Friday, September 21, 2012

STUDY: Tax Cuts Don't Lead To Growth

Business Insider
Henry Blodget | Sep. 21, 2012, 7:59 AM |

Henry Blodget is CEO and Editor-in-Chief of Business Insider.

One economic theory has been repeated so often for so long in this country that it has become an accepted fact:

Tax cuts spur growth.

Most Americans have gotten so used to hearing this theory that they don't even question it anymore. …

But is the theory true? Do tax cuts really spur growth?

The answer appears to be "no."

English: Seal of the United States Congression...
English: Seal of the United States Congressional Research Service. (Photo credit: Wikipedia)
According to a new study by the Congressional Research Service (non-partisan), there's no evidence that tax cuts spur growth.

In fact, although correlation is not causation, when you compare economic growth in periods with declining tax rates versus periods with high tax rates, there seems to be evidence that tax cuts might hurt growth. …

One thing that tax cuts do unequivocally do--at least tax cuts for the highest earners--is increase economic inequality. Given that economic inequality is one of the biggest problems we face in this country right now,  this conclusion is very important. …

…[First] let's look at the top marginal tax rates for the past 60 years or so. These are not effective or average tax rates--they're just the top marginal rates. As you can see, they've trended steadily down:

Top Marginal Tax Rates

And now, average tax rates for the country's highest earners--the super-rich 0.1% of incomes. These have also trended steadily down:

Average Tax Rates

So, have these declining tax cuts for the rich--the "job creators" who are being given a bigger incentive to invest by the reduced tax rates--led to faster economic growth?


The following charts show the correlation between tax rates and economic growth over the periods above. The slope of the solid line in each chart is the key.

Components of economic growth (Saari 2006)
Components of economic growth (Saari 2006) (Photo credit: Wikipedia)
The lefthand chart shows that there is no correlation between GDP growth and the top marginal tax rates. The righthand chart shows that there might be a very modest tendency toward faster economic growth with higher capital gains rates. (…[The Congressional Research Service] does not find this correlation to be statistically significant.)

GDP versus Tax Rates

Along these lines, David Leonhardt of the New York Times recently put together a cool chart showing economic growth rates following periods of tax increases and tax cuts. The chart plots the average future 5-year economic growth rate from each point in time, which is known with the benefit of hindsight. You can see for yourself why Leonhardt (and any other sentient being) would conclude that the evidence does not support the idea that tax cuts spur growth. …

Tax rates and Growth
Image representing New York Times as depicted ...
Image via CrunchBase
David Leonhardt, New York Times

And now for the really bad news...

Although tax cuts do not appear to spur economic growth, they DO appear to lead to greater economic inequality.

As this chart shows, inequality in the United States recently hit a level that has not been seen since the 1920s: The country's top earners are taking home more of the national income than at any time in 70 years.

Share of Income

And now let's look at the correlation between this rise in inequality and tax rates. As you can see, the lower the top marginal rates go (left), the bigger the share of national income that goes to the top 0.1% of wage earners. And it's the same for capital gains rates.

Share of Total Income vs Tax

Meanwhile, the share of national income that goes to "labor"--a.k.a., most Americans--goes up as the top tax rates increase.

Share Of Income To Labor

Why is the rise in inequality so troubling? … Unlike middle class and upper middle class folks the country's highest earners don't spend all the money they earn. So this money doesn't get circulated back into the economy, where it can become revenue for other companies and salaries for other workers. (If there were a dearth of investment capital, the money might get invested, but we've got plenty of investment capital right now. Our problem is a lack of demand).

Income inequality and mortality in 282 metropo...
Income inequality and mortality in 282 metropolitan areas of the United States. Mortality is correlated with both income and inequality. (Photo credit: Wikipedia)
So, what's the bottom line?
Well, the bottom line appears to be that low taxes do not spur economic growth and DO cause greater economic inequality.

So, although it sounds like heresy, presidents and Congress-people who actually want to fix the economy might want to consider raising taxes rather than cutting them. Or, at the very least, keeping them the same.
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Thursday, September 20, 2012

The Health Exchange Game

The public health exchanges mandated by health care reform are getting a lot of attention. However, private versions are already in place.

