Post Pandemic, Congress should Introduce Medicare at 62

There is no denying that the pandemic will bring about significant changes in many aspects of our lifestyle, including the decision to opt for early retirement. Unfortunately, while the first qualification age to trigger Social Security benefits is 62, the qualifying age for Medicare is 65 (with certain exceptions), thus forcing millions of willing retirees to wait until the Medicare kicks in at 65 to avoid having to walk into the expensive COBRA/health insurance trap. Therefore, Congress should seriously consider lowering the Medicare age to 62 for all Social Security-eligible employees to allow and incentivize early retirement. So, what are the potential advantages? Let's consider these:

1. The Simultaneous Trigger of Social Security and Medicare at 62 will allow Willing Employees to Retire from "Full-time" Workforce at 62 – This will free up millions of jobs. Again, to qualify for the proposed "Medicare at 62," one must simultaneously trigger the Social Security benefits at 62, thereby ensuring permanent retirement from the "full-time" workforce. Of course, if one decides to return to the full-time workforce later, one must return all of the benefits earned (in line with the current Social Security law). Should the new retirees, from time to time, need to supplement social security incomes, they will have access to many of the part-time jobs the recent graduates would leave behind, leading to a very healthy and complementary continuum. 

2. The Simultaneous Trigger will Open up Millions of Jobs for New Graduates – Since most people retire from "long-held" jobs, those jobs tend to be "career" jobs. Most companies try to fill the long-term career jobs with new graduates, via their 1-to-3 year training programs (e.g., engineer trainee, management trainee, analyst, and research trainee, marketing trainee, etc.). Also, in today's fast-changing technological environment (as AI and Robotics have already taken over), the new engineering graduates are far more critical for the labor force than their senior counterparts, most of whom need extensive retraining. Therefore, the simultaneous trigger will allow senior employees, unwilling to be retrained, to take the early retirement and move on.

3. The Lower Replacement Wage will help Hire More New Graduates – By sheer longevity, the retirees usually command some of the industry's highest salaries. Since the new graduates would be hired at significantly lower wage levels, the replacement ratio might be higher, perhaps three new hires for every two persons retiring. Even if a small percentage of this group, say 20%, is enticed to retire at 62 every year, an unprecedented job boom would be in the offing. Now, add the higher replacement ratio to it, and it's an unparalleled boom plus!

4. The New Generation of Early Retirees will significantly Boost Leisure, and Recreational (Adult Lifestyle) Industries – The creation of this new generation of early retirees with significant disposable income will provide a big boost to the leisure/travel and recreation industries as a whole. From vacation homes to new cars to hospitality to airlines to Amtrak to cruise-lines to recreation vehicles (RVs), etc. will all benefit from this new-found economic class. The arrival of early retirees might help smooth out off-peaks leading to year-long consistent and predictable traffic patterns.

5. The Job Boom among Millennial and early-Gen Y will provide a Gigantic Boost to their Lifestyle Industries – While the early retirees will bolster spending in Leisure, the counter-story could be as exciting as well. Considering the millennial generation and early-Gen Y (born between 1995 and 1999) will fill in the vacancies to be left behind by their senior counterparts, their enhanced spending power will be a big boon to the (trendy) lifestyle industries like techs and gadgets, fashion and professional garments, alternative health and beauty, etc. The housing industry will see the beginning of a new replacement cycle.

Fast-growing mid-range companies do not necessarily compete for the top talents as they are generally competed away by the large-cap companies. This new job boom, resulting from the departure of early retirees, will see massive growth in high-paying career jobs, potentially trickling down to mid-to-smaller companies over time, making them more competitive in the global marketplace. 

The higher replacement ratio -- three new entrants for every two retirees -- will most probably make the program revenue-neutral, if not revenue positive, but cost-sharing could help manage any temporary shortfall. Early retirees would be responsible for part of the additional Medicare costs as cost-sharing; for example, 15% pass-through at 62, 10% at 63 and 5% at 64, etc.. Even if it comes down to some cost-sharing, it would still be a far better option than the COBRA or individual insurances. On the positive side, in a cost-sharing event, the participating HMOs (most likely) might offer to pick up the tab to shore up their enrollments. 

Again, since the pandemic is expected to reshape our lifestyle, especially the 60+ population in this country, Congress should seriously consider lowering the Medicare Age to 62. It's a no-brainer!

#MedicareAt62

-Sid Som

homequant@gmail.com

Post Pandemic, Congress should Introduce "Medicare at 62"

There is no denying that the pandemic will bring about significant changes in many aspects of our lifestyle, including the decision to opt for early retirement.

Unfortunately, while the first qualification age to trigger Social Security benefits is 62, the qualifying age for Medicare is 65 (with certain exceptions), thus forcing millions of willing retirees to wait until the Medicare kicks in at 65 to avoid having to walk into the expensive COBRA/health insurance trap. 

