grantor retained annuity trust or an installment sale to a trust, wealthy clients will be able to transfer vast sums, tax free, to trusts for their children, grandchildren and generations beyond.

With these new tax law changes, it is critically important to revisit your estate plan. Planning opportunities abound for people with substantial wealth.