Showing posts with label Taxes. Show all posts
Showing posts with label Taxes. Show all posts

Sunday, October 16, 2011

Let Them Eat Leftovers

Actually, this is closer to what he meant: "Let the idle poor buy the hand-me-downs of the job creators if they can't afford to pay a 9% national sales tax."

And the non-taxation of used goods is but one feature of Herman Cain's 9-9-9 catchy sounding "plan." Help, I find myself agreeing with Michele Bachmann: "the devil is in the details."

While his 9-9-9 plan is "transparent," it is also transparent that he fails to see it as a regressive tax. It sounds oh-so-fair on the surface, all individuals pay a 9 percent tax on earnings and a 9 percent national sales tax and voila, everything becomes an even playing field. One only has to run an equally simple spreadsheet to see how overwhelmingly regressive such a tax plan would be as at lower income levels, fixed expenses, such as food, shelter, transportation, insurance, health, and, of course, taxes, become 100% of one's earnings. Conversely, even with a national sales tax, very high income tax payers would have even a smaller share of their income taxed unless they spent every discretionary dollar at Tiffany's.

Even if all deductions are removed from the tax code, ones the affluent can more easily access, it is a long way from 9% to the current top 35% marginal rate. And eliminating the 15% capital gains tax is a net gain for those taxpayers. Doing away with the estate tax is another bonanza for the fabulously wealthy (no dispute on my part, though, the estate tax needs reform as outlined here).

Also if Mr. Cain is going to rely on reducing the payroll tax as a bone toss to the middle class, he is ignoring an increasingly large segment of the population -- retired folk who are living on non deferred savings accounts accumulated during their working careers (already subjected to payroll and income tax, and probably at a higher level). They don't get the offset of a reduced payroll tax and in effect this is a means of double taxing and further penalizing savers. And Mr. Cain likes to argue that the removal of the payroll tax is an offset for the average worker that would now have to pay "only" a 9% sales tax, failing to note that half of the 15.3% current payroll tax is presently paid by business.

Overzealous tax reformers advocating a flat tax, or a reduction in income tax, triumphantly use the "growth" card to fill in any revenue shortfall. "Trust me," they are saying, "reduce taxes and the economy will grow to such an extent that everyone will prosper." The "job creators" will work harder.

If, as Cain's supporters contend, the 9-9-9 plan raises as much revenue as the current flawed tax structure, then mostly it is on the backs of working stiffs. And while there are merits in simplifying the tax code, 9-9-9 is not one of them.

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Thursday, October 6, 2011

Do You Hear the People Sing?

About a year ago I likened the US income distribution to a "parade," the wealthiest appearing only at the very end, demonstrating the parabolic nature of great wealth at the very extreme of the income curve. I was wondering when, finally, the middle class would wake up to this growing disparity and do something about it. Finally, the "Occupation of Wall Street" movement takes up the cause, hopefully all by non violent means.

At the time I said "to listen to the Tea Partiers, a roll back of taxes of the very wealthiest to pre-Bush rates, is an evil, evil thing. Just think of the trickle-down effect that would be lost to the little folk who stand in line for the crumbs falling from the tables of the fabulously wealthy. It is ironic that these dire warnings of the effects of a tax increase on the wealthy are carried into battle on banners hoisted by 'Joe the Plumbers' -- it shows the power of the conservative media and the most virulent impact of the Internet. It just makes no sense that the people near the middle of the parade should become pawns for the people at the very end."

It is sad that Steve Jobs should pass away at this time. I think of him not only as a visionary technology and marketing genius, but as the greatest entrepreneur the world has ever known. The grass root movements of today, such as Occupation of Wall Street, would not be possible without the mobile devices he had a key part in developing and popularizing. I feel a personal loss of his passing at such an early age, and of the same terrible disease that took my father. And I wonder, if we did have a fairer graduated tax structure, one that would have rolled back the Bush tax cuts, would he have worked any less hard? The "don't-tax-the-job-creator" crowd might so argue.

Steve Jobs worked as he did because it was his passion. Entrepreneurs work with a creative obsession that is not going to be railroaded by a higher incremental tax rate. They are the job creators, not the legions of corporate and banking types, raking it in, paying a lesser portion of their income in taxes than a dozen years ago when the US actually had a balanced budget, CEOs now being paid unspeakable multiples of the average income of workers in the same company. Are higher incremental tax rates and the closing of loopholes the only solutions to the deficit? No, but it's a beginning. And that, as well holding these people accountable for any fiscal malfeasance, is what the growing Occupation movement is all about, the middle class finally awakening to the issue of their being used as puppets by political ideologists.

Do you hear the people sing?
Singing a song of angry men?
It is the music of a people
Who will not be slaves again!
...............Les Misérables, the musical


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Thursday, September 29, 2011

Catching Up...

The last few weeks went by in a whirlwind. During that period we took a two week cruise in the Baltic region, trans Atlantic flights to Holland and back, packing up from our summer on the boat, and then closing it up involving a myriad of operational chores best left unsaid and then driving the 1,250 miles home, 800 miles on the 2nd day -- made pleasurable by Stephen King's audio edition of On Writing read by the author himself -- arriving to assess all the work to be done in and around the house, particularly on the tropical overgrowth of landscaping, courtesy of the humid Florida summers.

The ports we visited deserve their own commentary and as I pull together photos another posting with a description of the ports will be forthcoming, but a few preliminary words on the cruise itself. We've taken many and of course beside the interesting ports, ship life and days at sea are high points to me. We try to confine our cruises to the "smaller" ships, in this case the MS Rotterdam. This particular ship accommodated "merely" 1,380 passengers on this trip, her displacement at 61,849 tons. We had been on this ship once before, almost ten years ago, through the Panama Canal. She is still an elegant ship, although refitting and updating will be needed soon.