Therefore, Congress should seriously consider lowering the Medicare age to 62 for all Social Security-eligible employees to allow and incentivize early retirement. So, what are the potential advantages? Let's consider these:

1. The Simultaneous Trigger of Social Security and Medicare at 62 will allow Willing Employees to Retire from "Full-time" Workforce at 62 – This will free up millions of jobs. Again, to qualify for the proposed "Medicare at 62," one must simultaneously trigger the Social Security benefits at 62, thereby ensuring permanent retirement from the "full-time" workforce. Of course, if one decides to return to the full-time workforce later, one must return all of the benefits earned (in line with the current Social Security law). Should the new retirees, from time to time, need to supplement social security incomes, they will have access to many of the part-time jobs the recent graduates would leave behind, leading to a very healthy and complementary continuum. 

2. The Simultaneous Trigger will Open up Millions of Jobs for New Graduates – Since most people retire from "long-held" jobs, those jobs tend to be "career" jobs. Most companies try to fill the long-term career jobs with new graduates, via their 1-to-3 year training programs (e.g., engineer trainee, management trainee, analyst, and research trainee, marketing trainee, etc.). Also, in today's fast-changing technological environment (as AI and Robotics have already taken over), the new engineering graduates are far more critical for the labor force than their senior counterparts, most of whom need extensive retraining. Therefore, the simultaneous trigger will allow senior employees, unwilling to be retrained, to take the early retirement and move on.

3. The Lower Replacement Wage will help Hire More New Graduates – By sheer longevity, the retirees usually command some of the industry's highest salaries. Since the new graduates would be hired at significantly lower wage levels, the replacement ratio might be higher, perhaps three new hires for every two persons retiring. Even if a small percentage of this group, say 20%, is enticed to retire at 62 every year, an unprecedented job boom would be in the offing. Now, add the higher replacement ratio to it, and it's an unparalleled boom plus!

4. The New Generation of Early Retirees will significantly Boost Leisure, and Recreational (Adult Lifestyle) Industries – The creation of this new generation of early retirees with significant disposable income will provide a big boost to the leisure/travel and recreation industries as a whole. From vacation homes to new cars to hospitality to airlines to Amtrak to cruise-lines to recreation vehicles (RVs), etc. will all benefit from this new-found economic class. The arrival of early retirees might help smooth out off-peaks leading to year-long consistent and predictable traffic patterns.

5. The Job Boom among Millennial and early-Gen Y will provide a Gigantic Boost to their Lifestyle Industries – While the early retirees will bolster spending in Leisure, the counter-story could be as exciting as well. Considering the millennial generation and early-Gen Y (born between 1995 and 1999) will fill in the vacancies to be left behind by their senior counterparts, their enhanced spending power will be a big boon to the (trendy) lifestyle industries like techs and gadgets, fashion and professional garments, alternative health and beauty, etc. The housing industry will see the beginning of a new replacement cycle.

Fast-growing mid-range companies do not necessarily compete for the top talents as they are generally competed away by the large-cap companies. This new job boom, resulting from the departure of early retirees, will see massive growth in high-paying career jobs, potentially trickling down to mid-to-smaller companies over time, making them more competitive in the global marketplace. 

The higher replacement ratio -- three new entrants for every two retirees -- will most probably make the program revenue-neutral, if not revenue positive, but cost-sharing could help manage any temporary shortfall. Early retirees would be responsible for part of the additional Medicare costs as cost-sharing; for example, 15% pass-through at 62, 10% at 63 and 5% at 64, etc.. Even if it comes down to some cost-sharing, it would still be a far better option than the COBRA or individual insurances. On the positive side, in a cost-sharing event, the participating HMOs (most likely) might offer to pick up the tab to shore up their enrollments. 

Again, since the pandemic is expected to reshape our lifestyle, especially the 60+ population in this country, Congress should seriously consider lowering the Medicare Age to 62. It's a no-brainer!

#MedicareAt62

- Sid Som, MBA, MIM

homequant@gmail.com

Replacing Personal Income Taxes with Middle-Class friendly Progressive Consumption Taxes

Under the existing income tax system, the top 1% pays 40% of all federal taxes. According to the Tax Policy Center, 44% of Americans will not pay any income taxes this year. On the other hand, Warren Buffett claims he has a lower tax rate than his secretary does. While much buzz was created about the carried interest, nothing has been done yet and as a result hedge fund billionaires continue to enjoy one of the lowest tax rates. According to Fortune, “Amazon will pay a whopping $0 in federal taxes on $11.2 billion profits.” These conflicting scenarios demonstrate how irrational the US Income Tax system has become. Therefore, it’s high time that we (phase out and) replace the personal income taxes with a set of progressive consumption taxes.

Of course, the one-size-fits-all consumption tax – which was proposed before and was justly unsuccessful – is inherently regressive, as poor and middle class folks tend to spend a much higher percentage of their incomes compared to the rich folks. Yet, the consumption tax could be an ideal replacement for the current income tax, as long as it is progressive. How? Quite simple – all non-food goods and services must be broken down into three progressive tax categories: Basic, Luxury and Ultra-luxury. While the basic category will have the lowest tax rates, luxury and ultra-luxury will carry progressively higher rates; for example, the national sales tax rate (atop the state and local sales taxes as it replaces the federal income tax) for basic durable goods (e.g., appliance) could be 2 to 3%, whereas the luxury and ultra-luxury could carry 5% and 10% rates, respectively. Needless to say, the lower rates for the basic category will advantage the middle class while the rich will be

Happier to pay higher national sales taxes in lieu of their disproportionately higher share of the federal income taxes (case in point: the top 1% pays 40% of all federal taxes). 

