Thursday, January 18, 2018

Long-Term Care Insurance

Should you buy long-term care insurance? Is it even affordable at this point? If you have a policy should you continue paying on it? These are all difficult questions.

First an update: Apple computer is now saying they plan on repatriating hundred of billions of dollars under the new tax law. Apple claims they will invest this money in yet another new headquarters building, bringing their flying saucer fleet up to two.   Next stop: Home planet of the lizard people!  However some are questioning whether the new tax law influenced this decision or whether it was their plan all along to expand their presence in the United States.  Apple is listed as the number one American company who is hoarding money offshore. So maybe it is just possible that this new tax law is having it's intended effect in repatriating capital.  Stay tuned.

On the other side of the spectrum, old school company General Electric, the company that basically created the entire electricity business over 100 years ago - without which Apple would never had existed - is facing hard times.  There is talk of splitting up GE into a number of separate companies although some analysts question whether this is feasible, as the value of the individual companies would be less than the current stock price.

And that's saying a lot, considering GE has lost more than 40% of its value in stock price over the last year alone.  And yes, I got burned on GE stock (but not their bonds) - but got out several years ago,  losing only about 5% of my investment.  This illustrates why stock prices and real company values are two different things. Market capitalization or "market cap" as they like to call it, is an imaginary number created by multiplying the share price times a number outstanding shares.  However this doesn't necessarily represent the real value of the company if it was broken up and sold in pieces, or if it was liquidated. It's merely the perception of value based on shareholder sentiment.  Think about that the next time you buy stock, particularly in this overheated market.

Anyway, during the go-go years of Jack Welch, GE expanded dramatically into the financial sector through its subsidiaries GE Capital. GE Capital is very aggressive about loaning money to people. When I put a new air conditioner on the roof of our office building on Duke Street, GE Capital offered to lease me the air conditioner for five years.  At the end of lease, I paid $1 for the air conditioner.  It was a pretty attractive deal, as I could write off the cost of the lease on my taxes annually, rather than try to figure out a complicated depreciation schedule for a capital improvement. It was also cheaper than trying to finance it using conventional means.

Unfortunately, GE also got into the long-term care insurance business, or at least got into it through reinsurance.  GE exited this business in 2004 but still has outstanding liabilities.  And they've turned out to be substantial outstanding liabilities.  Americans are living longer than ever and eventually ending up in assisted living and assisted living is getting very, very expensive.  Long-term care can cost well over $100,000 a year, particularly if you have some sort of esoteric illness or disease.  The cost of the claims is for exceeding the amount of money they received in premiums.

Jack Welsh did okay by himself.  He set up a system where they created long-term liabilities for the company and generated short-term profits.  At the time, he was hailed as a genius, as GE generated record profits.  But now that he is long gone, the chickens have come home to roost and it's turning out he made some very bad decisions.  In a way, this parallels what happened to General Motors. They made wild promises to the UAW in terms of retirement benefits and other perks.  But they didn't properly fund these things and eventually the whole thing came crashing down.

The strikes me as a great way to make money - if you have no morals or scruples whatsoever.  Rather than try to steal money from people directly - which might land you in jail in short order, set up a system where you get money up front and then have to pay back long after you're dead.  The people come who come after you have to clean up the mess and you've safely shuffled off the mortal coil. Just a hint for you scammers out there - it seems like a safe and legal way to make money.

In the news this morning another article relating to long-term care insurance. This article notes that the premiums for long-term care insurance are starting to go up - doubling in some instances.  Long-term care insurance isn't cheap.  I wrote about it before with regard to my posting on Northwestern Mutual Life.   My Northwestern agent was very persuasive selling me a number of policies including three life policies - whole, adjustable, and variable as well as a term policy.  He also sold us disability policies which I ended up canceling as they're very expensive.

He tried to sell us long-term care policies and that's where I drew the line.  He wanted $500 a month each for both of us for long-term care when we were only in our 40s.  The amount of money we would have put into such a policy would have been a staggering amount of money over time - hundreds of thousands of dollars in retirement . It's not that such a policy might not have paid off - indeed it's possible we could easily spend much more than that a long-term care should we become infirm.  However in the interim, we would find ourselves unable to retire as we would not have enough money to live on.

Only about one-fifth of Americans have long term disability insurance long-term care insurance according to the article.  So we will join the majority of Americans in relying on Medicaid should we need long-term care.  That is to say Medicaid and the money we have accumulated.  Also, we can hope that we don't need long-term care, but of course one can't really plan those sort of things in advance.

Should you get long-term care insurance?  For me it was a simple calculation.  Spending $1,000 a month on insurance that I might or might not need just seem too expensive.  I knew for sure I would need to have money to retire on and that was something more important for me to fund.  Like most Americans, I found long-term care insurance to be unaffordable.

