Archive for the ‘Taxes’ Category

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Simple math … the seeds of a tax revolt

April 16, 2009

Counterattacking the Tea Parties yesterday, Team Obama was out in force declaring: (1) 95% of workers are getting a tax break (2) over 60% of Americans support the President’s spending plans.

Let’s see …

Regarding the tax break: keep in mind that it’s a whopping buck-a-day for the average worker.  Better than nothing, but not by much. If that buys financial stability and happiness, I say ‘go for it’.

Regarding the support for the spending plan: keep in mind that about half of voters don’t pay any income taxes — or get a refundable credit check.  They have no skin in the game — why wouldn’t they support a boatload of new benefits — after all, they’re FREE.

Assuming all 50 on non-tax payers support the programs, getting to 60% support means that 20% of tax payers support the spending plan … or, said differently, 80% don’t.

Think about it: using Team Obama’s own numbers, 80% of the folks who have to pay for the spending spree oppose it … but politically, the payers are dwarfed by the freeloaders.

It’s simple arithmetic.

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Finally, a windfall profits tax that I can support …

April 16, 2009

According to the WSJ, Team Obama (Barack & Michelle) reported $6.8 million income in 2007 ($4.1) and 2008 ($2.7) …  “mainly from book sales”.

I think it’s fair to say that if Obama had not been selected to give a speech at the 2004 Democratic National Convention, his book sales would have been statistically insignificant.

In other words, his book earnings are, by definition, a windfall.

Why not tax them at windfall profits rates — say 90%, Barney Frank’s favorite number?

Obama has an grand opportunity to lead by example.

Makes sense to me

Source article:
http://online.wsj.com/article/SB123983002234522435.html

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High taxes, out-of-control gov’t spending, ballooning national debt … let’s have a tea party.

April 15, 2009

Just in case you haven’t heard (since NBC, NY Times, etc. have been ignoring the story or playing it down) …

According to the WSJ: Today, American taxpayers in more than 300 locations in all 50 states will hold rallies — dubbed “tea parties” — to protest higher taxes and out-of-control government spending. Below is a map of planned rallies and a link to an interactive map with specific locations and times.

Why you should care

If you’re reading this, your tax burden is considerable — probably way more than you think.  Consider a reasonably typical “professional”  couple earning about $125,000 (maybe with both husband and wife working).  Subtracting $10,900 for the standard deduction and  $13,600  in personal exemptions (assume a husband, wife, and 2 kids @ $3,400 each) leaves $100,000 in taxable earnings.  The Federal income taxes would be about about $15,000 … not bad, if that’s all there were.  But they’re not.

Add to that total payroll taxes, which are payroll deducted at a rate of 7.65% based on gross earnings (called FICA earnings) not taxable income … that’s another $9,500.  The couple is up to 24.5%.

Then, there are state income taxes.  On average, state income taxes run about 5.5% of taxable income.  That gets the couple up to 30%.  Note: for specific state rates, see
http://www.taxfoundation.org/taxdata/show/228.html

Then there are sales taxes.  The couple is left with $70,000 after income taxes.  Assume that they spend about 75% of it on taxable goods and services at an average state sales tax rate of a little more than 5%.  That’s another $3,000.  They’re up to 1/3 of their taxable income going to taxes.

Finally, let’s assume that they own a modest house and pay $5,000 in local property taxes.  Now, they’re approaching 40% … and that doesn’t include gas taxes, cell phone taxes, etc.  … which gets the number into the 40s for sure, and maybe up to 1/2 of taxable income … for a couple that probably doesn’t consider themselves to be rich. 

Think about it : half of what you make going to support about $4 trillion in annual government spending … much of it wasted.  For details, see the just released “Pig Book” — the annual summary of government spending published by the Citizens Against Government Waste
http://www.cagw.org/site/DocServer/CAGW-Pig_Book_08.pdf?docID=3001

That’s why there are tea parties today …

 

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Interactive map:
http://www.freedomworks.org/groups/19186

Related article:
http://online.wsj.com/article/SB123975867505519363.html#mod=djemEditorialPage

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Everyone Should Pay Income Taxes

April 13, 2009

Ken’s Take:

(1) I was all over this issue last fall in the election run-up.  My beef isn’t with tax rates per se — I think they’re pretty reasonable.  But, I hate seeing my tax dollars wasted on wacky programs and government inefficiency, and I think that everybody has to have some skin in the gain.  Having half of all voters pay zero income taxes (or less) may be politically advantageous in the short-run, but it’s economically fatal in the long-run …

(2) Question: Does the half of the population that doesn’t pay income taxes have a right to be outraged with the way tax dollars are spent ?  Perhaps they should at least show some courtesy to taxpayers —  by sitting down and shutting up …

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Excerpted from WSJ, “Everyone Should Pay Income Taxes”, Fleischer, April 12, 2009

A very small number of taxpayers — the 10% of the country that makes  — pay 72.4% of the nation’s income taxes. They’re the tip of the triangle that’s supporting virtually everyone and everything. Their burden keeps getting heavier.

As a result of the 2001 tax cuts . . . the share of taxes paid by the top 10% — those making more than $92,400 a year —  increased to 72.8% in 2005 from 67.8% in 2001.

Contrary to the myth that Mr. Bush cut taxes only for the wealthy, the 2001 tax cut reduced taxes for every income-tax payer in the country. He reduced the bottom tax rate to 10% from 15% and increased the refundable child tax credit to $1,000 from $500 per child,. In so doing, millions of lower income taxpayers were removed from the tax rolls, shifting the remaining burden to those at the top.

Mr. Obama is adding to this trend with his “Make Work Pay” tax cut that means almost 50% of the country will no longer pay any income taxes, up from a little over 40% today.

Today, Mr. Obama and many congressional Democrats want the “wealthy” to pay even more so there is more money for them to redistribute. The president says he wants the wealthy to pay their “fair share.” Who can argue with that? But he never defines what that means. Is it fair for 10% to pay 70% of the income tax? Does he believe they should pay 75%, or 95%, or does fairness mean they should pay it all?

In addition to exempting almost 50% of the country from income taxes, today nearly every other social cause is given a loophole — or a preference — in the tax code. Want to buy a hybrid vehicle? You get a tax break. Do you own a solar water heater? You get a credit. Want to give to charity? You get a deduction. Own a house? There’s another tax deduction for you. How about college savings, certain medical costs, and retirement savings? Yes, yes, and of course yes. Did you move, pay alimony, or “provide housing to a Midwestern displaced individual”? More deductions, credits and exemptions there too, if you qualify.

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It’s time to create an Economic Growth Code whose purpose is to fix and grow the economy, not redistribute massive amounts of wealth. A new tax code that creates growth and reforms our entitlement system is the only way to dig our way out of the hole we’re in.

Everyone in American would pay income taxes — everyone. Such a system would be designed to foster broad-based growth for all, in contrast to the loophole-ridden system we have today. Not only is the current code flawed from top to bottom, it is used by politicians to divide the public along class lines and fails to promote prosperity.

Congress should start by refusing to go along with Mr. Obama’s promise to cut taxes for 95% of the country. With the government running an almost $2 trillion deficit, no one should have their taxes cut — no one. Given the size of the deficit, fiscal responsibility demands nothing less.

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I favor the abolition of all Social Security, Medicare, ending the myth that these programs are supported through government trust funds and payroll taxes.

In their place, we should create a simple income tax system that has no deductions or credits at all. The result would be a progressive, multitiered income tax in which everyone pays.

I’d also create a mechanism so tax rates go up or down for everyone — no more dividing the country by lowering taxes for some or raising them only for others. A revenue system whose purpose is to pay the government’s bills should apply fairly to one and all. If Congress wants to raise or cut taxes, it should do so for everyone.

It’s funny what happens when everyone pays the bills; Americans may want less spending so they can pay fewer bills.

Full article:
http://online.wsj.com/article/SB123958260423012269.html

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A small victory for opponents of the death tax …

April 13, 2009

Excerpted from WSJ, “Death Blow”, April 9, 2009

The Bush tax plan intended to eliminate the death tax in 2010.  President Obama wants to reinstate 45% rate with a $3.5 million per person exemption.

Barely noticed, last week the U.S. Senate voted 51-48 to cut permanently the death tax rate to 35% and exempt all estates of less than $10 million per couple ($5 million for a single taxpayer) from any tax. 

Every Republican voted for the lower rate, and so did 10 Democrats. This is the closest thing to bipartisanship we’ve seen so far this year on Capitol Hill, but naturally the White House and most of the media are appalled. Their idea of bipartisanship is when three Republicans cross party lines to pass $780 billion in “stimulus” spending.

Full article:
http://online.wsj.com/article/SB123923589432903367.html#printMode

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It’s simple arithmetic … your taxes going up

April 9, 2009

Excerpted from WSJ, “Obama Plans Sound Fiscally Responsible But Don’t Add Up”, April 9, 2009

For years, the American people have been told they could have it all: costly wars, expansion of Medicare to cover drugs, health insurance for those without, more money for schools — and tax cuts for practically everybody. They deserve to be told that they can’t have it all in the future.

In the 1930s and the 1960s, the government began popular programs to support the sick and the elderly. The cost of treating the sick is rising, and the number of old people climbing. Since 1970, the government has paid for that by cutting defense spending.  But going forward, defense spending will not fall as much as it has, even if the Iraq war ends and the Pentagon is forced to be more efficient.  

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Pres. Obama envisions a federal government that taxes the American economy somewhat more than the historical average and spends significantly more. The president’s own projections show a deficit equal to 3% of gross domestic product well into the next decade, and that assumes all goes well.