So, how will the progressive consumption tax system work?

1. National Sales Tax on Basic and Luxury Durable Goods – In order to save, say $5K to $5M on annual income taxes, taxpayers would be amenable to an additional national sales tax – obviously atop the current state and municipal sales taxes – on durable goods. Unlike income taxes, consumption taxes are more humane meaning families can budget or plan for these expenditures. Since the basic durable goods impact the poor and middle class, the rate must be lower, say 2% to 3%, followed by progressively higher rates on luxury durable and ultra luxury durable goods generally demanded by the rich; for instance, all appliances under $10K could be the basic, $10K to $20K being the luxury while over $20K being the ultra luxury category, with progressively higher rates. Likewise, automobiles could have three categories as well. Since this a national sales tax, it must cover all online purchases. While states and municipalities will continue to charge different sales tax rates, the national sales tax rates will be uniform across all states and territories as they will replace the federal income taxes.

2. National Sales Tax on Unhealthy (processed) Foods and Beverages – It’s about time that the health-conscious folks are not forced to subsidize those who basically live off junk foods and high-calorie beverages. This is a (preventive) health issue and, hopefully, this national sales tax will save citizens billions in health insurance premiums down the road. The parallel case is equally compelling: Today smokers are paying a hefty price for their lifestyle (significantly higher taxes on their lifestyle products and higher premiums on life and health insurances, etc.). While we must not take smokers’ choice away, the rest of us must not finance their lifestyles either. The phase-out of the income tax system will take 5 to 7 years, during which as the income tax revenue starts to come down, the junk food/beverage sales tax should start high at, say 10%, graduating down and perhaps bottoming out at 5%.

3. National Sales Tax on all Name Brand Prescription Medications – When a particular medication (all forms: oral, injection, iv, etc.) has a generic counterpart, it must be subjected to the national sales tax. Since the name brands are significantly costlier, they are generally meant for the rich folks, without directly impacting the poor or middle class. Of course, if or when a generic is not available (or is not easily or readily available), the brand name must be exempt from the proposed sales tax. Even the prescription generics produced in foreign facilities could be taxed (excise or sales).

4. National Sales Taxes on Million dollar-plus Home Sales – Since the rich and ultra-rich owning the upscale and expensive homes will be big beneficiaries of the phase-out (followed by no income taxes), the million dollar-plus home sales must be subjected to the additional progressive national sales taxes. It must not be a blanket one-size-fits-all rate; instead, it must be progressive, for example, sale price $1M to $2M @5.00%, $2M to $3M @5.25%, $3M to $5M @5.75%, $5M to $10M @6.00% and $10M+ @6.25%, etc. At the individual level, unlike the income taxes, these sales will impact them once in a while, thus a far preferable option than the high annual income taxes they have been paying. On the contrary, in order to keep the upscale housing market liquid and economic, the property tax component of the SALT cap must be separated and de-capped. Should sales clusters start to balloon just under $1M, the threshold could be lowered to the jumbo mortgage (non-conforming) level.

5. National Sales Tax on Luxury Hotels (4 and 5-Star) – These hotels are primarily for the corporate executives and rich folks so an additional 5-6% national sales tax will not harm the hotel industry. In fact, these hotels might even use this sales tax as a promo (“We Will Pay Your National Sales Tax”) in order to compete for the traffic during off-peak seasons. A vast majority of these hotels have medium-to-large convention centers – seasonal to round-the-year – so convention center sales surtax could be an ancillary surtax as well. The hotels that are run as resorts must be subjected to an additional resort sales surtax. Similarly, all private golf courses must have additional surtaxes. Again, none of these will adversely impact the middle class; even if they impact the middle class to some extent, it will be insignificant when compared to the tax savings they will be enjoying from the elimination of income taxes.

6. National Sales Tax on all Luxury Air Travels, Amtrak, Vacation Cruises and Car Rentals – Business and first class air travel, both domestic and international, is primarily for the corporate executives and rich folks so an additional 5-6% national sales tax will not harm the airline industry. Similarly, those who spend thousands more on luxury and ultra-luxury vacation cruise suites can afford an additional 5-6% national sales tax and it won’t harm the cruise industry either. Foreign cruises coming to the US shores may be subjected to additional port charges. Luxury car, charter flights and private jet rentals must carry sizable luxury and ultra-luxury national sales taxes. Likewise, upscale suites and berths on Amtrak must be subjected to the national sales tax as well. Again, none of these will adversely impact our middle class.

7. Selling Non-specific National Sales Tax Data to Private Companies – Undoubtedly, the national sales tax data will pave the way for the largest warehouse of the most uniform consumer spending and market performance Big Data, so the Commerce Department might consider selling the generic data to private companies, reducing the importance of the back-door data from the social media. Private companies in the consumer sphere, including the market research and econometric consulting firms, will pay large sums on an on-going basis to have access to such central and uniform data. Since the data will constantly change in line with the economic cycles, companies will be dependent on it, perennially. Additionally, the sale of data to the end-user private companies will be directly taxed while the value-added resellers will collect sales taxes from their clients. In no time, the national sales tax data could be a big money maker for the federal government. Citizenry would be relieved as the dominance of the social media data taking a nosedive.

