The Tiny World of the Scrooge One Percent

In December, 2013, President Obama framed income inequality as “the defining challenge of our time.” As the 2014 elections loom, income inequality and tax reform proposals designed to move money from the well-off  to those of lesser means will take center stage. When you hear calls for the top 1% to pay more you may say, “Why not?” You may be ambivalent assuming that those favoring tax increases are not targeting you, so why care?

 Au contraire! Whether an aging baby boomer in or approaching retirement, or an upwardly mobile Gen X-er or Millennial, you have a dog in the fight.

  A renouned investment manager who made a fortune managing  bond funds calls for higher income taxes on the top 1%. Along with others like Warren Buffett who chide the one-percenters as Scrooges, the  investment guru thinks that taxing long term capital gains at a rate lower than the ordinary income rate on wages from labor should end, along with  other perks that benefit high earners and savers. On the surface you might say, “Well, they can afford it!”

Here’s the problem. There’s not enough one-percenters to make a meaningful dent in our mounting national debt and deficit spending. A piece by Jon Cowin and Jim Kessler in The Wall Street Journal (“Economic Populism Is a Dead End for Democrats,” 12/3/13) pointed out that there are only 300,000 tax filers who make more than $1 million a year. Those with household income of $100,000 plus are in the top 20% of earners. Household earnings of $250,000 or more places one in the top 2%. These are “the new rich” according to some, and must be targeted again as they were with recent tax changes if meaningful revenue is to be raised.

  Cowen and Kessler note that since 2010 Social Security payments to seniors have exceeded payroll taxes from workers. The leading edge of the baby boomer wave turns 68 in 2014, a retirement tsunami washing up on the entitlement beach. The boomer cohort numbered from 77 million to 80 million. The Gen X generation coming up behind them numbers but 41 million. That means less sons and daughters to help mom and dad in their old age while their “paying for educations and planning for retirement budgets” are strained by higher taxes and rising inflation. The Gen X and Millennial generations, unrepresented by AARP, are on the hot seat for more taxes and benefit cuts. Raise taxes on the enterprises that employ them and you get less money for wages and benefits, and lower stock prices in their 401(K) and mutual fund accounts.

 Add uncertainty relative to health care costs to the mix. Medicare is in worse shape than Social Security. By 2030 the typical couple reaching Medicare eligibility at age 65 will have paid in $180,000 in taxes while receiving $664,000 in benefits. How to close the gap? Move the eligibility age closer to 70, increase co-pays and deductibles, increase taxes, and/or means test benefits. Heaven help the politician who dares to propose such measures. We’ll see more attack ads showing some greedy conservative dumping grandma and her wheel chair off of a cliff.

 The implications? Young progressives may turn into Scrooge conservatives when they figure out that they will be handed the bills for the debts and underfunded obligations piling up today. If you are under age 50 you had best focus on career development moves to boost earning power, recognizing that more will be taken away by inflation and rising taxation. All investors should understand the impact that rising interest rates will have on personal debts carried as well as depressed returns from bond portfolios.

 "Mass affluent consumers" have been defined as those with total household investable assets of  $50,000 to $250,000, roughly 33 million households. If that’s you, you do not see yourself as “affluent.”  If you’ve saved $1million  to $1.5 million to reach the threshold of a comfortable but not a lush retirement, you do not consider yourself  “rich.” But do the math. We have just defined the target, the “wealthy” being discussed. Plan accordingly.

 Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com