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The bottom line:  either taxes as a share of GDP rise or spending on those popular benefit programs (or everything else) is throttled back.

It’s simple arithmetic.

Full article:
http://online.wsj.com/article/SB123921904349802157.html?mod=djemalert

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Cap & Trade … if it smells like a tax …

April 3, 2009

Excerpted from WSJ, “The Carbon Cap Dilemma”, March 28, 2009 

Ken’s Take: The Bushers were clever rebranding the estate tax as the more pejorative sounding “death tax”.  Team Obama is similarly clever calling their energy tax “cap and trade”.  Doesn’t change the essence — it’s a tax.

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On pure economic grounds, a straight carbon tax, would be simpler and more efficient than cap and trade.

But “the political will to go the tax route . . . is just not there. Nonexistent” — namely because the use of the word “tax.”

The cap & trade approach is to design a  program that will “simulate the same thing a tax would do.”

That is, to achieve the increased energy prices essential to the success of cap and trade.

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Full article:
http://online.wsj.com/article/SB123819777143661833.html#articleTabs%3Darticle

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“I’ll cut the deficit in half !” … depends where you measure from, I guess.

March 30, 2009

President Obama keeps saying that his 10-year budget will cut the federal deficit in half.

Since that’s counter-intuitive — given the amount of new spending he has planned, I got curious …

Here are they key numbers:

From 1969 to 2008, the Federal deficit was about 3% of GDP.  That’s about $350 billion per year.

The deficit ballooned during the recent spending and bailout spree to about 12% of GDP.  That’s about $1.9 trillion.

The CBO projects that the Obama budget — as proposed — would have a 10 year out deficit (in 2119) that’s roughly  $1.2 trillion — 6% of GDP.  Team O claims that the out year deficit will be “only” $750 billion — about 5.5% of GDP.

Bottom line: Big O is technically correct if he measures from the 2008-2009 multi-billion dollar spending extravaganza and heavy rounds the numbers.   The deficit goes from $1.9 trillion in 2009 to $1.2 trillion (or $750 billion if you buy Team O’s numbers) — as a percentage of GDP, it goes from 12% to 6%.  That’s about halving the deficit between 2009 and 2019.

More important, but omitted in the President’s remarks: Team O’s out year deficit will be roughly twice the 1969-2008 percentage of GDP and his out year deficit will be roughly 3 times the recent average deficit (in dollars)

Maybe not a lie  … but very misleading … don’t you think?

Spend, spend, spend …

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http://blog.heritage.org/2009/03/24/bush-deficit-vs-obama-deficit-in-pictures/

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CBO Budget Analysis:
http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf

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Dear AIG, I quit !

March 26, 2009

The NY Times reprinted the following  letter — sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward Liddy, the chief executive of A.I.G.

Won’t change many people’s minds re: the bonuses. but certainly paints another side to the picture …

* * * * *
Excerpted from NY Times, “Dear AIG, I Quit”, March 25, 2009

Dear Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P.

Most of those responsible have left the company and have conspicuously escaped the public outrage.

Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. A.I.G. management assured us on three occasions  that the company would “live up to its commitment” to honor the contract guarantees.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised.  They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

I can no longer justify spending 10, 12, 14 hours a day away from my family.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn.

This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget.

Sincerely,Jake DeSantis

For the full text of the letter:
http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=2&ref=opinion&pagewanted=all

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A new market force: Government induced ‘systemic risk’

March 23, 2009

Ken’s Take:

The Congressional act placing a retroactive confiscatory income tax on the understandably unpopular AIG FP bonuses is already beginning to have an impact — an impact that will certainly slow the untangling of the financial mess, and may even thwart it entirely.

All the Friday Wall Street chatter was about how the government can — on a whim — change the rules of the game in midstream, ditching contracts and agreements when it (the government) wakes up and realizes that its programs are ill-onceived and under-analyzed (i.e. unread) before enactment.

So, word has it that the government was soliciting 200 hedge funds to buy toxic securities as part of a public-private partnership.  Reportedly, only 3 have signed up — and it’s my bet that they did so before Thursday’s Congressional action and head for the exits.  (It’s ok for them to back out since deals aren’t deals any more).

Similarly, reasonably sound companies that took TARP funds because they were coaxed to do so by the government (think Northern Trust) are scrambling to find ways to pay back the money and walk away from TARP.  Reportedly, companies targeted with the TALC program (think student and consumer loans) are doubting whether government assistance is worth the pain.

Bottom line: in one svelte blame-dodging move Congress managed to put the recovery effort back to about square one. 

Way to go Nancy & Barney.

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Why did Nero fiddle when Rome was burning ?

March 20, 2009

Some questions to ponder over the weekend …

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Why did Nero fiddle when Rome was burning ?

Obvious answer: Because there was no TV in 64 A.D., so appearing on the Tonight Show wasn’t an option.

Call me ‘old school’, but I would have rather seen the President huddled all day with his economic advisers …

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Do people who don’t pay takes have a right to be outraged ?

I cringe when I hear “everybody has a right to be outraged … those are your tax dollars going to the AIG execs”.

Now (post-stimulus), less than half of voting age Americans pay income taxes.  In other words, less than half have any skin in the game.

I guess those folks (who don’t pay income taxes) are outraged because taxpayer money going to AIG bonuses potentially drains the pool of freebies that they’re lining up to get.

Geez

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Why doesn’t Ed Liddy resign ?

This guy was pulled from retirement by the Treasury Dept to step in to the AIG CEO slot.  His comp package: a whopping buck a year.  Then, he has moron Congressmen denigrate him in public.

If I were he, I’d tell them to stuff it … let Barney Frank run the place if he’s so smart

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What about Wells Fargo, Northern Trust, and JP Morgan Chase execs ?

Press reports say that those banks took TARP money only because the Treasury Dept pressured them to do so — so that badly run banks wouldn’t suffer the indignity of being so easy to pinpoint.

OK, so those execs are running good businesses and, in reasonable people’s opinions, deserve performance bonuses.  Now, they get the bonuses taxed at 90%

And, TARP says they can’t just repay the TARP funds out of earnings, they have to replace it with fresh capital.

Prediction: you’ll hear a lot about this over the weekend.

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Who’s next ?

As I pointed out yesterday, once a precedent is set to impose retroactive confiscatory taxes on people just because they are politically toxic … there’ll be no stopping the train. 

Imagine a $2 per gallon Federal tax on gasoline retroactive to January 1 … why not?

And, some folks got rattled by the Patriot Act.  This is one to worry about.

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We don't like you … so give us all of your money

March 19, 2009

Ken’s Take: Sure, the AIG FP execs are scum, but abrogation of contracts and retroactive confiscatory taxation can’t possibly be a good idea.  Once the precedent is set, there’s no way to stop them from doing it to me or you … just because they don’t like us. 

(OK, you run less risk because you’re probably more likeable than me.)

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Excerpted from Wsj,”Obama’s AIG Pani”, March 19, 2009 

Congress looking to string up AIG bonus recipients and, more generally, bankers in whatever bunker they can be found.

Senators Grassley and Baucus want to double the current income tax on bonuses, to 70% from 35% …Congresswoman Carolyn Maloney,  wants to tax it all — at 100%.

This is all too much even for Rep. Charlie Rangel, the House’s chief tax writer, who says the tax code shouldn’t be deployed as a “political weapon.”

He’s right. AIG’s managers may be this week’s political target of choice, but the message to every banker in America, indeed every business and individual  in America, is that you could be next.

At least we haven’t yet seen the resolution that was proposed in the English parliament, in 1720 in the aftermath of the South Sea bubble, that bankers be tied in sacks filled with snakes and tipped into the Thames.

But this fracas is still in its early days.

Full editorial:
http://online.wsj.com/article/SB123742023932678335.html

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We don’t like you … so give us all of your money

March 19, 2009

Ken’s Take: Sure, the AIG FP execs are scum, but abrogation of contracts and retroactive confiscatory taxation can’t possibly be a good idea.  Once the precedent is set, there’s no way to stop them from doing it to me or you … just because they don’t like us. 

(OK, you run less risk because you’re probably more likeable than me.)

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Excerpted from Wsj,”Obama’s AIG Pani”, March 19, 2009 

Congress looking to string up AIG bonus recipients and, more generally, bankers in whatever bunker they can be found.

Senators Grassley and Baucus want to double the current income tax on bonuses, to 70% from 35% …Congresswoman Carolyn Maloney,  wants to tax it all — at 100%.

This is all too much even for Rep. Charlie Rangel, the House’s chief tax writer, who says the tax code shouldn’t be deployed as a “political weapon.”

He’s right. AIG’s managers may be this week’s political target of choice, but the message to every banker in America, indeed every business and individual  in America, is that you could be next.

At least we haven’t yet seen the resolution that was proposed in the English parliament, in 1720 in the aftermath of the South Sea bubble, that bankers be tied in sacks filled with snakes and tipped into the Thames.

But this fracas is still in its early days.

Full editorial:
http://online.wsj.com/article/SB123742023932678335.html

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Some simple tax math …

March 17, 2009

Adopting a European welfare-based economic model requires taxing about 50% of labor costs.

Question:  if the bottom 50% pay no income taxes, then how much does the top 50% have to pay?

Do the math … you can take 50% from 100% of the citizens … or 100% from 50% of the citizens.

Technical note: the top 50% of the citizens is a broader group than the targeted top 2%

[Labor's European Model]

http://online.wsj.com/article/SB123716333620835923.html

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Who’ll pay the climate tax ? … Oops, I meant “Cap and Trade” ?

