scary scary debt

by russell

As we all know, the debt load carried by the federal government is a topic of great concern.  It's currently in the historically nosebleed territory of 100% of GDP.

I thought I was kinda concerned about that until I ran across this, and in particular this graph:

Federal debt is that green series.  Yes, it's growing, and is starting to approach levels we haven't seen since WWII.

But what the hell is going on with household debt (yellow series) and non-financial business debt (blue)?

And what the hell is going on with financial sector debt (orange)?

From the article:

In 1946, the total US debt-to-GDP ratio was 150%, with two-thirds of that held by the federal government. Since 1946, the federal government's debt-to-GDP ratio has since fallen by nearly half, to 54.8% of GDP in 2009. The debt-to-GDP ratio of the financial sector, by contrast, has increased from 1.35% in 1946 to 109.5% of GDP in 2009. The ratio for households has risen nearly as much, from 15.84% of GDP to 95.4% of GDP.^[1]

On April 2011, International Monetary Fund says, "The US lacks a "credibility strategy" to stabilise its mounting public debt, posing a small but significant risk of a new global economic crisis.

Where the "new global economic crisis" would, I surmise, be due to the fact that we - we, Americans, not we, the US government - are broke.

We're not there yet - total US debt is now about 3.5 times GDP, total US net worth is 5.2 times GDP.  But we, in the aggregate, owe about two thirds of our net worth.

I'm not an economist.  In some significant ways, I'm financially innumerate.  I just try to tag along.  Perhaps there's a reason why all of this is no big deal.  But it looks like a big deal to me. 

And it also looks, to me, like freaking out about federal debt is straining a gnat and swallowing a camel.

Comments

[DaveC]

The slope on the household and financial sectors is going down now. This could be the aftermath of the housing bubble.

[DaveC]

The graph ends at 2008, and does not include the 2009 stimulus, nor anything else for the last 2.3 years.

[avedis]

"The slope on the household and financial sectors is going down now."

That downward blip in the last year or so is most likely semi-random variance. The slope is not going down. The trend is upwards and increasingly so.

Russell scary as your graph is, I actually think the situation is worse than it appears. See, not all debt is the same. Debt that is an investment that promises returns greater than the debt can be a very good thing. This would be like borrowing money for an education that will repay the investment many fold, or a home loan that will leave the home owner with a real asset that has value that exceeds what was borrowed, or government spending on infrastructure that allows industry and GDP to expand beyond the spending that permitted it to reach those levels.

But we don't have that kind of investment debt. We are pissing away money on wars that benefit no one except a few arms dealers and contractors. We have home loans that exceed the value of the home. We have massive welfare give aways to the bankers that arranged those home loans. We have credit card debt incurred because wages don't meet basic living costs and because decent paying jobs are hard to come by and are going overseas.

This kind of debt cannot be even be paid back let alone result in fruitful returns.

So, the debt we have today is not only greater than the debt we had at the beginning of the graph, it is of a far lower quality than then as well.

This ends really badly. Brace yourselves. It's coming and it has no parellel in US history.

[russell]

This could be the aftermath of the housing bubble.

The graph ends at 2008, and does not include the 2009 stimulus, nor anything else for the last 2.3 years.

I guess what caught my eye was the 60-plus year long trend.

And the negative net worth of the financial sector.

I understand that debt can sometimes represent an asset. If that's what's going on here, lovely. Perhaps someone can provide an analysis that will make that evident.

In general, my sense is that avedis' analysis is closer to the reality.

Not trying to be alarmist, just trying to understand WTF is going on.

[Laura Koerbeer]

Household debt is easy to understand: ordinary Americans don't make enough to live on. When the paycheck barely covers housing, car payment and food everything else goes on the charge card: car repairs, home repairs, school clothes for the kids, medical expenses...obviously another tax cut for the rich is needed. And union thugs should lose their collective bargaining rights because the ecoomy will benefit from impoverishing the few remaining workers who get beefits and a living wage. And the AFC act is socialist and Ryan's road map for the future will solve all of this. How do I know? Because that's what Republican politicians say and they have good intentions.

[bobbyp]

Russell,

Avogadro's number and the speed of light are also very big numbers. The scary part is not the numbers, it's the conscious effort to shift income upward.

Wages have been under tremendous pressure since the 70's. So first, housewives entered the job market. When that maxed out, we turned to private debt...it's a great scam, owner's lend the fruits of the increase of labor productivity back to workers and collect interest....

As for the public debt, it is an accounting identity that when the private sector seeks to save, the government has to go into deficit. Currently, the private sector is trying to repair its balance sheet. Since we have not instituted a debt jubilee or shot few bankers to encourage debt reduction, folks are forced to pay back.

The real question is not, I repeat not, "affordability". It's who gets the real output of goods and services produced by our society. Read some Jamie Galbraith, esp. "The Predator State". He explains this concept very well.

Re-read the first part of the article you cite. Immediately after the war, the debt/GDP ratio was 150% and 2/3 of it was held by the federal government! Think about this. If government "sold" the debt to itself, how did they do it? Then search the popular literature in 1946 for articles about how the war effort "mortgaged our future".

Don't be surprised if you don't find many.

[russell]

Immediately after the war, the debt/GDP ratio was 150% and 2/3 of it was held by the federal government!

And now it's either 54% or 100%, depending on which article of the two I've cited that you read. Which is, um, confusing.

Is the difference gross vs public debt?

But net/net government debt is not what I find disturbing in the graph. It's the increase of total US debt from 150% of GDP to 350% of GDP, and the fact that virtually all of that increase is in the private sector.

Everybody is freaking out about OMG THE FEDERAL GOVERNMENT'S DEBT but nobody seems to notice the elephant in the room.

As a ratio of debt to net worth, we're not completely broke, but we're 2/3 of the way there.

And the distribution of wealth tells me that a hell of a lot of us are way, way, way more than 2/3 of the way there.

Not good.

[russell]

sorry, I wasn't clear.

And now the debt held by the feds is either 54% or ~100% of GDP, depending.

[bobbyp]

So, the debt we have today is not only greater than the debt we had at the beginning of the graph, it is of a far lower quality than then as well.

Yes. There are a lot of dodgy assets carried on the books at par. And when you give the rich all the money, they tend to gamble, not invest.

But the federal debt will be paid. In theory it is not possible for it not to be, absent some lunatic political decision to default.

[Hartmut]

^
|
That must be among the strangest pieces of spam I have ever enountered.

[Brett Bellmore]

"Since 1946, the federal government's debt-to-GDP ratio has since fallen by nearly half,"

You know, that's kind of like climbing down from a mountain top, into a valley, and then racing up the side of the next mountain. Then, shortly before you approach the peak, you say, "I've lost thousands of feet of altitude since last week!" The federal government's debt to GDP ratio has roughly quadrupled since the 1970's.