Our cruise covered 2,998 miles (remarkable as I did not realize the region was so large). We arrived in Amsterdam after the fastest trans-Atlantic flight I've ever been on as the tail winds were over 100 miles per hour, only five hours from JFK. They served drinks and then dinner shortly after departing, turned off the lights for this "overnight" flight and it seemed as if only a half hour went by before they were turning on the lights for breakfast. At one point our air speed was 720 miles per hour. I felt like Chuck Yeager about to break the sound barrier. I hadn't flown KLM in some time, a very decent airline, but well worth the few dollars to upgrade to "economy comfort" seats.

We arrived in Amsterdam very early in the morning and had to wait several totally disorganized hours for the pre-arranged bus connection we had made through Holland America to finally depart for Rotterdam where our ship awaited. One would think that at least this part of the trip would be under control -- after all HA has done this before.

The cruise took us to Copenhagen, Warnamunde (Berlin's nearest port), Tallin, St. Petersburg, and Stockholm. We were supposed to go to Helsinki as well, but weather prevented the visit, for reasons I will explain when I write up our port visitations.

Embarking in Rotterdam, our ship life began by locating our cabin (mid ship, Ocean view), and as we live on a boat during the summer, we found it commodious by comparison --including several spacious closets and lots of drawer space!

There are so many things to do, even on a relatively small ship such as this, but our routine was to have a set dining time, a table with three other couples, nice people with whom we could exchange pleasantries about the trip, but politics and related topics were strictly off limits. After dinner most people went to the musical production shows but we discovered a great jazz trio in one of the lounges and became regulars there. Every evening they took requests from the great American songbook, the music we love so much.


The drummer (Seth) and the pianist (Jane) are a married couple who do gigs in Nantucket when they are not traveling on a cruise ship (the bass player was from Spain, hired by the ship, and fit right in). Jane is one of the best jazz pianists I've ever heard on a cruise ship and she plays requests from "lead sheets" or "fake books" which is the way I play, taking the melody line and the chords and improvising (although her skills are head and shoulders above mine). But she does all this from an iPod which has searchable PDFs of thousands of songs. I requested (among many others) the little-played "Cottage for Sale", a rendition we loved having been recorded years before by Julie London. To our amazement, Jane came up with the song immediately...

"A little dream in a castle
With every dream gone
It is lonely and silent
The shades are all drawn
And my heart is heavy
As we gaze upon
A cottage for sale

The lawn we were proud of
Is waving in hay

Our beautiful garden is
Withered away.
Where we planted roses
The weeds seem to say..
A cottage for sale"


Jane's style is so reminiscent of Bill Evans and Oscar Peterson. Her voicings are superb. In fact she played several Bill Evans pieces, including Waltz for Debby. These are not the kind of offerings one normally finds on a cruise ship. More information on Seth and Jane can be found here.

When I am away from everyday life while cruising, particularly the day to day gyrations of the market and politics and my beloved computer, reading becomes a pleasure, interrupted only by port visits, the obligatory meals, and jazz delights. The rest of the world goes by as contact is mostly limited to CNN International on board, a 4 page summary of the New York Times, and, of course, occasional, but very expensive and slow, Internet connections via satellite. Still, I tried to keep up with the baseball scores and the pennant races while on board, and the latest machinations of the approaching presidential election.

While away it seems that President Obama proposed a job-creation, infrastructure-fixing plan, with tax implications for the wealthy, one that was immediately shot down by the Republicans. How one can be so against a more progressive tax structure -- albeit with fixes of loopholes and some of the complexity along the way -- while 46 million Americans are living at the poverty level is beyond me. We had lunch with a woman one day who pontificated that half of Americans don't pay any taxes and that is why we should have a flat tax (very regressive in my mind). Hence, politics and the economy were off limits discussions (for me at least -- no sense on such a trip). However, on board I managed to see parts of the "Republican presidential debates" which were laughable as moderated by Fox, most candidates invoking God and the Constitution as their very own personal, exclusive allies.

So it was no wonder, off with the TV and on to some good reading. The first one I tackled, sort of an underground classic for which I thank my blogger friend, Emily, was J.L. Carr's A Month in the Country. This is written in the tradition of Thomas Hardy, a wonderful tale about a medieval mural of the apocalypse which was painted on the ceiling of a church in the countryside somewhere in England and whitewashed over. The man who is hired to restore the painting, in the process, resurrects his own soul in the bargain. He is separated from his wife, Vinny, and recovering from his experiences during WWI:"The marvelous thing was coming into this haven of calm water and, for a season, not having to worry my head with anything but uncovering their wall-painting for them. And, afterwards, perhaps I could make a new start, forget what the War and the rows with Vinny had done to me and begin where I'd left off. This is what I need, I thought -- a new start and, afterwards, maybe I won't be a casualty anymore. Well, we live by hope." It is a little gem of a redemptive novel.