March 17, 2009

Hint: They were promised a tax cut during the Obama campaign.

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Excerpted from WSJ, “Who Pays for Cap and Trade?”, March 9,2009

Cap and trade is the tax that dare not speak its name, and Democrats are hoping in particular that no one notices who would pay for their climate ambitions.

Perhaps Americans would like to know the deeply unequal ways that climate costs would be distributed across regions and income groups.

Politicians love cap and trade because they can claim to be taxing “polluters,” not workers. Hardly.  the costs would inevitably be passed on to all consumers in the form of higher prices. Stating the obvious, Peter Orszag — now Mr. Obama’s budget director — told Congress last year that “Those price increases are essential to the success of a cap-and-trade program.”

The Congressional Budget Office — Mr. Orszag’s former roost — estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating.

Hit hardest would be the “95% of working families” Mr. Obama keeps mentioning, usually omitting that his no-new-taxes pledge comes with the caveat “unless you use energy.”

* * * *

But the greatest inequities are geographic and would be imposed on the parts of the U.S. that rely most on manufacturing or fossil fuels — particularly coal, which generates most power in the Midwest, Southern and Plains states. It’s no coincidence that the liberals most invested in cap and trade — Barbara Boxer, Henry Waxman, Ed Markey — come from California or the Northeast.

Coal provides more than half of U.S. electricity, and 25 states get more than 50% of their electricity from conventional coal-fired generation.

In Ohio, it totals 86%, according to the Energy Information Administration. Ratepayers in Indiana (94%), Missouri (85%), New Mexico (80%), Pennsylvania (56%), West Virginia (98%) and Wyoming (95%) are going to get soaked.

Cap and trade, in other words, is a scheme to redistribute income and wealth — but in a very curious way. It takes from the working class and gives to the affluent; takes from Miami, Ohio, and gives to Miami, Florida; and takes from an industrial America that is already struggling and gives to rich Silicon Valley and Wall Street “green tech” investors who know how to leverage the political class.

Full article:
http://online.wsj.com/article/SB123655590609066021.html

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Posted in Cap & Trade, Environment - Green, Obama - Promises Made & Kept, Obama Administration, Taxes | Leave a Comment »

California Dreamin’ … Weed, yes … Oil, no.

March 5, 2009

Recent press reports say Golden Staters are considering the legalization of maijuana as a means of increasing state revenues to offset CA’s huge budget deficit.

But, no reported consideration for off-shore oil drilling.  Hmmmm.

According to  a recent study by the American Energy Alliance, an industry research group, developing our offshore energy resources would create in the coming years:

$8.2 trillion in additional GDP.

$2.2 trillion in total new state and federal tax revenues.

1.2 million new jobs at high wages.

$70 billion in added wages (all taxable) to the economy each year.

The much maligned Gov Palin proved that eco-sensitive drilling can bulge state coffers … and cut citizens tax bills.

Pro-weed, anti-oil … that says it all, doesn’t it …

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Source of AEA info:
http://www.ibdeditorials.com/IBDArticles.aspx?id=320544753372991

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Raising capital gains taxes in 2011 … Obama says: take that, Mr. Dow

March 5, 2009

Barack-O is bound and determined to raise capital gains taxes — from 15% to 20%.

I guess that’s because O thinks returns on invested capital aren’t really “earned” and capital gains only accrue to rich folks.

The problem: this ill-timed move is certain to suppress any market rebound that might materialize.  Why?

2011 sounds like a long way off.  But, to qualify for capital gains, an asset has to be held for at least 12 months.  That means that stocks bought next year (after Jan. 1 2010) will be — by definition — subject to the upped capital gains tax rates.  So, their after tax returns will be reduced.

What to do? Buy stocks later this year (2009) and sell them late next year — before the tax rate goes up — and before the sell-off that will certainly occur in Nov-Dec 2010 (as every Tom, Dick & Harry) tries to bail to beat the tax rate increase).

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Reminder to Pres Obama: a tanked stock market impacts almost 2/3s of Americans — mostly in 401-Ks

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WARNING: This is an econ-political observation, not investment advice.

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As the Dow keeps dropping, O is running out of people to blame.

March 4, 2009

Excerpted from WSJ, “The Obama Economy”, March 3, 2009
  
As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. Yesterday the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama’s policies have become part of the economy’s problem.

It’s become clear that Mr. Obama’s policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence — and thus a longer period of recession or subpar growth.

In the last two months … the economy has received no great new outside shock.

What is new is the unveiling of Mr. Obama’s agenda and his approach to governance. 

One negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion. Most of his “stimulus” spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest.

The market has notably plunged since Mr. Obama introduced his budget last week, and that should be no surprise. The document was a declaration of hostility toward capitalists across the economy. 

His assault on business and investors is delaying a recovery and ensuring that the expansion will be weaker than it should be when it finally does arrive.  The result has been a capital strike.

Full article:
http://online.wsj.com/article/SB123604419092515347.html

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Closing the hedge fund barn door … after the hedgers escape with the loot

March 4, 2009

Finally, something out of the Obama brain trust that I agree with …

“Managers at private-equity firms, real-estate investment trusts and other investment partnerships (e.g. hedge funds) would pay an additional $24 billion in taxes over the next decade. Currently, most pay taxes at the 15% capital-gains rates on the bulk of their compensation, which comes in the form of something called “carried interest,” which entitles them to a share of the firm’s profits. Because it isn’t a return on an investment they actually made, many tax experts argue it is more akin to a fee or salary for their services. Mr. Obama’s budget would require most investment managers to pay ordinary income taxes on that income.”

Note: Larry Kudlow, conservative economist (with whom I usually agree), said on CNBC: “Worst possible action he can imagine”

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Source: WSJ, “Business Braces for a Big Hit”, Feb 27, 2009
http://online.wsj.com/article/SB123569739787189001.html

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Question: What happens when there’s no wealth to redistribute?

March 4, 2009

Obama’s grand plan is centered on taking money  from the rich and either spending it like a drunken sailor or giving it away to folks unburdened by work.

Well, the financial crisis has vaporized mucho wealth and cut the number of mega-earners. 

Anybody with any serious money and a brain must be plotting how to shelter earnings and wealth from taxes — either because they loath taxes in general, or because they’re not fans of the Obama-Reid-Pelosi spending spree.

Question: So, if there are fewer rich people, and if the remaining rich people shelter their dough or pull a Geithner and just forget to pay taxes …  what will Obama redistribute ?

My bet: The definition of rich will start sliding down the scale.  We’ll all be rich — at least in the eyes of the tax collector.  Hide your wallet.

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Charities take another hit … a big hit

March 4, 2009

Charitable giving is down because of the bad economy and tanked stock market.

Now, President Obama’s proposed budget cuts the income tax deduction for charitable contributions.

But, only for rich people — those who do the lion’s share of charitable giving.

Sounds anti-social, so why’s he doing it?

Simple, Obama believes that government can do a better job than individuals channeling money to the “right” causes.  You can’t trust individuals to give to the right causes, can you?

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To support home prices, cut the mortgage interest deduction … huh ?

March 3, 2009

This stuff just keeps getting wackier and wackier …

“The budget came with a painful and unexpected surprise:

After 2010, American households making over $250,000 would see the rate at which they can deduct mortgage-interest payments and other items from their taxes reduced to 28% from the current 35%, costing them $318 billion over 10 years.”

Question: Will that help or hurt home real estate prices?

Also taking this hit: tax deductions charitable contributions.  Guess NFPs will just have to grovel (more) to the government bureaucrats.

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Source: WSJ, “Taxes Test Obama’s Support Among Higher-Income Voters”, Feb 27, 2009
http://online.wsj.com/article/SB123570454670090115.html

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Closing those offshore tax loopholes … and the unintended consequences

March 2, 2009

Pres O says that he’ll go after US companies that take advantage of tax loopholes to ship American jobs offshore.

I assume that he’s talking about the “loophole” that says companies pay taxes on profits where they are realized.  For example, if a company has a subsidiary in Aruba, its subsidiary pay’s income taxes in Aruba … not in the US.  Conversely, if an Arubian company has a subsidiary operating in the US, its US subsidiary would pay US income taxes (but not Arubian taxes).  That’s standard operations around the world. No double taxation of income.

Pres O can’t possibly be thinking of double taxing US corporations.  If he is, companies can simply reincorporate offshore … and only pay US taxes on money made by its US subsidiary operations … just like foreign companies (think Nestle, Unilever) do now.  Certainly, the US government won’t try to tax Nestle on its Swiss earnings, right?  what would be the difference?

Pushing companies out of the US just doesn’t seem like a bright idea to me …

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If you make less than $250,000 your taxes won’t go up! … yeah, right … continued

February 26, 2009

Ken’s Take: In yesterday’s post, I argued that fully taxing the top 2% wouldn’t come close to paying for Barack-O’s programs.  A day later, here’s the WSJ analysis.  Slightly different numbers, same conclusion.

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Excerpted from WSJ, “The 2% Illusion  – Take everything they earn, and it still won’t be enough”, Feb 26 2009

President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end “tax breaks for the wealthiest 2% of Americans,” and he promised that households earning less than $250,000 won’t see their taxes increased by “one single dime.”

This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can’t possibly raise enough revenue to fund Mr. Obama’s new spending ambitions.

In 2006, roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That’s about 7% of all returns; the data aren’t broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% — about 1.65 million filers making above $388,806 — paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.

As a thought experiment, let’s go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That’s less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable “dime” of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

The bottom line is that  Obama is selling the country on a 2% illusion.  Taxes on the not-so-rich will need to rise as well.

Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don’t ignore the data. And the reality is that the only way to pay for Mr. Obama’s ambitions is to reach ever deeper into the pockets of the American middle class.

Full article:
http://online.wsj.com/article/SB123561551065378405.html

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If you make less than $250,000 your taxes won’t go up! … yeah, right.

February 25, 2009

The two parts of Obama’s speech that struck a chord with me were (1) he promised a cure for cancer and (2) “not a dime” of additional taxes if you make less than $250,000. 

Since most of my Homa ancestors had cancer of one mode or another, I’m all for eradicating it.  The sooner the better. I’m a bit skeptical, but what the heck.

Since I now rake in about $8.75 per hour teaching, I can slide comfortably under the “tax the rich” threshhold.  But, I’m even more skeptical of this one.

Last summer, I posted several pre-election tax analyses (mostly drawn from work at the Heritage Foundation) that drew two fundamental conclusions:

(1) The Obama tax plan would create a new voting majority in America: people who pay zero income taxes (or less) but draw mucho resources from the system. That train has left the station. The largest item in the stimulus package was the across-the-board $400 low income tax cut. 

Though it’s only about a buck a day, it’s enough to swing income tax payers from a majority to a minority.  The Congress’ nonpartisan Joint Committee on Taxation estimates that 62.4 million will have a 0% income tax rate. That’s not good. 

Now they (non-tax payers) can vote for any program — beneficial to the common good or just plain whacky — and simply order the dwindling number of tax payers to up their ante.

(2) The Obama tax plan was essentially a tax revenue breakeven — simply redistributing about $135 billion each year from the top earners to low income earners.

Here’s the rub: last night, Obama indicated that the $400 credits that were billed as “temporary stimulus” last week will become permanent — and I assume, bumped up to $500.  And, the “Bush tax cuts for the wealthy” would be allowed to expire — bumping the top marginal tax rates.

OK, but that’s essentially budget neutral, and Obama said he’d be cutting the deficit (while spending more).  Hmmm.

Answer: go get even more from the folks in the top tax bracket … the really rich.

But, the Congress’ nonpartisan Joint Committee on Taxation estimates that 1.1 million income tax filers will have $733.3 billion in income taxed at the top marginal rate of 35% rate this year. Taxed at the 35% rate, the $733 billion currently produces about $250 billion in federal revenues … leaving them with about $500 billion. 

That’s just the right amount to hit Obama’s deficit reduction target.  All it requires is a 100% marginal rate for earnings over $350,000 (where the top bracket starts).  Not likely, right?

So, how will the deficit be cut?  By “scrubbing the budget line-by-line” to eliminate wasteful spending.  A cynic might say: yeah, just like he did on the pork-laden, non-stimulative plan.  Maybe he’ll pick up some loose change there.  (In fact, maybe that’s the change he’s been talking about)

Kidding aside, the inescapable conclusion is that tax hikes will start hitting everybody who currently pays taxes.  It would be political suicide for Obama to re-institute taxes on the free-riders — that train doesn’t have a reverse gear. 

The top bracket doesn’t have enough income to fund Obama’s wish list — even at a 100% marginal rate.  So, he’ll have no choice but to pare the shopping list  or break the “not a single dime” promise.

My money’s on the latter.

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Some facts sourced from:
http://www.ibdeditorials.com/IBDArticles.aspx?id=320369763494616

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Marion Barry agrees with Harry Reid: "Taxes are voluntary"

February 19, 2009

Last week, we posted the link to an interview in which Sen. Harry Reid said repeatedly that paying income taxes in the U.S. is strictly voluntary.  Apparently, former DC mayor Marion Barry is on the same page as Reid.

If you missed the Reid interview, here’s the link again.

http://www.youtube.com/watch?v=R7mRSI8yWwg

Trust me, this is worth watching.

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Excerpted from AP, “Prosecutors ask judge to send Barry to jail”, Feb 10, 2009

Former Washington mayor Marion Barry was given three years of probation in 2006 after pleading guilty to misdemeanor charges for failing to file his tax returns from 1999 to 2004. As part of a plea bargain, he agreed to file future federal and local tax returns annually.

Now, prosecutors have asked a federal judge Monday to send  to jail for failing to file his tax returns for the eighth time in nine years.

If the judge decides not to send Barry to jail, prosecutors asked for a hearing so that Barry can explain his conduct and prosecutors can seek to extend his probation by two years.

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Barry served four terms as mayor. In 1990, during his third term, he was videotaped in a hotel room smoking crack cocaine in an FBI sting. He served a six-month prison sentence and in 1994 was re-elected to the mayor’s office for another four-year term.

Full article:
http://wtop.com/?nid=596&sid=1597042 

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Marion Barry agrees with Harry Reid: “Taxes are voluntary”

February 19, 2009

Last week, we posted the link to an interview in which Sen. Harry Reid said repeatedly that paying income taxes in the U.S. is strictly voluntary.  Apparently, former DC mayor Marion Barry is on the same page as Reid.

If you missed the Reid interview, here’s the link again.

http://www.youtube.com/watch?v=R7mRSI8yWwg

Trust me, this is worth watching.

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Excerpted from AP, “Prosecutors ask judge to send Barry to jail”, Feb 10, 2009

Former Washington mayor Marion Barry was given three years of probation in 2006 after pleading guilty to misdemeanor charges for failing to file his tax returns from 1999 to 2004. As part of a plea bargain, he agreed to file future federal and local tax returns annually.

Now, prosecutors have asked a federal judge Monday to send  to jail for failing to file his tax returns for the eighth time in nine years.

If the judge decides not to send Barry to jail, prosecutors asked for a hearing so that Barry can explain his conduct and prosecutors can seek to extend his probation by two years.

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Barry served four terms as mayor. In 1990, during his third term, he was videotaped in a hotel room smoking crack cocaine in an FBI sting. He served a six-month prison sentence and in 1994 was re-elected to the mayor’s office for another four-year term.

Full article:
http://wtop.com/?nid=596&sid=1597042 

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Stimulating the economy on a dollar per day …

February 12, 2009

Uh-oh.

Reid & Pelosi slashed Pres Obama’s pride and joy, the $500 refundable tax credit down to $400 per worker.

I used to make fun of the $500, pointing out that $1.37 per taxpayer per day wasn’t likely to jump start the economy

My hunch: odds are even lower at $1 per day … or, to be peresise, a buck and a dime per day.

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Pelosi and Reid also scratched the  GOP’s idea of a $15,000 tax credit on the purchase of a new home.  While I think it would have had a minimal impact, it was at least pay-as-you-go.  Credits could only be claimed when houses were purchased, and there was a cap on the amount.

Would have at least made Congress look like it was trying to address the housing problem.

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Stimulus tax breaks: going for the capillaries instead of the jugular

February 11, 2009

The tax cuts included in the current version of the stimulus bill deserve the resounding “thud” that they’ve been getting.

Setting ideology aside and just resorting to basic arithmetic reveals the plan’s glowing deficiency: it is so “in the box” and marginal that it is unlikely to have any measurable effect on the economy.  Rather than slashing at the economy’s jugular, the tax cuts barely scratch the capillaries.

For example, take President Obama’s pride and joy, the $500 refundable tax credit.  Does anybody really believe that $1.37 per taxpayer per day is going to jump start the economy?    Or, will an extra $40 per month save many struggling mortgage holders from foreclosure? 

Similarly, take the GOP’s idea of a $15,000 tax credit on the purchase of a new home.  Somebody buying a $150,000 home with a 5%, 30 year mortgage would save about $80 on their monthly mortgage payment (getting it down to about $750) and provide a $15,000 equity cushion, just in case home values fall further.  Is that really enough incentive to pull job-threatened folks off the sidelines? 

The annual AMT adjustment would have happened later in the year anyway, especially since its greatest impact is in Democratic strongholds with high state income taxes (think NY, CA. NJ, and CT). That said, its average impact is about $2,400 for affected taxpayers.  These folks earn enough to have an AMT problem, so an extra $200 per month isn’t likely to change their shopping behavior, let alone their life style.

The biggest business tax break is the tax loss carry backward which allows retroactive tax credits (refundable I assume) for companies that made money during the boom but are tanking during the bust.  Again, the extra money may keep some marginal companies on life support for awhile, but isn’t likely to turn a struggling company into a jobs creator.

Congressional thinking has been trapped in partisan boxes.  Many ideas have been death-branded as either old and tired, or as favoring the rich.  No big ideas have been proposed that could realistically get the economy moving again.

There are big ideas for the politicos to consider if they are really serious about moving the economy forward.

First, there is the tried and true investment tax credit.  Give companies a 15% ITC for investment spending in 2009, and a 10% ITC for investment spending in 2010.  If necessary, sweeten the pot by allowing 2009-2010 investments to be written off on a very accelerated basis (say, over 3 or 5 years).

Second, give multi-nationals a tax holiday on repatriated earnings.  Cut the 2009 rate from 35% to 5% or 10%.  Such a move could bring over $500 billion back into the U.S. from foreign stashes, and generate $25 to $50 billion incremental tax revenue.  Otherwise, companies will use the money in their foreign operations and the U.S. tax take will be zero.

Third, give companies that maintain or grow their workforce a payroll tax rebate.  For example, a company that contributes the same amount of payroll taxes in 2009 as it did in 2008 might get 25% of its aggregate contributions rebated; a company that pays in10% more payroll taxes year-to-year might get a 50% rebate. A company that shrinks its workforce gets no rebate.