"But the federal debt will be paid. In theory it is not possible for it not to be, absent some lunatic political decision to default."

The federal debt won't be paid, it will be 'paid'. Paying off a debt by devaluing the currency it's owed in might not, by the barest technicality, be "default", but it's not morally different, nor different in it's effects on your credit rating.

I agree, though, the mammoth level of private debt is, in principle, even scarier. Probably doesn't scare people as much as it should because individuals actually have some choice in whether to take it on, or pay it off, whereas the government's debt just gets assigned to you regardless of your wishes. Having some personal control over a situation goes a long ways towards relieving fears.

Won't help you a lot, though, as the economy gets dragged down around you by other people's debts.

[cleek]

the government's debt just gets assigned to you regardless of your wishes.

no. i retain the option to move to a debt-free paradise like Somalia, if i choose. i have thus far assigned myself to the fortunes of America.

[Brett Bellmore]

You know, suggesting that people who want less government, (As in, no more than the highest law of the land authorizes), ought to move to Somolia, makes about as much sense as my suggesting to you that, if you want more government, you move to North Korea.

[Hartmut]

Maybe you could compromise on Singapore ;-)

[bobbyp]

Try a different look at this...It's not the level of private debt that is the problem. After all, in the private sector assets = liabilities. This is an accounting identity. The problem is this: There is not enough income to carry the debt burden.

So why are incomes too low?

[cleek]

if you want more government, you move to North Korea.

who wants more government ?

who walks around with signs crying for "more government" ?

who ?

anyone here ?

[bobbyp]

The federal debt won't be paid, it will be 'paid'. Paying off a debt by devaluing the currency it's owed in might not, by the barest technicality, be "default"

No. There is no might about it. It's the law, and in fact required by the very U.S. Constitution that you worship.

As for morals, people begging and sleeping under freeway overpasses in the richest nation in the world is immoral. It is a travesty that should bring absolute shame to anybody who has some semblance of prosperity. Getting all worked up about little green pieces of paper that promise to pay the bearer with other little pieces of green paper...well, not so much.

[Rob in CT]

Lots of household debt leads to people (belatedly) realizing it's a problem so they have to cut back to deal with it, which leads to reduced demand, which pretty much explains the current economic situation. Demand is weak, employers aren't hiring, people are struggling so demand stays weak...

I'm not an economist either, but that seems like it has snowball potential.

[russell]

The federal government's debt to GDP ratio has roughly quadrupled since the 1970's.

At the risk of jacking my own thread, I would be remiss as one of the resident lefties if I did not take the opportunity to note that (a) yes, this is true, and (b) you can thank Presidents Reagan, Bush, and Bush.

Reagan proved that deficits don't matter, except they do.

And yes, Obama will add to it, significantly.

because individuals actually have some choice in whether to take it on, or pay it off, whereas the government's debt just gets assigned to you regardless of your wishes

Look, federal taxes are based largely on income, and local taxes are based largely on property.

If you don't want to pay a lot of taxes, don't make a lot of income, and don't own a lot of property.

Sales tax bug you? Don't buy a lot of stuff.

It may sound like I'm being a smartass, but there are people who do in fact live that way, deliberately, so as to limit their involvement in taxation as well as other entanglements of modern life.

You could do it if you wanted to.

[hairshirthedonist]

"Since 1946, the federal government's debt-to-GDP ratio has since fallen by nearly half,"

You know, that's kind of like climbing down from a mountain top, into a valley, and then racing up the side of the next mountain. Then, shortly before you approach the peak, you say, "I've lost thousands of feet of altitude since last week!" The federal government's debt to GDP ratio has roughly quadrupled since the 1970's.

Consider how the economy was doing in the years just after 1946 and what it was doing in the 1970s. Weird, huh?

[wj]

I'm looking at all that household debt, and I'm wondering: who is lending these people all that money? Since every loan has both a borrower and a lender, someone, somewhere has to be doing the lending.

If you run credit card balances they tend to keep growing --and at some point your credit (and your cards) get cut off. Ditto with things like auto loans. So is it all mortgages (including second mortgages)?

If it is all mortgages, I have to think that a lot of the mortgages which are underwater will eventually default. Which will trash the balance sheets of whoever is actually holding the paper, but should cut down on the household debt level.

A similar question occurs with the financial sector debt. Is that just a lot of us buying mutual funds that "invested" in mortgage-backed securities? (Guilty, although until the housing crash it wasn't clear that that was what was happening. At least to me.) Or is it banks lending money to each other? To the extent that it is not, who is lending to all those folks?

My theory is that there is a pretty limited amount of debt that is held outside the country. (Except, of course, of US government debt. So far, the world seems to see that as a safe haven and keeps buying ever more of it.)

So who or what is on the lending side of all that debt?

[cleek]

wj, the answers you seek might be in this report: Fed Reserve, Flow of Funds.

i know fnck-all about this stuff, so i won't even try to answer specifically.

[Chicagojon]

To me this looks like pretty much any graph of the US government ____ from post WWII to date (military spending, debt, personal savings, GDP, social security/individual Federal programs, etc). It shows a period after the war of slow buildup/relative calm until ~1980 when thinks start rising or shrinking quickly - generally with an even sharper turn around 1986.

I think of this as the Reagan curve.

Compare it to this graph of the personal savings rate in the US which shows an inverse Reagan curve: US Personal Savings 1950-2010

I know this is an oversimplification in many ways, but if you think the American Dream should be for people to own "stuff" (especially a house), that housing prices can only go up, that lower taxes mean more prosperity for all, & that everything we buy for entertainment should be driven down in price and quality by outsourcing to cheap global markets then this is what you get. This has been the blueprint since 1980 and it's effectively a one-party system that's been in charge to keep things moving down this line. The only reason the curve angles down during Clinton 1992-1994 IMO is that the dotcom boom was a particularly successful bubble and gave a stronger feeling that we were finally done with bubbles than the previous ones. In reality, though, it's just another blip that was reversed with things back to the status quo before the end of the 90's.

[Chicagojon]

@wj I'm looking at all that household debt, and I'm wondering: who is lending these people all that money? Since every loan has both a borrower and a lender, someone, somewhere has to be doing the lending.
Any/everyone that can get in line is lending all of the money. I can't tell you how many bank branches have opened up in my neighborhood in the last 5 years, let alone the number of banks in the last 30 years. For whatever reason banks are also still considered good investments though that one boggles my mind as IMO it's all smoke & mirrors.

