This article appears in the December 2007/January 2008
issue of The American Spectator. To subscribe to our
monthly print edition, click here.
MY WIFE AND I WENT to one of those free dinners that brokerage
houses offer to attract clients. This was a Smith Barney affair,
and I was glad to go because it was held at an Italian restaurant
(one of a chain) called Maggiano’s. I like Maggiano’s because they
don’t assume you’re on a diet, unlike so many places.
There must have been 40 of us on hand. We listened to an
entertaining speech by Moshe A. Milevsky, an associate professor of
finance in Toronto. And although his speech was about “risk and
wealth management” (sounds so boring!) and was illustrated
with slides (way too many charts and numbers), he actually wasn’t
dull for a moment. He didn’t give investment advice either. I don’t
think they’re allowed to on these occasions. He talked about the
rapid disappearance of company pensions — “defined-benefit
plans.”
“You just got hired by one of the hundred largest companies in
the U.S.,” he said. “Did they offer you a defined-benefit pension?”
In 1985, 89 percent did. By 2005 that was down to 37 percent.
General Motors recently froze its pension plan. So did many other
companies: Dupont, IBM, Sears, Verizon, on and on. In the last 20
years, two-thirds of the traditional pensions have been frozen.
Pretty soon, I guess, only government employees will have them.
If you want a pension, in other words, you had better start
saving your own. Lots of people still don’t think about these
things. One-third of poll respondents say they don’t have any
retirement money saved at all. But many do, and what most people
are doing is saving in a tax-deferred instrument called a
401(k).
It circumvents one of the great impediments to saving — the
taxation of interest. Since the value of your money is also eroded
by inflation, you cannot possibly get ahead of the game by saving
money in a normal interest-bearing account. Twenty or 30 years from
now, it won’t buy nearly as much. Understandably, then, a lot of
young people don’t even think about saving. The tax code rewards
you if you get into debt (with a mortgage), and punishes you if you
save. I know it’s cockeyed. But that’s the way things have been for
many decades.
If the government wants us to save for our retirement, why not
end the taxation of interest right away? Because the left would set
up their customary howls of envy and resentment. It makes them feel
good and some spend their whole lives at it. So, to get around that
unpleasantness, lawmakers have inserted this saving inducement into
the law, named after subsection 401(k) of the tax code.
How many Americans have such accounts? One Federal Reserve study
said that about half of U.S. households-there are 110 million of
them-have 401(k)s. And about 70 percent of that money goes into
equities. Which is to say, into the stock market. So, more and more
of us own stocks. Grover Norquist of Americans for Tax Reform tells
me that about 60 percent of American adults now have money either
directly invested in the stock market, or indirectly in retirement
accounts.
We are reaching the point where a majority of voters have a
direct, personal interest in the performance of the stock market.
We may already have passed it. So when we see that the Dow Jones
Industrial average dropped 362 points, as it did on November 1, a
good many people out there, not just Wall Streeters, have reason to
worry.
What Dr. Milevsky was telling us was that the number of voters
who will be in that position ten years from now will far exceed
today’s. The disappearance of traditional pensions means the
investor class is growing by millions every year. And unless I am
mistaken, that will transform politics in unexpected ways. It may
already be doing so, beneath the surface.
If the tax rate is raised on investment income such as capital
gains and dividends, then the stock market will certainly drop.
Why? Capital is mobile and goes elsewhere if it’s not well treated.
Lots of high net-worth investors will find other ways (and places)
to invest their money, rather than surrender even more of it to the
government.
The envy brigades don’t want to hear this and maybe don’t even
understand it. Because the rich are few and the needy are many, in
their view, taking billions from the few and redistributing it to
the many is a no-brainer in a democracy. Little pain, lots of gain,
and justice for all.
BUT BECAUSE MORE AND MORE PEOPLE are invested in the market, and
their retirement accounts will increasingly depend on the
performance of that market, more and more people are figuring out
the connection between tax changes in Washington and the value of
their own retirement accounts. They won’t look kindly on pols who
raise taxes but try to reassure us that they’re only going after
the rich. Hit the rich and the whole stock market will fall, and
that will affect those in the middle far more than the rich.
That’s why, even now — if I’m reading this correctly — the
Democrats are wary of their own rhetoric. They can talk about
soaking the rich, Norquist has suggested, as long as they don’t
think we really want them to do anything about it. Dopey Dem Sens.
Obama, Edwards, and others may brag about how they intend to raise
taxes on the rich. That’s the up-front story. By all means, talk
the envy talk. But the untold back-story is that pulling the
trigger may not be such a good idea.
On the day when the Dow Jones dropped 362 points, the
Washington Post headline read: “House Panel Backs Tax
Measure Offering Breaks for Middle Class.” The more important
subheading was: “Rate Increase for Executives, Financiers Would Pay
for Package.” The bill, passed by Rep. Rangel’s Ways and Means
Committee, would subject hedge fund and private equity managers to
higher tax rates. But — important footnote — the Senate might not
go along.
The authors of the story, Jonathan Weisman and Jeffrey Birnbaum,
seemed puzzled. The Democratic Party “is supposed to be on the
offensive,” they hinted, rather too broadly. Nancy Pelosi’s staff
was “flummoxed.” Democrats were “taking cover.” The “difficulty and
the political reluctance to tackle issues of ‘tax fairness’” was
“striking.”
There was (still is) an opportunity for the Democrats to raise
tax rates here, because the Alternative Minimum Tax, intended for
millionaires, is now reaching into the pockets of millions and
needs to be adjusted. George Bush wants the AMT to be “patched” for
another year. Rangel’s bill abolished it completely, and “paid for
it” with a new tax-the-rich scheme. If the measure were to pass
both houses, and Bush were to veto it, Democrats would be able to
crow that the President had capitulated at last and raised taxes on
the middle class. So why wasn’t the Senate on board?
An important reason is that those who work on Wall Street are
among the more important constituents of Sen. Chuck Schumer and
that other senator from New York whose name escapes me right
now.
Some senators, even Democratic ones, do grasp the underlying
hazard. It can be explained in one word: London. That city is
already threatening to become the financial capital of the world,
because its tax and regulatory rules are more lenient than they are
in New York. And all Wall Street needs is one more hit to push it
over the edge.
There’s evidence that Chuck and Hillary do understand that,
unlike some journalists who should know better. One difference
between the U.S. and Britain (not to mention China — Shanghai
should also be put into this equation), is that Britain has already
been thoroughly exposed to the socialist bacillus and perhaps has a
degree of immunity against it. Maybe we haven’t, yet. But I like to
think that the ever-growing investor class will help to fight it
off.
