87.6 F
San Fernando
Saturday, Mar 2, 2024

Personal Finance—The Media and the Muffler Are Players in Tax Debate

It was the muffler heard round the world. In a press briefing, U.S. Sen. Tom Daschle, D-S.D., said a wealthy taxpayer would be able to buy a new Lexus with his tax cut, while a $50,000 earner would be able to buy only a new muffler for his used car. The comment was repeated ad nauseam on radio, TV and in the print media. The media, true to form, lunged for the sound bite and left everything else behind. None of us got to hear what U.S. Sen. Kent Conrad, D-N.D., and Sen. Daschle wanted to communicate. In fact, the two senators have some compelling misgivings about the size and distribution of the tax cut President Bush has proposed. Here are their basic concerns: – The tax cut is too large. They argue that the $1.6 trillion cut in the Bush plan is a low-ball figure. The actual cost, they say, will be substantially higher. They reckon the true cost at a cool trillion dollars more. That’s quite a difference. The true cost of the Bush plan, the senators say, is $2.6 trillion. The additional costs include $200 billion to make the cut retroactive, another $200 billion to reform the alternative minimum tax, $100 billion to extend expiring tax provisions and $500 billion for additional interest the Treasury will have to pay because paying off the national debt will take longer. (As the late Everett Dirksen once said, “A billion here, a billion there, and sooner or later it adds up to real money.”) The most recent Congressional Budget Office projections of the surplus now total $5.6 trillion over the next 10 years. But a closer look shows that $2.5 trillion will be in the Social Security trust fund and $0.4 trillion will be in the Medicare trust fund, a total of $2.9 trillion. Subtract that from the $5.6 trillion total surplus and the surplus available for a tax cut is $2.7 trillion. That’s only $100 billion more than the Democratic senators’ reckoning of what the Bush plan will cost, $2.6 trillion. Since $100 billion is rounding error in government, there won’t be a dime for contingencies or new programs. There also won’t be any room for error or recession. – There will be no debt reduction. If 100 percent of the actual surplus is committed to a tax cut, there will be no money to reduce the national debt. If we fail to reduce the portion of the national debt held by the public, we will be ill-prepared for the surge in retirement costs when baby boomers retire. Ironically, paying down the debt is also a way of financing a tax cut. Net interest costs absorb about 25 percent of federal income tax collections. Pay off the federal debt and you can cut income taxes 25 percent. – The surplus may not exist. “As we all know, projections are no better than weather forecasts. And if we are prepared to accept weather forecasts for five or 10 years out, I suppose we ought to accept these projections. But the ramifications of being wrong on these projections are far worse than being wrong on a weather forecast.” That’s what Sen. Daschle said in a Feb. 7 news briefing. A small change in our rate of growth could make the surplus disappear. – The tax cut is unfair. As Sen. Daschle sees it, the bottom 80 percent of all earners will get only 29 percent of the tax cut, while the top 20 percent will get the remainder. The top 1 percent, he says, will get 43 percent of the benefits. In a recent telephone conversation the senator told me he was disappointed by how much substance had been lost in media reporting of the press briefing. “This has huge ramifications. We ought to give it the debate it deserves,” he said. I asked what he would like to see as an alternative. “Most likely, our proposal will have three components. One will be pay-down of government debt. Another will be a tax cut,” he said. The third and he is proposing an even three-way division would be “investments in key priorities,” i.e., new spending. Who would get the tax cut? While the details are far from final, the senator is thinking about a tax “dividend” that would offset a portion of the payroll tax. This would lower the total tax burden of the 93 percent of all workers who earn less than the $80,000 maximum on the employment tax. Screening for Funds Question: I have been investing exclusively in mutual funds for the last 15 years. I have also been involved almost exclusively with the Fidelity family of funds. Fidelity’s Web site (www.fidelity.com) has a program called “fund evaluator” that uses different criteria for selecting mutual funds from its own family as well as the total universe of mutual funds. I am currently using stock funds, year-to-date returns, three-year returns and Morningstar ratings as my criteria. What would you suggest as the specific criteria to use to evaluate funds? Also, with constant market rotation, what sectors should I focus on in the months ahead, as I do get involved in Fidelity’s sector funds? — T.G., by e-mail Answer: Advances in java programming and database management have brought a lot of new screening and ranking capability to Web users in the last two years, including the Fidelity site. Morningstar’s own Web site, however, offers a greater variety of variables for screening, so I think the first thing you should do is visit the site and use its Fund Selector (http://screen.morningstar.com/FundSelector.html). I also think you should avoid sector funds. The reason for this is very simple: Sector funds are more volatile than broader portfolio funds, and we should be working to reduce, not increase, the volatility of our investments. The greater the volatility of our investments, the greater the odds that our long-term return will be reduced by what technical types call “variance drag.” Basically, the greater the volatility of your portfolio, the greater the odds that you will one day be hit by a really nasty decline. Recovery from a nasty decline is difficult. Suppose, for instance, that you own a fund that has great potential. But it also has a bad year and declines by 50 percent. Just to get back to your original value, the fund now has to double. That’s variance drag. Among domestic large value funds, however, the ratings were reversed. Only 17.6 percent were rated four or five stars, while 20.7 percent were rated one or two stars. In the last three years, growth funds did better than value funds. The situation, however, reversed last fall. Since then, value funds have done better than growth funds. If you screened by Morningstar ratings, you’d tend to be over-committed to growth funds over value funds. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: scott(at)scottburns.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.

Previous article
Next article

Featured Articles

Related Articles