And like with disability insurance, what you are insuring is not your long-term care but your assets.  When making the pitch for the insurance, my agent pointed out that if I should have to go into long-term care, Medicaid would first insist that I liquidate all of my assets and use them to pay for my care before they would kick in government money.  Thus, what you are protecting with long-term care insurance is your assets that you might be leaving to your children or other descendants.

Since I don't have any children - or if I did I would be less worried about leaving that money - I felt this was ridiculous for me to pay so much money to insure my money.  Besides, as I noted before, there are other ways of protecting your assets if you go into long-term care.  Medicaid trusts and other techniques are well-known for transferring assets so they're not counted to work Medicaid payments.

To me, that seems like a lot cheaper solution than paying hundreds of dollars a month on something that might never happen.  Better to put those hundreds into retirement savings, which can then be used for care, and when that runs out, rely on Medicaid, or throw yourself under a bus.

If you have a long-term care policy, should you keep it up?  The couple profiled in the article is facing staggering increases in their premiums.  One of them had to go back to work part-time just to pay the premiums for their policy which are about $5,000 a year at this point.  Again, this is a difficult question to answer.  At their age, they may be aware of medical infirmities that could result in their need for long-term care.  As such, maybe smart to keep the policy in force as they may be collecting on an in short order.

On the other hand if you were just starting out with a policy and the premiums start going up, you might want to think about where this is going.  At one time I had over $600,000 in term life insurance - which was a good thing to have as I had a couple million dollars in mortgages to pay.  When I was in my thirties term life insurance was incredibly cheap - maybe at $200 a year for all of that coverage. But as I got older and older, the premiums started to get higher and higher.  Eventually it reached a point where I realized that I didn't really need the insurance anymore as I had money in the bank and that paying ever higher premiums for this coverage wasn't really a worthwhile investment.  So I dropped the coverage.

Whole life policies have fixed premiums - because an excess amount is invested up front to pay the difference later on in life.   I ended up converting my whole life policies (two of them, anyway) to paid-up life policies, that not only require no premiums, but increase in cash value every year and also pay a dividend.   Turns out I need the money more than my potential heirs do.   The remaining policy has dividends that exceed the premiums, so it is self-funding.

And that is an interesting point about whole life versus these disability and long-term care policies (as well as term life).   At least with whole life, you might be able to salvage something if you later on find out you can't afford the premiums.   But term, disability, and long-term care plans may evaporate like ether, once you stop making payments on them.   And if premiums go up, well, they aren't very affordable, are they?   And that may be one reason companies are jacking premiums right now - trying to discourage people from keeping the policies in force, as the insurance companies realize they over-extended themselves in terms of liabilities.

For life policies, insurance companies can figure out how long you will live and know down to the penny what the payout amount is.  So they can figure out the premiums down to the last dollar and offer "level premium" whole life policies.   But long-term care coverage is an open-ended committeemen, and has gotten a lot more expensive as time as gone on.  GE and others miscalculated when they sold these policies, and the promise of level premiums turned out to be a verbal promise for some policies - it was not in the actual documents.  So premiums go up as you get older - to the point where you can't afford them, and might end up dropping the policy just a few years shy of when you need it.  Irony.

Similarly, the disability coverage policy that my Northwestern agent strong-armed me into buying really was unaffordable.  Yes, it is possible for horrible things to happen to you at age 40 and you end up in a wheelchair for life at which point you wish you had a disability policy.  On the other hand if you bankrupt yourself based on this what-if proposition, then what will support you in your retirement years if you are not disabled?  For me it was a very simple question to answer - I simply could not afford the premiums on the policy and I let it lapse.

Then there's the question of the solvency of the company.  An insurance policy is nothing more than a contract.  And if one of the parties the contract goes bankrupt, then you may have limited recourse.  In some states life insurance policies are backed up by state agencies which will pay a portion of the policy if if the company goes bankrupt.  But long-term care or disability?  I am not sure these are covered.   And given how the market is today, I suspect these policies may drag down one or more companies - and some have already exited the market.   Over 100 companies wrote long-term care coverage a few years ago.  Today there are about a dozen.

I started thinking, when I let that disability policy lapse, that perhaps I was over-insured.   While insurance has its place in life, you can insure yourself to the point where you are bankrupt.   Sure, you should insure your big-ticket assets, provided the insurance is affordable.   But if insurance skyrockets in price - should you still buy it?   This is the conundrum for pre-Obamacare health insurance policies.   The amount you pay into such a policy is often equal to the cost of health care.  You file a claim, your rates go up, because you are sick.   You are not really buying "insurance" so much as you are funneling all your health care costs through an insurance company, who is taking a cut in the proceeds.

