Well, not much worthy happened yesterday in our blog world so please allow me to share with you something that I wrote (most of it) before Trump was sworn in for my day job. I have shared with you some of my own personal finance work before and those posts were well received, so here is another one about my wish list for financial and tax reform so I can go watch some NCAA basketball games. Behave!
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My Wish List For Financial and Tax Reform
I started my 25-year career in the financial industry as a tax accountant before I transitioned to a fee-only fiduciary adviser in 1999. During these years, I’ve seen a lot of what goes on in the financial sector.
So as the new administration prepares to make changes on the tax and other financial fronts, here’s my wish list. They are changes that I think would benefit consumers–and, admittedly, my industry.
1. Repeal the alternative minimum tax. This legislation was a knee-jerk reaction by an embarrassed government in 1969 when it became public knowledge that 155 tax filers with an annual income of $200,000 were legally paying $0 in federal income tax.
While President Ronald Reagan’s 1986 tax reforms eliminated most of the deductions that allowed this to happen, the AMT is still around 48 years after it began. Now it catches mostly middle class families instead of super-wealthy individuals. That’s because the level of income that triggers the AMT hasn’t been adjusted to today’s income levels—in fact, $200,000 in 1969 is equivalent to an annual income of more than $1.3 million in today’s dollars.
2. Simplify and reduce taxes. Why stop at the AMT? Let’s go for real tax reform. The U.S. tax system is ridiculously and unnecessarily complex.
The federal tax code has 2.4 million words, up six-fold from 409,000 words in 1955, according to the Tax Foundation. Americans will spend 8.9 billion hours and $409 billion complying with IRS tax filing requirements this year.
President Reagan reduced the highest federal income tax rate from 50% to 28%, but that didn’t last long. It’s now up to 39.6%.
Meanwhile, American corporations face the highest tax rates in the world. The U.S corporate tax rate is 35%, whereas the global average is 25%. The tax rate has barely changed since 1986 and since then, other countries have cut their rates aggressively. The U.S. rate is two to three times higher than its direct competitors, like the U.K. (20%), and Ireland (12.5%).
3. Teach personal finance in public schools. As a foreign-exchange student my first year in the U.S. in the mid 1980s, my excitement to sign up for a class titled “Home Economics” was quickly deflated when I discovered the curriculum wasn’t about managing personal finances. It was a class where I could learn how to make pancakes and similar life skills.
We have math, science, English, yet we graduate students who are totally unprepared for a crucial life skill—managing the money they’ll earn. It’s past time to change that.
We need to graduate fiscally responsible citizens who understand that racking up $1,000 on a shopping spree and making the minimum credit-card payments will cost them $516 in interest and take 7.2 years to pay off.
They need to know how to create and manage their personal income and spending budget, how consumer debt and mortgages work, what choices they have to save and invest responsibly, how compounding interest works, and so on. Start in elementary school…or middle school…or high school. Just get the classes going. Will it work? It certainly can’t hurt.
4. Institute real standards for financial analysts, experts and everyone else telling consumers how to save, borrow and invest. It’s amazing how anyone can be a financial planner or adviser these days—so it’s up to consumers to do the homework on the individual’s credentials and experience. And the confusion begins with a plethora of possible credential designations and the various organizations providing the certifications. You’ve got advisers, specialists, financial planners and analysts—everything from ABA, CLU, CFP, CFA, CFS, ChFC, CIC, CIMA, CMT, CPA, and MFP to PFS.
In this alphabet soup of financial designations, the certified financial planner (CFP) is the most highly recognized and recommended for giving personal financial planning advice (and, in the interest of full disclosure, the one I have). Becoming a CFP also requires qualified work experience and that’s important. The CFP designation should become the standard and we should rally behind it if we want to elevate our industry to a true profession.
5. Stop measuring advisers and brokers by assets under management. While it’s an easy statistic for journalists to verify and quote, it means nothing in terms of competency of the adviser.
Certainly there are more predictive credentials to ask about and report, such as how many clients do you have that you personally deal with? Or, what is your client retention rate? Or even, what experience do you have working with people in my situation?
6. Apply the fiduciary standard to all financial advice, not just retirement accounts.
An executive order by President Trump last week has called into question the fate of the fiduciary rule, which had been expected to go into effect in April. And there has been lots of confusion since its issuance.
I am a firm believer in the rule, under which brokers would no longer earn commissions unless they agree to do so pursuant to a best interests contract agreement with the client. It’s a huge step in the right direction requiring transparency and disclosure—stating that brokers can only earn “reasonable compensation” for giving advice in the “best interest” of their clients.
Other countries have enacted more stringent reforms than the fiduciary rule with positive outcomes. In the U.K., for instance, the ban on commissions has actually created an environment that is better for both the industry and advisers. An unexpected consequence of the separation of fees from products has led to advisers better understanding the needs of clients and articulating the value they provide, which has resulted in clients who are willing to pay for an adviser’s expertise.
7. Fight tax identity theft. In the 2013 filing season, it was estimated by the Government Accountability Office, that the IRS paid $5.2 billion in fraudulent identity tax refunds. That was the year one of my clients got victimized and it was awful and lengthy experience to resolve.
A step in the right direction is a new law that requires the IRS to hold refunds tied to the Earned Income Tax Credit and the Additional Child Tax Credit until Feb. 15. The hold allows the IRS to match information from forms W-2 and 1099 with information reported on tax returns; in prior years, refunds could be issued before forms were matched, increasing the likelihood of fraud.
But is that enough? The IRS still has difficulty telling if the person filing the return and claiming the refund is actually the real taxpayer. The IRS needs to take a lesson from the credit-card companies, which are much better at flagging suspicious charges before they are paid out.
And I leave you with this…
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