From the sublime to the entertaining I picked up another Jonathan Tropper novel, This is Where I Leave You. Here is yet another clever novel by him, the focal point of which is our hero, Judd Foxman, sitting a seven day shiva with his dysfunctional family, as his marriage is falling apart. Tropper is known for his smart witty dialogue and this novel delivers. Although comic, Tropper is an observer of the manners and mores of modern times and I almost think of him as a Jane Austin type, delectable to read, with stinging observations. For example, this is his riotous description of sitting shiva (sat on chairs lower than their visitors) on one particular day: "The parade of weathered flesh continues. Sitting in our shiva chairs, we develop a sad infatuation with the bared legs of our visitors. Some of the men wear pants, and for that we are eternally grateful. But this being late August, we get our fair share of men in shorts, showing off pale, hairless legs with withered calves and thick, raised veins like earthworms trapped beneath their flesh who died burrowing their way out. The more genetically gifted men still show some musculature in the calf and thigh areas, but is more often than not marred by the surgical scars of multiple knee operations or heart bypasses that appropriated veins from the leg. And there's a special place in shiva hell reserved for men in sandals, their cracked, hardened toenails, dark with fungus, proudly on display. The women are more of a mixed bag. Some of them have managed to hold it together, but on others, skin hangs loosely off the bone, crinkled like cellophane, ankles disappear beneath mounds of flesh; and spider veins stretch out like bruises just below the skin. there really should be a dress code." A laugh a minute because it is so true.

My final novel for the cruise was one I've been saving for years for the right moment, a mass market paperback edition, small and portable, although some 500 pages, so ideal for carrying on a trip -- Pat Conroy's The Lords of Discipline. I've read most of Conroy and when he writes autobiographical material, he is at his best. I'm sure many of the episodes he chronicles in this book, one about a boy coming of age in a military college in Charleston, SC, come right out of his own life experiences. It is powerful and fast-moving, a page turner, beautifully written, Conroy being one of our most lyrical writers today. It is about the true meaning of honor, a painful lesson our protagonist, Will McLean, learns in the real world. Will is not from the elite society of Charleston as are some of his classmates. He is on scholarship as the point guard on the basketball team, as was Conroy himself was when he went to school. Although Conroy's autobiographical My Losing Season primarily deals with that subject (basketball), well worth reading, this novel devotes only a dozen or so pages to the topic, but perhaps the most vivid, accurate ones I've ever read about playing the game. Still, it is the beauty of his writing that glued me to the pages of this novel: "The city of Charleston, in the green feathery modesty of its palms, in the certitude of its style, in the economy and stringency of its lines, and the serenity of its mansions South of Broad Street, is a feast for the human eye. But to me, Charleston is a dark city, a melancholy city, whose severe covenants and secrets are as powerful and beguiling as its elegance, whose demons dance their alley dances and compose their malign hymns to the far side of the moon I cannot see. I studied those demons closely once, and they helped kill off the boy in me."

Thanks to these three novels, the jazz trio, my ship time was spent in good company (and with Ann of course). Ann wrote a detailed email to her friends about our trip, describing each port, and I am going to draw heavily from her observations when I get around to editing and selecting photographs, as well as adding my own thoughts.

But I will say one thing as a teaser for a future piece. The high point was St. Petersburg where we hired a private guide for two ten hour days. One cannot tour Russia without a Visa or a registered travel guide (or one of the ship's bus tours, which we did not want to do). Our guide turned out to be as stunningly beautiful as she was knowledgeable, a graduate of St. Petersburg University, with a degree in Art History, and with excellent English skills. Each place of visit was accompanied by her knowledgeable narrative. It started with an early morning visit to the Peterhof Palace, with its lush gardens and magnificent furnishings, these two exterior photos hardly do it justice, but, as I said, this is merely foreshadowing of a more detailed account in a later entry.


















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Sunday, July 24, 2011

“A Glide Path to Zero Debt Post 2011”

This “glide path” was forecast in George W. Bush’s Feb. 28th, 2001 budget, A Blueprint for New Beginnings; A Responsible Budget for America’s Priorities.

The centerpiece of the legislation was a $1.35 trillion tax cut over 10 years which was signed into law on June 7, 2001. This cut was supposed to spur growth and thus increase federal revenues in spite of the tax cut (sound familiar?)

The exact wording from Blueprint for New Beginnings:

Over the next 10 years, the Federal Government is projected to collect $28 trillion in revenues from American taxpayers. The President’s Budget devotes roughly $22.4 trillion to extend the Government we have today, including the President’s new initiatives. This leaves a $5.6 trillion surplus. The President’s Budget takes a cautious approach to allocating this staggering sum, starting by saving the entire Social Security surplus—nearly 50 percent of the total surplus—for Social Security and debt retirement. None of the Social Security surplus will be used to fund other spending initiatives or tax relief.

By devoting these revenues to debt retirement, the Nation will be able to pay off all the debt that can be redeemed—an historic $2 trillion reduction in debt over the next 10 years. The only remaining debt will be those securities with maturity dates beyond 2011. In all likelihood, American taxpayers would have to spend an additional $50 to $150 billion in bonus payments to bondholders to accelerate the repayment of those notes, a wasteful and senseless transaction. It makes more sense to allow the securities to mature naturally, leaving the Nation on a glide path to zero debt post 2011.

By 2011, Federal debt will have fallen to only seven percent of GDP—its lowest level in more than 80 years. Net interest payments on this debt will be less than 0.5 percent of GDP, less than one quarter of today’s share and only three percent of the budget. This represents a great national achievement
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Meanwhile, the threat of recession intervened, and the Federal Reserve ratcheted down interest rates. America went on a borrowing and speculation binge, focused on real estate and the building industry. Government, Wall Street and Main Street were all complicit, greedy investors buying up “investment property,” Wall Street packaging them as “risk-free” CMO’s, and homeowners indulging in the practice of using their homes as a piggy bank, with exotic no money down, no initial interest payment loans, the repayment of which was dependent on future appreciated real estate values. At the same time we continued to outsource our manufacturing capabilities to China and other emerging economies. Why work when Utopia could be achieved by merely borrowing?