Or take car insurance.  When I was in my 20's, I got into a couple of wrecks and got a lot of tickets.  My insurance was over $3,000 a year for liability and collision - on a car worth maybe $3000 on a good day!   Was this a value proposition?   Or should I have just bought a cheaper, paid-for car and dropped collision and comp?   I eventually paid off the loan on the car and did just that (and got into a wreck the day after!).   Of course, what I eventually learned to do, was to stop driving like a maniac and since then, I haven't gotten a single speeding ticket - or into a wreck, that was my fault, anyway.

I guess for me, the idea of long-term care insurance or disability insurance are just non-starters.   I simply don't have an extra $10,000 to $20,000 in income per year to spend on these "what-if" propositions, which would slowly drain my bank account over time, until I could only hope to become disabled or sent to long-term care, as the only means of supporting myself.  But of course, long before then, I would have dropped coverage, as it became increasingly expensive and unaffordable.

And that sort of reminds me of the old joke:  "A man wants to swim across the Atlantic Ocean in order to get into the Guinness Records book.  He only made it halfway across and realized he wasn't going to make it, so he swam back!"

Buying a disability or long-term care policy and paying on it for a number of years and then dropping coverage seems sort of like the same thing.   Better off not to buy, if you can't afford it, than to end up in the middle of the ocean, with nothing.

Wednesday, January 17, 2018

What Exactly Does The New Tax Law Do?

What exactly will the new tax law do?  We'll have to wait and see, I'm afraid.

A reader writes:
Anyway, I've seen you reference the new tax plan a couple of times in your writing, stating (and I'm paraphrasing) that it will just benefit the rich and encourage businesses to move out of the US. From all my research it does the exact opposite, providing the biggest relief to the middle class and encouraging businesses to stay in the US with a very competitive corporate tax rate compared to before. And that's not even mentioning the repatriation rate that encourages businesses to bring cash back from overseas.
Everyone has blind spots of course, but just wondering if you can expand on that if you have something to add, as maybe I'm missing something.
He has some good points.  If you listened to the Republicans, Donald Trump, and Fox News, the new tax law will put a chicken in every pot and a new car in every garage.   We will all be rich as Nazis, and factories will work overtime to make all the products that Americans will buy with all their newfound money.

Or maybe not.  Law have effects, both intentional and unintentional.  And already we are seeing some of these unintended effects.

The law has a lot of different features.  There is the corporate tax cut, the change in marginal rates, the change in the standard deduction, the cap in SALT deductions, the elimination of the Obamacare "penalty" and the proposed elimination of the so-called "death tax" or Gift and Estates tax, as it is properly called (which was dropped at the last minute).  So there are a lot of features, and some that are so minuscule that people aren't even aware of them - but they may affect certain people and groups of people.  And these effects may be intentional or unintentional, as we shall see.

The problem with our tax code is that it is complicated and uncomplicated at the same time.   We have a system of tiered marginal rates which apply to different income levels.  On top of this, we have exemptions (or had them, anyway), deductions (itemized), a standard deduction, and of course tax credits.  And then we have capital gains, which are taxed at different rates than "ordinary income" and taxed at two separate rates - long-term and short-term.

If you want to know what your tax bill will be for $50,000 of income, compared to $100,000 or $150,000, it isn't as easy as saying, "10%, 20%, and 30%, respectively" but rather you have to sit down and actually go through all the tax forms to calculate the tax due.   Simplification of the tax code has thus been a goal for many.   But there are many interest groups that want to keep special perks for certain behaviors and events - which may or may not make sense.   Tesla wants to keep a fat tax credit for their cars - as it sells more cars.   Others argue that these credits help develop an industry which may someday be predominate, and that it is in the nation's interest to insure it thrives.

Other consequences are harder to foresee.   For example, non-profit companies that donate "all proceeds to charity" as is written on the labels of Newman's Own products, may face hefty tax bills if they continue to donate all proceeds to charity after the owner dies.  This is an unintended consequence of a law designed to prevent people from using non-profit entities to skirt taxes in the long term.

So where do we begin?   Let's start with the Corporate tax cut.   Now, all you pony-tail and man-bun hippies holding signs saying "Corporations are evil, man!" can just go away now.  We are trying to analyze this rationally, and with as little political bias as possible.  And as we shall see, both Democrats and Republicans wanted a corporate tax cut - the only difference being how much.   And this tax cut is creating and will create unintended consequences as well.

To begin with, tax cuts are not a Republican thing.   Democrats have been in favor of tax cuts, including the granddaddy of them all, the Kennedy Tax cut of the early 1960's.  Back then, marginal rates were well over 50% and many argued (correctly) that this was a disincentive to working.  Why bother working an extra hour, when all it would profit you, after Federal, State, and local taxes, is a few bucks?   Coming off the 1958 recession, the Kennedy tax cut stimulated the economy and the 1960's were swinging as a result.   Well, until the oil embargo of 1973, anyway.

With regard to the corporate tax cut, people on both sides of the aisle have been in favor of this for years.  Obama proposed a cut to 28%, but it went nowhere with the do-nothing Congress who was more concerned with not letting Obama "win" than with getting something done.   As I have noted before, people have long argued that the corporate tax rates were too high and in effect, double-taxation.

