Archive for the ‘Fiscal cliff’ Category

My imagination, or did my middle class paycheck get smaller?

January 14, 2013

Even the lowest information voters should have realized by now that their paychecks have shrunk by 2% …  since the Feds didn’t renew the 2% payroll tax holiday.


The big question for the economy as 2013 gets underway is how America will react to their smaller paychecks.


Financial math: Capital gains tax rates are going up 8.8% … So, how much will after-tax capital gains go down?

January 8, 2013

This is a relatively simple financial math question that most people I’ve asked have gotten wrong.

Answers have ranged from less than 8.8% – since only capital gains are being taxed (huh?) … 8.8% – because that’s how much the marginal rate is going up … to more than 8.8% – “otherwise you wouldn’t be asking the question”.

First, what’s magic about 8.8%?

Well, Obama did what he promised and jacked capital gains tax rates from 15% to 20% … and, don’t forget ObamaCare has a 3.8% non-payroll payroll tax on investment income starting in 2013.

So,  the effective capital gains tax rate is going from 15% to 23.8% … a delta of 8.8%.

That 8.8% increase will cut after-tax capital gains by 10.35% !

If you don’t believe me, here’s he math …


HOT Encore: If capital gains tax rates go up 8.8%, how much will after-tax capital gains ROIs go down?

January 5, 2013

Here’s an encore presentation of a HOT: Homa Online Tutorial originally posted before the election.

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Well,  Obama got his dream to come true — capital gains rates have been jacked from 15% to 23.8% ….  the basic capital gains tax rate went  from 15% to 20% … and ObamaCare has a 3.8 non-payroll payroll tax on investment income starting in 2013.

So, the effective capital gains tax rate goes from 15% to 23.8% … a delta of 8.8%.

That 8.8% tax rate increase will cut after-tax capital gains ROIs.

By how much?

Answer: The pre-tax ROI times 8.8%.

Here’s the math …


Oink: Porking deficit reduction … say,what?

January 3, 2013

Nice recap  in the WSJ today outing the pork that was sausaged into the deficit-adding Fiscal Cliff Bill:


Here’s a sampling:

  • Michigan Democrat Debbie Stabenow was able to retain an accelerated tax write-off for owners of Nascar tracks (cost: $78 million
  • New Mexico’s Jeff Bingaman saved a tax credit for companies operating in American Samoa ($62 million), including a StarKist factory.
  • Distillers are able to drink to a $222 million rum tax rebate.
  • Businesses located on Indian reservations will receive $222 million in accelerated depreciation.

The WSJ gave special recognition to Chris Dodd, the former Senator who lobbied for Hollywood’s movie studios … getting a provision that allows film and television producers to expense the first $15 million of production costs incurred in the United States … this Hollywood special will cost the Treasury $430 million in 2013 and 2014.

Consumers will get tax credits for buying plug-in motorcycles ($7 million).

Do the jabrones in Washington have no shame?

You can’t reduce the debt by adding to the deficit.

It’s that simple guys.

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Encore: Those %#@! Bush Tax Cuts

December 21, 2012

This Homa FIles brief was originally posted July 23, 2008. It’s long, … loaded with with pivotal facts.

Since expiration of the Bush tax cuts looks increasingly likely, I thought they’re worth another look — just as background


On the 2008 campaign trail, candidate Obama broad-brushed all of the Bush tax cuts as “for the wealthy”.

Now, OMB estimates that extending the Bush tax cuts in their entirety would cost $3.7 trillion over 10 years … of that amount over 80% goes to folks making less than $200,000 – $250,000 annually.

In other words, over 80% of the Bush tax cuts for the wealthy went to Obama-defined “non-wealthy” folks — some of whom pay income taxes, and many of whom don’t.

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Summary: We’ve all heard the rants about the cuts in the top bracket rate, capital gains rate, dividend taxes, and estate taxes.

But, when was the last time that your heard anybody mention the new 10% bracket, larger and refundable child and earned income credits, negative income taxes, elimination of the marriage tax penalty, or expanded college benefits?

Here are the details of the Bush tax cuts  …


Background: Here’s a way to raise tax revenues & create jobs.

December 20, 2012

In the fiscal cliff talks, I think that the Feds – both Obama & Congress – are demonstrating “no brain” thinking – working ineffectively on the wrong stuff.

