From the December 2008 issue of Investment Advisor • Subscribe!

In the Numbers

The best way to keep the jobless rate down is to spend those tax revenues on education.

More On Tax Planning

from The Advisor's Professional Library
  • IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
  • IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.

It's no news to you that it's important to look beyond the headlines, especially when said headlines are coming out of television speakers, to learn the true import of any report or action that appears to affect your business and your clients' financial plans. Take the unemployment report, for instance. On November 7, the Labor Department's Bureau of Labor Statistics declared that the jobless rate for Americans in October rose to 6.5% from 6.1%. Sounds really bad, but let's provide a little perspective here. During the worst recession since World War II saved us from the Great Depression, the jobless rate peaked at 10.8% during the 1981-1982 downturn. (By contrast, the unemployment rate hit 24.9% in 1933, when, a 2003 BLS article blithely notes, "the economy reached its trough," before going on to point out that despite all the effort put into the New Deal, joblessness still stood at 14.6% in 1940.

My favorite statistic on the Labor Dept. jobless report is one you can use for your children, or your clients' children, who want to foreswear going to college. The October 2008 unemployment rate for people who did not finish high school was 9.3%, for those who finished high school but didn't have any college it was 5.9%, for a person with at least a bachelor's degree it stood at 3.0%. Oh, it's a pretty good argument for opening a 529, too.

With a new populist President elected partly on the traditional Democratic platform to cut taxes for the middle class while raising them for the wealthy--which President-Elect Obama currently describes as people with family incomes of $250,000 or more--you can expect the Democratic-controlled Congress to respond, eventually, with revisions of President Bush's EGTRRA and JGTRRA legislation. While campaigning, Obama promised that "95% of working Americans" would receive a tax cut. Okay, but a 2006 Congressional Budget Office study, using Internal Revenue Service tax-returns data and Census Bureau population numbers, concluded that in the tax year 2004 the top 1% of taxpayers by income paid 25.3% of all federal taxes, that the top 10% paid 52.3%, and that the highest quintile--12.6 million American families--paid 67.1% of total Federal taxes. In 2004, the average pretax income for the top 1% of taxpayers was $1.05 million, for the top 10%, $243,900, and for the top quintile, $174,000 (see Web Extras at investmentadvisor.com for copies of the reports).

Obama said in his first post-election press conference that creating jobs and growing the economy would be his top goal, and that if a stimulus bill isn't passed during the lame-duck session of the 110th Congress, it will be the first order of business in the 111th Congress. I'm happy to pay my fair share of taxes to support the government, and speculation is running pretty high that the new President may shift that stimulus bill to focus on infrastructure improvements throughout the country rather than a handout to taxpayers a la 43. That would kill two economic birds with one legislative stone: improve the sad state of roads and bridges and railroads throughout the country, and put plenty of people to work accomplishing said tasks (plus it could be a dynamite investing opportunity, of course).

My modest proposal, however, would be to suggest that the best way to keep the jobless rate down is to spend those tax revenues on education, to help ensure that nearly everyone can afford a college education. I mean, the numbers are pretty clear on the benefits, right?

Reprints Discuss this story
This is where the comments go.