If a corporation "played it straight" (as few do) and paid out all its profits as corporate dividends, it would have to pay taxes - at 35% on those dividends.   Individual shareholders could end up paying well over 30% in income tax, if they were in the higher brackets.  The net effect was an effective tax rate of 70% or more.   As a result, many companies were shunting excess money overseas and parking it in Treasury bills or corporate bonds.  Some say one unintended effect of the new bill could be a sell-off in bonds.

Trump proposed lowering the tax rate to 20% but a compromise was reached at 21%, to limit the amount of additional deficit in spending.   And here's the first unintended consequence of the tax code - increasing the national debt.   Or you could argue it was an intended effect as legislators knew all along what would happen.

Remember the debt clock?   Like clockwork (sorry) Republicans would drag this out whenever a Democrat was in power, and make ominous warnings about how the national debt was increasing at an alarming rate.  For some odd reason, when Republicans are in power, they don't talk much about the debt clock - and for good reason, too.   Turns out that Republicans love to spend as much as Democrats do.   But instead of "tax and spend" they are "deficit and spend" which could be really the same thing.

Just as companies can pay shareholders in a number of ways - by paying dividends, retaining earnings, or buying back stock - countries can tax their citizens in a number of ways.  You can tax income, sales, land, cars, possessions, capital gains, dividends, or whatever - at the Federal, State, or local levels.  And there are also "user fees" and other charges that act as taxes.

Or you can print more money.   Talk to anyone in Venezuela today about this.  If you print more money to meet your financial obligations, you create inflation.   Inflation decreases the value of every dollar (or bolivar or whatever) and as a result takes a little away from everyone - or a lot in some cases.   Wiemar Germany, after World War II printed money like mad to pay off foreign debts from the Versailles treaty.   People's savings were wiped out in a matter of months.  Similar events have happened in Chile and elsewhere.

So this is a real concern for me - or anyone else hoping to retire on their savings.   Inflation could wipe out our carefully laid plans, and so far, it appears that interest rates will be going up shortly (after artificially propping up the market for years) and inflation will follow suit.

But unintended consequences don't end there.  As I noted in an earlier posting, it was projected that the new tax law would reduce the value of corporate deductions, as well as corporate taxes, and some big banks, still deducting losses from the 2008 meltdown (remember that?) will show lower profits.  And today, Bank of America is showing just thatSo is Goldman.  Whether this is a one-time deal or something more pronounced, remains to be seen.  Some are saying it will affect BoA for one quarter but other banks, such as Citibank, far longer.

Others are saying that the plan - which ostensibly will allow corporations to "repatriate" money they have squirreled overseas - will do just the opposite.   21% sounds good, but it is still more than the 12.5% in Ireland, or even less than other jurisdictions.   What's more, a one-time "repatriation tax" may be a roadblock to this money flooding back into the States anytime soon.  What will actually happen?  We'll just have to wait and see.

But Bob, I heard that Wal-Mart is already handing out bonus checks of $1000 to each employee from the tax savings of this plan!   That is an interesting stunt on the part of Wal-Mart, but since they have yet to see these savings, they are really not handing them out.   What they are doing is a stunt, designed to get employees (and citizens in general) to connect some concrete event with the tax plan and thus be in favor of it.

That is the problem with tax policy.  The effects are so nuanced that few people see any difference in their paycheck from month to month.   It is only when you do your taxes at the end of the year that you really figure out what you owe, and even then, your life situation and income may have changed from year to year, so you really don't understand whether you've paid more or not.

Yes, there are some folks out there who look at their taxes in terms of their "refund check".   If the refund check is larger, then they think they paid less taxes.   But of course, the refund check only represents the difference between what was withheld and what was paid in taxes, and if you withheld more, you get more back, if taxes stay the same.   It illustrates how most people have no clue how taxes work and indeed, don't know what a marginal rate is, or what the difference between a tax credit and a tax deduction is.   And yes, a lot of people think you can deduct your way to wealth  - particularly people in brackets so low, they end up paying little or no taxes anyway, and deductions are of no use to them.


New RateNew Income Bracket|Old RateOld Income Bracket
10%Up to $19,050|10%Up to $19,050
12%$19,050-$77,400|15%$19,050-$77,400
22%$77,400-$165,000|25%$77,400-$156,150
24%$165,000-$315,000|28%$156,150-$237,950
32%$315,000-$400,000|33%$237,950-$424,950
35%$400,000-$600,000|35%$424,950-$480,050
37%$600,000+|39.6%$480,050+
As you can see, in the lowest tax bracket, there is no real tax cut.   But then again, people in this bracket end up paying little or no tax anyway, what with the standard deduction and exemptions of yesteryear.