8. Selling Naming Rights to Lesser-known or Un-named Federal Infrastructures – Let the rich people and private institutions pay to put their names up on lesser-known federal government buildings, town squares adjacent to federal buildings, highways, bridges, parks and recreational centers, education/job training centers, shelters, libraries, etc. that the federal government owns and operates. Federal government must also own the naming rights while funding (or primarily funding) non-profit institutions with federal dollars. If the wall is built on the southern border, naming rights to each stretch or segment must be auctioned off as well (in fact, this could provide partial funding for the wall, as well as the cost of general maintenance). The selling process must be totally open and transparent (via open tenders), thus awarding the naming rights to the highest bidders (some restrictions could apply). Also, in order to attract the right market price, it must also be term-limited, say 3 to 5 years. US DOT should also consider private-public joint ventures to build new toll roads and bridges (unable to get federal funding) wherein the private party incurs all costs to build the infrastructure in return for the toll incomes for 10-15 years.

9. Last but not least, Massive Savings will be generated by Downsizing IRS – IRS has over 80,000 employees with an operating cost of $11.5B. Obviously, the vast majority of them are expected to work on the personal income side. With the phase-out and eventual elimination of personal income taxes, the overall manpower could be significantly downsized, reducing the operating cost to $2B to $3B. Of course, a much smaller national sales tax group (Collection, IT and Data Science) will be needed under the umbrella of the Commerce Dept. Along with the reduced headcount, many IRS Centers around the country could be closed, data centers merged and cloud/storage facilities scaled back. The corporate income tax rate has already been lowered to 21% and any further reduction would necessitate some compensating European Union-style VAT. 

Instead of forcing the top 1% to pay 40% of all federal income taxes, we should seriously consider switching to a more humane progressive consumption tax system wherein people at large get to plan and decide the amount of taxes they would pay. While progressive consumption tax is poor and middle-class friendly, the rich would also welcome the idea considering the trade-off. Of course, studies will be needed to make the switch at least revenue neutral.

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book

Lowering Medicare Qualifying Age to 62 will Entice Early Retirement

While the first qualification age to trigger Social Security benefits is 62, the qualifying age for Medicare is 65 (certain exceptions are there: qualifying by disability; SS-eligible spouse turning 62, etc.), thus forcing millions of willing retirees to wait until the Medicare to kicks in at 65, without having to walk into the expensive COBRA/health insurance trap. 

Therefore, the Federal Government must seriously consider lowering the Medicare age to 62 for all SS-eligible employees to allow and incentivize early retirement. So, what are the potential advantages? Let's consider these:

1. The Simultaneous Trigger of Social Security and Medicare at 62 will allow Willing Employees to Retire from "Full-time" Workforce at 62 – This will free up millions of jobs. Again, in order to qualify for the proposed "Medicare at 62" one must simultaneously trigger the SS benefits at 62, thereby ensuring permanent retirement from the "full-time" workforce. Of course, if one decides to return to the full-time workforce at a later date, one must return all of the benefits earned (in line with the current SS law). In fact, in order to reduce experimentations with early departures from the full-time workforce, an additional (post retirement) surrender penalty could be assessed on both, thus minimizing the possibility of the system being gamed as a temporary make-shift retirement mechanism.

2. The Simultaneous Trigger will Open up Millions of Jobs for New Graduates – Since most people retire from "long held" jobs, those jobs tend to be "career" jobs. Most companies try to fill the long-term career jobs with new graduates, via their 1-to-3 year training programs (e.g., engineer trainee, management trainee, analyst and research trainee, marketing trainee, etc.), with the objective of indoctrinating the candidates into their unique corporate cultures. When the new graduates go through these structured training programs, they become more knowledgeable and visionary employees, generally with long-term association with their companies. Also, in today's fast-changing technological environment (as AI and Robotics have already taken over), the new engineering graduates are far more critical for the labor force than their senior counterparts as most of whom would need vast re-training. The simultaneous trigger will, therefore, allow senior employees, unwilling to be retrained, to take the early retirement and move on.

3. The Lower Replacement Wage will help Hire More New Graduates –

By virtue of sheer longevity the retirees usually command some of the highest salaries in the industry. Since the new graduates would be hired at significantly lower wage levels, the replacement ratio might be higher, perhaps 3 new hires for every 2 persons retiring, etc. Let's not forget that baby boomers still comprise the largest generation (of course, the millennial generation is expected to outnumber the baby boomers by 2020), making the congestion and the resulting relative strength of this age group (meaning the number of employees comprising this age group of 62 to 65 relative to the competing groups on the labor force) simply enormous and powerful. Even if a small percentage of this group, say 20%, is enticed to retire at 62 every year, an unprecedented job boom would be in the offing. Now, add the higher replacement ratio to it and it's an unprecedented boom plus!

