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Re: Good news for American investors/FIREs
Old 05-12-2006, 05:15 PM   #21
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by whitestick
Martha, does this mean that irregardless of AGI right now, I could do a traditional, non-deductible IRA, and convert (actually combine with an existing ROTH that I currently have).* I'm trying to build my current ROTH to a particular asset level, and my current AGI won't let me contribute directly.* Is this a way around my current problem of too high an AGI for ROTH contributions?
We had this problem when both spouse and I were working or when we were harvesting cap gains from mutual funds.

When we couldn't deduct our traditional IRA contributions, we kept making non-deductible contributions (which requires tracking the IRA basis with Form 8606).

When Roths started up we were still above the income limits so we kept making those non-deductible contributions to our traditional IRAs.

When our income dropped below the limit, we started making Roth contributions and let the traditional IRAs keep compounding.

Now that our earned income has essentially dropped to zero, we've been converting the traditional IRAs to Roths. We do a little each year up to the top of the 15% tax bracket. We'll keep doing this until we're all Roth and no traditional. We've also learned that having a substantial basis in a traditional IRA can confuse the IRS's document-matching computers, so keep up with those 8606s.

We'll pause during the kid's college years (Roth conversions are equated to income on a financial aid form) but we should be done converting within the next 10 years. I have 17 years to SS and 25 years to RMD so it's no problem.
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Re: Good news for American investors/FIREs
Old 05-12-2006, 05:19 PM   #22
 
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by Nords
I'd rather have a Congress that has to face a spending cut than a Congress that's trying to decide how to deal with a surplus.

You know what'll happen to either party if they try to raise taxes!
Yeah right! - Just tell me what they're gonna cut? - I have asked this question to the Republicans for 20 years. - The answer is they cut nothing!

- Someone is gonna tax you. Whether it's devaluing your retirmement stash or an out and out tax increase - But the pain is a comin'.
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Re: Good news for American investors/FIREs
Old 05-12-2006, 06:53 PM   #23
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Re: Good news for American investors/FIREs

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Originally Posted by Martha
The hope is to raise a bunch of money when those high tax rate people pay taxes on their IRA money to convert to a ROTH.* Bird in the hand.
Or eating your seed corn.
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Re: Good news for American investors/FIREs
Old 05-12-2006, 08:00 PM   #24
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by whitestick
Martha, does this mean that irregardless of AGI right now, I could do a traditional, non-deductible IRA, and convert (actually combine with an existing ROTH that I currently have). I'm trying to build my current ROTH to a particular asset level, and my current AGI won't let me contribute directly. Is this a way around my current problem of too high an AGI for ROTH contributions?
Not until 2010, unless your income drops.
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Re: Good news for American investors/FIREs
Old 05-13-2006, 10:38 PM   #25
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Re: Good news for American investors/FIREs

Also, regarding the 2010 conversions to Roth's, is a provision in the new law for paying the tax over a 2 year period.
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Re: Good news for American investors/FIREs
Old 05-13-2006, 11:18 PM   #26
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by Martha
Not until 2010, unless your income drops.
Thought it sounded too good to be true, although 2010 is just around the corner, so I can start planning for that. Current plan is to RE (sort of) in 2009 - I'll be 60 1/2, so my income needs will drop, and maybe I'll get to the level that NORDs spoke of.
Thanks
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Re: Good news for American investors/FIREs
Old 05-13-2006, 11:20 PM   #27
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Re: Good news for American investors/FIREs

A quick comment about the horrors of the national debt. Remember that you don't ever need to pay it off. To a very large extent, it pays itself off. If you do nothing more than service the interest, the problem solves itself.

Meaning, inflation of 4% will cut it effectively in half in 19 years without a penny ever being allocated to the principal. Running deficits because of needed spending is a negative, but debt increase has to exceed 4% in a given year before it is truly a debt increase.

So thinking in terms of "children paying it off" is not directly true. Maybe it has some impact on rates, but it's hard to make that case given just how low mortgage rates were only a year ago -- and how low short term rates were only a year ago. The debt wasn't exactly small last year and it didn't seem to affect rates.

So . . . as far as the evidence to date shows, no one ever really has to "pay it off". Inflation pays it off.
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Re: Good news for American investors/FIREs
Old 05-13-2006, 11:21 PM   #28
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Re: Good news for American investors/FIREs

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Originally Posted by rodmail
Inflation pays it off.
So does a growing GDP.
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Re: Good news for American investors/FIREs
Old 05-14-2006, 06:02 AM   #29
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by rodmail

So . . . as far as the evidence to date shows, no one ever really has to "pay it off".* Inflation pays it off.
The result of which is that we are poorer in the future. Future payment for present consumption leaves us all poorer in the future.
If inflation is nice and stays at 2%-3%-4% it can be handled and won't be devestating, but if it rages to 10% or 15% or higher it can and will cause a severe economic dislocation.

