FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
November 20, 2007

IN THIS ISSUE:

1.   The Rich Don’t Pay Their Fair Share?

2.   Democrats Plan To Hike Top Tax Rate To 65%

3.   Treasury Study Blows Away Liberal Myths

4.   What’s Up (or Down) With The Stock Market?

5.   What I’m Thankful For This Year

Introduction

Last Tuesday, the US Treasury Department released a shocking new study on “income mobility” which has received very little coverage in the mainstream media, and I’m going to tell you why.  As I will discuss in detail below, this latest 10-year study from the Treasury showed that almost 60% of income tax filers who were in the lowest income groups in 1996 had climbed into higher income groups by 2005.

As I will elaborate below, this well documented Treasury study single-handedly blows away the liberal myth that the middle class is shrinking, and the myth that the rich are getting richer and the poor are getting poorer.  For sure, the poor are not getting poorer, and the fact is, all income groups are getting richer – except those in the top 5% of all income earners, who actually saw a decrease in real median income from 1996 to 2005.

For my liberal readers, let me warn you that you are about to be in for a shock!  And a well documented one at that.  Actually, you’re in for multiple shocks this week that you will not be able to refute objectively or factually.  You can, of course, stop reading now, except for those of you who chose to criticize my E-Letter two weeks ago on income taxes.  You folks need to continue reading.

In my November 6 E-Letter, I wrote at length about Rep. Charlie Rangel’s proposed “Mother of All Tax Hikes” that would impose an effective income tax increase of 5-6% on those individuals making $150,000 or more and married couples making $200,000 or more per year.  I was roundly criticized by some readers who suggested that I purposely did not point out that the rich pay a lower percentage of their total annual income in income taxes than their brethren in the lower income brackets.  Guess what – it’s not true!  I’ll show you the numbers as we go along.

But just as a glimpse, the latest IRS data shows that the top 50% of tax filers in 2005 paid 13.84% of their total annual income in income taxes, while the bottom 50% of filers paid only 2.98% of their total income in income taxes in 2005.  This is data straight from the IRS, not me.  Also, do you know that the leading Democratic presidential contenders are considering raising income taxes from 35% to 65% on those making $200,000 or more per year?  I didn’t think so.  We’ll get into that as well this week.

There is a lot of important information, including the latest Treasury study on income trends, in the pages that follow.  Given that, you are free to distribute this E-Letter as you wish.  It may be very instructive for friends and family, especially your kids and grandkids, but be warned, it will not be well received by the liberals. 

At the end, I’ll share with you some of the things I’m most thankful for this Thanksgiving.  Let’s get started.

The Rich Don’t Pay Their Fair Share?

In my November 6 E-Letter, I quoted the Tax Foundation that recently released an analysis of the Internal Revenue Service’s income tax data for 2005 (latest available).  For purposes of this discussion, let me repeat just a small part of that Tax Foundation analysis:

America’s richest 25 percent of taxpayers paid about 86 percent of all federal income taxes in 2005, despite earning only 67 percent of the nation’s income… The highest-earning 1 percent alone— those earning more than $364,657—paid a staggering 39.4 percent of all federal income taxes… That means the top 1 percent of tax returns paid about the same amount of federal income tax as the bottom 95 percent of tax returns combined.

This data for 2005 is not really new.  The top income brackets have always paid the majority of income taxes.  Yet I was roundly criticized by some of my liberal readers for not also quoting the percentage of their total income that the wealthy pay in income taxes.  Here’s a digest of the negative responses I received:

Gary, you are intellectually dishonest to show only the percentage of all income taxes paid by the rich versus the poor.  Obviously, someone making a million dollars a year will pay more than someone making $50,000.  But what you shamelessly elected not to show is that someone making $50,000 a year pays a far higher percentage of their total annual income in income taxes than someone making $350,000 or more a year.

Quite honestly, I have never paid much attention to the percentages of total income paid in income taxes.  But based on the number of these responses I received, I felt compelled to do some checking.  As I expected, it turns out, they were WRONG.  Here is the data from the IRS for 2005:

[Note: The Average Percent of AGI paid in taxes for each of the Taxpayer Brackets listed above is calculated by taking the sum of all income tax paid by individuals in each bracket in 2005, and dividing it by the total adjusted gross income of all such individuals.  For example, based on 2005 income tax data from the IRS, the top 50% of taxpayers had total adjusted gross incomes of $6.544 trillion, and paid total income taxes of $906 billion.  Thus, $906 billion divided by $6.544 trillion equals the 13.84% tax rate shown above.]

