Brad Jacobs

Thanks to Lou and Kenneth. This is very helpful.

Thanks so much. I appreciate it very much.

I am a CPA preparing tax returns. The client has a Schedule C with $475,000 net income. He is contributing $55,000 to a 401K and almost all of his QBID is phased out. He also has $140,000 pension income plus some investment income. Charitable contributions are approximately $75,000. MFJ, 69 years old. I would like for him to adopt a DB pension plan and defer a large portion of his net profits. My questions are as follows: 1. Should he elect c-corp tax status? If so, does he need to pay himself a salary? I am thinking of a $200,000 DB contribution and a $200,000 salary, leaving some cash in the c-corp to be taken as dividends in later years (once fully retired). Is there a minimum salary that he must pay himself? 2. If c-corp status is not elected, can he still set up a DB plan for himself even though he is not an employee? Does he pay SE tax on profits before the contribution, or on profits net of the contribution? 3. He has not yet filed his 2023 returns. Is it too late to set up and fund a DB plan for 2023? I would appreciate any feedback on this. New territory for me. Regards, Brad

Yes, it is an oversimplification because I think it would be impossible to predict market behavior fully and accurately when eliminating the corporate income tax, a 100 year old institution. But, I do challenge the assumption that ROI will remain unchanged because corporations will just drop their prices. If we live in a global economy, the correlation between prices and the CIT diminishes and I don't wish to conflate the two. In fact, if I invested in a corporation who began charging less than market rates for its products, I would sell the investment if the board didn't fire the management. Going form 8% to 12% is a wild guess, but I would say that most of us could agree that it would at least go up and not down. But, I speak not as a trained economist. I propose that all income, whether earned or investment, is taxed at the same marginal rate on the individual tax return. I am not saying that only taxing investment idea is a bad idea; rather, it could be a great idea - I haven't given it much thought. What I am saying is that we cannot get there from here. We can easily get to my proposal. The US income is approximately 90% IIT and 10% CIT (plus some gift and estate and excise taxes). Replacing 10% CIT with IIT is within reach. Replacing 90% IIT with CIT is not.

My 2 cents, Great points. If we eliminated the corporate income tax, why would that result in higher executive bonuses? The executives have done nothing extra when their company earns a higher ROI, why would they bonus? If I was a stockholder of a company that paid out higher exec bonuses in lieu of a dividend to me, I would be enraged. You're collating and conflating prices with tax policy. I am not sure this makes sense and is true. If the expected return from stock investing rises from 8% to 12% with the elimination of the CIT, any company not having a visible increase in its after-tax earnings would lose stock price and the interest of the investor. As an investor, I would challenge companies to charge market prices for their product, not just enough to maintain their historical ROI. Employers should make contributions to retirement accounts as a value proposition, not a tax-driven proposition (as you propose). Employers that offer complete benefit packages, including well-funded retirement accounts with a 4x funded plan, would attract better employees - an old argument. That would be a market-driven, value proposition. Or, I could work for the city of Detroit whose pension plan barely survived bankruptcy. I would chose the employer whose plan was 4x solvent. If employers choose not to offer its rank and file employees a fair deal, those employees should leave and find employment elsewhere. And, with no corporate income tax, it will be an employees' market, not an employer's market. Thanks for responding. Just some thoughts.

Thanks all for responding. The secret sauce is in asset return. If we could increase asset return 2.5%, I believe we could solve the pension crisis, both private and public. The answer is to 100% eliminate the corporate income tax. The other tweak to the rules would allow pension funds to be quadruple or more funded, eliminating the penalty for overfunding a pension plan. If so, the plan managers would have the freedom to invest in a portfolio that is higher performing yet slightly more volatile. If the market does a 2008 nosedive, the plan remains 200% and recognizes a buying opportunity.

I just read an article in Institutional Investor, the December 2016 - January 2017 issue, on page 27 regarding the California Public Employees' Retirement Fund entitled "Jerry Brown's Battle". The fund is $300 billion. The question was whether the discount rate should be moved from 7.5% to 6.5% immediately or over a 20 year period. I am not an actuary but, for plans like these, what would happen to the plan if the rate magically increased from 7.5% to 10%? Generally would the effect of increasing the discount rate 250 BP for DB pension plans have a low, moderate or high impact to the calculations? How sensitive are plans to discount rate changes? If moving the rate downward 1% immediately or over 20 years is a huge debate.... I would appreciate thoughts and feedback on this. Regards, Brad

I am working on article for a benefits class in which I am enrolled and need some data. I am not an actuary nor do I have an actuarial model but am hopeful that a member can assist. I would like to know the sensitivity of returns of pension plan trusts. For a typical trust, what is the project long-term rate of return? Say it is 7%, what is the company’s pension liability? What happens when the rate is increased to 8%, 9%, 10%, 11% and even 12%? If anyone has a live dataset and model and could provide this information as a favor, I would truly appreciate it. And, if the article ever gets published, I would of course give attribution and the possibility for additional input into the project. The article is due in just a few days and this information would be quite useful. I would appreciate any help that you could provide.