Risk and Insurance Online
By Carol Patton

Image representing Extend Health as depicted i...
Image via CrunchBase
Early in 2009, 7,000 retirees at Eastman Chemical Co. stepped into what may represent the future of health benefits. Since then, they've had the opportunity to choose from over 300 different health care plans offered by more than 25 insurance carriers on Extend Health, a private health care exchange....

"Moving [the retirees] to an exchange model offered them the opportunity to purchase many different plans," he said. "It allows Medicare retirees to individualize their coverage."

Although private health care insurance exchanges have been around for more than a decade, serving mostly small businesses, a growing number have started popping up that are targeted to mid- to large-sized companies. Employees shop for health plans at these insurance marketplaces, which offer multiple plans from either a single carrier -- or ideally, multiple carriers -- and are designed to encourage competition. But private exchanges don't have long track records, and are referred to as "grand experiments" by some consultants. While exchanges are off to a good start in offering employee choice and helping companies predict annual health care costs, their real value may not yet be discovered.

Now that the Supreme Court has upheld the Patient Protection and Affordable Care Act, the concept of health care exchanges is gaining ground. The law contains a provision for the creation of public health care exchanges in 2014, aimed at small employers and individuals without insurance. …

Still, nothing is perfect. Switching to a private exchange can provoke fear among some employees, who may be confused, resistant to change or even intimidated by the new system.

Predicting Costs

"We were not sure what to expect," said Belcher. "We were very cautious in the beginning." …

While the exchange helped Eastman reduce its administrative workload and realize savings, Belcher said, predictability may be the biggest benefit.

"We have totally capped our costs, so we know, on an annual basis, what we're going to spend in providing retiree benefits to that population," he said. "That's a huge advantage."…

Still, the company has no plans to use an exchange for its active 11,000 U.S. employees, said Edna Kinner, Eastman's vice president of HR for North America....

"At this point in time, we do have a focus on prevention and actively managing disease and reducing health risks associated with our [employees] and their families," she said. "Will the exchanges be able to host [our] integrated objectives that become critical to business success, vs. just cost management?"

Both are integral to the overall outcome that companies need to achieve from an employee productivity standpoint, said Kinner. If exchanges can't offer all the pieces of an integrated health strategy, she said, companies could end up paying the price by actually reducing their health outcomes rather than improving them. …

Image representing Bloom Health as depicted in...
Image via CrunchBase
Other companies have chosen not to wait. At Bemidji, Minn.-based North Country Business Products, 200 employees have been using My Plan by Medica, which offers 20 different plans under one carrier and is powered by Bloom Health's defined-contribution private-exchange platform.The employees have been enrolled since January and, so far, no complaints, said Dean Crotty, president of the employee-owned company, which installs and supports point-of-sale systems in 22 states.

Crotty asked a small group of employees in different areas to evaluate the exchange. While members believed it was "an awesome way to go," he said, some employees were intimidated by the exchange when it was first introduced….

The company developed an online presentation to help educate employees about how the exchange worked and explain its benefits. Every employee now receives a fixed dollar amount each month for insurance premiums, while those who select a health-savings account receive an additional company contribution for that. The company encourages HSAs because they're a long-term safety net since funds grow tax-free over time and can be withdrawn years later for health care expenses.

English: US Citizens with Private Health Insur...
English: US Citizens with Private Health Insurance in %; U.S. Census bureau: Income, Poverty, and Health Insurance Coverage in the United States: 2007 Deutsch: US Einwohner mit privater Krankenversicherung in %; Daten nach U.S. Census bureau: Income, Poverty, and Health Insurance Coverage in the United States: 2007 (Photo credit: Wikipedia)
Employees who previously couldn't participate in the company's health plan have now found plans they can afford, he added. Buying their own health insurance has also increased employee awareness of insurance costs and enhanced their appreciation of health insurance as an employee benefit. ...

"From a cost standpoint, we know exactly what health care is going to cost us now on an annual basis," Crotty said, adding that the company was facing a 12-percent increase in health care premiums. "Before, we didn't. Today, we know exactly what that dollar amount is going to be."