So returning to the halcyon Blueprint for New Beginnings, another lesson to be learned from China: "Forecasting is difficult, especially about the future.” This is why the brinksmanship of raising the debt limit is such political grandstanding. Where was the outcry about the buildup of the national debt during the Bush years or holding Congress accountable for the failure of Blueprint for New Beginnings? While the stock market was climbing to new highs by 2007 and real estate prices were soaring, making homeowners and investors feel (not be) wealthy, not one peep about the national debt. We were borrowing against the future.

Depending on how one defines accountability to an administration (which takes control in late January every four years, but really does not have much impact until at least the end of the following Sept. 30 fiscal year), one could argue that Bush administrations were responsible for about a $6 trillion increase in National Debt (9/30/2001 - 9/30/2009) and the Obama administration for about $2.5 trillion thus far. (See this link for historical figures.)

Of course, debt growth has been more dramatic over the last few years (including the final year of the Bush administration) as Keynesian spending of “saving the world” from a depression soared. In spite of that spending, economic growth has been slow, unemployment persistently high, and real estate and associated industries remain in the doldrums.

These are the serious issues, as well as the national debt, which must be addressed. While I am the first to argue for fiscal responsibility, a balanced budget cannot be achieved overnight and cannot be achieved without some revenue increases via taxes. The best argument against pinning hopes that spending cuts, alone, will achieve a balanced budget is simply to reread Blueprint for New Beginnings. Allowing the US to default on its debt is a hopelessly reckless option.

PS: An interesting follow up to the above published by Bloomberg news two days later.

Monday, June 13, 2011

Substance and Talking Points

I try to set aside Sunday mornings for catching up on some newspaper reading and to watch political shows such as Meet the Press, keeping my eyes on the page/computer and my ears on the TV, drifting back and forth depending on what I'm reading or hearing. This week's Barrons', which I've read forever it seems (now online, having forsaken the print version), had a remarkably to the point article by Doug Kass, founder and President of Seabreeze Partners, and well-known "short-seller" which echoes some of what I've written about the subject of the growing abyss between the haves and the have not's and its impact on the misery of the middle class. Kass' term for this misery is "Screwflation" (combing inflation with the screwing of the middle class). Here are some of his bullet points although its best to read the entire article:

* While...corporate profits will soon attain a new peak, median real wages have made little recent progress....Moreover...an unprecedented four years of declining home prices have further weakened the confidence and purchasing power of the middle-class screwees.

* Unemployment has exacerbated screwflation's impact on all but the wealthiest Americans.

* Because there are few areas of the domestic economy that can replace the prerecession strength in real estate, a recovery in jobs will be more difficult than in previous cycles. Work related to real estate accounted for nearly 40% of U.S. job growth in 2001-06–almost all of it middle-class.

* Back in 1980, the richest 1% of Americans captured 9% of national income. Today, the richest 1% receive about a quarter of national income.

* [The] rise [ of commodity prices] falls more heavily on low- and middle-income families, who spend most of their money on the necessities of life. Add rising health care, education and other costs to commodity prices, and the result is a poor foundation for growth.

* Difficult fiscal decision...must be made this summer in Washington. The needs to accelerate job growth and to control the federal deficit seem irreconcilable.

* A shallow and fragile domestic economic recovery may be exposed to and be vulnerable to the need to cut spending–but drastic spending cuts will jeopardize the shallow recovery in jobs. Not moving on deficit reduction holds its own risks, of U.S. dollar weakness, soaring interest rates and higher unemployment....Partisanship already makes a real solution less likely.


Kass concludes with some excellent suggestions, but with Washington in gridlock, even on such major issues of raising the debt ceiling, and in the throes of pre-Presidential election rhetoric (see Meet the Press discussion below), one can't be terribly optimistic about implementing them:

* Policies that could help quickly include: extending the payroll-tax cut initiated by the Obama administration; reducing income taxes for the middle class; providing federal funds for infrastructure spending; creating incentives for businesses to make new capital investments; allowing tax-free repatriation of U.S. corporate earnings made abroad, if they are earmarked for the creation of American jobs; the launch of an energy plan that taps domestic resources; and the use of federal-housing financing to slow foreclosures and distressed sales.

While reading that article of substance, I was watching Meet the Press, particularly David Gregory's interview with Debbie Wasserman Schultz, the Democratic National Committee Chair and Reince Priebus, the Republican National Committee Chair. Talk about talking points galore. Here is the entire transcript.

Gregory immediately baits the debate with so called "facts:"

MR. GREGORY: All right. Well, let's talk more, let's talk more about the economy in some more detail. This is the president's standing in terms of handling the economy in the public's eye, and it's pretty negative right now. Sixty percent almost, 59 percent, disapprove of the president's handling of the economy . And there are facts that back that up that are difficult for this administration and for the Democrats: unemployment's up 25 percent since Inauguration Day for President Obama ; the debt's up 35 percent, over $14 trillion; a gallon of gas up over 100 percent, with gas $3.75, higher than that in certain parts of the country . Why should Americans trust Democratic governance right now on the economy , and particularly the president's?

The numbers might be correct but one has to wonder about the "cause" of the "effect." Naturally, both Schultz and Priebus jump on their talking points:

REP. SCHULTZ: ...when President Obama took office, the month before he was inaugurated, the economy was bleeding 750,000 jobs a month, David , and we were not headed in the right direction. Now, I know we -- and President Obama has said we have a long way to go . We'd like the pace of recovery to, to, to be picked up. But we have definitely begun to turn the economy around. You, you fast-forward two and a half years later now, and the economy has created 2.1 million private sector jobs, a million of those jobs just in the last six months. We've had 15 straight months of job growth .

