Once again we draw from an interesting opinion piece in the Wall Street Journal.  This article was written by Arthur Laffer, and centers on the implications of changes to the tax code and the reporting of profits.

As with everything in life, investing is never to be considered in a vacuum.  One of the most meaningful factors in investment considerations is the consequence of taxation.  There’s no question that taxation can influence the behavior of the taxed… and some argue that therein lies the very purpose of taxation to begin with.

Mr. Laffer’s case, stated simply, is that the economy is presently benefitting from individuals and corporations shifting profits to the present to avoid heavier tax rates in the future, and that once that trend runs its course, corporate profits, and thus the economy, will suffer.  It’s a bearish case, but certainly one that should be heard out.

http://online.wsj.com/article/SB10001424052748704113504575264513748386610.html?KEYWORDS=arthur+laffer#printMode

Today’s edition of the Wall Street Journal had a very interesting opinion piece on the possible implications of the proposed changes to the healthcare industry.

The most eerie sentence in the entire piece reads as follows, “Ultimately, we could see a complete restructuring of American industry, with firms dissolving and emerging based on government subsidies.”

I hesitate to say exactly how much of a “complete restructuring” that would be, given the fact that many industries that are present in our economy today would not exist at all in the absence of government subsidies.  Regardless, the prospect of that ugly transformation sweeping across the breadth of American industry is chilling to say the least.

From the 5/21/2010 edition of the Wall Street Journal

Goodbye, Employer-Sponsored Insurance

Companies are discovering that it’s cheaper to pay fines to the government than to cover workers.

By JOHN C. GOODMAN

Millions of American workers could discover that they no longer have employer-provided health insurance as ObamaCare is phased in. That’s because employers are quickly discovering that it may be cheaper to pay fines to the government than to insure workers.

AT&T, Caterpillar, John Deere and Verizon have all made internal calculations, according the House Energy and Commerce Committee, to determine how much could be saved by a) dropping their employer-provided insurance, b) paying a fine of $2,000 per employee, and c) leaving their employees with the option of buying highly-subsidized insurance in the newly created health-insurance exchange.

Economists say employee benefits ultimately substitute for cash wages, which means that AT&T employees would get higher take-home pay. But considering that they will be required by federal law to buy their own insurance in an exchange, will they be net winners or losers? That depends on their incomes.

A Congressional Budget Office (CBO) analysis of the House version of ObamaCare, which is close to what actually passed in March, assumed a $15,000 premium for family coverage in 2016. Yet the only subsidy available for employer-provided coverage is the same one as under current law: the ability to pay with pretax dollars. For a $30,000-a-year worker paying no federal income tax, the only tax subsidy is the payroll tax avoided on the employer’s premiums. That subsidy is only worth about $2,811 a year.

If this same worker goes to the health-insurance exchange, however, the federal government will pay almost all the premiums, plus reimburse the employee for most out-of-pocket costs. All told, the CBO estimates the total subsidy would be about $19,400—almost $17,000 more than the subsidy for employer-provided insurance.

In general, anyone with a family income of $80,000 or less will get a bigger subsidy in the exchange than the tax subsidy available at work.

But will the insurance in the exchange be as good? In Massachusetts, people who get subsidized insurance from an exchange are in health plans that pay providers Medicaid rates plus 10%. That’s less than what Medicare pays, and a lot less than the rates paid by private plans. Since the state did nothing to expand the number of doctors as it cut its uninsured rate in half, people in plans with low reimbursement rates are being pushed to the rear of the waiting lines.

The Massachusetts experience will only be amplified in other parts of the country. The CBO estimates there will be 32 million newly insured under ObamaCare. Studies by think tanks like Rand and the Urban Institute show that insured people consume twice as much health care as the uninsured. So all other things being equal, 32 million people will suddenly be doubling their use of health-care resources. In a state such as Texas, where one out of every four working age adults is currently uninsured, the rationing problem will be monumental.

Even if health plans in the exchange are identical to health plans at work, the subsidies available can only be described as bizarre. In general, the more you make, the greater the subsidy at work and the lower the subsidy in the exchange. People earning more than $100,000 get no subsidy in the exchange. But employer premiums avoid federal and state income taxes as well as payroll taxes, which means government is paying almost half the cost of the insurance. That implies that the best way to maximize employee subsidies is to completely reorganize the economic structure of firms.

Take a hotel with maids, waitresses, busboys and custodians all earning $10 or $15 an hour. These employees can qualify for completely free Medicaid coverage or highly subsidized insurance in the exchange.