Unknown Territory

Although exchanges may be the panacea for rising insurance premiums and medical expenses, companies may need to take another look, said Pat Haraden, principal at Longfellow Benefits, a brokerage and consulting firm in Boston.

"Once you make the commitment to do the exchange and downsize, it's very hard to go back," he said. "If the exchange concept fails, becomes too cumbersome, or the exchange is bought by an insurance company that only offers its own products and you don't like them, you'll have a very hard time going back to the traditional buying benefits on your own."…

"One of the things that is critical to a successful exchange is competition," added Ken Sperling, national health-exchange strategy leader at Aon Hewitt in Norwalk, Conn. "There has to be viable competition in order for prices to go down and for efficiency to come through in this delivery system." …

The biggest disadvantage of an exchange is that it's a relatively unproven concept, said Sperling. "There's lots of precedent to demonstrate that the concept should work, but we don't have 20 years of experience running a private exchange in the United States health care system to prove that it will actually work," he said.

Although employers are currently experiencing modest claims increases, he said, now is the time to lock in a fully insured exchange rate, not "after the barn has started burning" or when claims explode. …

Exchanges will probably follow the traditional product development curve, said Sperling, in which a few companies try them, followed by a wave of "fast followers" and then, ultimately, a fair percentage of employers. "We'll go from an idea to a mainstream strategy in a fairly short period of time, maybe three to five years."

Growth and Opportunity

Back in 1999, HealthPass New York began operating as a private health insurance exchange for small businesses in downstate New York. Today, its 4,000 members choose from between 16 and 22 plans offered by three carriers, said Vince Ashton, the company's CEO.

Many exchanges present employers with opportunities to improve their workforce's health and quality of health care, he said. Their plans offer benefits such as wellness, which some employers could not previously afford.

"Getting the CFO to sign [off] on something that's going to be more expensive in the beginning, but yields benefits down the road, is sometimes difficult," said Ashton. "[Exchanges] might be an easier way for HR to make that happen and reap some of the benefits without having to have such a large expenditure for the setup... .

It's all about the long view and how this is going to play into your ability to manage your benefits long-term--and the costs associated with it."

All exchanges, however, must throw employees a life preserver, by offering multiple tools and resources, said John Naylor, general manager for commercial sales and account management at Minneapolis-based Medica.

Employees need multiple tools and resources -- not just a website -- in order to make informed decisions. These resources include bilingual advisers, a phone bank and decision-support tools to help them narrow down their choices in a systematic way.

Overall, exchanges have wide appeal, especially for American corporations with overseas competitors, added Bryce Williams, managing director of exchange solutions at Towers Watson in San Mateo, Calif. He believes many will migrate a substantial part of their workforce over to exchanges. …

"They are absolutely going to look at exchange opportunities to take care of those people," Williams said, adding that employers using exchanges have realized savings of up to 25 percent of their health care costs. "Exchanges can [frequently] provide a better benefit value for the dollar than they currently offer through their group plan." …

Because they offer choice, he said, exchanges will also boost health-plan satisfaction scores among employees. For the first time, he said, Americans can do what they do every day as consumers -- shop and compare.

Exchanges may indeed live a long, healthy life, partly due to the Supreme Court's PPACA decision.

"It was imperative that the ruling happen," Williams said, explaining that the decision will help fuel the growth of exchanges. "Now you will see them proliferate."

CAROL PATTON can be reached at

September 15, 2012
Copyright 2012© LRP Publications
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Monday, September 10, 2012

What is a L.I.R.P.?

A life insurance retirement plan can give your clients the tax-free advantages of a Roth IRA — with fewer hassles.

