Thursday, December 27, 2012

It's Déjà Vu All Over Again

Great ideas often receive violent opposition from mediocre minds.

“Insanity: doing the same thing over and over again and expecting different results.”

The quotes above have been widely attributed to Albert Einstein.  We knew he was a brilliant man, but it’s incredible to think that in the early 20th century he could so accurately describe politics in the 21st century. 

We were all set to write a piece on the current “fiscal cliff crisis” in Washington, but realized we wrote all that needs to be said last year when we faced essentially the same problem, but under different media labels – today’s “fiscal cliff” vs. 2010/11’s “debt ceiling debate”.

Apparently in Washington you can either be in the “spend too much” camp or the “tax to little” camp.  There is no middle ground, no rational thought, no compromise and an abundance of mediocre minds. 

So, we’re forced to wait for Congress and the President to agree on the least painful and most politically expedient legislation to avoid the “fiscal cliff.”  This legislation is likely to trade-in the moderate pain caused by the “debt ceiling debate” can-kicking exercise in 2011 for a debilitating pain to be incurred by young workers and our children and grandchildren sometime in the future. 

Instead of following the typical media outlet practice of regurgitating our good ideas in a new package, we decided to regurgitate our good ideas in their original packages. 

Each one of the articles below could have been written today and given the insanity in Washington, we have no doubt that we’ll be able to recycle them again in 2013/14. 


Government Doesn't Need A Raise (December 14th 2010) – A reminder that there are in fact two sides to the “deficit” equation.  Total revenue gets all the attention in Congress and the White House, but it’s really the Total Spending part of the equation that needs to be addressed.   

To Tax, or Not To Tax, That Is Not The Question (April 15th 2011) - Why taxing the rich isn’t as bad as Republicans think, but it’s laughable that Democrats believe this will materially reduce the deficit.

You Call That Compromise? (July 27th 2011) – Our commentary on the negotiations between Congress and the White House, plus our proposed Grand Bargain. 

The Grand Mistake (July 29th 2011) – We urged the Tea Party Republicans to not overestimate their mandate coming out of the 2010 elections, and to avoid a US debt default.  They obliged. 

But Americans Want It! (August 1st, 2011) – The fallacy of basing tax policy (i.e. spending cuts vs. tax increases) on poorly constructed public opinion polls.  

Desperate Times, Desperate Measures (August 9th, 2011) – Our analysis of the S&P downgrade of US debt, and our debunking of the “tea party downgrade” theory. 

Warren Buffett's Missing Facts and $3,000 Gallon of Milk (August 16th, 2011) – One of our favorite pieces, taking aim at the beginnings of the “Buffet Rule.” 

White House: Lower Taxes By Raising Taxes (December 6th, 2011) & Putrid Payroll Tax Politics (December 21st, 2011)  – We remind everyone of the original purpose of payroll taxes and why cutting payroll taxes now without cutting future benefits will be a disaster for our children and grandchildren.
Testing the Logic of "Fairness" in Taxes (January 26th, 2012) – Discussing the lazy populist sound bite used over and over again by the Obama Administration and Democrats in Congress. 
#Our2cents on #My2k (December 3rd, 2012) – Our latest piece on the absurd White House use Twitter to drum up populist support for extending the payroll tax holiday. 

Monday, December 3, 2012

#Our2cents on #My2k

The White House occasionally uses Twitter to build support for their policies, with the original effort being the shameful #40dollars campaign in February to generate support for the extension of the payroll tax holiday. 

Here they go again.

This time, it’s an equally shameful attempt to urge Congress to extend the Bush/Obama tax cuts for the middle class tax which are scheduled to expire on January 1st.  This time @whitehouse is urging Americans to tweet what $2,000 a year can do for them - $2,000 a year being the average increase in taxes for the middle class if the Bush/Obama tax cuts expire as required by current law.
Remember, in order to lower taxes when the government is running a deficit, one of three things has to happen to offset the lower revenue:
  1. We can borrow more money.  Given our current deficit, borrowing more is probably not the best idea.  Yes, money is cheap, but even if it’s free, it still needs to be paid back or refinanced in the future, and guess who’s paying for that through higher taxes and/or lower benefits?  Our children and grandchildren, and that’s despicable. 
  2. We can cut government spending.  Despite being the only real solution, neither party has shown any ability to cut spending, and as President Obama and Governor Brown in California like to say, the only way to cut spending is to fire teachers, firefighters and policemen.  There's also the elimination of all that government waste that for some reason hasn't already been eliminated.
  3. We can raise taxes on other Americans.  Pure and straight income redistribution.  Raise taxes on Peter, lower taxes for Paul.  It’s only fair.     
When reading the following tweets, please remember that all these things are more important to these Twitter users and the official White House twitter account than our children’s future, today’s teachers, firefighters, policemen and other people’s hard earned income.