I can't find the original report/methodology, but here's a SF Gate article about an Equifax credit report on the 5 cities with the highest average credit card debt: SF Gate article on Equifax credit card debt report

Some gems:
- 54 million households still owe more than $800 billion in debt to credit card companies alone, without taking into account their mortgage payments or any other loan.
- The average consumer is now laden with over $4,200 in credit card debt, which, although down a modest 4% from the previous year's average, still represents a high proportion of many families' earnings.

Someone's loaning these people money and who can blame them...before the 2005 regulations to increase the required minimum payments it was the easist investment in the world. Saddle people with debt and collect your 18-32% interest as they make minimum payments forever. Snipped from another random article that seems like a reasonable source:
For example, consider $1000 of debt at an 18% interest rate. Before last year, it would have taken 19 years to repay the debt in full by making only minimum payments, and taking into account the interest of $1,931. Using the new payment structure it would take someone only 7 years to repay the debt in full, with incurred interest of $515. Consumer debt counselors suggest some tips for leveraging shorter payoff times.

[Uncle Kvetch]

individuals actually have some choice in whether to take it on, or pay it off, whereas the government's debt just gets assigned to you regardless of your wishes. Having some personal control over a situation goes a long ways towards relieving fears.

I guess I should consider myself lucky that I have still have the right to vote. I wonder what Brett must have done to lose his.

[russell]

I guess I should consider myself lucky that I have still have the right to vote.

Correct.

And when I get to vote for the folks who set policy in the various banks, financial institutions, and other commercial concerns that make a big dent in my life in 1,000 ways every day, I'll be far less suspicious of them.

Hell, if I could get any of them to return a phone call I'd be pleased as punch.

[Chicagojon]

I guess I should consider myself lucky that I have still have the right to vote.

Absolutely. Enjoy your right to vote for either of the 1 billion + dollar candidates for POTUS, both of whom follow the same macro economic strategies of spending their way into recessions and increasing spending to get out, increased military spending, lax regulation and taxation on corporations (especially banks and energy), and 'free trade' via tarrifs, subsidies, and giving money to countries without regard for if their citizens have the right to vote (Saudi Arabia, Bahrain, Iraq 1980~1990, etc. etc. etc.)

[Countme-In]

As with "death tax" and other Republican, Luntzian North Korean perversions of the English language, government debt held by the lenders (mostly the U.S. public) is now referred to as IOUs.

It used to be that debt held by the lender was referred to as an accounting asset on the balance sheet.

I don't think you'll ever hear Jamie Diamond refer to credit card debt or mortgage debt extended by J.P. Morgan as IOUs. Shareholders might look askance.

Better to stick with "assets". It sounds so ... growth oriented.

It's an accounting asset, to be increased at all times and at all costs, without regulation.

Diamond, however, for his own political and business purposes, depending on whatever banking legislation that threatens the "asset" side of his balance sheet, will from time to time hire Luntz to refer to Treasuries purchased by J.P. Morgan as IOUs.

[McKinneyTexas]

who walks around with signs crying for "more government" ?

who ?

anyone here ?

I seem to recall this being proposed once or twice here at ObWi.

More generally, what is missing from this graph is the revenue side of the picture. My guess: households in the aggregate have the after tax revenue to service their debt and eventually retire it. Ditto the financial and non-financial business. Definitely not ditto for gov't.

I carry a fair amount of person debt (two home loans) that are offset by assets whose values even today exceed loan balance. With low interest rates, the carrying charges are well within reason. I carry a much smaller amount of business debt, which could be paid off on relatively short notice, but the carrying charges make it more worthwhile to put the money elsewhere.

On the gov't side, revenues can only go up by taking more money from citizens. Taxing the rich at Clinton rates won't cut it. On the private side, people and businesses make real spending cuts. Gov't, not so much.

[russell]

My guess: households in the aggregate have the after tax revenue to service their debt and eventually retire it. Ditto the financial and non-financial business.

Revenue is not given in the article, however net worth, interest payments, assets and liabilities are, all relative to GDP.

Considering interest payments as a percentage of GDP as a reasonable proxy for ability to service debt, as of 2008 it looks like we, in the aggregate, were spending about 22-23% of GDP to service debt.

Which seems like a lot, to me.

Definitely not ditto for gov't.

Let the Bush tax cuts expire.

[McKinneyTexas]

Let the Bush tax cuts expire.

For everyone? Has anyone done the math? What size dent would 3.9% tacked on to the highest marginal rate get us?

[russell]

Personally I'd let them expire for anybody over $100K. But that's just me.

I don't care if it would retire the entire debt load or not. Cuts aren't going to make it all go away, either.

In any case, it's a better idea than reducing them to 25%, which appears to be the Republican plan. That, plus throw Momma from the train.

You mentioned revenue, that's where the government gets revenue. Taxes.

[Countme-In]

MckT: Google "Let the Bush tax cuts expire."

See also Dave Leonhardt of the New York Times and try not to think about the fact that he just won, what is it, a Pulitzer Prize?

Also, check out Bruce Bartlett, Reagan economic adviser -- he might have numbers to back up his opposition to the Bush tax cuts.

Greenspan, for what it's worth, wants the Bush tax cuts rescinded.

Failing expiration of the tax cuts, how about a war tax instead of borrowing to finance the quagmires.

The downside is you'd have to fire the file clerk. The upside is his Army enlistment, training, and combat expenses would at least be paid for with real money instead of those other assets ... um, IOUs.

I kid.

I'd have mentioned Krugman, but if Bartlett doesn't convince you of anything, then the next step is two free tickets to "Atlas Shrugged, Part III", the musical.

I kid some more.

[cleek]

know who else won a Pulitzer?

this guy.

[Countme-In]

Cleek, maybe "your" man can compete for Secretary of the Treasury under a Trump Presidency with this guy:

http://andrewsullivan.thedailybeast.com/2011/04/a-totally-appropriate-endorsement.html

[Turbulence]

For everyone? Has anyone done the math? What size dent would 3.9% tacked on to the highest marginal rate get us?

See the graph in Ezra Klein's post here.

[Slartibartfast]

What size dent would 3.9% tacked on to the highest marginal rate get us?

Decent question. You could confiscate the entire net worth of the Forbes 400 and still come short of covering this year's deficit.

[Ugh]

You could confiscate the entire net worth of the Forbes 400 and still come short of covering this year's deficit.

Probably, though if you slapped the top 400 individual tax returns for the year most recently available with a 100% income tax, you'd end up with almost $138B in revenue for 2007 alone (not that I'm suggesting we do this).

Table here.

Average federal income tax rate for those folks, who on average reported adjusted gross income of $344,000,000? 16.62%.

Someone tell me why that shouldn't at least be closer to 50% than 15%?

[Slartibartfast]

See the graph in Ezra Klein's post here.