Folks like me in the old 15% bracket might see a small break, but then again, I really pay little taxes these days, other than self-employment (social security and medicare) taxes, which I will pay for the last time in April of 2018.   So there isn't much in terms of savings for me.   It doesn't even really pay to itemize in this class, and in fact, with the new standard deduction, itemizing is going to be a thing of the past for a lot of middle-to-lower-income people.

Now, if you go up the chart, you see the juicy parts are where the higher incomes are.  Not only are rates dropped (except for the 35% bracket) the income levels are much higher now.   The stated goal of reducing the number of brackets went by the wayside in the sausage-making, apparently.

It is interesting how they did this, as they can claim, with a straight face that the largest cuts are in the lower brackets (dropping from 28% to 24% in one case).   But since the income numbers are also jiggered, it hides the effect on higher income people.

Taking deductions, credits, and other things aside,  if you made $1,000,000 in 2017 and 2018 (which is doing fantastically well, by the way - about 20 times the median income) your gross taxes in 2017 (before deductions, etc.) would be $340,144.20 - calculating marginal rates for each stage of income and adding them up.   Your gross taxes in 2018 (before deductions, etc.) would be $310,879.

So you can see, there is a huge savings - over 10% in fact - for people in the higher brackets.  And most of this is because the cutoff has been raised to $600,000 for the highest bracket while simultaneously lowering the marginal rate.  Marginal rates alone don't tell the story.

If we break out how much tax you pay in each step of the calculation, it looks weird.  The big savings is in the top bracket, but the 35% bracket expands so much in size, that you end up paying more in that range.  The main thing you see, though, is that folks making $50K a year aren't going to see much in the way of savings - while people making a million are going to see huge savings.

Tax paid for each marginal bracket, married couple, taxable income of $1,000,000
New RateNew Tax|Old RateOld Tax
10%$1905.00|10%$1905.00
12%$7002.00|15%$8752.50
22%$19,272.00|25%$19687.50
24%$37,500.00|28%$22,904.00
32%$27,200.00|33%$61,710.00
35%$70,000.00|35%$19,285.00
37%$148,000.00|39.6%$205,900.20
By the way, these individual tax rate cuts expire in a decade, but the corporate tax cut is permanent.

But of course, this presupposes that someone making a million dollars a year doesn't have some sort of tax dodge.  And the oldest one in the books was to create a subchapter-S "pass-through" corporation and then try to pay yourself in capital gains - the so-called Romney rate of 25% or less - sometimes far less.

In the past you had to be a big Whale to do this - be able to afford an army of attorneys and accountants to file your taxes and end up in perpetual audit.   This is why Trump's claim of "I'm being audited" as an excuse not to release his taxes is so bogus.   Guys like him are pretty much audited every year.  His accountants play games and then they see what they can get away with at the IRS.

I noted before how my brother-in-law followed advice of an accountant and paid himself exclusively in dividends from his Subchapter-S corporation, rather than paying the 18% self-employment tax (which is on top of the marginal rates shown above).  His accountant ended up going to jail, and my brother-in-law realized too late that he didn't have the 40 quarters of income necessary to qualify for social security.  He scrambled to do this, before he retired, and will receive the minimum benefit under the law as a result.

Under the new law, people who own a subchapter-S corp - well, certain people, anyway - can report a portion (20% from what I hear) of their income as a return on capital, and thus get a lower capital gains tax rate.  This may favor some small businesses, but not others (some service providers may be exempt).   It is an interesting incidental feature of the law, one that Johnny Lunchbucket will not benefit from.

One thing that will change for us little people is the change in the standard deduction, exemptions, and the SALT deductions for State And Local income and property Taxes.   This could complicate things for many people, simplify them for others, and cause tax hikes for people in blue states and tax cuts in red ones.

Personal exemptions were designed to eliminate from the tax calculation, money you spend on supporting yourself and your kids and other dependents - that was the theory, anyway.   The new law eliminates these.   As a result, if you have ten children, you may see your taxes go up, as you lose this $4000+ deduction from your income (for each child/dependent, yourself and spouse!).

But at the same time, the standard deduction goes from $12,700 to $24,000 (married couple filing jointly) which means that for a lot of people, itemizing mortgage interest may no longer be worthwhile.   This may help offset the loss of the personal exemption, provided you were claiming fewer than three kids.   For many people, particularly those who itemized before, it may be a wash.

The law also caps SALT deductions at $10,000, which for folks living in places like New Jersey or New York, means a huge increase in taxable income.   People in some areas there are paying well over $1000 a month in property taxes, sometimes $2000 - plus State and local income taxes of up up 5%.   If these are capped at $10,000, some middle-to-upper income people may see an effective tax rise as well.

The law also abolishes the AMT - Alternative Minimum Tax which may have mixed and unintended consequences.   Some argue this will help the "blue state" high earners who have high tax bills.  The elimination of the AMT will also help upper income people.  The AMT was designed to prevent people from deducting their way to tax-freedom, by claiming so many deductions and credits as to make their declared income look tiny.   So I would have to label this one as a sop to the rich.