Cue the madness…

So, to recap, Peter’s taxes should go up to pay for Caitlan's mother’s nursing home fees, Tewale's piano lessons, a new car for Melissa, vacations for Laura, car insurance for John and Joelle's swim team dues.

The last two are priceless.  Someone else (perhaps even their own kids and grandkids) should pay higher taxes because Robert and Sarah have decided to have 13 children between the two of them without adequately planning for them financially.  It’s pathetic, and the worst part about it is that all of these #My2k tweets were re-tweeted by the official White House twitter account, and are therefore a direct endorsement from the President on how government resources, primarily tax revenue, should be spent.

We’re not opposed to minor increase in tax rates to pay down the debt or fund useful and important government functions.  We are vehemently opposed to raising taxes so someone can go on more vacations and eat out at restaurants more frequently.  

Friday, November 9, 2012

What if? Reflections on the 2012 Elections

What if Governor Romney and the GOP had included the following two planks in the Republican Party platform?
  1. “We will not write or sign any piece of legislation that infringes upon a woman’s reproductive rights.”  
  2. “We can not, and will not, write or sign any piece of legislation that denies anyone, regardless of sex, the benefits and rights afforded to those in a civil union.  Same-sex couples have the exact same civil rights as straight couples.”
What if? 
Romney would be the President-Elect.  In a close race, these two issues alone decided the election.      
But didn't President Obama win by millions of popular votes and 125 electoral college votes?  How can we say it was a close race?
Romney lost Florida, Colorado, Ohio and Virginia by a combined total of 393,295 votes (as of CNN’s count today).  Therefore, if roughly 200,001 American (specifically, 30,001 Floridians, 60,001 Coloradoans, 50,001 Ohioans, and 60,001 Virginians) voted for Romney instead of Obama, Romney wins these states and is the President-Elect by virtue of winning 275 electoral votes (5 more than the 270 needed to win). 
120,000,000 votes were cast across America.  200,004 votes equals 0.16% of these votes – one sixteenth of one percent.  A statistical rounding error.  Even if we just look at vote totals of these four states, 200,004 votes is only 1% of all those votes.   
It was close. 
We believe these 200,004 Americans were but a small fraction of moderate and independent Americans who are unhappy with Obama but simply could not vote for Romney or any other Republican because of the issues above.  Given the time, money and effort Democrats put into characterizing Romney and the GOP as waging war on women, a characterization brought to life by some incredibly stupid comments by Republican Congressional candidates, it’s very possible millions of moderates and independents voted against Romney and other Republican candidates only because of these two issues.    

Our in-depth research tool we call our  "Facebook News Feed" illustrated how important this issue was with voters.  We only have a couple hundred friends, but many of our smart, educated, and world-traveled friends filled our news feed with women’s rights memes and proclamations that they were voting in favor of their “uterus and daughter’s uterus and loving families of all kinds.”  We admit this is highly unscientific research, but telling nonetheless.    
Would the partisan Democrats have voted for President Obama regardless of who he was running against?  Absolutely.  Would the Republicans on the far right stayed home if Governor Romney and the GOP included these planks in their platform?  Doubtful.  Did at least 200,004 (and probably many more) moderate and independent voters in Florida, Colorado, Ohio and Virginia vote for Obama purely because they disliked Romney’s views on women’s rights and same-sex marriage?  Absolutely. 
The biggest question coming out of the 2012 elections is whether the Republican Party will unhitch itself from the social conservative bandwagon to catch up to the times, or erode into irrelevance.  If Republicans continue to nominate staunch social conservatives, the biggest question for 2014 and 2016 is whether fiscally conservative, socially liberal independent candidates can successfully fill the large political void in the middle of our “center-right" country.  We sure hope so. 

Tuesday, October 16, 2012

The Detail is the Devil

A friend recently asked us how we get our children to eat healthy dinners.  "We require them to eat exactly 13 bites of baked salmon, 9 bites of steamed broccoli, 12 bites of roasted sweet potato and 12 short sips of 2% milk." 