Priebus has his talking points:

MR. PRIEBUS: David , the chairwoman's living in fantasyland. We know that the facts are the facts, and we can't get away from that. And Barack Obama is defenseless to the truth on what's going on in the American economy . We have lost as -- two and a half million jobs since Barack Obama 's been president. And of that two and half million jobs, almost 45 percent of those people have been out of work for six months. That number, that number rivals the Great Depression .

Back and forth, your talking points vs. mine. It is a sign of the silly season of an impending election, with the danger that the increasing polarity will result in a stalemate that leaves our economy on the edge of a cliff once again.

But, can they both be "right?" The Bureau of Labor Statistics' Employment, Hours, and Earnings from the Current Employment Statistics survey (National) 2001 -- 2011 confirm that, indeed, we've lost about 2.5 million jobs since Obama was inaugurated, and we've gained almost 1 million jobs in the last six months. But the BLS also shows about 4.4 million non-farm jobs lost in the 12 months before Obama took office. How's that for a talking point?

One can play with all these statistics any which way to "prove" a point of view. The fact of the matter is we had tremendous job growth in the three plus years before the collapse of the economy (and almost the collapse of our entire economic system) in 2008, but those jobs "created" were heavily real estate and construction related during a housing run-up which we now know was merely a chimera. These are jobs that would not have come into existence without the frothy, nothing-down, exotic mortgage real estate market and the complicity of the investment banks and Washington to get those deals done. We simply "borrowed" from the future. Now, those jobs our out of the system with no prospects of returning soon. It is going to be very difficult to have robust job creation if, as Doug Kass suggests, real estate represents 40% job growth without solving our foreclosure and distressed sales issues which is now on such an enormous scale.

And how fair is it to "mark" a President's starting point for job creation as the date of his inauguration? The economy is a leviathan which cannot be turned on a dime. And, by the time Obama was making some headway, he lost control of Congress. Now we have such a polarized government, it is a wonder that any jobs are being created.

And, really, what control does the President have on world oil prices? We could have an army of rigs in the Gulf of Mexico and it wouldn't make much difference in prices as it is a world market for oil. The US cannot effect prices much by creating marginally more supply. Now, controlling the speculative aspect of prices may be a different matter, but financial regulation is habitually resisted by Obama's adversaries.

Agreed, we should have a national energy policy, but for it to have any teeth it will mean some hardship. In Europe, gas is twice the price as it is here. People learn to drive smaller cars, take mass transit, etc. No one would agree to that here so a national energy policy is simply kicked down the road, by both parties.

Finally, the deficit. Does anyone really think that if McCain was elected it would be much different today? President George Bush's 2001 and 2003 tax cuts have been big contributors as well as funding for the wars in Afghanistan and Iraq. Granted, President Obama's 2009 stimulus bill is also in the mix. But that was enacted when the Federal Reserve no longer could cut interest rates (they were already effectively at zero) and there was general agreement that the economy was still in crisis and without a stimulus, it would slip off the cliff again. And one one argues the bill failed to create jobs as intended. No Republicans voted for the act and now that they control Congress, one has to wonder what they will vote for or block. We know the talking points, and Kass makes substantive suggestions, but can Congress even function any longer?


Friday, December 10, 2010

She's Quick on the Trigger

With targets not much bigger than the president's deficit commission. I don't think I've ever actually READ anything by Sarah Palin, although I've seen her paraded before TV cameras, so it was with some interest that I noted "her" opinion column in the Wall Street Journal, Why I Support the Ryan Roadmap; Let's not settle for the big-government status quo, which is what the president's deficit commission offers.


I had expected a folksy take on the topic in keeping with her TV persona, perhaps sprinkled with homey references to Alaska wildlife, or more aptly the disappearing wildlife when Sarah Oakley has her high-powered rifle with telescopic sight at her side, but instead was greeted by a more or less professionally written piece of journalism, quite possibly with the help of the people at News Corp which owns the WSJ and also owns Fox which in turn employs Ms. Palin. She or her ghost writer is "disappointed" in the deficit commission's recommendations but commends the commission for exposing "the large and unsustainable deficits that the Obama administration has created through its reckless 'spend now, tax later' policies." I go speechless when reading such an accusation, feeling like Melville's Billy Budd confronting the evil Claggett. Sarah, do you really believe what "you" wrote? Not only are the deficits at least partially shared by your Party (not to mention the National Debt most of which could be pinned on the Bush era), but Congress now has the opportunity to roll back some of the tax forgiveness for the super wealthy, both in terms of incremental tax rates and the inheritance tax, and your Party is stonewalling that prospect. However, pardon my impertinence, "a man never trifles / with gals who carry rifles...Annie Get Your Gun.

Tuesday, December 7, 2010

Rebels Without a Cause?

It was a "chicken-run" by the Republicans and the Democrats, drag-racing to the edge of the Bush Tax Cliff as the sun was setting, but who really bailed out of the car and who remained will be revealed in two years. In the movie, the adversaries, Jim (played by James Dean) and Buzz, check out the abyss of the cliff before climbing into their cars:

Buzz: This is the edge. That's the end.
Jim: Yeah. It certainly is.
Buzz: You know something? I like you. You know that?
Jim: Why do we do this?
Buzz: You got to do something, now don't you?

And that seems to be the nature of the "deal" between the two parties: "You got to do something, now don't you?" On the surface, President Obama caved in. Someone had to and it was pretty clear the Republicans were prepared to fly off the cliff to preserve the precious Bush tax cuts for "everyone," especially for the wealthiest, the old Razzle Dazzle 'em of trickle-down economics.