Some things the Republicans wanted didn't pass, apparently.  The elimination of the Gifts and Estate tax did not go through.  The GOP has been using this as a "talking point" for years now, convincing people who live in trailer parks that they will have to pay a "death tax" when they die.   The reality is, of course, there is  a $5M exemption from the gifts and estate tax, and certain exemptions for farmers and the like.   There are a number of ways around this tax (trusts, etc.) and only the very, very rich have to worry about paying it.

Another "minor" effect of this bill was to eliminate the Obamacare "penalty" tax for not having health insurance - or not having an Obamacare-compliant plan.   This will have a far greater effect than many expect.   As I noted before, Obamacare has a lot of problems, one being that folks in certain brackets get nailed for the full cost of Obamacare - with a rather sudden cutoff.   It is an unintended consequence of a law that was not well-thought-out and rushed through.  So you see why I am skeptical of a rushed GOP tax law - it will likely do similar things.

People making over $100,000 a year are faced with huge costs for health insurance.  My premiums, if not subsidized, would be over $20,000 a year.  I have to hope my income stays low, otherwise I would have to pay this.  For example, a small inheritance I received last year had some capital gains associated with it (from a trust).  Will this put me over the edge, cause me to lose my subsidy, and thus force me to not only pay tax on the inheritance, but also $20K for Obamacare?  If so, ouch.

Non-compliant health insurance plans are available - ones that do not allow for pre-existing conditions, for example (usually exempting claims for one year for pre-existing conditions).  This is basically what we had before Obamacare.  Now that the "fine" has been repealed, many healthy families may shop around for such lower-cost plans, leaving the sicker folks on Obamacare, which in turn will increase premiums even more dramatically.   This could lead to a collapse of the whole system, as people can no longer afford the premiums, and the government can no longer afford the subsidies.  Again, wait and see.

So, what do we conclude from all of this?  Beats the heck out of me.   We will have to see the dust settle before we know the intended and unintended effects of this bill.   My gut reaction is that the GOP tried to do too much, too quickly.  Sudden dramatic changes to our tax code are not healthy for the economy as it makes it hard to plan ahead, both for individuals and for corporations.

But the overall conclusion is that this helps the rich more than the middle class, is kind of inescapable.   But then again, when things go up or down by flat rate, across the board, the rich make out better than the poor.   If the richest man in town makes $100,000 a year and the poorest makes $10,000 a year, and everyone gets a 10% raise, the richest man makes 10 times more in his raise than the poorest.   What's more the "income inequality gap" goes from $90,000 to $99,000 - which illustrates why, in part, income inequality will always be on the rise, unless punishing taxes are enacted (and I am not promoting that idea!).

This humorous story illustrates the effect of tax cuts "across the board":
Suppose that every day, ten men go out for lunch and the bill for all ten comes to $100.
If they paid their bill the way we pay our taxes, it would go something like this:
  • The first four men (the poorest) would pay nothing.
  • The fifth would pay $1.
  • The sixth would pay $3.
  • The seventh would pay $7.
  • The eighth would pay $12.
  • The ninth would pay $18.
  • The tenth man (the richest) would pay $59.

So, that's what they decided to do. 
The ten men ate lunch in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. 
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily lunch by $20.00."  So lunch for the ten men would now cost just $80. 
The group still wanted to pay their bill the way we pay our taxes.  So the first four men were unaffected.  They would still eat for free.  But what about the other six men?  How could they divide the $20 windfall so that everyone would get his fair share? 
They realized that $20 divided by six is $3.33.  But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat his lunch. 
So the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

  • And so the fifth man, like the first four, now paid nothing (100% off).
  • The sixth now paid $2 instead of $3 (33% off).
  • The seventh now paid $5 instead of $7 (28% off).
  • The eighth now paid $9 instead of $12 (25% off).
  • The ninth now paid $14 instead of $18 (22% off).
  • The tenth now paid $49 instead of $59 (16% off).

Each of the six was better off than before.  And the first four continued to eat lunch for free.  But, once outside the bar, the men began to compare the amount they got off. 
The sixth man said, "I only got $1 off out of the $20 while the tenth man got $10 off!" 
"Yeah, that's right," exclaimed the fifth man.  "I only got $1 off, too.  It's unfair that he got ten times more benefit than me!" 
"That's true!" shouted the seventh man.  "Why should he get $10 off, when I got only $2?  The wealthy get all the breaks!" 
"Wait a minute," yelled the first four men in unison, "we didn't get anything at all.  This new tax system exploits the poor!" 
The nine men surrounded the tenth and told him they they were angry that he got so much off while they each got very little. 
The next day the tenth man didn't show up for lunch, so the nine sat down and had their lunchs without him.  But when it came time to pay the bill, they discovered something important.  They didn't have enough money amongst all of them for even half of the bill! 
And that is how our tax system works.  The people who already pay the highest taxes will naturally get the largest benefit from a tax reduction.  Tax them too much, attack them for being wealthy, and they just may not show up anymore.  In fact, they might start eating overseas, where the atmosphere is somewhat friendlier. 