Based on the Internal Revenue Service’s own data, the rich do in fact pay a higher percentage of their adjusted gross income in income taxes, by far, as compared to those in the lower income brackets.  The top 50% of taxpayers pay 4.6 times the percentage paid by those in the bottom 50% on average.  Someone in the top 10% pays 6.3 times the percentage paid by those in the bottom 50% on average.

Keep these numbers in your head for the next time a liberal tells you that the rich don’t pay enough in taxes.  The top 50% already pay almost 97% of all income taxes paid, whereas the bottom 50% pay only about 3%.  And let us not forget that the top 50% create virtually all of the jobs in this country, and make the economy strong, yet the libs want to tax them even more!

If you want to see the 2005 IRS income tax data and tables, click on the following link to see the full story from the Tax Foundation:  http://www.taxfoundation.org/research/printer/250.html.

Democrats Plan To Hike Top Tax Rate To 65%

The three leading Democrat candidates for president – Hillary Clinton, Barack Obama and John Edwards – have all made it known that, if elected, they will consider raising taxes on “the rich” in order to fund their various programs, including nationalized health care.  And as discussed above, the rich are now defined as any individuals making $150,000 or families making $200,000 or more per year.

In the recent Democratic presidential debates, Hillary has avoided stating just how much she would raise taxes on the rich, but candidates Obama and Edwards have told us what they plan to do, and you’re not going to like it (unless you are one of my liberal readers).  They have done so in discussions on the subject of how to save Social Security.

Both Obama and Edwards have rejected the notion of cutting Social Security benefits or raising taxes on the middle class to fix Social Security’s unfunded costs.  Instead, both Obama and Edwards have actually proposed plans for raising the income tax paid by those making over $200,000.  To many moderate voters, this probably makes plenty of sense.

The question is, how much would taxes have to go up on the rich ($200,000 or more in annual income) in order to fix Social Security going forward and fund the Dems’ plans for national health care?  According to a front-page article in last Thursday’s Investment Business Daily:

“To bring in enough money to close Social Security’s shortfall and make good on the $2 trillion in IOUs in the trust fund would require an annual tax increase in excess of 25 percentage points on those earning over $200,000…  [Emphasis added, GDH.]

Combining this tax hike with the reversal of President Bush’s tax cuts for high earners – as all of the top Democratic contenders have called for to help pay for their health care plans – would raise the top rate on work income from 35% to about 65%.”  [Emphasis added, GDH.]

What, you haven’t heard of this?  Of course you haven’t.  The mainstream media is not about to tell us that the three leading Democrat candidates plan to skyrocket income taxes on those making over $200,000.  Heritage Foundation senior fellow David John reacted to the Dems’ proposed tax increases as follows:

“It’s easy to say, ‘We’ll just assess a small tax on the rich.  But when you start to add up the cost of (Democratic plans for) health care, Social Security, the (elimination of) the alternative minimum tax, you run into some astonishing tax increases.”  [Emphasis added, GDH.]

Given that many of you reading this E-Letter, myself included, have (or inspire to have) annual incomes of $200,000 or more, I suggest you start paying more attention to these Democratic presidential debates and be aware of just how deeply these liberals plan to raid our pocketbooks.  Even worse, if the Dems are successful in hiking taxes to such levels, there will be no guarantee that they will actually use the money to fix Social Security – they might just spend it.

Finally, can you imagine the negative effects that a top tax rate of 60-65% would have on the economy and job creation?  History has shown that at such excessive tax rates, high income earners find ways to limit or reduce wage and salary compensation.  Some wealthy individuals will actually work less, or not at all, rather than pay 60-65% tax rates.

I know some conservatives who are so disgusted with the Bush administration that they say they will vote for a Democrat in 2008, just to send a message.  I hope they’re ready to see their income taxes almost doubled if they do!

Treasury Study Blows Away Liberal Myths

Last Tuesday, the US Treasury Department released a shocking new study on income mobility.  For years, the Democrats have fueled class warfare by claiming that the middle class is shrinking, and economic opportunities are declining, while inequality is growing.  Not necessarily so, according to the latest landmark study by the Treasury Department. 

The Treasury Dept. conducted a 10-year study wherein they tracked the income tax returns of almost 100,000 filers, from 1996 to 2005.  The individual filers and married couples they tracked, all ages 25 or higher, were of various ages and various income levels from lowest to highest.  The various income levels were divided into five quintiles, from lowest to highest.  What is important to understand is that the study tracked the same people over the 10-year period to see how their incomes changed over time.

