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.