Defecit spending that results in an increase in production (i.e. for investment) works for our future, but defecit spending for present consumption does not.
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Re: Good news for American investors/FIREs
Old 05-14-2006, 07:54 AM   #30
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by rodmail
So . . . as far as the evidence to date shows, no one ever really has to "pay it off". Inflation pays it off.
So why are we worried about social security? Lets just increase the benefits and borrow more to pay them. Let it pile up forever and let inflation take care of the problem. Lets plug it into FIRECALC and see if we can do the same for our individual ER.

The "safe debt" level is a complicated topic and one I don't have an answer to. But the simplistic assertion that deficit spending simply doesn't matter does not ring even close to true.
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Re: Good news for American investors/FIREs
Old 05-14-2006, 08:11 AM   #31
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by rodmail
A quick comment about the horrors of the national debt. Remember that you don't ever need to pay it off. To a very large extent, it pays itself off. If you do nothing more than service the interest, the problem solves itself.
That is EXACTLY what they used to say in my home country (Brazil) back in the early 70's. The problem is that the national debt keeps rising (as the government always find more ways to spend) and it becomes more and more difficult to find people to finance it. As a result, you need to raise the yield on the treasures , which in turns raises the national deficit (and the debt) and this spiral keeps going until your entire economy collapses. It is not pretty. Trust me, I saw it first hand.
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Re: Good news for American investors/FIREs
Old 05-14-2006, 03:27 PM   #32
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Re: Good news for American investors/FIREs

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If inflation is nice and stays at 2%-3%-4% it can be handled and won't be devestating, but if it rages to 10% or 15% or higher it can and will cause a severe economic dislocation.
Mathematically, this is incorrect. 10-15% inflation would decrease the value of the debt even faster. Economic devastation would be due to that inflation, not the debt itself.

I imagine there are various justifications for declaring that inflation derives from debt -- but again, the debt was the value it was last year, and the year before, and the CPI wasn't 10-15% last year. The CPI wasn't 10-15% the year before that, either. Nor were interest rates.

Mathematically, if the increase in the debt is less than the inflation rate, it is not an increase.
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Re: Good news for American investors/FIREs
Old 05-15-2006, 08:21 AM   #33
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Re: Good news for American investors/FIREs

Interesting column in the Washington Post this morning. Not specifically addressing inflation, but taking on the beneficience of tax cuts. Busch, Cheney, Frist, Grassley, Santorum, et all have been touting the old 1980s voodoo about how tax cuts pay for themselves. Frist called this the "dirty little secret" that when done right cuts pay for themselves.

Sebastian Mallaby cites conservative economists to deflate that preposterous lie. N. Gregory Mankiew who chaired the Council of Economic Advisors at Busch Chaney invite published a paper last year that showed "surprisingly large" (his words) self-fianancing effects. Cap gains cuts finance 1/2 of their costs. Cuts on taxes against wages pay a whopping 17% of their costs.

Douglas Holz-Eakin, a Bush Whitehouse ecomomist and later head of the CBO, directed a CBO studied the extent to which a 10% reduction in personal taxes might pay for themselves. On the most optimistic asumptions they could come up with, they found enough growth stimulated to replace 22% of losses in the first 5 years and 32% in the second five. With pessimistic assumptions, the growth effects did nothing to ofset losses.
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Re: Good news for American investors/FIREs
Old 05-15-2006, 08:57 AM   #34
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Re: Good news for American investors/FIREs

Models and projections concerning the impact of this or that tax cut/policy are interesting, but they are very sensitive to the impact of assumptions. These assumptions must be made, but can't be made with precision.

Historically, the impact of tax cuts on federal revenues is established--lower tax rates have been followed by increased federal revenues. Maybe that was a coincidence, and of course it could "be different this time.

So--believe somebody's model, or go with what has consistently happened in the past.
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Re: Good news for American investors/FIREs
Old 05-15-2006, 09:57 AM   #35
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Re: Good news for American investors/FIREs

Rodmail
I agree that inflated dollars mean debt is less costly. The point is that when inflation works its way into the economy at a more than benign level, it causes economic dislocation. That is, hard assets become the only viable holding as the currency loses value. This is an inflationary spiral. The fed is aware of it, we were close in the 70's. That's the dislocation, not that debt itself gets paid back in cheaper dollars.
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Re: Good news for American investors/FIREs
Old 05-15-2006, 10:55 AM   #36
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Re: Good news for American investors/FIREs

Quote:
Originally Posted by donheff
Council of Economic Advisors at Busch Chaney
Am I the only one intrigued by Busch Chaney supporting Bush Cheney?
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Re: Good news for American investors/FIREs
Old 05-15-2006, 11:07 AM   #37
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Re: Good news for American investors/FIREs

Quote:
Am I the only one intrigued by Busch Chaney supporting Bush Cheney?


I didn't follow most of that. The gist is someone doesn't want to believe justification for lower taxes so a study was done to get the answer that that says they aren't good.

Not a lot of scientific method in economics. Whoever is getting grant money for "research" and wants it to continue will get a really well justified result that is in line with the grant agency's agenda.

Hell, this is true of all grant money. Has anyone ever seen a study that concluded with a statement anything other than "more research is needed?"