What the study found – surprise, surprise – is that Americans on the bottom rungs of the economic ladder continue to climb into the middle class and sometimes even the upper class in remarkably short periods of time.  Most notably, the study found that almost 58% of filers who were in the poorest income group in 1996 had moved into a higher category by 2005.  Nearly 25% jumped into the middle income groups, and over 5% sprang all the way to the highest income quintile.  Of those in the second lowest income group, nearly 50% moved up into the middle class quintile, while only 17% moved down.

The Treasury also found that the after-inflation median income of all filers tracked rose by an impressive 24% over the 10-year period.  Two out of every three workers had a real wage gain (after inflation).  This is even more impressive considering that “median” income and wage numbers are typically skewed down because the US has had a huge influx of young workers and low wage immigrants over the last 20 years.

As you can see in the following chart, those tax filers in the lowest income quintile saw their incomes almost double (up 90.5%) over the 10-year period.  This categorically blows away the liberal myth that the poor are getting poorer.  Likewise, it dashes the Democrats’ argument that the middle class is shrinking.  Instead, the study shows that the poorer an individual or household was in 1996, the greater the percentage gain in their income was after 10 years on average.

The Rich Getting Richer, Not So         

While all five quintiles, from lowest to highest, saw income increases over the 10 years from 1996 to 2005, the Treasury data was broken down even further.  As you can see in the chart above table, the Top 10% of filers tracked in the study had only a modest 2.9% increase in income over the decade.  But most surprising (especially to the liberals), the Top 5% saw a decrease in inflation-adjusted income of -6.8% over the period. 

Most surprising of all, the Top 1% saw their inflation-adjusted median incomes fall by 25.8% from 1996 to 2005.  In addition, of the Top 1%, over half (57.4%) had fallen into a lower income quintile by 2005!  This not only smacks the liberal argument that the rich are getting richer, it also points out that the rich aren’t the same people all of the time, since over 57% of those followed fell to lower income groups over the decade.

The Treasury Dept. also noted that the findings of its latest study are parallel with similar studies in the 1970s and 1980s.  However, how do we reconcile this study with statistics from the Census Bureau and others that find the top earners are getting a larger share of household income?

The key is that, while the top earning households are getting a larger share of the pie, the opportunity exists for virtually anyone to rise to those lofty heights.  Also, since the Treasury study followed the same group of taxpayers, it showed conclusively that any particular high-income taxpayer may not stay in the top brackets for long.  Instead, they are replaced by others who have taken advantage of the opportunity to move up to a higher income bracket. 

The kind of inequality and barriers to opportunity that some of the Democratic presidential candidates would have their followers believe would require the US to have a “caste” system of sorts, where there is no opportunity to be upwardly mobile.  That situation does NOT exist in the US, though I doubt that these candidates and their liberal supporters will allow this impartial study to convince them to change their rhetoric.

In any event, this Treasury Dept. income study is so informative that the mainstream media may have to address it at some point – we’ll see.  Hopefully, it will have some impact on the current political debate on “income inequality.”  An Op-Ed piece in last Tuesday’s Wall Street Journal summed it up as follows:

“The political left and its media echoes are promoting the [income] inequality story as a way to justify a huge tax increase.  But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences.  That kind of society can breed resentments and unrest.  America isn’t remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.

The great irony is that, in the name of reducing inequality, some of our politicians want to raise taxes and other government obstacles to the kind of risk-taking and hard work that allow Americans to climb the income ladder so rapidly.  As the Treasury data show, we shouldn’t worry about inequality.  We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.”

I couldn’t agree more!  The top Democrat presidential contenders will nonetheless continue to push for large tax increases on the wealthy (now defined as those families making $200,000 or more) that will slow down the economy and thereby hinder the ability for those in the lower income brackets to rise up as they have done over the last several decades.

These politicians believe that a majority of voters will buy into their inequality mantra and will not be aware of the truth revealed in this latest Treasury study.  Sadly, they may be right, at least in regard to their traditional liberal supporters.  However, a November 19 Investors Business Daily front-page article discussed a recent poll that may indicate Americans are smarter than the Dems give them credit for.

The IBD/TIPP poll found that, contrary to claims by liberal politicians and even some other polls, 75% of Americans consider themselves to be “haves” as opposed to “have-nots.”  More importantly, even a majority of those in the very lowest income categories consider themselves to be “haves” rather than “have-nots.”  This finding is huge, especially in light of all of the negative news and views we get from the mainstream media and liberals in general.