4. New Retirees needing to Supplement Social Security Incomes will still have access to Part-time Jobs to be Vacated by New Graduates –

From time to time, it may so happen that a small percentage of these retirees might need to supplement their social security incomes with part-time jobs. Just the way these retirees would pave the way for millions of high-paying career jobs, they would have access to tons of the part-time jobs the new graduates would leave behind, leading to a very healthy and complementary continuum. Given the wealth of knowledge and expertise these retirees are bestowed with, a sizable percentage might even consider part-time teaching and training jobs, a vast majority of which would otherwise remain perennially unfilled, especially in the rural areas.

5. Housing in Sunbelt will be Big Beneficiary of the New Beginning of the Early Retirement – To escape the high cost of living in big metropolitan areas, a big percentage of these retirees will move to the sunbelt, creating a new housing and economic boom there. Undoubtedly, the housing construction, including the adult retirement communities, would be the single biggest beneficiary of the influx of new retirees. Retirees are not known to be flippers and gamers of housing so their arrival would not force the house prices to skyrocket assuming, of course, the new construction keeps pace with the growth in retirement population. Likewise, as the early retirees leave the major metropolitan areas the housing trade-up would accentuate, welcoming the arrival of the new entrants into the labor force, with plenty of start-up housing to choose from. 

6. The New Generation of Early Retirees will significantly Boost Leisure and Recreational (Adult Lifestyle) Industries – The creation of this new generation of early retirees with significant disposable income will provide a big boost to the leisure/travel and recreation industries as a whole. From vacation homes to new autos to hospitality to airlines to Amtrak to cruise-lines to recreation vehicles (RVs), etc. will all benefit from this new-found economic class. Better yet, their presence will wholesomely complement the leisure and vacation industries; for example, airlines, hotel chains and cruise-lines that heavily discount their off-peak inventories may not be forced to the old marketing practice anymore, meaning the arrival of early retirees might help smooth out off-peaks leading to year-long consistent and predictable traffic patterns, with big growth in revenue and enhanced profitability. Medicare-participating HMOs and AARP will also see a big growth in membership populations.

7. The Job Boom among Millennial and early-Gen Y will provide a Gigantic Boost to their Lifestyle Industries – While the early retirees will bolster spending in leisure, the counter story could be as exciting as well. Considering the millennial generation and early-Gen Y (born between 1995 and 1999) will fill in the vacancies to be left behind by their senior counterparts, their enhanced spending power will be a big boon to the (trendy) lifestyle industries like techs and gadgets, fashion and professional garments, alternative health and beauty, etc.  The housing industry will see the beginning of a new replacement cycle: many older homes, subject to local zoning and variances, will be replaced by the trendy multifamily; downtown revitalization will get massive boosts; the traditional suburban homebuilders will fight for a piece of the fast-expanding urban housing pie, etc., the sum-total of which will contribute to a new economic and cultural boom in urban areas. Atop this boom, the early-Gen Y's entry into corporate America will be the new silver lining.  

8. Fast-growing Mid-range Companies will Finally get to Compete for Top Talents – Fast-growing mid-range companies do not necessarily get to compete for the top talents as they are generally competed away by the large-cap companies. This new job boom, resulting from the departure of early retirees, will see massive growth in high-paying career jobs, potentially trickling down to mid-to-smaller companies over time, making them more competitive in the global marketplace. While the lack of modern technical skills in our workforce originally paved the way for the H-1B foreign workers, the arrival of the new home-grown STEM graduates will greatly reduce the need for those foreign workers going forward. In order to nurture the massive young talent pool, most companies will return to the traditional long-term training programs, allowing young talents to adapt to their unique (corporate) cultures. Companies armed with better trained and modernized workforces will be more innovative and productive, resulting in significantly lower turnovers.

9. Higher Replacement Ratios will Make the ‘Medicare at 62’ Program Revenue Neutral, but Cost-sharing could be an Option to Make up any Temporary Shortfall – The higher replacement ratio -- three new entrants for every two retirees (studies needed by the GAO) -- will make the program revenue neutral, if not revenue positive, but a cost-sharing could be an option to manage any temporary shortfall could be passed through to the retirees by way of cost sharing (for example, 15% pass through at 62, 10% at 63 and 5% at 64, etc.). Even if it comes down to some sort of cost sharing, it would still be a far better option than the COBRA or individual insurances. On the positive side, in the event of a cost sharing, the participating HMOs (most likely) might offer to pick up the tab to shore up their enrollments. 

Congress should seriously consider lowering the Medicare Age to 62. It's a no-brainer!

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book

The Growing Income Disparity – The Global Case

According to a recent Credit Suisse report the richest 1% now owns 50.1% of the world’s wealth. Given this absurd concentration of wealth, we need this 1% to be self-convinced (like Mr. Warren Buffett) that they are just temporary custodians of their wealth. When a big chunk of their billions remains wastefully invested in unproductive and ostentatious wealth like $50M yacht and $300M in multiple mansions, it hardly benefits the human race.

The income inequality has been growing by leaps and bounds. The only way we can break out of this cycle is by establishing a whole new outlook: Exploring and inventing forward-looking growth and income opportunities for the so-called 99%. In order to maximize the exploration and harnessing of such growth opportunities, every country should start at the national level, gradually drilling down to the state, local and individual (yes, individual) level. The onus is on all of us.

