December 6, 2016
What We’re Reading this Week
There’s an App
The SEC has an app for your phone! Admittedly, this is not a new app. I came across it when I was reading an article that referenced the app, and I am having a really hard time imagining who would want this. While I guess there must be someone, the app was released in September of 2015 and has no user reviews. Several online sources also indicate it has very few downloads. Boy, would I have loved to be in the meeting where the SEC discussed spending time and money on a mobile app. You know, the one where they talked about how to quench the public’s thirst for the latest and greatest from the SEC? I mean, come on, there is a photos section on the app!
I settled in to read a nice article from Bloomberg regarding investment advisor Betterment and their use of algorithmic trading in their 401(K) platform. I was thinking about the benefits (low cost, simple asset allocation, automation) and if it could be incorporated into company retirement accounts that we manage. According to Bloomberg, “Why would a company choose a 401(k) upstart over the long-established pros? Among the reasons ticked off by Cynthia Loh, General Manager for the product, are lower fees; managed, personalized portfolios for all participants; no conflicts of interest in fund selection; and a modern, intuitive user interface.” Imagine my surprise when I read this sentence: “Betterment 401(k) accounts also can use a new algorithmic service the company launched in September that aims to improve a portfolio’s tax efficiency, which adds to returns over time.” In case that doesn’t confuse you, let’s review. Qualified retirement accounts do not generate taxable gains or loses inside of the account. You pay taxes on the distribution, but not on investment gain. Think of it like this: an investment account is good, a tax efficient investment account is better, and a qualified account is best. Using tax efficiency strategies in a qualified account might actually dilute performance. I had to know more. After reading the second article I was willing to give them the benefit of the doubt; maybe the article was implying that your 401(K) could work in conjunction with your taxable investments on Betterment’s platform and I misunderstood what they were saying. I reread the sentence. Nope, it says your 401(K) can use the new algorithm to improve your portfolio’s tax efficiency. Yikes.
During his campaign Donald Trump promised varying tax cuts and reforms, leaving many to conclude that his policies would ultimately benefit the very wealthy. As evidenced by other comments throughout the campaign and further comments after the election, we can’t always take his words as gospel. Sometimes Donald Trump speaks in euphemisms. Most recently, Treasury secretary nominee Steven Mnuchin has stated that, “Any reductions we have in upper-income taxes will be offset by less deductions so that there will be no absolute tax cut for the upper class.” This is seemingly in conflict with the published tax plan promising to “reduce taxes across-the-board.” While both can be true, one is truer than the other. You can cut taxes across-the-board and still remove deductions from upper income filers. While their bottom line tax number may stay the same, you have “cut taxes” by reforming income tax tables and marginal rates. On the surface, it may seem like promising to reduce taxes across the board while planning to cut deductions elsewhere is not being completely honest about your intentions and adds no real economic value. Truly though, simplifying the tax grid and removing deductions eliminates many inefficiencies inherent in the current system. From an economic perspective, things that are highly taxed will be utilized less and things that carry minimal or no tax will be highly utilized. The more complex the system, the more loopholes available. Very wealthy people tend to have smart lawyers and accountants, and therefore tend to benefit the most from a complicated system by operating in highly taxed areas of the economy and using the system to avoid taxes they were meant to pay. I won’t pretend that Trump’s promise to “cut taxes” wasn’t a little misleading, but it is a great example of how many Republicans have interpreted his messages to be what they wanted to hear. In totality, Trump’s tax reform would benefit the middle class the most. By simplifying tax codes and making tax incentives clearer, the system would close exploited loopholes and reduce the base income tax brackets for most Americans.
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