There are some flaws in the story, of course.   Tax cuts are rarely "across the board" even, as the new GOP tax law illustrates.   But even if they were "even Steven" the largest breaks do always go to the richest, as they pay more in taxes (except for the very, very rich) and as a result, see the biggest savings.

I think the biggest concern for me, personally, is that inflation will wipe out any benefit of this tax cut.   The idea that we need to throw viagra at the raging boner of the current economy is somewhat flawed - it could end up exploding.   In times of financial hardship, a tax break or stimulus makes sense - much as Obama cut the Social Security tax during his tenure.  Even the people who passed this bill admit that it will not expand the economy to the point where tax collection will offset cuts in rates.  So increased deficits - and accelerating deficits - will be the result.

This in turn will lead to rising interest rates (which are already rising from essentially zero) and increased inflation over time.   Ultimately, this will be the higher "tax" that the little people will have to pay - and they will have to pay it.

When I was 18, inflation was running at 10% or more.  Mortgage rates were in the low teens.  Unemployment was double-digit.   High inflation  and "stagflation" are something you don't want to live through, let me tell you.   And the problem with inflation and the deficit, is that it has a snowball effect.   When interest rates skyrocket, the government has to pay more to service its debts as treasury rates go up.   This leads to more deficits and more debt and higher interest payments.

I approach 2018 cautiously optimistic.   We'll just have to see where it goes.  But in terms of a "huge tax cut" I will not personally benefit much from the new law.


Tuesday, January 16, 2018

Surveillance Nation

Russians are necessarily worse drivers than anyone else, they just have more cameras. 

People today like to whine about how their freedoms are being taken away.   But oddly enough, we live in an era of greater freedom than anytime before in the history of mankind.

Consider this:   When I was a kid, pornography was illegal.  Other than "soft core" porn like Playboy, X-rated magazines and videos could be seized if sent though the mail, and you could be charged with possession of porn - depending on which State or County you lived in.  Today, of course, it is all over the Internet and freely available to anyone, just about anywhere.  So long as everyone depicted is over the age of 18, it is perfectly legal to possess and view, and indeed, the courts have held this is your right.

Again, this was not the case, when I was a kid.   You could go to jail!

And speaking of sex, most of it was illegal.  Not only were homosexual acts outlawed, but many sexual acts even between consenting adults outside of marriage (or even inside!) was considered not only immoral, but illegal as well.  Even adultery was punishable by law.

Gambling was prohibited in 49 States.  You had to go to Nevada to gamble legally.  Today, you can gamble anywhere, and even the government is in on the game, selling lottery tickets.

Oh, and you can legally smoke pot in several states now, until Jeff Sessions lowers the boom.

So take that, Libertarians!   You live in an era of more freedom than ever.   The 55-mph speed limit was abolished, stores are open on Sundays (well, except liquor stores in part of the South) and "dirty dancing" is no longer forbidden.  What more do you want?

Of course, we have seen some retrenchment.   The voting age was lowered to 18, while the drinking age was raised to 21.   Despite all our new-found freedoms, we seem more namby-pamby than ever before.  George Carlin might have made waves with his "seven dirty words" back in 1972, but today, the FCC just doesn't give a damn about swearing.   Nevertheless, the media deems it necessary to censor out words like "s***hole" with little stars so our feelies won't be offended.   They are more afraid of conservative Christians starting a boycott than legal action from the government.   As I noted before, the media lives in a bizarre parallel universe where everything is Mayberry, RFD, and no one has sex or dirty thoughts.  Meanwhile, the rest of the country has discovered the Internet.  And we wonder why cable disconnects are up.

But that was not the point of this blog entry.  What was it?  I started writing it years ago, and only finished it today.   Oh, yes, surveillance.   It is interesting that today, people are more paranoid than ever about "privacy" and whine and complain long and loud about how security cameras and speed cameras are an assault on their Constitutional right to privacy.   People cite the fifth amendment as creating a "right to privacy" under the "penumbra" of the Constitution.   A "penumbra" is apparently some kind of umbrella.

But the fifth amendment doesn't really say anything about a right to privacy - at least with regard to your actions in public spaces.
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Where is "privacy" mentioned here?  The idea that you cannot be compelled to testify against oneself has been bootstrapped (along with the 9th amendment, which is a catch-all) to include this new right. Certainly, no one in the 18th Century would have thought that the act of you walking down the street was somehow a protected right - and that no one had the right to record or make note of you doing so.