Fourth, since a depressed housing market is the root cause of the economic turmoil, adjust the standard income tax deduction a bit and allow the two-thirds of all taxpayers who use it to deduct their home mortgage interest payments.  This move alone would put money into more than 35 million pockets, might save a few people from foreclosure, and could coax some new buyers into the market.

Fifth, eliminate capital gains taxes on all residential real estate purchased in 2009 that is held at least 18 months. This initiative would certainly get investor-landlords back into the market.  They could buy some of the existing excess homes’ inventory, and deploy it as affordable rental housing.

Sixth, eliminate capital gains on all stocks bought in 2009 and held for at least 18 months.  Doing so would jolt the stock market upwards.  Would it favor the rich? Sure.  But it would also help restore the value of soon-to-retire baby boomer’s IRAs.

These ideas are representative of the pool of big ideas that have been overlooked in the stimulus package. It is time for Congress and the President stop playing small ball and go for the fences.  Give us something that we can believe will work.

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“Paying taxes is strictly voluntary” … so says Harry Reid

February 11, 2009

It makes me shiver to think that this guy is the second most powerful person in the country (after Nancy Pelosi)

Trust me, this is worth watching.
http://www.youtube.com/watch?v=R7mRSI8yWwg

click link to view … picture is just for effect
       image

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Did the Social Security crisis just go away ?

February 4, 2009

A couple of years ago, the hot socio-economic topic was the projected insolvency of Social Security. 

Remember how Al Gore wanted a “lock box” to insulate FICA contributions from Congressional money grabbers?  Or, how Bush wanted to privatize Social Security so folks could earn higher returns?

Now, pundits (e.g. Robert Reich, Larry Lindsay) are calling for payroll tax holidays.

President Obama is bound and determined to give payroll tax rebates to low income folks who don’t pay income taxes.  That is, to reduce their Social Security contributions … by about $135 billion annually.

Does that mean that Social Security has miraculously found strong financial footing?

Hardly.

Social Security is a trust fund (currently over $2 trillion).  Workers make contributions to the trust and draw benefits from it when they retire or become disabled.  In concept, the contributed inflows and trust earnings (i.e. interest) are supposed to cover the benefit outflows. (Think Ponzi and Bernie Madoff … see excerpted article “Social Security: National Ponzi Scheme ” below)

Currently, about $785 billion in Social Security taxes are collected annually  from about 163 million workers and $585 billion in benefit checks are sent out  to 50 million Social Security recipients.

Well, according to the Social Security trustees, because of demographic shifts (i.e. more retirees, fewer workers), outflows will exceed inflows somewhere around 2020 — a little earlier if interest on the trust isn’t counted, a little later if it is.  And, they project that the trust fund will be completely exhausted by around 2040.

With t-bill rates now hovering slightly over zero, earnings on the Social Security trust must be minimal (and less than considered in the projections).

So, if the Feds cut contribution inflows to the trust by over $100 billion annually, won’t Social Security be in a world of hurt — sooner rather than later?

I haven’t heard any of Obama’s smart guys in the room talking about this part of the problem … and it’s a big part !

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Excerpted from IBD, “Social Security: National Ponzi Scheme”, Williams, February 02, 2009

Congress collects about $785 billion in Social Security taxes from about 163 million workers to send out $585 billion to 50 million Social Security recipients.

Social Security’s trustees tell us that the surplus goes into a $2.2 trillion trust fund to meet future obligations.

The problem is that whatever the difference between Social Security taxes taken in and benefits paid out, Congress spends it.

What the Treasury Department does is give the Social Security Trust Fund non-marketable “special issue government securities” that are simply bookkeeping entries that are IOUs.

According to Social Security trustee estimates, around 2016 the amount of Social Security benefits paid will exceed taxes collected.

That means one of two things, or both, must happen: Congress will raise taxes and/or slash promised Social Security benefits.

Each year the situation will get worse since the number of retirees is predicted to increase relative to the number in the work force paying taxes.

In 1940, there were 42 workers per retiree, in 1950 there were 16, today there are three and in 20 or 30 years there will be two or fewer workers per retiree.

Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=318470763456742

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Want to curb outrageous compensation? … Here’s how!

January 30, 2009

There was broadscale outrage yesterday with the revelation that Wall Street bankers collectively walked off with almost $20 billion in bonuses — associated with their stellar 2008 performance.  Barack-O even chided them for gross irresponsibility — sucking money from taxpayer and digging our nation’s financial hole deeper.

It is ironic that Obama’s criticism comes at a time that he’s planning to dig our financial hole deeper by taking current and future taxpayer money and throwing it irresponsibly into a trillion dollar, pork-laden grab bag of whacky, non-stimulating social programs.  Nonetheless, he has a point.

Now, if he really wants to fix the problem, here’s some free advice

First, require all companies to publish — as an appendix to their proxy statements — a list of all employees who get annualized W-2 compensation over, say $250,000.  Companies are already reporting their 5 most highly compensated execs. It would be easy to expand the list since the numbers are already compiled and reported to the IRS.  If companies push back on the idea, then — privacy be damned — simply post the information to a government web site.

Hopefully, sheer embarrassment and activist shareholder pressure would dampen some of the excesses.    Failing that, the transparency would at least provide a centralized target list  for outrage and  “clawbacks”.   At an absolute minimum,  these publicly identified, highly compensated folks would get “punished” by being hounded endlessly by annoying boiler room investment hawkers.

More substantively, change the income tax codes.  For corporations, eliminate the tax deductibility of any annualized compensation exceeding $250,000 per individual.  If companies feel the need to pay people more, that’s fine.  They just do so on their own dime — not on the back of other tax payers.

For individuals, go pre-Reagan and re-introduce a couple of very high income tax brackets with draconian marginal rates.  For example, leave the current brackets where they are (35% starts at $357,700), but add a bracket that starts at $500,000 with a marginal rate of 40%, a million dollar bracket at 50%, and a $5 million bracket at 75%. Business incomes — like family farms  — could be exempted, and individuals could continue to income average so they don’t get blasted in isolated windfall years.  While individuals might clamor for still higher compensation to cover their added tax burden, their claims would likely be throttled by the corporate provisions which would disallow corporate tax deductibility.

This multi-part plan has a couple of related benefits: (1) Obama fulfills his pledge to fill the tax coffers bysoaking the rich, (2) it becomes very expensive for companies to over-compensate employees, (3) it makes uber-compensation less valuable — at the margin — to individuals, and  (4) it can be implemented Monday morning.

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Related point: Wall Streeters argue that they have to pay high levels of compensation to retain their talent pool.  Aren’t these the smart men and ladies that cratered firms and threatened our entire economy? I say: let ’em walk.  Try recruiting randomly from the jury pool. Results can’t be worse.

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A $545 billion stimulus plan … with no additional debt or taxes … too sensible to be enacted.

January 29, 2009

Ken’s Take: Two proven ideas have gotten little (i.e. no) visible discussion as part of the current grab-bag stimulus plan: (1) investment tax credits that reliably get businesses to step-up and accelerate capital spending plans, and (2) low tax repatriation of foreign earnings.  Most US multi-nationals park sizable cash stashes in foreign subsidiaries to legally avoid high US corporate income tax rates.  If that money were brought back on-shore, it would certainly provide some impetus to the slow economy.

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Excerpted from WSJ, “A $545 Billion Private Stimulus Plan”, Sinai, Jan. 28, 2009

The Obama team should implement a private-sector funded stimulus and allow a temporary reduction in the 35% tax rate that U.S. companies pay to repatriate foreign subsidiary earnings. Doing so could inject more than $545 billion into the U.S. economy without expanding the deficit.

Driven by previously strong foreign economies and a low dollar, the foreign subsidiaries of many successful U.S.-based companies have generated substantial earnings that could be invested in the U.S. economy at virtually no cost to the federal government. These earnings reside overseas, however, because of U.S. tax laws that many foreign competitors do not face.

Under the current system, U.S. corporations are charged 35 cents for each foreign-earned dollar they bring back home to the U.S. If they keep that income overseas, it is taxed at lower rates. As a result, those dollars tend to stay overseas permanently, since companies know they will automatically lose more money by bringing that income home than they can reasonably expect to make by reinvesting it once it is here.

In 2004, the American Jobs Creation Act incentivized U.S. businesses to bring $360 billion of foreign subsidiary earnings back into the U.S. at a reduced corporate tax rate of 5.25% for one year. On average, 25% of those funds went for capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction.

A similar opportunity exists now … lowering the tax on repatriating foreign-earned income would inject $545 billion into our economy.

A private-sector stimulus could be a win-win for government.

Full article:
http://online.wsj.com/article/SB123310439653922291.html 

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Doubts on stimulus plan mount … combo of bad fundamentals and bad marketing

January 28, 2009

Below is a summary of the proposed stimulus plan.

Ken’s Take: (1) No question but that a stimulus is needed to kick the economy back into gear (2) But, a stimulus should stimulate, not be used as a trojan horse to advance a socio-political agenda (3) the Dems made a mistake throwing everything — including the kitchen sink — into the plan — especially controversial stuff like abortion aid and global warming studies and  (4) the Dems make a mistake everyday letting Reid & Pelosi out in public to explain the plan (5) If I were a GOP rep, I’d vote no on the plan — it’s going to pass anyway — conspicuous benefits are unlikely (it’ll be more TARP-talk: “would have been worse without it) — so, let Obama-Reid-Pelosi own it (“we won – we write the laws now”)  — and let them get the credit in the unlikely event that it does work.