Interesting strawman Ezra's batting about, there: Our fiscal problems did not begin in 2010. Anyone who's been paying attention knows that the really monumentally large deficits started one year to the left of Ezra's graph. Not that the several years before that were all that exemplary.

[Hartmut]

But it would get US at least part of the way there. It could meet cuts in military spending coming the other way.
Taking part of the golden eggs is better though than slaying the hen for dinner. And both is better than to have to borrow the eggs at interest from the sly bird that falsly claims that taking a single egg from it would kill it or it would fly away (good luck with flying weighed down with lots of dense metal).

[hairshirthedonist]

Anyone who's been paying attention knows that the really monumentally large deficits started one year to the left of Ezra's graph.

The question is whether or not they will readily admit it. That and, "What about all the people who haven't been paying attention?" That strawman may have some flesh.

[Rob in CT]

Ugh,

That percentage sounds really close to the percentage my family paid in 2010 in federal, state and local (property) taxation (we didn't make $300+K, but we do well).

It's for that reason that I'm continually amazed that people seem to think we are heavily taxed in this country. Hell, I'm in CT. We're one of the highest-tax environments in the nation, and my well-off family is paying 16%, give or take a percentage point. Deductions, baby, deductions. We have a mortgage. We have a kid. We have major childcare expenses. We contribute heavily to our 401(k)s. All of which reduces our AGI.

We do, in my estimation, have a spending problem. But we also have a revenue problem. And an overly complex, pandering tax code problem. And a foreverwar problem.

[Slartibartfast]

That strawman may have some flesh.

So far, though: nameless, faceless flesh. Klein is not telling us if he's responding to real people, or the voices in his head.

[wj]

Pretty clearly it will not be possible to solve the debt problem solely by raising taxes. Neither will it be possible to solve it solely by cutting programs (unless someone is proposing really big cuts to Social Security and Medicare which simply will not fly politicially).

So rather than arguing about the merits, or lack thereof, of either of those extreme ideal cases, perhaps we could get some discussion of trade-offs? You know, what mix of possible program cuts and tax increases would get us balanced? And wht evidence do we have on the impact of those program cuts, and of those tax rates?

I realize that our elected officials are not going to do that if they can possibly avoid it. But perhaps we could try it here -- after all, none of us are looking to get re-elected to anything. ;-)

[Turbulence]

I am glad to see that no one has any substantiative objections to the graph in the Ezra Klein piece I linked to.

[McKinneyTexas]

Treasury Secretary Timothy Geithner said Wednesday that congressional Republicans’ calls to renew expiring tax cuts for the top two percent of Americans would require the U.S. government to borrow $700 billion over the next decade to pay for it.

Failing expiration of the tax cuts, how about a war tax instead of borrowing to finance the quagmires.

This year's deficit is 1.6 trillion. The cost of the Bush tax cuts is 70 billion a year. So, the deficit gets reduced by 4.3%. Extrapolating, if the marginal rate went to 50% and if Geithner is right, you'd reduce the deficit by 17%. Still, not much and you would, at 50%, pay a slowed growth penalty that would manifest in lost jobs and reduced revenues.

To repeat, raising taxes is what we do after cutting the living carp out of costs across the board, including the Holy Trinity of Medicare, Medicaid and Social Security.

Raising taxes on everyone making over 100K necessarily reduces the amount of money those folks have to service their debt. Among other problems.

Count MI, even when he kids, comes up with good ideas. If there was a national sales tax that kicked in every time a president or congress ordered troops to war outside of immediate threat or in self defense until the cost of the adventure was paid off, there'd be a lot less shooting. A sur tax on those making over 250K dedicated to reducing Iraq and Afghanistan-fueled deficit has a certain appeal. But not simply to move money around and keep spending.

Klein takes a chart prepared by the Center for Budget and Policy Priorities which calculates a 3.2 trillion 10 year cost of the Bush tax cuts. I propose that the CBPP have a sit down with the Treasury Secretary and get the facts straight. I am guessing that the CBPP has fluffed the numbers significantly to produce a dramatic result.

The hard fact is, entitlements are going under the knife, particularly on the medical side. As it happens, my mom was taken off of a ventilator this morning. We expected her to die within a couple of hours. She fooled us, as she has a number of times since stroking 4 and half years ago. The cost of keeping her alive should not be born by anyone but our family. It's ridiculously expensive and morally questionable at that stage in life to prolong life in a reduced condition that was entirely due to her life choices. BTW, please no sympathy notes. She's 81, smoked a ton, did us all proud in the martini/scotch consumption department, fried most of her meals in butter or lard, stayed active by playing a lot of bridge and cleaning house by sweeping the room with a glance. Subtract the stroke, and I'd sign on for that deal.

As a tax-resistant, tax paying (a lot more than 16%, more like 45%) citizen, I agree that once real, permanent and painful cuts are made, taxes go up to pay off the spending spree. Once the debt is retired, we lower taxes and live within our means absent existential war. The well to do bear the burden of retiring the debt so our children don't have to, but once they've paid it off, enough.

[Slartibartfast]

It'd be nice if Wikipedia actually linked to the data that went into making that chart, because I'm damned if I can find it.

My guess is that most of the "yellow" category is mortgage debt. Yellow is close to 100% of GDP (Which is roughly $14T), and that's just about exactly what mortgage debt is. There's some consumer household debt, too, but that's much less; about $2.4T.

What the orange category means is not at all clear. After all, in a world where one man's asset is another man's debt, there could be some multiple-dipping going on here.

[Turbulence]

Klein takes a chart prepared by the Center for Budget and Policy Priorities which calculates a 3.2 trillion 10 year cost of the Bush tax cuts. I propose that the CBPP have a sit down with the Treasury Secretary and get the facts straight. I am guessing that the CBPP has fluffed the numbers significantly to produce a dramatic result.

Sadly, No!

In August 2010, the Congressional Budget Office (CBO) estimated that extending the tax cuts for the 2011-2020 time period would add $3.3 trillion to the national debt, comprising $2.65 trillion in foregone tax revenue plus another $0.66 trillion for interest and debt service costs.

I'm inclined to trust the Congressional Budget Office. But I welcome explanations for how and why they too must have "fluffed the numbers significantly".

[Slartibartfast]

I realize that our elected officials are not going to do that if they can possibly avoid it.

Our elected officials are, IMO, in this debate solely for the purposes of winning. I'm judging strictly by the caterwauling from all quarters that arose as a result of the latest extremely paltry budget adjustment, and by the fact that the GOP thinks they actually achieved something useful to those not looking just at political points-scoring.

[Ugh]

Klein takes a chart prepared by the Center for Budget and Policy Priorities which calculates a 3.2 trillion 10 year cost of the Bush tax cuts. I propose that the CBPP have a sit down with the Treasury Secretary and get the facts straight. I am guessing that the CBPP has fluffed the numbers significantly to produce a dramatic result.