Perhaps the majority of Americans, unlike certain Democratic presidential hopefuls, know that America is still a land of opportunity, and that where you start out on the income ladder is not necessarily where you’re going to end up.  Thus, while everyone may not have a large current income, they know they do have the opportunity to move up on the ladder.

To be fair, it’s important to note that the PewResearchCenter conducted a poll that had very different findings on the “haves” versus “have-nots” issue.  Fortunately, the Investors Business Daily article delves into this discrepancy in results, and it seems to boil down to the age-old polling factors – who you ask and how you ask it.

Even so, I think the IBD/TIPP poll is very indicative of the opinions of those who do not depend upon the six o’clock news to help them make up their minds in regard to what they think or feel.  That is why I encourage you to forward this E-Letter to as many people as you can.  You might let them know that they can receive this E-Letter directly, and free of charge, by CLICKING HERE to subscribe.

What’s Up (or Down) With The Stock Market?

The US equity markets have been in a funk for the last month or so.  The S&P 500 Index is down apprx. 8% since the peak in early October.  Obviously, this is the “correction” that BCA warned about last month, as I discussed in my November 6 E-Letter.  Several things are bothering stock market investors: a slowing economy, high oil prices, weak consumer sentiment and a general feeling that the Fed is not going to cut interest rates next month, just to name a few.

My view is that the latest downward move in stocks is just a correction and not the beginning of a bear market.  The market is still well above the August lows.  BCA continues to believe that the Fed will cut interest rates at least a couple more times over the next 2-3 months, and continues to recommend a fully-invested position in equities.  For those who are under-weight or are on the sidelines, I would view the latest decline as a buying opportunity. 

What I’m Thankful For

Here are just some of the things I’m thanking God for at Thanksgiving.  First, I am thankful that I was born in America and for the freedoms we all enjoy.  I am most thankful for my wife, business partner and best friend, Debi.  I am thankful to have two great kids, Tyler (17) and Jordyn (15) who do great in school and stay out of trouble. 

By the way, Tyler’s football team (that I coached back in Middle School and even before) went undefeated in District again this year and is in the playoffs, winning its Bi-District game last Friday night, and hoping for a second consecutive State Championship.  Tyler was the top-rated receiver (total yards receiving) among all Central Texas private schools for the regular season – Dad is real proud!  As soon as football is over, he’ll move right into basketball, and then baseball right after that. 

I will coach his baseball team one more season starting in February, along with two other coaches, and then I’ll probably retire from my 12-year coaching career – what the folks in our office call “my other job.”  I never had any intention of coaching youth sports; I was simply abducted the first season Tyler played baseball by the Head Coach who needed some help.  I am so thankful for that and the thousands of precious memories with the boys (and girls – I coached my daughter’s basketball teams and softball teams as well) that I will cherish forever.

I am thankful that my daughter Jordyn hasn’t had a wreck as we’re doing the “parent-taught” Driver’s Ed.  I must admit, it will be much harder to turn her loose behind the wheel than it was for my son, but that day will come in May of next year, whether I like it or not.

I’m thankful for my co-workers.  We have 12 people in the company, most of whom have been with us for many years.  It is an atmosphere more like a family than a business.  I am especially thankful for Mike Posey, our Senior Vice President.  In addition to managing the operation, Mike helps me a lot with writing these weekly E-Letters.

I am thankful to have close to 2,000 clients all across the country.  I must say that we have some of the nicest clients I’ve ever known.  Sure, we have a complainer once in a while, but virtually everyone we talk to is very pleasant, professional and appreciative.  Thank you so much!

Lastly, I am thankful for all of you who read my weekly ramblings in this E-Letter, and especially those of you who send me comments and/or suggestions.  I really appreciate them, including even those who disagree with me in a respectful way.

I am thankful to God for all these blessings and many, many more.

I’ll be cooking turkey, dressing and more for a group of 20 or more on Thursday, including family and some close friends, along with some rooting for the Cowboys.  It will be a great time to give thanks.

I wish you and yours a very Happy Thanksgiving!

Best holiday regards,

SPECIAL ARTICLES

Income Confusion - what the latest IRS data show.
http://www.realclearpolitics.com/articles/2007/11/income_confusion.html

Dollar Will Weather the Whines, Jeers and Jokes
http://bloomberg.com/apps/news?pid=20601039&sid=aiRdK_VcUFHU&refer=columnist_berry

Dick Morris: Hillary's Secret Police Return
http://www.newsmax.com/morris/clinton_obama/2007/11/19/50691.html

Clinton, Obama clash over experience
http://www.latimes.com/news/politics/la-na-clinton20nov20,0,2834295.story?coll=la-home-center

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