We now continue the drag race to the same cliff in two years but this one also includes the Presidential election. If the "compromise" just further expands the deficit without creating meaningful jobs, the Democrats will blame the Republicans who will be left in the car. Of course the American people will be in the passenger's seat. "This is the edge. That's the end."

Wednesday, December 1, 2010

Dueling Headlines

No sooner after writing the last entry of this same date, these two headlines from AP accosted my in box:

AP Extended unemployment benefits for nearly 2 million Americans begin to run out Wednesday, cutting off a steady stream of income and guaranteeing a dismal holiday season for people already struggling with bills they cannot pay. Unless Congress changes its mind, benefits that had been extended up to 99 weeks will end this month

AP GOP says it'll block bills until tax cuts extended. "While there are other items that might ultimately be worthy of the Senate's attention, we cannot agree to prioritize any matters above the critical issues of funding the government and preventing a job-killing tax hike."

Translation: if the peasants have no bread, let them eat cake! Translation for "job-killing tax hikes" for those in the highest income bracket: trickle-down economics with no basis in fact.

This was exactly my fear after the mid-term elections: If the Republicans and Tea Partiers interpret their gains to mean they now have carte blanche to keep the Bush tax cuts for the highest wealth tier -- people who would not be hurt by some roll back to pre-Bush tax levels -- the result will only increase the deficit further.

More posturing at our country's expense.

Wednesday, November 10, 2010

A Taxing Question

How rich is too rich? Actually, I published a book by that title almost twenty years ago and some of its ideas are as relevant today as it was then (How Rich Is Too Rich; Income and Wealth in America by Herbert Inhaber and Sidney Carroll: Praeger, 1992). Two points from that book stuck with me. First, there is the very descriptive opening chapter of looking at income distribution as an imaginary "sixty minute grand parade," tax payers being the marchers, grouped by their height which would be representative of their incomes, the first marchers having the lowest income and the last the highest, with "height" determined by the "average" taxable income being equal to the "average" height of an individual American. The "parade" in effect is an X/Y graph, the Y axis being the income (height), and the X axis being the minutes of the "parade." The first few minutes one sees no marchers even though we can hear some noise. These are people with negative height, those who report the loss of money in that taxable year. It isn't until about ten minutes into the parade that we see marchers between 10 and 24 inches in height and it isn't until 36 minutes we see the so called "average height" taxpayer march by. With about only 20 minutes left, heights begin to rise dramatically. With the last five minutes giants appear, people whose heads are so high we can hardly make out their faces without binoculars. The marchers in the very last minute of the parade are so tall we can only see their feet. These are people of accumulated, sometimes inherited, wealth and in the last few seconds the marchers are the size of sky scrapers. In effect, the parade shows a slowly rising gradient until the far right of the curve when it begins a parabolic rise and then shoots straight up off the graph.

While the numbers might have changed over the last twenty years, the concept has not. Probably, if anything, the "parade" has become even more dramatic, more parabolic, with a steeper rise at the end. And, those at the end of the parade pay now less as a percentage of their income to the government than at any time before.

To listen to the Tea Partiers, a roll back of taxes of the very wealthiest to pre-Bush rates, is an evil, evil thing. Just think of the trickle-down effect that would be lost to the little folk who stand in line for the crumbs falling from the tables of the fabulously wealthy. It is ironic that these dire warnings of the effects of a tax increase on the wealthy are carried into battle on banners hoisted by "Joe the Plumbers" -- it shows the power of the conservative media and the most virulent impact of the Internet. It just makes no sense that the people near the middle of the parade should become pawns for the people at the very end.

Actually, I think the converse is true: it is an evil thing for people who have benefitted from being able to accumulate wealth in the greatest of all capitalist democracies, not to give back more for that opportunity. The argument goes that asking these people to pay more will remove the incentive for them to work, and maybe if we're talking about 70 percent of one's income that might be true. But in 2000, people reporting AGIs of more than $1 million paid 28% of their income as taxes vs. 23% five years later. In 2005 there were 304,000 households reporting income of more than $1 million, more than a trillion dollars of income or $3.375 million per household. And mind you of those, there are a few at the very end of the "parade" with incomes that have so many zeros they would be hard to read. The latter are sports stars, entertainers, and, of course, very, very successful entrepreneurs. Are they going to work "less hard" by paying an additional five percent overall? That five percent would mean another $50 billion going to the US Treasury, at least a beginning to address the ongoing deficit. And, of course, if you look at the $250,00 level as the cut off as suggested by President Obama, there is much more to be gleaned, but given the midterm elections, that level is probably going to be raised if it is not eliminated altogether.

The alternatives that are occasionally pushed by the Tea crowd, such as a flat tax, is, in effect, a regressive tax, with the lower income people having to pay the same taxes on necessities as the wealthy, which just further splits the great economic divide in this country. A national sales tax does the same thing and as we are now so dependent on consumer spending, that could be the death knell for the economy. No, a progressive tax structure has been this country's basis for supporting it's national programs and we have been able to grow in spite of these supposed "disincentives" of higher taxes at a higher bracket.

No doubt the current tax structure is hopelessly and needlessly complicated and THAT is where the discussion should also be focused. There are so many loopholes, that a revised graduated tax structure would not have much teeth without addressing those as well. And then there is the issue of capital gains and dividends. We certainly want to encourage taxpayers to reinvest in our equity markets.