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Re: Good news for American investors/FIREs
Old 05-15-2006, 11:41 AM   #38
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Re: Good news for American investors/FIREs

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Originally Posted by samclem
Historically, the impact of tax cuts on federal revenues is established--lower tax rates have been followed by increased federal revenues. Maybe that was a coincidence, and of course it could "be different this time.
Link?
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Re: Good news for American investors/FIREs
Old 05-15-2006, 01:19 PM   #39
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Re: Good news for American investors/FIREs

The Congressional Joint Economc Commitee (1996)
http://www.house.gov/jec/fiscal/tx-g...t/reagtxct.htm claims that reducing the top rate actually increased the taxes paid by the wealthiest Americans. (Not exactly an answer to your question, but interesting)
"During the summer of 1981 the central focus of policy debate was on the Economic Recovery Tax Act (ERTA) of 1981, the Reagan tax cuts. The core of this proposal was a version of the Kemp-Roth bill providing a 25 percent across-the-board cut in personal marginal tax rates. By reducing marginal tax rates and improving economic incentives, ERTA would increase the flow of resources into production, boosting economic growth. Opponents used static revenue projections to argue that ERTA would be a giveaway to the rich because their tax payments would fall.

The criticism that the tax payments of the rich would fall under ERTA was based on a static conception of human behavior. As a 1982 JEC study pointed out,[1] similar across-the-board tax cuts had been implemented in the 1920s as the Mellon tax cuts, and in the 1960s as the Kennedy tax cuts. In both cases the reduction of high marginal tax rates actually increased tax payments by "the rich," also increasing their share of total individual income taxes paid. Unfortunately, estimates of ERTA by the Democrat-controlled CBO continued to show falling tax payment by upper income taxpayers, even after actual IRS data had become available showing a surge of income tax payments by affluent taxpayers."
**************************

Chicago SUN-TIMES article by Terry Savage
http://www.suntimes.com/output/savag...-terry155.html
" John F. Kennedy proposed major tax cuts in 1963, and in February 1964, after his assassination, the top tax rate was cut to 70 percent from 91 percent. Tax revenues nearly doubled in the next four years. After Ronald Reagan cut taxes in the mid-1980s (and those tax cuts were phased in over a period of years), revenues grew to $1.2 trillion from $900 billion.

In fact, Kennedy recognized the phenomenon that the government can get more revenues by cutting taxes in this famous statement: "An economy hampered by restrictive tax rates will never produce enough revenues to balance our budget, just as it will never produce enough jobs or enough profits. ... In short, it is a paradoxical truth that tax rates are too high today, and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates now."
*****************************

From a review of the numbers immediately after the Kennedy and Reagan tax cuts, it appears that revenues fall for the first few years then accelerate (as the economy responds to the lower tax rates--folks change their investments to expose more to taxation, businesses expand, people get jobs, etc.)

Reagan Years (Revenue from Individual Income Taxes)
Year Actual Constant 1987 dollars
1981 $285,917 $367,692
1982 297,744 356,366 << Tax cuts take effect in 1982
1983 288,938 332,033
1984 298,415 328,470
1985 334,531 354,677
1986 348,959 359,307
1987 392,557 392,557
1988 401,181 387,128
1989 445,690 411,533

Total Federal Tax Collections (individual plus corporate) (billions)
Year Nominal Constant (87 dollars)
---------------------------------------
1980 $517.1 $728.1
1981 599.3 766.6
1982 617.8 738.2 << Tax cuts take effect
1983 600.6 684.3
1984 666.6 730.4
1985 734.1 776.6<< Recovered
1986 769.1 790.0
1987 854.1 854.1
1988 909.0 877.3 << Total govt revenues up by 14 percent in real terms compared to 1981
1989 990.7 916.2
1990 1031.3 914.1
1991 1054.3 894.7
1992 1090.5 895.1

After Kennedy's tax cuts in 1964, revenues decreased (by 1.5%) for just one year. After that federal revenues accelerated sharply.

Now, that's just two cases. I'd bet other free-market economies have responded in the same way, but I haven't checked. On the face of it both sides get a battle cry: "Tax cuts hurt federal revenues" (for the first couple of years). Or "Tax cuts increase revenues" (but not at first)

What we need is a parallel universe where we can try these things out in a perfectly identical "earth" so we can be sure other variables weren't truly the cause.
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Re: Good news for American investors/FIREs
Old 05-15-2006, 02:13 PM   #40
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Re: Good news for American investors/FIREs

Right, I think it's more complicated then, "reduce taxes, increase revenue." You obviously can't tax at 1% and expect tax revenues to increase through the roof just as you can't tax at 91% (!) and expect revenue to not fall. Just as a manfacturer prices a widget, so the tax rate works - the optimal profit is where the two lines intersect.

As a counter example, Clinton raised taxes in 1994 and...tax revenue increased. They kept increasing until 2000, when the dot com bubble burst. The GDP skyrocketed upward as well. Can we claim that this revenue increase was because of a tax hike?
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