The Bush tax cuts went to more than the top 2% of taxpayers, which is what Geithner was referencing. So no sit down necessary (at least on the statements cited).

[Slartibartfast]

From what I can tell, the bulk of the "Bush Tax Cut" line item is due to some problems with AMT and not due to the much-maligned tax breaks to the top 1%. McKTx's uncited $70b a year is actually pretty close to CBPP's reckoning of what that costs us.

[Slartibartfast]

In other words, by fixing AMT, most of the "Bush Tax Cuts" issue goes way. I can't recall the last time I heard anyone lobbying for fixing AMT, though.

[McKinneyTexas]

The Bush tax cuts went to more than the top 2% of taxpayers, which is what Geithner was referencing. So no sit down necessary (at least on the statements cited).

So, the Bush tax cuts for the wealthy cost 70 billion a year, the tax cuts on everyone else cost 250 billion a year? (3.2 trillion minus 700 billion = 2.5 trillion divided by 10 = 250 billion) Is that what all of this means? The middle class is screwed, and not by the wealthy, but by the geniuses who can't do math and kept spending.

But even if we reinstate on everyone, the deficit this year is 1.6 trillion this damn year. We'd be in the hole big time even with all of the cuts in place.

It's time to cut spending. Period.

Plus Slarti at 5:00 p.m.

[McKinneyTexas]

McKTx's uncited $70b a year

Geithener's 700 billion divided by 10 = 70 billion.

[Slartibartfast]

Oh. Ok. Well, I still prefer to take figures from a report than from statements by government officials. I'm weird that way.

But thanks for clearing that up.

[Turbulence]

From what I can tell, the bulk of the "Bush Tax Cut" line item is due to some problems with AMT and not due to the much-maligned tax breaks to the top 1%.

The CBBP report indicates that the AMT only accounts for 1/3 of the cost of the Bush tax cuts they calculated. It also shows that even if you ignore the AMT fixes, the cost of the tax cuts grows every year.

[russell]

My guess is that most of the "yellow" category is mortgage debt. Yellow is close to 100% of GDP (Which is roughly $14T), and that's just about exactly what mortgage debt is. There's some consumer household debt, too, but that's much less; about $2.4T.

What the orange category means is not at all clear. After all, in a world where one man's asset is another man's debt, there could be some multiple-dipping going on here.

Is the hypothesis that yellow household debt is mortgages which then show up as orange fin sector debt and so they cancel out, one man's liability is another man's asset style?

Why the growth over the time series? Did people just not have mortgages in 1950? Or they did, but the mortgages were just a tiny bit of the GDP?

I'm not saying that's not so, I'm just saying I don't know. I'd like to know what the hell is going on.

[Countme-In]

MckT:

Hey, this is the internet where you can demand anything you want but not get it. You want slashed Medicare, Medicaid, and Social Security AND you want no sympathy for your Mom's plight.

Sorry, no can do on the first three.

And, no can do on the no sympathy request. I'm sorry that your mother is going through this misery.

She sounds like a pip.

I agree with your position on end-of-life decisions. I expect to be helping to decide the same sort of thing for my own mother in the near future, except that the saint doesn't deserve a single bit of the misery and pain she's already experiencing.

And, if you can pay for all of that for your mother, more power to you and your family.

But somewhere along the line of the last four years and perhaps before, all of us have helped pay for your mother's care and maintenance, if only to inspect the nursing home and vet her pharmaceuticals, if in fact she needed those services, which I hope she didn't.

Again, if you and your family were able to pay for all of that, more power to you.

In the meantime I was happy to help. Raise my taxes. Double the Medicare tax for starters. There's nothing like revenue to spread those concierge services far and wide.

In turn, thank you for your part in paying for my blind, diabetic sister's dialysis and numerous hospital visits over a 20-year period.

I'm not saying there weren't big downsides to maintaining her life, but she chose to live and it had to be paid for.

I hope you never have a stroke. Well, maybe some minimal stroke symptoms when your marginal tax rate rises by 3.9% in the near future, but your doctor's concierge will tell you that it's all in your head.

And, by the way, should you suffer a stroke, which I hope you don't, during your working days and can't make a living, I expect your doctor's concierge services to be withdrawn and you'll be sitting in a plastic chair in a crowded emergency room next to the rest of Governor Perry's and Rep. Ryan's victims trying to prove your financial wherewithal with a clipboard of insurance forms in one hand and a sippy cup in the other.

It'll be like shopping.

Sorry about your Mom.

[Phil]

This year's deficit is 1.6 trillion. The cost of the Bush tax cuts is 70 billion a year. So, the deficit gets reduced by 4.3%. Extrapolating, if the marginal rate went to 50% and if Geithner is right, you'd reduce the deficit by 17%. Still, not much and you would, at 50%, pay a slowed growth penalty that would manifest in lost jobs and reduced revenues.

Pure chutzpah. When pointed out to the likes of you that eliminating the entirety of the Departments of Energy, Education and HHS would barely dent the Federal budget, your response is generally, "Hey, it's a start!"

Also, that last sentence is pure BS, or at least rests on a great number of assumptions that are unproven.

[Bernard Yomtov]

Ugh,

Average federal income tax rate for those folks, who on average reported adjusted gross income of $344,000,000? 16.62%.

Take a look at the table you link to. The explanation is there. Around 86% of the taxable income for this group is made up of dividends and capital gains taxed at 15%. Obviously, that makes a huge difference.

There's also a little known feature of the tax code that comes into play here. The 15% income is "only" about 73% of Adjusted Gross Income. What makes it jump to 86% of Taxable Income? Deductions come off the more highly taxed income sources first.

Suppose your gross income is 25% high-tax (salaries and wages, interest, business income) and 75% low-tax (dividends and capital gains), and you have deductions amounting to 10% of your income. The deductions reduce your high-tax income. So high-tax is 16.7% of taxable income(15/90), while low-tax is 83.3% (75/90).

That explains a lot.

[Laura Koerbeer]

SO McT thinks that a bed ridden old lady should have her beefits cut.

Why does he thik thsi? Becuase it is so very improtat ot to reduce the icome of people making more than one hundred thousand a year. And this is supposed to be a excusable attitude on his part because it is a waste of money to keep people on vetillators.

And I am supposed to believe that his intentions are good. Well they aren't. His intentions are to do exactly what Republicans are doing: using the budgetary mess made mostly by them to screw over everyone who isn't rich.

[Countme-In]

Some interesting historical tax revenue data:

http://digbysblog.blogspot.com/2011/04/not-problem.html

Incidentally, I agree with MckT that janitors, grandmothers and the other undeserving (neither of my grandmothers worked; I've never encountered two more sweet, kindly, undeserving people in my life) shouldn't be afforded Ferraris, goose liver pate, or Tiffany products at taxpayer expense.