The other point I never forgot from that book was its commentary on the estate tax, arguing against the estate tax altogether, provided there was an alternative system of "estate dispersion." Rather than taxing one's estate at death, it suggested a tax-free dispersement up to a certain level per recipient (rather than per estate). For argument's sake, call that $1 million per recipient. Amounts exceeding that would begin to be taxed on some kind of graduated basis. Those would be life time totals, so if an individual receives money from different inheritances, they would be accumulated and taxed on that scale. "No longer would the estate tax system generate an American royalty -- those freed from the need ever to be economically productive. This alternative system would generate for all the incentive that most of us have in the outcome of our own economic lives. No longer would a large part of our national wealth be beyond responsive use."

Now, the incredibly wealthy could give a million dollars each to a thousand different people, all tax free (if those recipients also received no other inheritances in their lifetimes). The point is that those thousand people would put that capital to work, rather than vesting a billion dollars in one's immediate family who might decide to simply live off the income and pass it on to the next generation, and the next. Or he/she could still leave more to the immediate family, but it would be subject to taxation, perhaps substantial taxation on a graduated basis.

"Wealth great enough to entitle one to membership in the elite comes from two sources -- enormous earnings or inheritance. Prudent public policy should allow those, who, through individual ingenuity, talent, or luck, gain a fortune to use and enjoy it for life...but if these individuals have the power to transmit immense wealth to others after death...they can write the rules controlling this wealth, possibly many generations into the future. This breaks the chain of personal effort that is tightly bound, for most of us, to personal reward. Economic resources, controlled by rules set up by the dead, are denied to those who might well be more productive."

If the Republicans and Tea Partiers interpret their gains to mean they now have carte blanche to keep the Bush tax cuts for the highest wealth tier -- people who would not be hurt by some roll back to pre-Bush tax levels -- the result will only increase the deficit further. There would seem to be no upside to such an action; in effect it is a spending initiative something they claim to condemn. Failure to make tax reforms that lead to a more graduated income tax and closing loopholes, and not having a sensible inheritance tax also just further drives a stake between the haves and the have-nots.

On a related subject, the so called "wealth effect" the Federal Reserve is trying to engineer with its QE2, is still another factor favoring the haves. This is convincingly analyzed by my fellow blogger over at Fund My Mutual Fund in his posting Who Will Any Form of Intermediate Term Wealth Effect Really Help? Not the Masses. It is well worth reading.

A tranquil reprive from QE2 and the upcoming taxation battle in Congress

Monday, October 18, 2010

Tale of Two Economists

In an ironic twist, an economist turned entrepreneur writes a rigidly academic critique, The Recklessness of Quantitative Easing, and an academic pens an anecdotal piece of writing on a different but related subject, I Can Afford Higher Taxes. But They’ll Make Me Work Less.

Recklessness by John Hussman, whom I’ve quoted before in this blog as I consider him to be one of the clearer thinkers about the uncharted territory we call today’s economy, argues that the Federal Reserve’s announced intention to pursue a second round of QE is to drive “interest rates to negative levels in hopes of stimulating loan demand and discouraging saving” and to “increase the supply of lendable reserves in the banking system.” But will this increase output and employment?

Hussman thinks not as “interest rates are already low enough that variations in their level are not the primary drivers of loan demand.” There is simply a lack of confidence – both for the consumer and businesses -- that they will have the income in the future to pay off loans. So low or even negative interest rates is not a barrier and “removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back (the economic term being "constrained optimization" as he explains.)

“Instead, businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?”

The effect of all the talk about QE2 has been to propel gold to new highs and to further erode the value of the US dollar as the Fed dramatically expands its balance sheet. “But once the Fed has quadrupled or quintupled the U.S. monetary base from its level of three years ago, how will it reverse its position?” Hussman’s answer is that many years down the road it will be forced to sell off the instruments it is buying, driving interest rates much higher as foreign buyers might be absent from such auctions, and undermining whatever recovery might have begun of its own accord, just further accentuating the boom bust cycle.

He has constructive suggestions, fiscal responses that might include “extending unemployment benefits, ensuring multi-year predictability of tax policy, expanding productive forms of spending such as public infrastructure, supporting public research activity through mechanisms such as the National Institute of Health, increasing administrative efforts to restructure debt through writedowns and debt-equity swaps, abandoning policies that protect reckless lenders from taking losses, and expanding incentives and tax credits for private capital investment, research and development.” Of course many of these require the cooperation of Congress and watching the mud slinging of the mid term elections, one has to wonder.

But Hussman’s article is must reading it its entirety, especially if you are an individual investor and wondering how to position a portfolio in this strange new economic world. The net effect of the Fed’s actions, besides the obvious nearly zero return on any CD you might buy, is to “force” the investor to move into riskier assets commodities in particular and equities as well. One could also “play” the decline of the dollar by investing overseas or in US multinational companies, which derive a majority of their income abroad. But to what extent QE2 is already baked into the prices of these riskier assets is anyone’s guess. There is also the possibility of a more protracted deflationary period than anyone can imagine right now, with the ongoing real estate crisis and high unemployment having a continuing impact. There seems to be a heavy reliance on the Fed’s future actions leading to an idyllic outcome. I think Hussman would disagree.

One of his suggestions as noted is “ensuring multi-year predictability of tax policy” which leads me to the other economist, Professor Mankiw who is professor of economics at Harvard and was an adviser to President George W. Bush, whose administration has to share some if not a majority of the responsibility of our present economic morass.