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Specifically, in the fiscal cliff talks, practically all of the focus has been on jacking up the marginal tax rates for millionaires and billionaires making more than $250,000

Payroll taxes – for Social Security & Medicare – have been largely pushed off-stage.

That’s because both Dems & the GOP seem to agree that the 2% payroll “tax holiday” should be allowed to expire.

That may be true, but I think the payroll tax structure may be the key to hitting the seemingly conflicting objectives of raising tax revenues and creating jobs.

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Let’s lay out some basics:

What happens to whom if the current payroll tax holiday expires?


Politics: Boehner, Obama & W.C. Fields

December 18, 2012

According to CNBC, fiscal cliff talks moved forward in the past couple of days.

  • Obama has been steadfast that income tax rates go up for millionaires & billionaires making more than $250,000.
  • Boehner had been equally adamant that – as a matter of principle – no rates could go up.
  • Over the weekend, Boehner reportedly said he’d agree to higher tax rates starting at the $1 million income level
  • Obama reportedly countered by upping his threshold from $250,000 to $400,000
  • Boehner immediately expressed indignation and rejected the counter-offer

Reminded me of an old W.C. Field’s routine …


Here’s the way the skit goes ..


Nums: The millenials’ real fiscal crisis is still ahead …

December 6, 2012

No secret that spending is out of control … exceeding tax revenues by 10 percentage points of GDP

Dems are saying “don’t touch Social Security, Medicare or any other entitlements”

Some folks are saying “Keep borrowing, rates are low”.

Here’s the predictable outcome …  no budget left for ANYTHING except entitlements and interest on the debt … and, it can’t be solved by simply taxing the millionaires and billionaires who make more than $250,000..

Source: Mary Meeker KCPB

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TAX WARNING to DINKs: The marriage penalty is coming back …

December 5, 2012

One of the provisions of the Bush tax plan was to eliminate the so-called marriage penalty … the tax rules and rates that had a husband & wife pay more income taxes if they were married than if they stayed single.

I’ve been bemused that in all of the chatter about Obama’s obsession with jacking rates, I haven’t heard anything about the resurrection of the marriage penalty … at least for evil rich millionaire & billionaires who make more than $250,000..


Here’s the rub: Obama’s tax hikes apply to individuals earning more than $200,000 and families earning more than $250,000.

Let’s do a simple example:


How do current interest rates compare to past rates?

December 3, 2012

Here’s a chart to calibrate your perspective …

The Fed Funds Rate currently running at about zero … that compares to a historical average of about 8% … and a peak of about 18% in the Carter years.

There’s only one way to go – up.

Imagine the fiscal crisis if if the interest rate on the $16 Trillion debt slides back up to the 8% historical average … or, gawd forbid, to the Carter-level rates.

Now, that would be a fiscal cliff !


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Unemployment claims and the stock market … interesting !

November 14, 2012

Not to worry, not another rant against the curious BLS reporting.

Business Insider posted an interesting analysis by GSAM Chairman Jim O’Neill, mapping the inverse of initial unemployment claims with the S&P 500.

First, it’s pretty clear that the series track closely.

Moreover, O’Neill observes:

”it’s worth noting the last time there was a severe break between the two lines was [Summer 2011], around the debt ceiling fight, a scenario which the current fiscal cliff debate harkens back to. Then the market freaked out, but mostly the economy kept on rolling.”

In other words, the economy is improving, albeit slowly, and last week’s drop was related to the election … but it’s not “Obama elected, market tanks” … it’s “Will divided government gridlock or avert the Fiscal Cliff?”

So, if the fiscal cliff gets resolved, then following O’Neill’s logic … the market goes up.



Advice to GOP: Let Obama have his tax rates on the wealthy with a couple of twists.

November 14, 2012

I really don’t understand why Obama and the Congress are having such a hard time resolving the “revenue” issue, i.e. raising taxes.

Make no mistake, I’m opposed to raising taxes and then wasting the money … both of which are eventually going to happen.


That said, here’s what I’d do to break the log jam – a tax plan that protects small businesses (GOP goal) and soaks the rich (Obama’s focus):

1) Separate business income reported on 1040s from all other income … then cap the business income portion at 25% … allow losses to offset ordinary income.