So, what should we do about it?

1. Develop Basic Infrastructure with Private Cooperation – A country with well-developed infrastructure can attract more high quality foreign and domestic investments than their counterparts who are struggling to ramp up their infrastructure. Therefore, instead of selling out their natural resources, the poorer third world and developing countries should intensify the development and expansion of the basic infrastructure by enticing private companies (well-known local and foreign) to provide the leadership in that sector. For example, those companies could be encouraged to build new toll highways and bridges, railroads, metro and light rail, ports, airports, rural electrification, tele-communications, etc. shouldering all costs in return for all revenues (at pre-negotiated resell rates) from those projects for the first 15 to 20 years. It will be win-win. With the rapid growth of infrastructure, the credit ratings of those governments will improve. On the other hand, companies investing in infrastructure will get a steady and predictable revenue stream (revenue for, say 12 to 18 years, post completion).

    2. Let the Revenue Cycle Continue – When the ownership returns to the government, they can once again auction off those projects (revenue rights and maintenance obligations) generating significant upfront revenue to reinvest in derivative infrastructure, e.g., schools, hospitals, national/state parks, etc. In order to maintain the tempo of growth, governments must not get into the business of “running” any basic infrastructural services. Of course, they should be in the front-end (deciding on the location, type, extent, etc.) and back-end (project audit, collection and oversight), but not in the mid-end (actual “running” of the services). At that point, the toll, utility and transportation rates would be much lower (considering they would be paid for) benefiting all consumers, including the new arrival of businesses needing better and faster transportation and communication services.    

    3. Avoid Bridges to Nowhere – The participation of the private sector will help avoid the building of unproductive bridges to nowhere as they will conduct their own feasibility studies with rigorous cost-benefit projections. With the expansion and renewal of the basic infrastructure, those countries will become more attractive for foreign investments. Since they are inherently foreign exchange poor, enticing foreign investments with more competitive infrastructure will be the path forward. As the multi-national companies find out the growth of investment-friendly infrastructure in those countries vis-à-vis their surrounding peers, they will be more eager to explore direct and joint venture investments there. Needless to say, those companies are also constantly looking for new markets to explore and penetrate!

     4. Entice Neighbors to Follow the Successful Example – Of course, with the rising prosperity comes the border issue. A good leader sets examples that others are spontaneously enticed to follow. Today, we live in a world of economic cooperation and free trade so building a Chinese wall around the country’s border does not lead to lasting economic prosperity; rather, the prosperous countries must encourage the poorer neighbors to follow the successful example and shore up their own basic infrastructure, thus paving the way for a concerted regional revitalization and growth. This is how the refugee problem (from the neighboring countries) will be best avoided.

    5. Develop Regional Economic Zones – As the regional renewal gains momentum, countries must work together on creating their own economic zones, letting goods and services flow freely across borders without the costly and unnecessary taxes, tariffs and other economic barriers. With economic zones in place, it would be easier to convince corporations to build toll-ways, bridges, waterways, etc. across borders, offering better scalability and enhanced economy of scale. Countries must experiment with and use (macro economic) growth models that are sustainable. In fact, G-7s down to BRICS must aid and cooperate with the countries that become signatories to an international economic model emphasizing regional growth, renewal, cooperation and development of economic zones.   

   6. Create Tax-free Enterprise Zones – With the rapid growth and expansion of the basic infrastructure, countries will need to set up tax-free or, at least, tax-abated enterprise zones around the country. It does not make sense to build all infrastructures around a handful of big cities, making them even more overcrowded. It must be a distributed and decentralized economic model, with the emphasis on enterprise zones, including affordable housing. 10-15 year tax abatement is a good incentive to attract an array of big and diverse group of companies from around the world, vertically integrated with the growing infrastructures. A decentralized model would help people live close to their roots – an ideal way to keep employee turnover and absenteeism low, with morale always high. New payroll taxes along with the derivative revenue taxes would initially compensate for the lost corporate income taxes. Upon expiration of the tax abatement period, the corporate income tax revenue would start to kick in, enriching the exchequer by leaps and bounds.

   7. Invite Private for-profit to Build Institutes of Higher Technical Education – As those countries start to develop the service sector (atop the manufacturing sector), a steady flow of qualified employees with higher technical education would be needed. Again, instead of the local governments getting involved and controlling this layer of education, the private for-profit companies could be invited to build and run the institutes, with initial concentrations in enterprise zones, as an added enticement. While the acceptance must always be merit-based, governments must significantly subsidize all economically disadvantaged students, to avoid having to implement a quota system down the road. Furthermore, the interested students must have equal access to all competing schools across the economic zone. Again, a steady flow of technically qualified local employees is critical in enticing companies to invest in the service sector.