I don't know, though, denying them excellent medical care at taxpayer expense because folks don't want to pay taxes may cause me to make this country a miserable f*cking place.

Under those circumstances, I don't think America will deserve domestic tranquility at taxpayer expense either.

[bobbyp]

This is simply being disingenuous. The Congress "patches" AMT just about every year. So what's your point? They don't post a list of lobbyist names? You must be kidding.

See http://www.mystockoptions.com/faq/index.cfm/catID/DFE2FBA7-9773-4AE3-BBE66CABB4CE79B8/objectID/D943A51D-30A9-11D4-B9080008C79F9E62> this, for example

[bobbyp]

"I can't recall the last time I heard anyone lobbying for fixing AMT, though"

My inept cut n' paste above was in response to this aside by Slarti.

[bobbyp]

....raise less corn and more hell.

Mary Elizabeth Lease, 1888 or so.

[bobbyp]

http://www.slate.com/id/2248304/> For those of you throwing dueling CBO test scores about, you might read this.

[bobbyp]

I'd like to know what the hell is going on.

Desperate lower and middle class folks, deprived for decades of the rightful fruits of their labor by a rich cohort that has either compromised or captured our political system and turned its vast powers to their narrow greedy ends, have turned to debt to maintain the standard of living their parents enjoyed.

It's not that hard.

[wj]

Somehow I think we are losing something here. A huge chunk of the cost of Medicare (and medicine generally) is care for people who are going to die shortly. It is spent on keeping them alive a few more months, often in less than comfortable circumstances. We're not talking about people with chronic conditions (expensive, for an individual, as dialysis and such are). And we're not talking about regular medical care for people of any age. We're talking about spending big bucks to let someone add a few more months to a lifetime.

IMHO, we would get far more value for money, for both the people paying and for the individuals under care, if we spent a fraction of that on hospice-type care to make those folks comfortable. And on top of the expensive procedures not doen, they could probably be in their own homes, rather than expensive hospitals or nursing-homes.

Yes, somebody would have to make the decision for those who did not already sign DRNs (Do Not Resuscitate -- the form that you, or someone with your Medical Power of Attorney, sign to tell the caregivers not to bother with "heroic measures" in an effort to keep you alive a little longer). And yes, that would doubtless get branded as "death panels" -- by whichever end of the political spectrum was fighting it this time. But it would still be worth doing. For everybody's sake.

[Countme-In]

You're right, wj.

I have more to say, but it will wait.

[Ugh]

BY - yes, capital gains is pretty much why someone who makes 9 figures pays a lower effective tax rate than someone who makes 6.

It really is quite a scandal, which is hidden by government statistics and general reporting that usually talks about the "Top 5%" of income earners, and may top 1%, but never quite breaks it down to the top 0.1, 0.01, and 0.001% (or in the case of the opt 400, 0.0001%) to show just how much of a disparity there is (that is, the top 0.1% of earners are effectively hiding among the other 4.9%).

[Slartibartfast]

It also shows that even if you ignore the AMT fixes, the cost of the tax cuts grows every year.

Of course it grows every year. The only way it doesn't grow every year is if both a) income subject to the pre-Bush higher tax rate shrinks, and b) you stop accounting for the interest cost of the tax cut.

I know they say they're not counting interest, but further down in the report it says that they are. Nearly half of their cost estimate (46%) is interest.

You'd think someone could do a decently detailed, itemized reporting of what the "Bush tax cuts" consist of, but so far I haven't seen anything. Which is very confusing, because you'd think the data are there to be analyzed, right?

The CBBP report indicates that the AMT only accounts for 1/3 of the cost of the Bush tax cuts they calculated.

It also says tax cuts on the upper 1% account for about 25% of the cost. So here's what I take away from that:

Upper bracket rate: 25%
AMT: 30%
Interest: 46%
Total: 101%

Close enough for that to be a full cost breakdown of the CBPP estimate, as far as I'm concerned.

The perverse thing about counting the AMT fix as part of the tax cut is that given the initial purpose of AMT, it's actually affecting many more taxpayers than intended. So: fixing AMT so that it actually does what it was intended to do would result in an even larger tax cut, and even more debt. Partially fixing it, which is what happened under Bush, resulted in a still-broken AMT and decreased revenue.

[Slartibartfast]

Is the hypothesis that yellow household debt is mortgages which then show up as orange fin sector debt and so they cancel out, one man's liability is another man's asset style?

It's more a possibility, or the suspicion of a possibility. I won't commit to more than a suspicion until I have access to the data that went into making the chart. I could dig up endless quantities of my own data and make my own chart, but it's unlikely to match up with the one in Wikipedia. I'd probably label things differently, for one thing.

Why the growth over the time series? Did people just not have mortgages in 1950? Or they did, but the mortgages were just a tiny bit of the GDP?

I wish I could tell you. I'd guess that the value of real estate has risen as a fraction of GDP, but everything I Google says that's not it. Possibly we're all going into hock more to make those investments.

I'm not saying that's not so, I'm just saying I don't know. I'd like to know what the hell is going on.

I feel your pain, and share your desire to know more.

[Slartibartfast]

SO McT thinks that a bed ridden old lady should have her beefits cut.

It's best to address things McKTx has actually said, Laura.

[Slartibartfast]

This is simply being disingenuous.

No, it's not.

AMT never gets fixed; it gets patched. Its patching is by definition a temporary measure because AMT exemptions aren't inflation-indexed.

If the AMT-patching is an annual thing and a good thing, is it disingenuous of e.g. CBPP to throw AMT_patching in with the "Bush Tax Cut" conversation and label it a bad thing?

[Slartibartfast]

My inept cut n' paste above was in response to this aside by Slarti.

At least you've got the clickable link in there, for which you have my gratitude.

[Slartibartfast]

BY - yes, capital gains is pretty much why someone who makes 9 figures pays a lower effective tax rate than someone who makes 6.

It really is quite a scandal

I agree with this. Capital gains should be taxed as regular income, when taken as regular income.

The counterargument is that it would adversely affect investment. Fine. Make capital gains on income-deferred investments taxable as regular income only when taken out of the plan. Problem solved. If necessary, make it easier for everyone to invest under a tax-deferred shelter.

Simple, no?

[Phil]

It's best to address things McKTx has actually said, Laura.

But he did. He explicitly said that the very first things that need to be cut are Social Security, Medicare and Medicaid.

[hairshirthedonist]

Pretty clearly it will not be possible to solve the debt problem solely by raising taxes.