  • Note: The system is already to set-up to handle multiple income streams taxed differently – e.g. ordinary income vs. capital gains.
  • Note: There will be a rash of LPs started to game the system … but, so what? Shouldn’t amount to that much.

2) Then, since Obama is obsessed with raising rates on “millionaires & billionaires” who make more than $250k, I would add some brackets:

  • Bump anything over $250k but less than $500k from 35% to 36%
  • Bump anything over $500k by an additional 2 points to 38%
  • Bump anything over $1 million by still an additional 2 points to 40%
  • Bump anything over $2.5 million by still an additional 2 points to 42%

Bingo … Obama gets his prized punitive rate on millionaires and billionaires making more than $250K without hurting small businesses, and there’s minimal impact on the millionaires (?) making less than $1 million.

It’s as easy as that.

Again, it’s not the way I’d attack the deficit problem, but if Obama’s bound and determined to raise income tax rates, this is how I’d do it.

Note: I must admit that I’m swayed by the inevitability of the GOP losing on this issue … and by an analysis I heard about that said that the vast majority of tax payers would be impacted live in NY, CA, NJ, MD and DC … blue states that overwhelmingly support Obama’s policies … there’s a certain poetic justice to them paying the freight.

Stay tuned for posts re:how I’d really attack the problem.

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80 CEO’s call for deficit action … only 80?

October 25, 2012

Lead story in the WSJ today is that 80 CEOs (click for listhave banded together to nudge Congress towards bipartisan deficit reduction … i.e. get the fiscal cliff resolved.

The group – calling themselves Fix the Debt – issued a public statement.

Here are snippets from the Journal’s recap:

Any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

“You can’t tax your way to fix this problem, and you can’t cut entitlements enough to fix this problem.”

The executives didn’t endorse Mr. Obama’s proposal to raise the marginal income-tax rates for the top 2% of taxpayers or any other proposal.

Rather, they called for an overhaul of the tax code that, among things, would eliminate or reduce deductions, credits and loopholes (known as “broadening the base”), and one that also would bring the Treasury more revenue than the existing code does.

Notably absent from the Fix the Debt list are CEOs from big U.S. energy companies, some of whom fear that tax increases will fall more heavily on them.

Hard-line foes of tax increases aren’t likely to be moved by the CEOs.

“When bipartisan deals are struck promising to cut spending and raise taxes, the spending cuts don’t materialize but the tax hikes do,”

Raises a couple of questions:

1. Where have these jabrones been?

2. Only 80 CEOs?  Where are the rest?

3. Is a public statement rehashing the obvious the best they could do?

C’mon guys, mobilize for the good of the country.

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Here comes the taxman … BOOM!

October 5, 2012

Great analysis published this week by the non-partisan Tax Policy Center that details the potential impacts if the Bush (and Obama) tax cuts are allowed to expire at the end of the year.

The entire report is worth reading if you’re in the 53% who do pay Federal income taxes … or if you’re at the top earning end of the 47% – since you’ll get banged, too.

According to the TPC, there will be different effects on households at different income levels:

For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts.

  • Households with low incomes would be particularly affected by the expiration of the credits expanded or created by the 2009 stimulus.
  • Households at the highest income levels would be particularly affected by expiration of the 2001/2003 tax cuts that apply to upper income levels and by the new health reform taxes.
  • Upper middle-income households would be particularly affected by the expiration of the AMT patch.
  • In addition to raising average tax rates, the fiscal cliff would substantially raise marginal tax rates.  The average marginal tax rate would increase by about 5 percentage points on wages and salaries, by about 5 percentage points on interest income, by about 7 percentage points on long-term capital gains, and by more than 20 percentage points on qualified dividends.


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Potential Stock Sell-off

One implication of increasing marginal tax rates is that some investors would have an incentive to sell appreciated stocks, bonds, and other assets before the end of the year, if they believe the capital gains rate will go up as scheduled and then remain in place for tax year 2013.

That is exactly what happened following the enactment of the Tax Reform Act of 1986, which increased the top capital gains tax rate from 20 percent to 28 percent.

Capital gains realizations almost doubled in 1986 and then fell back in 1987 as investors rushed to take advantage of the soon-to-expire 20 percent rate.

Similar behavior is likely this year unless investors believe that the scheduled tax increases will be averted.

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In summary: Ouch.

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