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Excerpted from WSJ, ” Doubts on Obama Plan Mount” & “Stimulus Bill Near $900 Billion”, Jan. 27, 2009 

The economic stimulus package proposed by Democratic House leaders totals $825 billion and includes three broad pieces: a $365.6 billion spending measure for such brick-and-mortar projects as highways and bridges; a $180 billion measure to boost jobless benefits and Medicaid, and a $275 billion tax-relief package, which includes a plan to give a $500 payroll tax holiday to all workers (a proposal from Mr. Obama’s presidential campaign).

The Congressional Budget Office estimates that $169 billion (~ 20%) of the $825 billion in stimulus will hit the economy before the end of September and that the bulk of it will show up in 2010 and 2011.

CBO also said that government borrowing prompted by enactment of the plan would add another $347 billion, pushing the estimated cost of the stimulus plan to more than $1 trillion, including interest.

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The estimates point to one of the challenges of formulating an effective plan. Tax cuts can be implemented quickly, but many economists think they wouldn’t stimulate much new spending because consumers and businesses are so keen on saving. Government spending would generate economic activity more quickly, but it is hard to ramp up right away.

The one thing that is certain to flow from the stimulus is a large increase in the federal debt. Large government budget deficits are showing signs of starting to nudge interest rates on government debt higher, from very low levels.

If that persists, it could eventually damp some of the stimulus-plan’s benefits. Higher government rates raise the cost of borrowing not only for the Treasury, but also for many private-sector borrowers, since corporate bonds and mortgage bonds are often benchmarked to Treasury yields.

Bond markets have been hit by a flood of new supply of Treasury debt in the past few weeks, a factor that some traders say has pushed up rates. The yield on a 10-year note hit 2.519% Tuesday, up from a little over 2.00% at the end of 2008.

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It’s projected that deficits in 2009 and 2010 will reach between 10% and 12% of gross domestic product, respectively, roughly double the previous peacetime records set in the Reagan years. It added that federal debt will soar from about 70% of GDP to more than 90% of GDP.

Economists say that the rise in debt will eventually lead to slower economic growth and diminished standards of living in the U.S.

Full article:
http://online.wsj.com/article/SB123311521129023245.html?mod=article-outset-box 

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Quick Takes from the Weekend … Geithner, Stimulus, Infrastructure

January 26, 2009

Is it just me, or is this stuff getting nuttier and nuttier by the day?

The very same people who are railing that the TARP hasn’t worked (I agree), say that Geithner (one of the plan’s key architects) needs to be confirmed because he’s the best man for the job (really?) and provides needed continuity (for a plan that they say isn’t working).  Huh?

Geithner — who will head IRS as Treasury Secretary — testified that he does his own  taxes using TurboTax (that’s good, I guess) and blames the software package for not prompting him that he needed to pay self-employment taxes.  And not a single Senator burst out laughing.

I really do think that cheating on your taxes is disqualifying for a job heading up the IRS.

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The Congressional Budget Office says that less than 25% of the proposed stimulus package will impact 2009.

Geithner’s answer: 1/3 are refundable tax credits.  When it was pointed out that less than 12% of last year’s tax rebate checks provided any stimulus to the economy, Geithner replied “yes, but that will just be the first installment of a continuing program that (candidate) Obama promised the people”.  So, if it doesn’t stimulate, why’s it in a stimulus package?

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Conservative critics are having a field day with some of the specifics, e.g. “aid to contraception clinics”.  An administration spokesperson said that part of the stimulus plan is geared to rebuilding the U.S.  infrastructure … and that the infrastucture is both physical (like bridges) and social.  Talk about Trojan horses. 

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On the plus side, critics are opposed to the gov’t replacing much of its auto fleet with new cars.  I like that idea since it’s immediate, helps the auto industry, and can get some more fuel efficient cars on the road (provided that the replaced cars are taken out of service).

Also, there’s much opposition to sweetening unemployment payouts and food stamp programs.  Even if they are usually subject to abuse and usually become permanent entitlements, I say that it’s worth the price to help folks who are really struggling.

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New Year, New Tax Rules … here are highlights

January 20, 2009

Excerpted from WSJ, “Wealthy Likely to Benefit Most From 2009 Tax Changes”, Jan 6, 2009

Social Security taxes. The maximum amount of earnings subject to Social Security taxes rose to $106,800, up 4.7% from $102,000 in 2008.

AMT:  Unless lawmakers do something to pass relief from the alternative minimum tax,  tens of millions of Americans will have to pay higher taxes for 2009.

Estate Tax Exemption: Starting Jan. 1, the basic federal estate-tax exemption jumped to $3.5 million from $2 million in 2008. Transfers from one spouse to the other typically remain tax-free.  During the campaign, then-Sen. Obama proposed retaining the $3.5 million exclusion amount and the 45% top rate in coming years.

Exempt Gifts: The annual gift-tax exclusion rose to $13,000, up $1,000 from 2008. This means you can give as much as $13,000 this year to anyone you wish, or to as many people as you want, without having to worry about taxes or even having to file any forms with the Internal Revenue Service. It’s a simple way to help others and reduce the size of your taxable estate. You can give even more than that by paying directly for someone else’s tuition or medical expenses. Just be sure to pay the institution directly.

Retirement savings: The maximum amount that someone under age 50 can contribute to a 401(k) plan for 2009 rose to $16,500 from $15,500. Those 50 or older can put away an additional $5,500 this year, for a total of $22,000, up from $20,500.

Standard Deductions: The basic standard deduction for joint filers for the 2009 tax year will be $11,400, up from $10,900 for 2008. For singles, the amount for 2009 will be $5,700, up from $5,450.

Stealth taxes. These refer to laws that increase taxes owed by millions of upper-income Americans without actually raising the official tax rates. They’re known as stealth taxes because they’re often complex and difficult to detect.  For the 2009 tax year, most taxpayers will begin to lose some of the value of itemized deductions if their adjusted gross income exceeds $166,800, up from $159,950 in 2008.

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[Many Taxpayers Stand to Gain From New Laws]

Source:
http://online.wsj.com/article/SB123128601819059077.html

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Maybe some taxes really are regressive …

January 16, 2009

In several prior posts, I demonstrated that the core of the US tax system — income taxes and payroll taxes (i.e. Social Security and Medicare) — are progressive.  That is, when all pay-ins and pay-outs are considered, high earners pay a higher proportion of their earnings in taxes.  Apparently I did overlook one very regressive tax …

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Excerpted from IBD, “Will The Poor Feel Tax Pinch From Stimulus?”, Malkinn, Jan 14, 2009

Congress is rushing this week to impose massive tax hikes of at least 61 cents on every cigarette pack sold in America, in addition to new increases on other tobacco products … a  punitive tax increases on the poor.

How so? Health surveys show that smokers are more likely to be blue-collar workers, minorities and have less than a high school education.

Tobacco taxes take a 50 times larger share of income from those earning less than $20,000 than those earning more than $200,000.

Put another way: Families making less than $30,000 per year pay more than half of all taxes paid on cigarettes, while families making more than $60,000 pay only 14%.

That’s the dictionary definition of regressive, not progressive.

Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=316826618344159 

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Quick: How many people does it take to feed the IRS ?

January 15, 2009

Each year, the IRS publishes roughly 70,000 pages of forms, publications, schedules, instructions and rules … that’s equivalent to 25 volumes of administrative and legal guidance books that take up nearly nine feet of shelf space

There have been 3,250 changes to the tax code since 2001, more than 500 of them in 2008 alone. 

Americans (individuals, company employees, tax firms) expend 7.6 billion hours preparing, submitting, and answering questions about tax filings …. the time is split about 50 / 50 on individual and company returns.

“If tax compliance were an industry, it would be one of the largest in the United States. The ‘tax industry’ requires the equivalent of 3.8 million full-time workers.” 

In 2006, corporations and individuals spent $193 billion to comply with the tax code … some estimates go as high as $265 billion.

60% of taxpayers pay professionals … 22% of taxpayers buy tax prep software (e.g. TurboTax, TaxCut).

On average, individual tax payers spend about 20 hours each on tax filing and end up overpaying by more than $600 per return

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Excerpted from IBD, “Change We Need”, January 13, 2009
http://www.ibdeditorials.com/IBDArticles.aspx?id=316743763302078 

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Breathing life into the death tax … Obama’s fires first tax increase shot

January 12, 2009

Summary:  Under the Bush tax plan, death taxes — formally known as estate taxes — are due to expire in 2010.  But, President-elect Barack Obama and congressional leaders plan to move soon to repeal the move and keep the estate tax  at current levels.

Ken’s Take: Except for family owned businesses, this move is mostly symbolic (from the standpoint of tax collection).  Few estates are subject to the tax (especially since the stock and real estate markets tanked) , and there are plenty of tax maneuvers for minimizing the taxes paid.  The impact on family businesses that are being passed along to the next generation are huge.  I don’t understand why they don’t simply get carved out of the tax grab.

But, this news has the potential to move the markets — down, of course.  It’s proof positive that Obama is still intent on cranking up taxes.  It’ll start with the uber-rich, but with trillion dollar deficits, it’ll spread like wild fire. Just watch.

Sidenote: Despite what Team Obama will claim, canceling a programmed tax reduction ai a tax increase ! 

Here are some highlights from the source article.

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Excerpted from WSJ, Obama Plans to Keep Estate Tax, Jan 12, 2009  

The Democratic stance on the estate tax contrasts with Mr. Obama’s reluctance to press forward with his campaign pledge to raise income-tax rates on top earners, which he worries could have an adverse economic impact during a recession.

Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million — $7 million for couples — from any taxation. The value of estates above that would be taxed at 45%. If the tax were returned to Clinton-era levels, it would exclude $1 million from taxation with the rest taxed at 55%.

In making their case for the restoration, Democrats contend that such a large additional tax break … would increase the deficit … wouldn’t have any impact on the economy … and would help the the affluent who already have benefited handsomely from the Bush tax cuts.

They also reason that if they don’t act now, it will be politically harder to go ahead with their plan to resurrect the estate tax once it has disappeared.

For small-business groups ,,,the emerging Democratic plan marks a stark defeat.

At the level proposed in the Obama policy, all but the largest estates — fewer than 2% of annual deaths — would escape taxation.

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The estate tax was enacted in the early 20th century as a levy on wealth and inherited assets. It was later amended to allow a spouse to avoid the tax.

Initial efforts to repeal the estate tax — cleverly coined a “death tax” — was backed by affluent families such as the Mars candy family, the Gallo wine family and the heirs of the Campbell’s soup fortune. 

But sharp divisions in the coalition emerged between the super rich and the merely rich. Business groups have sought a measure of certainty with an estate tax that is free of graduated timelines or sunset provisions, with the largest possible tax exemption — $10 million, or $20 million per couple. The rate of taxation above that level was of little concern, since virtually every small business would be exempt from taxation.

Yet the super affluent who began the movement wanted the lowest possible rate, since even a $10 million exemption would leave the bulk of their estates subject to tax.

“The very wealthy, in their quest to reduce their exposure, made proposals that threw the small-business community overboard.” 

Full article:
http://online.wsj.com/article/SB123172020818472279.html

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It’s official: Ken is “fair minded” … yes !!!

January 8, 2009

Justin Fox is TIME’s business and economics columnist cited one of your’s truly’s tax analyses … praising my “fair mindedness” and taking former labor secretary Robert Reich to the hoop for BS’ing.

I don’t think I’ve ever been accused of being “fair minded” before.

Below is the article …  Here’s the link   ..,   Click for PDF

image

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A FICA tax holiday? … It’s worth considering.

December 5, 2008

Inspired by IBD, “Bail Out Bill Or Bail Out Joe?”, December 04, 2008

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From the article

Nancy Pelosi (wants) another bailout bill in the neighborhood of $500 billion to be ready for President Obama’s signature on Jan. 20.

Rep. Louie Gohmert, R-Texas, has come up with an idea of what to do with that $350 billion, and it involves not rescuing those who have gummed up the works, but relieving the burden on those who have been trying to pull the wagon — suspend FICA and income taxes for two months starting in January 2009.

Gohmert would declare a tax holiday for FICA (Social Security and Medicare) and income taxes.

American taxpayers [a slim majority of adults] pay an average of 25% of their wages in federal income taxes.  [Virtually all American workers pay another 7.25% for FICA — which funds Social Security and Medicare.]

So, in aggregate, Americans pay over $101 billion in income taxes and another $66.5 billion in FICA taxes each month. Two months’ worth is around $332 billion. The employer’s portion of FICA would also be suspended, giving businesses large and small $65 billion in tax relief to expand and hire more workers.

[For an average American family making about $50,000 a year, the FICA tax is about $300 per month — taken directly out of their paychecks.] So, there would be a dramatic increase in take-home pay for the working poor and middle class, and might save more homeowners from bankruptcy and foreclosure.

And, the unspent $350 billion left in the government’s TARP fund could be used to cover the revenue losses in the Treasury, so Social Security and Medicare would not lose a penny.

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Ken’s Take

(1) The income tax part is a non-starter for reasons of “fairness” and administration — since withholding doesn’t match perfectly with end-of-year tax liabilities.  Some people have too much withheld and get refunds; some have too little withheld and pay taxes on April 15.

(2) But, I think the the FICA suspension has merit.  Prior to the election, I was opposed to co-mingling income taxes with  “contributions” to the Social Security and Medicare Trust Funds (they’re called “contributions” in the statutes).  But, Obama’s “relief” to the middle class irreversibly lumps them together — folks who don’t pay income taxes get credit checks if they pay so-called payroll taxes. 

(3) So, why not dole out the payroll tax related tax relief in the fastest, administratively easiest way.  Ditch the income tax part of the proposal and suspend FICA for a couple of months. 

I think IBD screwed up the math a bit.  Employers have to match employees’ FICA contributions dollar-for-dollar — so the FICA  free-up would be about $130 billion per month.

The  FICA tax holiday could be extended to 3 or 4 or 5 months by simply capping the monthly “holiday” at, say, $300 per worker so that high income folks don’t get too much of the benefit .

(4) While I still don’t like the co-mingling of income taxes and SS-Medicare contributions, I do like the potential stimulative aspects of the plan: (a) the paycheck effect of the plan would be significant to lower income folks (b) businesses — especially those employing lower and middle income folks get a tax break — which allows them to hire more workers (or stay in business).

(5) Note: this is largely Obama’s middle class tax relief — “rebranding” the philosophically repulsive “refundable tax credits” and adding some tax relief for employers.
 
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Full IBD article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=313284571794137 

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To stimulate the economy, break a few windows … huh ?

December 5, 2008

158 years ago, the  pioneering French economist Frederic Bastiat, wrote about the “broken window fallacy.”

It goes like this: Most people agree that when someone breaks a store window, it’s a tragedy for the shopkeeper. But many also believe the overall economy actually benefits, because the shopkeeper now must buy a new window, a kind of “stimulus.”

This logic, of course, makes no sense.

Yet it’s the basic idea behind all government stimulus plans. The money for the window comes out of the shopkeeper’s pocket. Instead of carrying more stock in his store, or hiring a clerk, he must spend his money instead on a window. So the “stimulus” is really zero — or negative.

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Excerpted from IBD, “The Cost Of Green”, December 03, 2008
http://www.ibdeditorials.com/IBDArticles.aspx?id=313199997499579

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Ken’s Take: Also keep in mind that the government is playing with OTM — “other people’s money” — your’s, if you’re one of the dwindling number of taxpayers.

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In the new political economy, smart lobbyists will be arriving in hybrids …

December 1, 2008

Excerpted from IBD, “Job One: Wean The Economy Off Of Politics”,  Krauthammer,  November 28, 2008

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We have gone from a market economy to a political economy.

In the old days, if you wanted to get rich, you did it the Warren Buffett way: You learned to read income statements and balance sheets. Today you learn to read political tea leaves.

Today’s extreme stock market volatility is largely a reaction to meta-economic events: political decisions that have vast economic effects. You don’t anticipate Intel’s third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

We may one day go back to a market economy. Meanwhile,  the two most important implications of our newly politicized economy are the vastly increased importance of lobbying and the massive market inefficiencies that political directives will introduce.

Lobbying used to be about advantages at the margin — a regulatory break here, a subsidy there. Now lobbying is about life and death.

You used to go to New York for capital. Now Wall Street, broke, is coming to Washington. With unimaginably large sums of money being given out, Washington will be subject to the most intense, most frenzied lobbying in American history.

The other kind of economic distortion will come from the political directives issued by newly empowered politicians.

For example, bank presidents are gravely warned by one senator after another about “hoarding” their bailout money. But hoarding is another word for recapitalizing to shore up your balance sheet to ensure solvency. Isn’t pushing money out the window with too little capital precisely the lending laxity that produced this crisis in the first place?

Even more egregious will be the directives to a nationalized Detroit. Sen. Schumer, the noted automotive engineer, has declared “a business model based on gas” to be completely unacceptable. He says,  “We need a business model based on cars of the future: the plug-in hybrid electric car.”

The Chevy Volt, for example? It has huge remaining technological hurdles, gets 40 miles on a charge and will sell for about $40,000, necessitating a $7,500 outright government subsidy. Who but the rich and politically correct will choose that over a $12,000 gas-powered Hyundai?

The new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.

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Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=312760589983880 

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Stimulus rebates would be so much better … if they worked.

November 26, 2008

Excerpted from WSJ, “Permanent Tax Cuts Are the Best Stimulus”, Taylor, Nov. 25, 2008

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The major part of the first stimulus package was the $115 billion, temporary rebate payment program targeted to individuals and families that phased out as incomes rose. Most of the rebate checks were mailed or directly deposited during May, June and July.

The argument in favor of these temporary rebate payments was that they would increase consumption, stimulate aggregate demand, and thereby get the economy growing again. What were the results? The chart below reveals the answer.
The upper line shows disposable personal income through September. Disposable personal income is what households have left after paying taxes and receiving transfers from the government. The big blip is due to the rebate payments in May through July.
The lower line shows personal consumption expenditures by households. Observe that consumption shows no noticeable increase at the time of the rebate. Hence, by this simple measure, the rebate did little or nothing to stimulate consumption, overall aggregate demand, or the economy.

[Commentary]

Based on the permanent-income theory of Milton Friedman, and the life-cycle theory of Franco Modigliani, temporary increases in income will not lead to significant increases in consumption. However, if increases are longer-term, as in the case of permanent tax cut, then consumption is increased, and by a significant amount.

The mantra often heard during debates about the first stimulus was that it should be temporary, targeted and timely. I recommend alternative principles: permanent, pervasive and predictable

Full article:
http://online.wsj.com/article/SB122757149157954723.html 

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A Real Middle Class Tax Cut …

November 24, 2008

Ken’s Take: A clever move in the direction of a flat tax.  Certainly worth considering …

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Excerpted from WSJ, “Let’s Have a Real Middle-Class Tax Cut”, Gingrich, Nov. 20, 2008

Obama is right: America needs a real and meaningful middle-class tax cut. Unfortunately, his tax credits won’t stimulate the economy.