    8. Manage Natural Resources Properly – While the local governments should stay away from running all non-essential services, they must be involved in properly managing their natural resources along with all essential services like military, law and order, taxes, basic education, healthcare, clean water, etc. Countries that are built on moral (not religious) high grounds are more attractive to investors. For example, in many third world countries in Africa, Asia and Latin America, young women do not have equal access to education (which is a crime against humanity!). “Equal access to education” is a primary metric all foreign companies must use in evaluating the investment climate of a country, thus forcing those evil regimes to return to the basic decency and morality we must all follow and promote. While evaluating direct foreign aids, foreign governments must also use this as one of the primary “humane” metrics.

    9. Negotiating Trade Deals – When a rich country borders with poorer countries, it is prudent to consider the collective economic interest of the region while negotiating trade deals. Case in point: Whether we build a wall on the southern border or not, while re-negotiating trade deals with Canada, Europe, Japan, China and the rest of BRICS, etc., the US must wrap around the economic interests of the Central American countries. Their growth and prosperity is in our best interest. For example, many successful companies from around the world would be interested in the US market but they might not be able to initially meet our wage levels. If a common trade deal is in place, those companies would set up their initial shops – manufacturing, processing, assembly, IT, research, etc. – in one of the Central American countries with lower wage levels, with unrestricted access to the US market. No doubt, given time, they would be setting up shops here, hiring locally and paying our prevailing wages. Meanwhile, we have to consider Central America as our enterprise zone, enticing and redirecting vast amounts of second-tier economic activities from around the world to them (we are losing those businesses, anyway!). Let Central America be our nurturing ground. It will be win-win. Once we have a level playing field, they will be our full world partners, not just our enterprise zone. In not too distant future, we will have fast-track lanes at the border for them. No human crisis is ever solved by building walls; they are solved by creating meaningful and cooperative economic opportunities. And, it’s never too late!      

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book

The Growing Income Disparity – The US Case

According to Forbes, “In 1965, America's top 1% controlled about 10% of the nation's after-tax income. That number has now grown to over 15%. The average CEO-to-worker pay ratio has increased from 20-1 in 1965 to a whopping 312-1 in 2017. And middle-class real wage growth has been stagnant for decades.”

Presidential candidates are also weighing in on the fast-growing income inequality in the US. On September 24, 2019 Senator Bernie Sanders announced his “Tax on Extreme Wealth” with a proposal for ultra-wealth tax ranging between 2% and 8% depending on the net worth. Presidential hopeful Andrew Yang’s campaign website Yang2020.com states, “Andrew would implement the Freedom Dividend, a universal basic income of $1,000/month, $12,000 a year, for every American adult over the age of 18. This is independent of one’s work status or any other factor.”

Given this widening income gap between rich and poor and stagnant wages for the middle class, we need some serious socio-economic re-engineering. Here are some:

1. Implement Laureate Yunus’ Microcredit Model to Create Economic Opportunities in Inner Cities – Most inner cities in the US lack proper economic opportunities resulting in poverty, often rampant poverty. Thousands of bright people are stuck in poverty in inner cities due to state and local governments’ inability to create any meaningful economic opportunities. One size fits all economic model does not work there; instead, the local governments should try Laureate Yunus’ Microcredit Economic Model, thus financially empowering the local entrepreneurs (who “are too poor to qualify for traditional bank loans”) to turn their neighborhoods around. Though this bottom-up economic model was developed for poor villages in third world countries, it has tremendous potential for our inner cities. In order to maintain the uniformity of the program, it needs to be federally (HUD) funded or insured, with a dedicated chain of private financial institutions operating and managing it, in line with the existing SBA program. Again, for the program to successfully work, governments must not be involved in running it.

   

     2. Proclaim all small and mid-size Downtowns as Enterprise Zones –

     Downtowns of many small and mid-size towns around the US suffered heavily with the out-migration of population to the suburbs. While the theme of revival and revitalization of downtowns has been gaining momentum, it needs to accelerate and become more widespread. In fact, all such downtowns must be proclaimed as Enterprise Zones, enticing businesses and builders to return to take advantage of the long-term income and property tax abatements. Sales tax subsidies could be offered to entice consumers to return to shop in revitalized downtowns as well. Public parks could be privatized in an effort to convert them to esthetically-decent yet income-producing family-oriented amusement and entertainment centers. A well-planned nationwide downtown revival initiative will create enormous economic opportunities and jobs; in fact, it could complement the much-talked about trillion dollar Federal Infrastructure Plan, creating much better synergy than approaching them mutually exclusively.

     3. Build Water and Sewage Treatment Plants – Clean water along with effective sewage system is life’s basic necessity. In fact, providing clean water to citizens is as important as the basic education and preventive healthcare. Therefore, investing in water and sewage treatment plants must also be viewed as preventive healthcare, helping people avoid unnecessary trips to health centers and emergency rooms due to easily avoidable water-borne diseases and lack of sanitation. Private companies must be enticed to build and run these plants in exchange for long-term tax-free revenue. Upon expiration of the initial contracts, governments must auction off the maintenance and revenue rights for lump-sum and upfront revenue. This could be one of the best investments in keeping people healthy while reducing overcrowding at the ER, thus freeing up doctors and nurses to provide more critical medical services. This rising tide will incentivize private companies to make bigger and better (AI and robotics) investments in water treatment and recycling technology, striving to lower the overall development and maintenance costs.