Life Insurance Selling magazine



Americans are watching with a growing sense of dread as our nation’s debt levels continue to spiral out of control. …

Today, the federal government spends 76% of the federal budget on just four things: Medicare, Medicaid, Social Security and interest on the national debt. Absent serious efforts on the part of Congress, those costs are set to climb to 92% of the federal budget by the year 2020.1

This huge increase will be fueled in large part by the exodus of our nation’s 78 million baby boomers out of the workforce and on to the rolls of our entitlement programs. In order to offset these costs, tax rates would have to rise dramatically.2 In fact, David Walker, a former federal comptroller general, has calculated that taxes would have to double immediately in order to sustain our ever-increasing debt load.3

Grand Slam Life Insurance Plan
Grand Slam Life Insurance Plan (Photo credit: Wikipedia)
In response to these dire warnings, many Americans have turned to tax-free accumulation tools as a means of protecting their retirement assets from the impact of rising taxes. For many, a well-balanced approach to tax-free retirement planning may include the use of a life insurance retirement plan, or L.I.R.P.

The L.I.R.P. advantage
A L.I.R.P. is an accumulation tool that shares many of the tax-free attributes of traditional retirement accounts, such as the Roth IRA. Not only are distributions 100% tax-free, but they also do not contribute to the income thresholds that trigger the taxation of Social Security. When utilized properly, the L.I.R.P. has additional attributes that make it a surprisingly attractive alternative for tax-free retirement accumulation.

Retirement Funds over Time
Retirement Funds over Time (Photo credit: RodBegbie)
No income restrictions: … For clients who either earn too much or lack the necessary earned income to contribute to a Roth IRA (e.g., retirees), the L.I.R.P. can be a powerful alternative.

No contribution limits: Currently, the IRS restricts the amounts that can be contributed to tax-free accumulation accounts, such as the Roth IRA. In 2012, those who are under age 50 can contribute $5,000 per year, while those over 50 can contribute $6,000 per year. There are no such limitations with the L.I.R.P. …

No legislative risk: … If history serves as a model, however, the L.I.R.P. will likely be immune to the impact of tax law changes. When Congress changed the rules on the L.I.R.P. in 1982, 1984 and 1987, existing L.I.R.P. arrangements continued to be taxed under the old laws. Such grandfather clauses give the L.I.R.P. a much longer shelf life than traditional tax-free alternatives.

Multiple accumulation strategies: Another benefit of the L.I.R.P. is the flexibility it provides in choosing how to grow dollars within the tax-free accumulation account. Clients can choose between one of three basic accumulation strategies at the outset of the program. Determining the right one for your clients will depend on their individual goals and objectives.

1. Insurance company investment portfolio: … Because insurance companies are in the business of managing risk, these types of returns tend to be safe but very modest. Typical returns can range anywhere from 3% to 5%.

2. Stock market: Alternatively, clients can pass their contributions through insurance companies and into mutual fund portfolios called sub-accounts. While this approach can provide much higher returns, it exposes clients to the impact of severe market declines. …

3. Index: In this arrangement, clients contribute dollars to an accumulation account whose growth is linked to the upward movement of a stock market index, like the S&P 500. Clients participate in the growth of this index up to a cap, typically between 13% and 15%. On the flip side, if the index ever loses money, the account is credited zero. With back-tested historical returns of between 7% and 9%, this can be a safe but productive way to accumulate tax-free dollars for retirement.

Internal Revenue Service (IRS)
Internal Revenue Service (IRS) (Photo credit: cliff1066™)
The cost of admission
To many, the L.I.R.P. sounds like the perfect tax-free retirement tool. Some might ask, “Why not put all of our clients’ money into the L.I.R.P.?” For starters, it’s never a good idea to have all of your eggs in one basket. We diversify our clients’ investments; we should likewise diversify their streams of tax-free income.
Second, in exchange for nearly unlimited tax-free savings, the IRS requires that [out] flows, on a monthly basis, the cost of term life insurance. However, many life insurance companies recognize that clients approaching retirement may not have a glaring need for term life insurance. So they’ve done something to sweeten the pot.

Many life insurance companies now offer a provision whereby clients can access death benefit proceeds prior to death for the purpose of paying for long-term care. This is a compelling alternative to traditional long-term care insurance policies, where clients pay premiums for protection they hope they never have to use. When clients utilize the L.I.R.P. to cover long-term care risks, they do pay for it, but if they die never having needed it, their heirs still receive a tax-free death benefit.