Today, well, we think otherwise.   Uncle Fred parks his Cadilliac with vanity tags "SEXYFRED" in front of the strip club.   A news truck, a security camera, or Google "street view" capture this piece of data, and Fred gets all bent out of shape - his privacy has been invaded!  Never mind that Uncle Fred has posted nude pictures of himself to a dozen dating and hookup sites - not to mention Craigslist.  He also has all sorts of intimate information about himself on Facebook and other social media sites.  We are obsessed with privacy, but at the same time, bare our souls to the world.

This "privacy penumbra" is one reason we don't have speed cameras in the United States.   Oh, sure, we have cameras that tell you your speed and admonish you for speeding.  But they don't take photos and send you tickets.   Red light cameras, for some reason are exempt from this privacy concern.   Apparently the "right" not to be killed in a T-bone collision trumps your right to keep secret from the world your shitty driving habits.

I for one, just don't get it.  It is not like the government is putting cameras on our bedroom, but rather on city streets.  And these tend to make me feel safer, even if they are a little creepy sometimes.  People claim that don't like "the government spying on me!" but in fact, the government really doesn't care that last Tuesday, you want to Wal-Mart at 2.45 PM and bought a box of waffle mix.  These are hardly State secrets.

If you are ashamed of something you are doing in your life, ask yourself why.   Uncle Fred certainly doesn't mind people knowing he goes to the strip club - that's why he proudly parks his Caddy out front.   It is only when someone snaps a photo of it - even as part of a background scene - that he gets upset.  Why is this?

Others say that if we allow this sort of surveillance, it will only get worse over time, and the government will be able to track our behaviors and stamp out political dissent.   They can see you walking into the building where the anti-surveillance society is meeting!   But then again, not really.   If you were really doing something illegal, then they can monitor your activities already - with or without a search warrant, depending on what they are looking at.   And if someone is planning on planting a bomb or gunning down concert-goers, well, I for one would be happy if the government was keeping an eye on them.

Hotels today are getting rid of the "do not disturb" signs in hotel rooms, and informing guests that housekeeping will need to enter the room at least once a day, whether you want them to or not.   This way, people cannot assemble an arsenal of guns or set up a meth lab or traffic humans - or whatever.  The hotel's rights trump your right to "privacy."

Of course, that is the whole damn point, isn't it?   "Privacy advocates" usually are a front for people doing illegal things.   For example, a young man is driving his girlfriend's rented car, with a trunk loaded up bricks of heroin.   He's a bad guy and should go to jail.   The question before the Supreme Court is, does a non-designated driver in a rental car have an expectation of privacy in the contents of the trunk?

It is an interesting question, as if someone stole my car and was pulled over before I could report it, could the Police be barred from searching the trunk and finding me there bound and gagged? (Good thing we own a hatchback!).   Or does the fact that the car is clearly not his negate his "right to privacy" in someone else's car?  How would the police know that the person had permission to use the car?   The idea that the Police will start "pulling over every rented car" as Justice Sotomayor stated, is a little far-fetched.  You still need "probable cause" under Ohio v. Terry to pull a car over.

But it illustrates the mental gymnastics that some Judges will resort to, to find new rights in the Constitution.   Rights that really don't provide any real benefit to the population, but provide relief to criminals and make the job of the Police that much harder.

No, I am not worried about being pulled over and searched as an unauthorized driver of a rental car.   Why?  Well, first of all, when I rent a car, I make sure I am an authorized driver - and don't let someone who isn't, drive the car.  Why?  Because if they wreck the car, I may not be covered, and now I have to buy the rental car company a new car.

But even if they searched my car, I am not upset or worried.  Why?  Because I don't have 98 bricks of heroin in my trunk and never will.   The "right to privacy" doesn't provide me with any additional rights, unless I am a criminal.  Why are we creating rights that affect only one class of people - the criminal class?

Like most people who have a presence on the Internet, my life is an open book.  I gain nothing from a "right to privacy" other than the knowledge that it will help some criminal who has victimized me, get away with his crime.

In a way, it is like this whole Bitcoin or crypto-currency nonsense.   There is no legitimate use for many of these currencies, but the criminal underworld does make use of them to traffic in drugs, weapons, and children.   What's not to like?   And people get bent out of shape when the government steps in to regulate these wild-West "exchanges" - as if some personal right of theirs is at risk.   And perhaps it is, if they are doing illegal things over the Internet.  But your right to buy a coffee drink with Bitcoin?   That isn't at risk here - it is just impractical as all get out.

Maybe we won't be able to "get away" with things in an era of security cameras on every lamppost.  But then again, what are you trying to get away with?   As I noted in the beginning of this post (aha! it does tie in!) we have more freedom today than ever before in the history of mankind.   You can do what you want, in this country, provided you are not victimizing someone else (except perhaps in the commercial sense).

I don't see how security cameras take away from that freedom, unless you are a criminal.