    4. Let the Private Sector Develop a Fair and Equitable Property Tax Assessment System – Property tax is often the major source of revenue for Cities and Towns. The poorly built or haphazard assessment systems tend to be highly regressive, thus heavily favoring the rich. Under such a biased system, the poor and middle-class homeowners subsidize the upscale and high-end properties. The young and prospering cities and towns around the country must therefore consider outsourcing this important public task to the private sector or at least develop it in collaboration with the private sector so it becomes truly fair and equitable. Ideally, the development and managing of this task must be entrusted to the private sector. Obviously, an unfair system discourages home ownership at the rank and file level, uproots seniors and minorities and often pushes the middle class off the cliff. On the other hand, a fair and equitable system spontaneously entices property developers, both residential and commercial, to explore those markets. Likewise, the major developers tend to avoid cities and town with unfair and/or unpredictable assessment systems.

     5. Develop a Competitive yet Investment-friendly Business Climate –

     States down to cities and towns must develop an investment-friendly business climate and learn to compete with one another in order to entice significant domestic and foreign investments, leading to persistent and long-term economic prosperity and an ever-expanding job base. Political leaders must also realize that a marketable local economy requires a marketable labor force along with an attractive business climate comprising lower corporate taxes, growth-friendly corporate and environmental regulations, separation of church and state, developed financial institutions, low crime, cooperative and functional government, etc. Furthermore, in order to attract major corporations to help take the city/town to the next level and reshape the economic landscape, local governments must be as forthcoming and accommodative as is economically possible, considering such an event could bring about epoch-making economic impact locally; Case in point: In 2018, we noticed the absolutely astounding reactions from many cities and towns across the country to the proposed development of Amazon’s HQ2 and the regional centers.

    6. Build more Long-term Care Facilities, not Jails and Prisons – People committing the so-called “serious crimes” must be sent to high-security long-term care centers under the care of qualified psychologists and psychiatrists. If we decide to move to a “merit-based immigration,” the top-notch psychologists and psychiatrists from around the world must top the merit list alongside the STEM professors and highly qualified researchers. This humane approach will help save a ton of taxpayer dollars, finding ways back into those poorer communities. The young and reinvented cities around the country should rethink and redefine crime and punishment from a moral high ground. The lack (perhaps absence of) of economic opportunities often forces poor people to commit petty offences, resulting in unnecessary jail terms. Instead of sending them to jails, they should be assigned to the local clergies, rabbis and imams to perform community service. Similarly, in a civilized world, the building of juvenile detention centers does not pass the muster of moral hazards. Those kids should also be supervised by the local spiritual leaders. This holistic approach will be a much better deterrent than the traditional jail terms. They will thus remain as normal and productive citizens without the useless stigma of jails and detentions. In return, the participating religious institutions must receive government aids and grants for maintenance and conservation of their facilities.

    7. Make College Education Free for STEM Students – This country needs to emphasize science and technology education to maintain global championship. Government colleges must provide free STEM education to all qualified poor students. In order to get into the free STEM programs students must compete and qualify for the available seats, ensuring the acceptance of the best and brightest. Students pursuing other essential disciplines like nursing, teaching, etc. must receive tuition subsidies as well. All other majors (e.g., business, humanities, etc.) irrespective of the students’ financial needs must pay full tuition, thereby forcing the otherwise needy to pursue vocational education in line with the market demand. Again, vocational education must carry full financial aid for the needy. While the local governments must always ensure that the financially disadvantaged students are never left behind, they must simultaneously understand the marketability of the labor force. Taxpayer dollars must never be squandered on education that is contrary to the market demand.

     

     8. Richest 1% Needs to Accept the Generational Reset – The richest 1% now owns 50.1% of the world’s wealth. Given this absurd concentration of wealth, we need this 1% to be self-convinced (like Mr. Warren Buffett) that they are just temporary custodians of their wealth. They must therefore come to terms with the generational reset meaning, at the end of their lives, they must return a sizable portion, if not all, of their wealth back to the society, pulling tens of thousands out of abject poverty each year. In other words, the success or failure of this country is now largely dependent on them. If they are honest and honorable enough to accept this harsh reality, the advancement of the citizenry will gleefully continue; absent which, millions more will continue to drift away in utter poverty. Hopefully, this voluntary return of wealth – and not forced redistribution of wealth – will become a self-fulfilling prophecy in arresting the ever-widening income disparity and mitigating poverty. We just want them to be more humane in feeling the pain and anguish of millions of mothers watching their children go to sleep hungry.

    9. Apply the Same High Moral Standard to the other 99% – We must learn to put the interest of the country ahead of our own. So, the rich and poor alike must also come to terms with the generational reset, voluntarily returning a big part, if not all, of our wealth back to the society. Perhaps, we need a universal ring-tone ‘Mom, I am hungry, I can’t sleep’ which will constantly remind us that millions of children are hungry and that their mothers are starving. That nightly cry is the Via Dolorosa for those mothers – that just never ends. We must never forget that these are our children and their mothers are our daughters and sisters. They are inseparably part of us!

- Sid Som, MBA, MIM

President, Homequant, Inc.

homequant@gmail.com

Link to the Book