Ryan-Graph (Photo credit: Wikipedia)

However, unless the L.I.R.P. is structured correctly, the expenses can overwhelm the growth inside the accumulation account. In order to maximize the impact of the L.I.R.P. strategy, a client must purchase the minimum insurance required while contributing the maximum amount allowed under IRS guidelines. If properly structured, the expenses within the plan can cost as little as 1% of the annual account balance over the life of the program.4 That’s less than the average annual expenses in the typical 401(k).5

The L.I.R.P. is a surprisingly flexible retirement vehicle with attributes that make it unique among tax-free accumulation tools. When utilized properly, it can play a crucial role in helping your clients insulate their assets from rising taxes while protecting them from the impact of premature death or long-term care.

1. “Running the government on 8 cents,” Jeanne Sahadi,, Jan. 21, 2011
2. “Long-Term Economic Effects of Some Alternative Budget Policies,” Congressional Budget Office, May 19, 2008, 8-9,
3. “Commentary:  Why your taxes could double,” David M. Walker,, June 15, 2009
4. An equity indexed-based L.I.R.P., at preferred rates, using a minimum non-MEC face amount of $173,161, an increasing death benefit option, a $10,000 annual premium for 15 years, and an 8% rate of growth, has an internal rate of return in year 25 of 6.99%, or average annual fees of 1.01%.
5. “Are fees draining your 401(k) retirement savings?,” Christine Dugas, USA Today, Aug. 25, 2009.
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Wednesday, September 5, 2012

Daylight Saving: Energy Policy or Placebo?

Richard M. Nixon
Cover of Richard M. Nixon
POWER Magazine

In December 1973, President Richard Nixon explained to the American people his administration’s critical initiative to confront the “energy crisis” du jour (precipitated by the 1973–74 Arab oil embargo): “Many [energy savings measures] require inconvenience and sacrifice. But daylight saving time... will mean only a minimum of inconvenience and will involve equal participation by all. Unlike many of our other initiatives to deal with the energy crisis and to accomplish the goal of self-sufficiency in energy... these savings will not require research, new technology, diplomacy, or exploration.”

Jimmy Carter
Cover of Jimmy Carter
In the almost four decades since President Nixon resurrected daylight saving as a critical component of national energy policy, our populace has clung to the hope that such a “no cost/no sacrifice” silver bullet would rescue us from each succeeding energy crisis. The nation accordingly ignored President Jimmy Carter’s admonition that confronting our energy exigencies required great sacrifices approaching the “moral equivalent of war.”…

Historical Background

Benjamin Franklin is credited as the first to identify the potential fuel savings associated with adjusting the clock. …

Retailers generally favor DST. United Cigar St...
Retailers generally favor DST. United Cigar Stores hailed a 1918 DST bill. (Photo credit: Wikipedia)
In 1918, U.S. federal law standardized the start and end dates for daylight saving. During World War II, Congress mandated daylight saving throughout the 50 states. Following the end of the war, other than 1973 and 1974, the daylight saving time period was 26 or 27 weeks. Beginning in 1988, federal legislation extended the period to 29 or 30 weeks. A 1975 federal study concluded that these measures reduced overall electric consumption by 1%. In a 1976 report to Congress, “Review and Technical Evaluation of the DOT Daylight Saving Time Study,” the National Bureau of Standards found no significant energy savings.

Energy Policy Act of 2005: Same Old, Same Old

From the early 1980s … oil prices remained around $25 a barrel. However, prices began a run-up in mid-
An illustration of the beginning of Daylight S...
An illustration of the beginning of Daylight Saving Time. (Photo credit: Wikipedia)
2003, reaching $60 a barrel by summer 2005. Congress passed the Energy Policy Act of 2005 (EPACT) to respond this “second energy crisis.” Prices ultimately peaked at just under $150 in mid-2008, before declining due to the financial crisis and associated global recession.

… Congress, however, essentially “dropped back 30 years” and … reverted to President Nixon’s political acumen to prioritize a policy promising “no cost/no inconvenience.”

… Our clocks now “spring ahead” on the second Sunday in March and “fall back” on the first Sunday in November. This 34-week period observed by most of the United States likely represents the world’s longest daylight saving period, exceeding the period in European nations by three or four weeks.

