Plan to Limit a Tax Break for the Rich Could Hurt the 99% Too

Getty Images In trying to save for retirement, tax-favored retirement accounts like IRAs and 401(k)s are valuable tools. They give savers tax benefits for putting money into retirement accounts and let them profit from those investments without having to pay taxes until they withdraw the money in retirement. But some policymakers are concerned that the wealthy are taking unfair advantage of IRAs and 401(k)s, accumulating extremely large balances in them tax free. In order to rein in that abuse, the Obama administration proposed earlier this year to limit the amount of money that you can hold in tax-favored retirement plans. Essentially, the plan would cap your the size of a retirement account at an amount that would allow a person to buy an annuity that pays out $205,000 a year, at that year's prevailing interest rates. So the cap is variable, depending on how interest rates move. (Why $205,000? It's already the federal limit for defined-benefit pension plan annuities.) Based on those numbers, the initial cap would have been $3.4 million in April, which makes it clear the proposal is aimed at only the wealthiest of Americans. Yet further analysis shows that the proposal could actually affect a much wider swath of the American population, thanks to unintended consequences that could make it harder for millions to save for retirement. Hitting a Moving Target The nonpartisan Employee Benefit Research Institute recently took a look at the administration's proposal, seeking to figure out its impact both now and in the future. The study found that in the short run, implementing the balance cap would affect a very small number of savers. Over time, though, the impact would be much larger. The EBRI found that even if interest rates remain the same as they are now (and they won't), more than one out of every 10 401(k) participants would be likely to reach the proposed limit at some point before they reach age 65. The effect is even bigger if you make some realistic assumptions about the future direction of interest rates. Rates are important because the proposal doesn't refer directly to a total-balance limit but rather ties it to what an equivalent pension plan would produce in annual income. If rates rise, then the $3.4 million figure would drop. Specifically, if the interest rates used to determine the limit were to double, between 20 percent and 30 percent of savers could end up being affected by the limits. Cutting Off Small-Business Employees Having maximum balances for IRAs and 401(k)s is problematic, but it would still allow savers to get sizable benefits from tax-favored retirement accounts. However, a second-order effect of retirement-account limits could actually prevent many workers at small businesses from having access to 401(k) plans. The EBRI noted that in many cases, small businesses establish retirement plans in order to give their high-income owners the maximum ability to save money on a tax-deferred basis. If such business owners were to hit the maximum limit allowed under the new proposal, however, they might decide that it no longer made any sense to keep offering plans to their employees. If owners terminated their plans, their workers would lose access to the 401(k) retirement savings option. The analysis is built on many broad assumptions, making it hard to reach firm conclusions. But under one set of conditions, between 30 percent and 40 percent of participants could suffer reduced 401(k) balances when you take the possibility of businesses terminating their retirement plans into consideration. In particular, younger workers could be hit the hardest. With the most time to accumulate assets and reach the retirement savings limits, the EBRI found that as many as 70 percent to 80 percent of employees aged 26 to 35 would see some reduction in their 401(k) balances by the time they reach age 65. Be Smart About Retirement Savings The EBRI's findings show how hard it is to craft legislative proposals to reach what seem to be desirable ends. Even with the intent of reducing abuse of retirement plans, these limits could end up hampering the retirement prospects for millions of Americans. Regardless of what happens with this proposal, you can expect the battle over tax-favored retirement accounts to continue well into the future. Several major U.S. corporations dodge domestic taxes by moving profits internationally to tax havens. For example, a company can utilize the "double Irish" formula to minimize their U.S. taxes. If the profits from the sale of a good stayed in the U.S., they would be taxed at the federal 35 percent rate. However, some companies sell the intellectual property rights to an Irish subsidiary to minimize tax obligations. The profits from that U.S. sale are paid overseas to the Irish subsidiary. As long as the Irish subsidiary is controlled by managers elsewhere - for instance, a Caribbean tax haven - the profits can move around the world without a dime of taxation. At this point, the profits are moved to a nation with no tax, skirting around the U.S. 35 percent rate.  

By Business Insider

Corporations can avoid paying taxes on US profits with the "Double Irish" arrangement. This is the "Double" part of the Double Irish, and also entails a trip through the Netherlands. When the same company's product is sold overseasthat profit is routed to a second Irish subsidiary, Since Ireland has treaties with the Netherlands to make inter-European transfers tax free, the profits are then routed through the Netherlands, and then back to the first Irish subsidiary, and then to the no-tax Caribbean Island. As a result, the U.S. company never has to repatriate the money and they never has to pay taxes on the products.

Can Goldman Sachs Stock Move Higher?

With shares of Goldman Sachs (NYSE:GS) trading around $166, is GS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Goldman Sachs is engaged in investment banking, securities, and investment management. It provides a range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments, and high net worth individuals. The company operates in four segments: investment banking, institutional client services, investing and lending, and investment management. Through its segments, Goldman Sachs provides valuable investment services to consumers and companies worldwide.

Goldman Sachs has lost a complicated bet it made on the foreign-exchange market, leading to a drop in revenue for the third-quarter and forcing executives to defend the bank's trading strategy. According to people familiar with the matter who spoke to the Wall Street Journal, a bet made on the value of the U.S. dollar versus the Japanese yen backfired on Goldman during the third quarter. When Goldman reported its third-quarter results last month, the company showed a drop in the revenue of its currency trading unit, and WSJ's sources say the yen-dollar bet is what caused the slump.

T = Technicals on the Stock Chart Are Strong

Goldman Sachs stock has made significant progress in the last several quarters. The stock is currently trading in a sideways range that has existed for most of the year. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Goldman Sachs is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Goldman Sachs options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Goldman Sachs Options	19.66%	23%	21%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
December Options	Flat	Average
January Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Goldman Sachs’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Goldman Sachs look like and more importantly, how did the markets like these numbers?

	2013 Q2	2013 Q1	2012 Q4	2012 Q3
Earnings Growth (Y-O-Y)	1.05%	107.87%	9.44%	203.29%
Revenue Growth (Y-O-Y)	-19.51%	0.21%	1.42%	52.69%
Earnings Reaction	-2.42%	-1.69%	-1.61%	4.05%

Goldman Sachs has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Goldman Sachs’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Goldman Sachs stock done relative to its peers, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), and sector?

	Goldman Sachs	JPMorgan Chase	Citigroup	Morgan Stanley	Sector
Year-to-Date Return	30.53%	29.63%	30.45%	61.24%	38.96%

Goldman Sachs has been a relative performance leader, year-to-date.

Conclusion

Goldman Sachs is a bellwether in the financial sector that strives to provide valuable financial products and services to consumers and businesses around the world. The company has lost a complicated bet it made on the foreign-exchange market, leading to a drop in revenue for the third quarter and forcing executives to defend the bank's trading strategy. The stock has been moving higher in recent years but has been part of a range for most of this year. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had conflicting feelings about Goldman Sachs's earnings announcements. Relative to its peers and sector, Goldman Sachs has been a relative performance leader year-to-date. Look for Goldman Sachs to OUTPERFORM.