I think we have to understand what the "debt problem" is before figuring out what's necessary to solve it. And I think spending better rather than less would better allow us to handle whatever debt we would have. (I won't bother with suggesting that we could forego issuing debt in the first place, at least on a dollar-for-dollar basis to offset all deficit spending.)

When people purchase our debt, they're not investing in "the dollar," per se. They're investing in our ability to produce. With the number of unemployed and underemployed we have and the state of our infrastructure and the empty factory floors, our productive capacity is whithering. That's a real resource problem, not a magic number.

I don't care what the "Bush tax cut" costs. I care about getting us to a tax regime that causes the least harm to our economy, and a spending regime that does the most in the long term to increase our economic health, our productive capacity and our quality of life (rather than, more narrowly, our material standard of living).

I know this is all very general, high-level stuff, but you know what they say about forests and trees.

[CCDG]

Some interesting tax tables. 140 returns in the top 0.1% in 2008. Some more interesting number to fill in some of the blanks in questions above maybe. I read most of the comments, if it was already linked to I apologize in advance.

[Rob in CT]

First off, sorry McTex. I completely understand your request for no sympathy posts, and I think you're right-on about end-of-life care, but still your mom is dying and that sucks, so sympathy you get.

...

Tax reform, Robstyle: Give me cap gains taxed as income, rip out all deductions and tax expenditures (I'm fine with phase-outs), rebalance the rates to keep them progressive and recognize inflation (the highest marginal rate is on ~$300k in income? Ludicrous!), cut corporate income tax to zero, add a modest carbon tax, and aim for ~20% of GDP in revenue (with hopes of getting that down to ~18% in the future once we've: a) gotten away from foreverwar; b) bent yea olde medical care cost curve; and c) paid down some debt or at least reduced it to a less scary % of GDP). Oh, and I personally believe in a much stronger inheritance tax. Aristocracy is bad, m'kay? Don't do aristocracy...

[Countme-In]

The confederate, secessionist, terrorist, tax-hating, jackbooted Governor of Texas is requesting that I issue more IOUs and let him steal my tax dollars to help his whining, under-taxed state douse the wildfires consuming what by historical rights should be Mexico's responsibility.

I suppose the next thing that thug will want is for Medicaid and Medicare to cover the expenses for the burn victims among undeserving Texan janitors, secretaries, teachers, grandmothers, file clerks, and fast food workers.

Why can't Texas tax its own burning flesh instead of stealing from me?

The President should explain to that callow Texan punk that unless he is presented with clean debt ceiling legislation, all Federal money (all of it, right down to the tasers Texans stole from me to subdue the brown races) flowing to that fiscal sinkhole will be halted as part of the Federal government's first week default of one trillion dollars of the effing debt.

One week later, South Carolina, Wisconsin, and Florida can burn too as the second traunch of defaults kicks in.

Let Cantor and Kyl (the fascist Republican Party is sending those two murderous clowns to negotiate with the White House) take those facts back to the filth in Congress.

[hairshirthedonist]

...and recognize inflation (the highest marginal rate is on ~$300k in income? Ludicrous!)

I really can't understand why long-term tax legislation is passed with hard numbers of dollars in the first place. We have teams of economists putting in hours and hours of work in research to update the CPI regularly already. Can't we use the numbers we're already paying them to produce?

[Ugh]

Tax brackets are adjusted by some measure of inflation every year, as is the Social Security income cap.

[bobbyp]

hairshirt nails it above @ 4/20/9:31. The discussion should be about what we are capable of producing, the societal goals achievable given that level of output, and the allocation of the goods and services.

Hyperventilating about the national debt and deficits is a smokescreen that hides political decisions behind asserted "financial constraints". Let's look at two:

Deficits: If one accepts the assumption that output below capacity is not a good thing, then we need government spending (ie demand for output)to fill the gap until the private sector recovers. Given our fiat money system the size of this deficit is irrelevant. So the question is not "should we go into debt", it is what goods and services should the government buy. Issuing a bunch of Treasuries is not mortgaging our future, involuntary forgone economic output is.

National Debt: The Fed can buy all the debt we can issue. Government bonds inject net financial assets into the private sector, and satisfy changes in the public's liquidity preferences (holding bonds or holding cash). Actually, we could do just fine without them. Wall Street would scream bloody murder if that came to pass. Again, under a fiat money system, the size of this debt is largely irrelevant.

[bobbyp]

I agree with this. Capital gains should be taxed as regular income, when taken as regular income.

I'm not quite sure how capital gains could be "taken" as anything other than regular income (irregular income, perhaps?), but I agree wholeheartedly.

As for the so called effect on the level of investment...well, since so much investment is government induced, supported, or subsidized, I find it hard to believe there would be much of any. In fact, the urge to defer taxes would be greater. This is the same as deferred consumption, i.e., savings, which as we all know ='s investment in the national income accounts.

[Slartibartfast]

I'm not quite sure how capital gains could be "taken" as anything other than regular income

Now that I scratch my head, I'm not quite sure either.

Capital gains should be taxed as regular income when realized, or when removed from a tax-deferred vehicle. It's the latter bit that I'm not quite sure how it works.

[bobbyp]

Slarti,

I'm not quite sure what it is that confuses you. So I shall hold my usual misplaced and biting criticism pending further elaboration.

Regards,

[Tony P.]

Russell, in the original post: And it also looks, to me, like freaking out about federal debt is straining a gnat and swallowing a camel.

Agreed. And I think the obvious reason we swallow the camel is that private sector debt is, well, private. Liberals and conservatives may both agree that the private sector is nuts to have taken on so much debt, but I don't think either side is willing to restrict the private sector's right to BE nuts.

So we circle back to the relatively small burden of the government debt. The government debt seems worth arguing about because its size is a collective decision. Private sector debt is merely an aggregate of millions of private decisions.

Of course, the size of the government debt is also ultimately something that results from millions of private decisions, i.e. decisions about which candidates, proposing which policies, individual Americans decide to vote for. The difference is that you can vote for a larger government debt (either by backing pols who will spend more, or pols who will tax less) without calculating how much your own personal interest payments will go up as a result.

That's a big contrast with private borrowing decisions: most Americans (natural and corporate) know that taking on more debt, yourself, means you have to pay more interest, yourself. That knowledge does not seem to have restrained private sector borrowing much, I admit.

But I have to believe it has restrained it some. And I think sincere believers in The Free Market must agree. So that's why I keep suggesting to such people that they should support my modest proposal to "privatize the national debt", if they really are freaking out about it.

--TP

[Slartibartfast]

I'm not quite sure what it is that confuses you.

Not confused so much as unsure. What I'm unsure of is whether all withdrawals from a tax-deferred plan are subject to normal income tax, or only the part that you put in. In other words, do you pay capital gains rate on the gain, in that situation?