Mr. Obama’s tax plan includes creating or expanding nine or more federal income tax credits mostly focused on low- and moderate-income earners, with an estimated cost of $1.3 trillion over 10 years. These tax credits will do little or nothing to promote economic growth because they do not reduce marginal tax rates — the rate on the next dollar of income — to provide powerful, meaningful incentives for productive activities such as investment, entrepreneurship and work.

For a real middle-class tax cut, we should cut the 25% income tax rate that now applies to single workers earning $32,550 to $78,850, and married couples earning $65,100 to $131,450. We should reduce that rate down to the 15% rate paid by workers below these income levels. That would, in effect, establish a flat-rate tax of 15% for close to 90% of American workers.

This 40% cut in middle-class income tax rates would provide a powerful boost to the economy, greatly expanding incentives for savings, investment and work.

We could add to this alternative tax proposal an increase in the personal exemption from $3,500 to $7,000. The package would then cut taxes for all taxpayers, including those in the lower tax brackets.

Because of the highly beneficial effect of these middle-class rate reductions on our economy, and the freedom they would give workers to spend, save or invest their money as they choose, this proposal would likely enjoy broad public support and present a viable alternative to the liberal social purposes of President-elect Obama’s tax credits.

Full op-ed:
http://online.wsj.com/article/SB122714465532443171.html 

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Dow = 7,500 … Where in the world is President-elect Obama?

November 21, 2008

As I predicted on the day before the election, if Obama won, the Dow would fall to 7,500.  Well, it did.

Of course, there are mega-financial pressures completely unrelated to Obama’s election. 

But, he left some undetonated campaign grenades that unsettle the market.  Will he raise taxes on businesses and investors next year?  Last word from him: yes.  Will he protect UAW jobs in Detroit with a bailout?  Last word: yes.  Who will be hisTreasury Secretary?  Last word: hold your pants on.

At minimum, Obama should name Paulson’s successor and pledge to hold tax rates where they are until they expire naturally in 2010.

If he wanted to do something bolder, he should cut capital gains tax rates to zero for stocks bought from now until the end of 2009.

Regardless, he’s got to quit playing paddycake with Hillary, come out of hiding, and give investors some reason to believe.

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Note: I stand by my other market prediction: if Franken wins and Chambliss loses — the Dow will have it’s largest 1-day decline ever — at least 1,000 points.   Hope this one goes unverifiable.

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Opinion: Boost the national debt and make the next generation pay for it!

November 21, 2008

I used to think that the escalating national debt was a serious economic problem — creating an enormous, painful burden that would  be shifted to our sons & daughters.

I’ve stopped fretting.  Why ?

Exit polls indicate that collegians craved “change” and voted overwhelmingly for Obama — at least 2 to 1. 

Obama’s ambitious agenda of government programs will cost trillions of dollars. 

Rather than raising taxes on the folks who don’t want change, why not shift the burden to those who do?

It’s called poetic justice.   

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Dirty Dozen … there must be a special spot in hell for these greedy lowlifes

November 20, 2008

Excerpted from WSJ, “Before the Bust, These CEOs Took Money Off the Table”, Nov. 20, 2008

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Fifteen corporate chieftains of large home-building and financial-services firms each reaped more than $100 million in cash compensation and proceeds from stock sales during the past five years, according to a Wall Street Journal analysis.

Four of those executives, including the heads of Lehman Brothers Holdings Inc. and Bear Stearns Cos., ran companies that have filed for bankruptcy protection or seen their share prices fall more than 90% from their peak

Charles R. Schwab                                    $816,606,046
Dwight C. Schar (NVR)                              $626,322,372
Angelo R. Mozilo (Countrywide)               $470,686,861
Robert I. Toll (Toll Brothers)                     $427,768,300
Richard D. Fairbank (Capital One)            $245,344,205
Richard S. Fuld Jr. (Lehman Bros)             $184,613,049 
James E. Cayne (Bear Stearns)                  $163,240,403
Bruce Karatz (KB Home)                           $191,806,999
R. Chad Dreier (Ryland Group)                 $181,420,943
Maurice R. Greenberg (AIG)                      $132,833,450
Paul C. Saville (NVR)                                $130,460,697
Lloyd C. Blankfein (Goldman Sachs)         $130,116,843

Full details, full list:
http://online.wsj.com/public/resources/documents/st_ceos_20081111.html

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Ken’s Take: How about some speedy action in Congress to pass a windfall profits tax: say, 95% on any income over $50 million … retroactive to January 1, 2008. 

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Part 2 … Declaring war: First shots fired in tax payers’ revolt .

November 20, 2008

President-elect Obama has a mega-challenge: he has promised many additional high cost government programs, but his plan reduces the number of folks paying taxes, the slow economy is cutting incomes (hence, there’s less to tax), and if my observations are right, the surviving group of tax payers is working feverishly to pay as little in taxes as the law allows.

So, one might ask: where is the soon-to-be President Obama going to get the money he needs to fund his ambitious programs?

Option 1: Go through the budget “line by line with a scalpel” and redeploy the freed-up money.  Nice try, but every spending line in the budget has a sponsor and a constituency. And, practically every cut ultimately calls for lopping off some government workers (who may be union members or protected by Civil Service) or contractor employees.  As VP, Al Gore took a noble shot at “reengineering” the government for greater efficiency.  He eventually gave up and went after a more modest challenge: global climate change.

Option 2: Raise corporate taxes, ostensibly by just closing loopholes.  Remember every so-called loophole has a constituency and a purpose. Does this seem like a time to further threaten global competitiveness and risk spiraling the recession into a depression?

Option 3: Hit the top 5% with even bigger tax hikes.  Despite it’s inherent populous appeal, this tactic could just aggravate another cycle of aggressive tax avoidance.

Option 4: Take back the “tax relief” promised to the 95% and make everybody buy a ticket to ride – even if their “fair share” is just a small token amount.  This approach could raise some serious money since there are a lot of people in the 95%. But it wouldn’t be politically survivable.  Just ask President Bush Forty-One.

Option 5: Continue to deficit-spend like drunken sailors. After all, it was easy to approve a $700 billion bailout, complemented with $150 billion in earmarks.

Sure, the last option – more deficit spending — would pass another trillion or two in national debt on to our sons and daughters. So what? The overwhelming majority of them craved change and voted for Obama. It’s poetic justice for them get stuck with the bill.

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Declaring war: First shots fired in tax payers’ revolt.

November 19, 2008

A potentially fatal flaw in President-elect Obama’s tax plan is its implicit assumption that the dwindling group of citizens left paying income taxes won’t change their ways – except for allowing more of their earnings to be copped by the government for redistribution. 

Vice President-elect Biden has declared that such socio-economic passivity would be patriotic.  Cynical observers characterize the behavior more clinically as “bending over”.

While my observed sample is admittedly small and may not be representative of a broader population, I’m seeing the early stages of a full blown tax payers’ revolt.  Now that the ballots have been counted, some of the folks left holding the tax bag are hatching plans to vote again – this time with their pocketbooks,  Many are dusting off pre-Reagan tax planning playbooks to defer or avoid as much of Obama’s added tax burden as they legally can.

How they’re doing it 

For example, many people are doing the obvious: taking capital gains now at the current 15% rate and reinvesting in “like grade and quality” securities that they plan to hold until the capital gains rate comes back down (as it eventually will – it always does). 

Other folks are moving money to tax-free bonds and tax deferred annuities – accepting lower apparent returns just to avoid higher taxes.  

More daring investors are redeploying capital out of the U.S. – opening off-shore accounts and buying real estate in foreign locales. 

A few of the most aggressive folks are seriously pursuing citizenship in more tax-friendly nations.  One friend-of-a-friend has already moved to Mexico and changed her family’s citizenship. 

Then, there’s “income management”. Those who are close to the $250,000 threshold are managing their incomes to slip under the tax-exploding trigger. Why work 60 hours per week for the same after tax income as working, say, 40 hours?

Some corporate execs are reportedly lobbying compensation committees to get annual bonuses accelerated into the 2008 tax year. Tax-deductible expenses (e.g. December’s mortgage payment, charitable gifts) are being delayed until after the first of the year – when they’ll provide a bigger tax advantage.

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Why they’re doing it 

Why all these shenanigans ? For some tax payers, it’s simple economics; for others, it’s personal.

Many folks in the much maligned top 5% — and many in the next lower layers who suspect that they’ll be the next targets – are feeling a bit disenfranchised at the moment. They tip their hats to Obama for compiling a formidable voting block of constituents who ride free with no income tax liability or get paid to ride – receiving refundable credit checks from the government. And, they know that when Obama’s tax plan goes into effect, the free riders will constitute a voting majority.

Some narrow-minded tax payers just don’t see the inherent fairness of wealth redistribution that Obama and Biden see. Many “top-fivers” are ready and willing to pay a little more in taxes for schools, roads, and tanks, but bristle at the notion of having their hard earned money redistributed to folks that Barack Obama considers more deserving. They say: that’s not the American way. In fact, some consider it to be bordering on taxation without representation – a traditional American no-no.

All of this presents the President-elect with a mega-challenge: he has promised many additional high cost government programs, but his plan reduces the number of folks paying taxes, the slow economy is cutting incomes (hence, there’s less to tax), and if my observations are right, the surviving group of tax payers is working feverishly to pay as little in taxes as the law allows.

So, one might ask: where is the soon-to-be President Obama going to get the money he needs to fund his ambitious programs?

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(to be continued tomorrow)

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