Energy Policy or Legislative Placebo?

At one level, EPACT’s expansion of daylight saving time could be viewed as a success: Almost no
An illustration of the end of Daylight Saving ...
An illustration of the end of Daylight Saving Time. (Photo credit: Wikipedia)
government funds were spent. The Department of Energy (DOE) also claims the extension reduced energy consumption … less than 0.5% and, moreover, only during the additional weeks of daylight saving in March and October. Critics challenged the validity of even this near-negligible energy reduction and argued further that on an annual basis this transitory savings is probably statistically insignificant. Furthermore, the fundamental debate over whether daylight saving time saves total energy consumption at all times and in all localities remains; critics contend that having more daylight hours increases air conditioning electric load and “leisure” gas consumption.

… Our nearly half-century experience responding to energy crises demonstrates that national energy policy must be developed with the understanding that there are no quick fixes and that success demands public and private investment, measured risk-taking (not all of which proves successful), and technological advances.

Energy policy must be crafted based on current facts and circumstances. President Nixon’s reliance on daylight saving made sense—increasing daylight hours in the 1970s represented the easily attainable “low-hanging fruit” of energy efficiency. However, EPACT expanded daylight saving only because “it worked before” and to avoid the political awkwardness of pursuing meaningful energy measures. … . Daylight saving should be assessed on its comparative social and economic costs and benefits. As a means to reduce energy consumption, daylight saving, particularly any further expansion of its duration, must be dismissed as a distracting placebo.

Steven F. Greenwald ( and  Jeffrey P. Gray  ( are partners in Davis Wright Tremaine’s Energy Practices Group.
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Tuesday, September 4, 2012

How to be happier at work


CBS News Moneywatch
By Laura Vanderkam

Cover of
Cover via Amazon
(MoneyWatch) COMMENTARY Happiness is much in the news this week with the release of Gretchen Rubin's Happier at Home, her sequel to the book-turned-cultural phenomenon known as The Happiness Project. …

…And so, the book got me thinking: Are there ways to do a happiness project in the office as well?

… Happiness is ultimately a choice. Here are a few ways to choose it on the job:

1. Put something on your desk that makes you smile. Sure, the photos of your kids are great, but I'm guessing you start looking past them after they're there long enough. Switch them up every few months, and think outside the photo album. What about a bright orange flower? A print? …

PBS @ SXSW 2010 / Gretchen Rubin
PBS @ SXSW 2010 / Gretchen Rubin (Photo credit: PBS PressRoom)
2. Schedule something to savor during every workday. Maybe it's lunch at a new place, 15 minutes reading a good book on your break, or a phone call to an old colleague to catch up. Plan it in, so you can enjoy the anticipation as well.

3. Choose your projects carefully. … When you're excited about a project, you're naturally more focused and cheery. Aim to be in that state most of the time. …

4. Challenge yourself. We are happiest when working right at the limits of our abilities, attempting things that are difficult but doable.

Instead of Saying
Instead of Saying (Photo credit: deeplifequotes)
5. Get a grip on your time. Time wasters (random web surfing, instantly responding to email) are fun in the moment, but weigh you down like eating too much fast food. Fill your work hours with important things, and you'll naturally devote less time to things that don't matter.

6. Make friends. Try to grab coffee with someone new each week. Social ties are a strong component of happiness, and knowing people personally makes work less chilly.

7. Take the long view. You can perceive ambiguous comments as slights, and ruminate on them all day. Or you can remind yourself that you will have absolutely no memory of this incident two years from now. …

Portrait of Samuel Johnson commissioned for He...
Portrait of Samuel Johnson commissioned for Henry Thrale's Streatham Park gallery (Photo credit: Wikipedia)
8. Choose the bigger life. … Rubin quotes Samuel Johnson, "Life is barren enough surely with all her trappings... let us therefore be cautious how we strip her." We often like to keep things simple. We like to avoid rocking the boat. … You can hold your fire, but what are you saving your energy for? Spend out -- and you may just buy happiness.

© 2012 CBS Interactive Inc.. All Rights Reserved.
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