Professor Mankiw op-ed piece in the October 9th New York Times, through a convoluted and highly subjective mathematical exercise, argues the proposed tax increase on the 2% wealthiest Americans – some attempt at least to close the budget abyss -- will lead to such people not working much, including, alas, movie and rock stars and even novelists! Outraged, and disappointed that I might not see another Harrison Ford movie, or see my first Lady Gaga “concert” or that Jonathan Franzen will put down his pen, denying us his next novel in protest, I immediately shot off a letter to the editor of the NY Times business section, in which Mankiw’s article appeared. Some very good letters were published in response, but not mine. The nice thing about a blog is I can publish my own rejections! So here is what I wrote:

While it is hard to argue with Professor Mankiw’s math (“I Can Afford Higher Taxes. But They’ll Make Me Work Less”) of what his incremental income might become thirty years in the future in a halcyon tax-free world, his conclusion that movie stars, novelists, rock stars, and surgeons might work less if taxes are increased is based more on his own anecdotal view of working. By his own admission: “I don’t aspire for much more than a typical upper-middle-class lifestyle,” and that’s fine, but don’t blame the tax code for declining his next free lance opportunity. If he should climb down from his Ivy tower and look at the real world with real unemployment around 15%, people trying to work to simply support their families and hold onto their homes rather than handing down wealth to succeeding generations, he might have a little more empathy for a progressive tax code that did not seem to destroy incentives during the Clinton years, the last years in which our country actually had a surplus. And even Warren Buffett and Bill Gates see the fairness in having some sort of an inheritance tax.

Maybe the Times found it too preachy or politically oriented. Perhaps I should have concentrated on the nature of work itself. Remember Hussman’s comment about constrained optimization, that removing a particular barrier only has a beneficial impact if indeed it was that particular barrier holding you back? If Mankiw is entitled to personalize his argument, so can I. I worked as hard when in a higher incremental tax bracket as I did when they were lowered. Why? I loved work, simple as that. And, that is what is missing not only from Mankiw’s formula but how our society looks at work and values workers.

I remember my first visit on business to Japan in the 1970’s, the taxi cab drivers waiting at the hotel for a fare, their cabs gleaming as between fares they would polish and clean their cars. The refuse collector doing his job well was as highly valued by society as a company executive. Japan today, of course, suffers some of the same maladies as ours, with a twenty-year head start on the phenomenon of deflation, so perhaps that has taken its toll on their workers. Somehow, as a society, we need to value all workers and restore work as something to be embraced.

Of course we don’t always have an idyllic choice of the work we do in our lifetimes, but we do have a choice of doing it well or not and by choosing the former, we open a path to finding it meaningful. I’m sorry Prof. Mankiw chooses whether he will write an article or accept an invitation for a speech merely based on what his incremental income bracket might be, although I think most people would envy that he actually has a choice.

I like what the great short story writer, Raymond Carver, wrote thinking about a friend who admitted he wrote something just to make a deadline and make a buck, knowing he could have written something better if he took the time. “If writing can’t be made as good as it is within us to make it, then why do it? In the end, the satisfaction of having done our best, and the proof of that labor, is the one thing we can take into the grave. I wanted to say to my friend, for heaven’s sake go do something else. There have to be easier and maybe more honest ways to try and earn a living. Or else just do it to the best of your abilities, your talents, and then don’t justify or make excuses. Don’t complain, don’t explain."

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Wednesday, June 9, 2010

Vicious Cycle

While budget infernos sweep state and local budgets, government bureaucrats fiddle away at deficits by making minor cuts and taking the easy road of tax increases. I’ve used the microcosm of the local Palm Beach County budget activity to make this point before, as it probably reflects what is going on in some municipal and state finances throughout the United States. PBC’s “recommended” 13.4% increase in property tax rate is designed to “make up” lost revenue” from falling property values. A future stream of required higher tax payments just devalues property further, begetting yet more future increases.

On the other side of the ledger, the “tough” spending cuts include cremating indigents when they die, rather than burying them, “saving” $100,000 (this, mind you, in a budget of some four billion dollars). Other cuts, of course, are aimed at the people who need help the most. Meanwhile, more than $1 billion is earmarked for “general government, interfund transfers, other, and internal services.” Make systemic changes to the way the County operates? Not a chance.

Saturday, May 30, 2009

Prelude to Panic

That’s the headline from today’s Palm Beach Post: Prelude to panic: Tax rolls plummet.
Surprise, surprise? More antidotal evidence that the recession is indeed the “Great Recession” and local government is out to lunch “with countywide values lower than feared.” Where have they been during the past year while the clock was ticking towards the end of their June 30 fiscal year and the beginning of the new one? Foreclosures and rising unemployment should have spelled out reality. All one needs to do is to drive through many of the neighborhoods in Palm Beach County where “For Sale” signs are interspersed with euphemistic “For Rent” signs.

Here are some bullet points:

* Property Appraiser Gary Nikolits had been expecting “the quickest free fall since the Great Depression” but his estimate of a 12% decline has now been revised to 13.5%

* Taxable countywide property has declined to $138 billion from $159.6 billion last year with 38 cities, towns, and villages having larger percentage declines

* Given the 13.5% decline in values, county administrators proposed a 13.5% tax rate increase (as well as laying off 175 workers, an undisclosed percentage of total employees)!

When times were “good” (fictitiously good, that is), our town in PBC was eager to spend. $Millions went into the ”beautification” of a street which might have been more beautiful if some of the homes were updated, but as the municipality can not just hand out money to homeowners (only the federal government can do that), they constructed little islands in the middle of the road and planted vegetation. Much of this beautification is now gone but the islands remain, constricting traffic and leading to a reduction in the speed limit: so much for handing municipalities the “benefits” of inflation. Now, faced, with deflation, and rising unemployment, no problem, presto, a proposed tax increase.

Prelude to panic, perhaps, but they can’t tax this away from us....


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