So the ideal arrangement is for the hotel to fire the lower-paid employees—simply cutting their plans is not an option since federal law requires nondiscrimination in offering health benefits—and contract for their labor from firms that employ them but pay fines instead of providing health insurance. The hotel could then provide health insurance for all the remaining, higher-paid employees.

Ultimately, we could see a complete restructuring of American industry, with firms dissolving and emerging based on government subsidies.

A much better approach was proposed by Sen. John McCain in the last presidential election. The principle behind that plan is enshrined in the legislation sponsored by Sens. Tom Coburn (R., Okla.) and Richard Burr (R., N.C.), and Reps. Paul Ryan (R., Wis.) and Devin Nunes (R., Calif). This approach would replace the current subsidies with a system that gives every family, regardless of income, the same number of dollars of tax relief for health insurance.

Under this approach, all insurance would be subsidized the same way, regardless of where it is purchased. All taxpayers would be subsidized the same way, regardless of how they obtain their insurance. Unlike the president’s scheme, it makes sense both in terms of equity and economics.

We had to share this insightful column from Stratfor, which discusses the present financial crisis in the larger context in which it belongs – as a political crisis.

As we watch Congress pepper corporate executives with questions, it makes sense to consider the origin of the modern corporation and the role of government in the economy.

This article is extremely insightful, taking the discussion to the European Union and the consequences of the EU’s reluctance to act on the purpose for which it was established and the problem of mutlinational arrangements.

Enjoy!

http://www.stratfor.com/weekly/20100503_global_crisis_legitimacy?utm_source=GWeekly&utm_medium=email&utm_campaign=100504&utm_content=readmore&elq=ce1946ae56b0422eb677eea7a3418283

It’s What you Buy

Growing up with a tightwad father, I learned that the only way to become financially prosperous was to scrimp and save, never buying a thing.  But as I got older, I discovered that I made so little that I could never save enough… I determined that my path to riches was to make more money.  As I’ve made more money, I’ve been able to set aside more, yet inflation has whittled those assets away.  The dollar I saved 10 years ago, might only buy me 80 cents worth of goods today.

So if saving my money won’t make me rich, and earning more money won’t make me rich, what will?

I’ve determined that it’s not what you save, it’s not what you make, it’s what you buy that will truly enhance your financial standing.

Every dollar you earn will buy you one of something from one of the following four categories:

• A service that will gratify you for a moment.
• A good that will be expended.
• An asset that will depreciate.
• An asset that will appreciate.

In the first three cases, your dollar has been spent.  In the last, your dollar has been invested.

Whether you’re talking about the Goose that lays golden eggs, or the servants who were given talents, there’s no more popular subject for analogies than the virtue in foregoing what you want today for what you want in the long run.  That is especially true when it comes to investing.

The simplest key to investing is to start early because the power of compounding interest is multiplied by early gains.  It’s so tempting to spend those first disposable dollars on fleeting wants – temporary services, expendable goods, or depreciating assets, but the simple truths are as follows.

• A dollar spent is a dollar gone tomorrow.
• A dollar saved is a dollar half-gone tomorrow.
• A dollar properly invested is two dollars tomorrow.

Investing is about making your money work for you, and the earlier you start, the longer you will have it in your employment.

*These figures represent a smoothing of an annualized return of 8% on monies invested.  Investing entails risk, and while there is potential for gain, there is also risk of loss.  Past performance is not a guarantee for future returns.  Investing may not be suitable for all individuals.

We at Yellowstone Partners see social networking as a major tailwind in the global economy.  The world and its people are becoming more and more connected.  It only makes sense that we take advantage of these resources to communicate with clients and associates.

Please visit the Yellowstone Partners Facebook page and join today!

http://www.facebook.com/pages/Idaho-Falls-ID/Yellowstone-Partners-Wealth-Management/110460138969598?ref=ts

In the Economic section of our Quarterly Update, I reference this graphical depiction of the economic cycle.

To offer a brief review, consider, simply that the economic cycle is a chain of cause and effect. Inflation, Consumer Sentiment, and Personal Income drive Consumer Spending, which, in turn, spurs Manufacturing and Services. That production determines Capital Spending which is a core determiner of Corporate Profits. Profits lead into Employment, and Market Valuation, which feed back into Consumer Sentiment, and Income, and thus the cycle continues.

For more Yellowstone Partners graphical depictions, please visit www.yellowstonepartners.com/library.