It's nothing that some Google-searching couldn't remedy, I'm guessing.

So I shall hold my usual misplaced and biting criticism pending further elaboration.

You have my gratitude :)

[Ugh]

What I'm unsure of is whether all withdrawals from a tax-deferred plan are subject to normal income tax, or only the part that you put in. In other words, do you pay capital gains rate on the gain, in that situation?

You pay ordinary income rates on all distributions from tax-deferred retirement plans no matter the mix of tax deductible contributions and gains.

If you have a Roth IRA, however (and I think there are Roth-type 401ks now too), since the contributions are not deductible, you pay no income tax on distributions.

If you made non tax-deductible contributions to a regular IRA, then when you start taking distributions you won't pay tax on the amount of the distribution attributable to the after tax contribution.

Of course, to the extent that, e.g., publicly traded equities are held by retirement accounts, pension plans, charities, etc., the reduction in the capital gains rate provides absolutely no incentive/relief from double taxation/inflation protection whatsoever to the individuals who benefit from such entities because they either pay ordinary income tax rates on distributions or no tax at all. Also note that regular C-corporations are subject to the same marginal rate on ordinary income and capital gains for their capital property.

Thus, who benefits the most from the very low individual marginal rate on capital gains that we currently have? Well, people who hold equities (and other capital property, such as real estate) outside of tax deferred pension plans and retirement accounts. You know, janitors.

[Ugh]

Also the last half of my previous comment is for general consumption, not aimed at you Slarti.

[Slartibartfast]

Thanks for clarifying, Ugh. I figured it was either that, or you haven't been paying attention to what I've been saying. And I haven't noticed that you were much lacking in the perspicacity department.

But that could be just me not paying attention ;)

[Bernard Yomtov]

One slight further complication. If the tax-deferred vehicle in question is an annuity, rather than an IRA/401(k) type vehicle, then you pay tax (ordinary income rates) on the earnings when you withdraw them, but not on the principal. Any withdrawals are presumed to be earnings first, however.

And by the way, let's not overlook dividends, which are also taxed at 15% and, for top 400 tax returns, are roughly equal to salaries and wages.

One point of all this is that for extremely wealthy taxpayers, the marginal rate is not really 35%. It may be only 15%.

This is also true of entrepreneurs running small businesses. Such companies typically don't generate a lot of cash, even if they are profitable, so owners take moderate salaries and the payoff to their labor comes in the form of increased value of the business. When that increased value is realized, on a sale of the company, say, it's taxed at capital gains rates.

Now, maybe because I've benefited from this, it doesn't seem quite so unfair. (Though going back to 20% would be fine, IMO). These efforts often do involve a lot of risk and sacrifice, and the prospect of a big payoff is an important motivator. It seems somehow different than a gain made from trading or holding stocks.

Then again, maybe not. I'm not usually a big fan of the "He worked hard and so deserves a big paycheck," argument. Lots of people work very hard indeed and earn little. I guess the value added makes the difference, but even here much of it, I can assure you, is added by employees. The notion of entrepreneur-visionary directing drone employees is just wrong. It could hardly be more wrong, in my experience.

Sorry to ramble, but this whole question of fair treatment seems quite complex to me.

[Countme-In]

Who figures to profit, or at least make up his losses, by default brinksmanship?

This anti-American piece of sh*t:

http://thinkprogress.org/2010/06/18/eric-cantor-treasury-bonds/

[bobbyp]

Slarti,

Looks like you got some enlightenment. I'll just add my 2cents: The major advantage of all tax-deferred vehicles is the ability to compound tax deferred until withdrawals are made. Over a relatively long time horizon (say 30-40 years) that is a huge assist to building up the nest egg.

Assuming some reasonable rate of return, you could do better with an investment like Buffet's Berkshire Hathaway (no dividend payout to be taxed annually) or real estate (buy and hold, excluding ownership costs--watch out!) because the tax at realization is calculated at the lower cap gains rate. However, for small investors, this is not practicable (too much capital required up front) or risky (all eggs in one pot for the long haul).

Thus IRA's allow a small saver to take advantage of compounding (reinvested dividends, tax free for some amount of time) and diversification (say, mutual funds). The penalty is they pay regular income rates at withdrawal. However, that rate depends on other income, and is presumably low because you are no longer working. Thus it pays to be a poor retiree. This is, after all, America.

Also: Never buy annuities unless there is a special (and most likely complex) tax angle involved because they are, for most folks, an utter rip off.

Insurance agents should all be herded into the Obama concentration camps.

[Lewis Carroll]

Bobbyp,

Be careful. You're ignorance is showing.

Despite the fact that I agree with you at least 90% of the time, your annuity comment is quite ill-informed. Fixed annuities are one of the only types of assets that accrue positively every single year, regardless of interest rates or capital market performance. That's pretty valuable to a lot of people.

In fact, bank products and floating rate funds are the only other assets that I know of for which this holds. Remind me again what they're yielding these days.

Annuities are not for everyone, but there are definitely advantages beyond the tax deferral.

Sincerely,
An insurance agent who needs to go to the Obama concentration camps.

[DaveC]

Thus, who benefits the most from the very low individual marginal rate on capital gains that we currently have? Well, people who hold equities (and other capital property, such as real estate) outside of tax deferred pension plans and retirement accounts. You know, janitors.

What that for the most part means is old retired people who sell their houses and the buy and hold stocks, before moving into the old folks' home, which is pretty expensive.

[DaveC]

Lewis, my eperience is that you cannot lose your principal in an annuity, and this may seem crazy but an annuity can outperform an IRA because it is insured.

[Ugh]

I hope old retired people are invested mostly in bonds.

[Lewis Carroll]

Dave,

You are correct that, for accumulation purposes, the principal of annuity is guaranteed, at least by the creditworthiness of the insurer. Typically one would want a AAA-rated insurer. And there is no interest rate risk like there is for fixed income securities.

AFAIK, it is not a meaningful comparison between an annuity and an IRA because the two aren't mutually exclusive; you can purchase an annuity in an IRA. This would only be recommended IMO where the primary concern, or at least a very important concern, of the IRA owner is protection of principal and guaranteed positive accrual, as I mentioned in my post above.

If you're talking about the comparison that my industry likes to make between a non-qualified, stand-alone variable annuity and an IRA invested in stocks and/or funds, I'm pretty skeptical. IMO a variable annuity will almost never beat good equity investments over the long run. The additional expenses are too much of a burden. And as far as IN the IRA, bobbyp's point is valid there; I don't see any utility in a variable annuity there, since you already have tax deferral in the IRA.

I'm not a big believer in VAs overall because of those fees. There have been some recent innovations like guaranteed minimum accumulation options that sometimes make them worthwhile for the right situation, but overall I don't find them that useful.