We are accountants…but we’re not that bad. 

We all know how that approach would end – especially when you’re dealing with children.  In reality, we make a healthy meal, make it tasty and influence our kids to eat it.  If they eat their food we reward that behavior with something fun like ice cream or a peanut butter cup, reinforcing that behavior for the next meal.  Let’s call it principles-based parenting – no need for excruciating detail, just a few principles, some effective negotiating and a little bribe.   

This is not a parenting advice column - the example is instructive when thinking about how a president (the parent) can best influence and drive the legislative results of Congress (the children).
This dynamic has come to the fore recently with the Romney/Ryan approach to tax reform.  It’s safe to say that the Romney Tax Plan is principles-based.  The plan is simply to lower the marginal tax rates (make a healthy meal) and broaden the tax base (make it tasty) to create a healthy tax regime free from distortions and loopholes.  As a reward for completing the healthy reform, the plan expects higher economic growth and increases in tax revenues over time (the ice cream and peanut butter cups).   

Democrats and media pundits highlight the lack of detail as a reason to discredit the plan.  Or worse, they just fill in the blanks with their own assumptions, and claim it’s either mathematically impossible, or that the middle class will get hit with an enormous tax increase while the “rich” will each pay $250,000 less in taxes.      

Details matter, but tax law, in its gory detail, is negotiated and legislated by the 535 members of Congress. 

Sure, the vice president has the tie breaking vote if required in the Senate, and the president has the right to veto, but the details are owned and finalized by Congress.  Therefore, any detailed discussion of tax reform by presidents or presidential nominees, while red meat for debates and talking head shows, is a fool's game and has no bearing on reality.  As Paul Ryan was able to note in-between Vice President Biden’s interruptions, “here’s the framework [the Romney/Ryan Tax Plan], let’s work together to fill in the details…That’s how you get things done.” 

We tend to forget some stubborn facts during presidential elections – first on the list is the fact that the president cannot unilaterally create or change the law (despite the current administrations efforts).  Views on tax reform, abortion, gun control, legalizing pot or any other issue that requires legislative action are interesting, but ultimately inconsequential without the ability to influence.  In our current world where Congress is split evenly across bitterly partisan lines, the best a president can do is influence the debate, with fineess using the powers of persuasion or through the blunt power of the veto. 

A presidential candidate can fabricate as many details as they need to make a certain plan “deficit-neutral” or affect only the “rich” to pander to certain constituents, but these details are meaningless.  The president can’t and shouldn’t micromanage the process of legislating.  We’d much rather see an incoming administration open to different ideas and details on how to achieve a certain goal or principle, rather than locked into their campaign promises of specific giveaways or penalties.  In fact, we think the Romney/Ryan plan is too detailed.  By attaching a 20% target to the marginal tax rate reductions, Romney has invited criticism, caused the wonks to scream “does not compute”, and more importantly, has wasted valuable campaign time on a number that was most likely plucked out of thin air in a time of desperation during the primary.

We deserve a vigorous debate on the presidential candidates principles of tax reform, not meaningless details.  Getting stuck in the weeds of whether someone making $225,000 will get some, none or all of this tax credit or that itemized deduction, is meaningless in a presidential campaign, and a waste of the public’s time, resources and attention. 

Friday, August 17, 2012

Extortion and the Obama Campaign, Perfect Together

We're not lawyers, but this letter from the Obama campaign to the Romney campaign feels uncomfortably close to extortion.

The key passage from the letter is:

"...if the Governor will release five years of returns, I commit in turn that we will not criticize him for not releasing more--neither in ads nor in other public communications or commentary for the rest of the campaign."

The letter is signed by Jim Messina, Obama's campaign manager, but it may as well be signed "Tony Soprano."

Again, we're not lawyers, but our trusty friend Wikipedia defines the criminal offence of extortion as follows:

"Extortion (also called blackmail, shakedown, outwresting, and exaction) is a criminal offence of unlawfully obtaining money, property, or services from a person, entity, or institution, through coercion. ...  The actual obtainment of money or property is not required to commit the offense. ... Exaction refers not only to extortion or the unlawful demanding and obtaining of something through force, but additionally, in its formal definition, means the infliction of something such as pain and suffering or making somebody endure something unpleasant."

It sure sounds like the Obama campaign is explicitly trying to obtain property (i.e. Romney's tax returns) through coercion by making Romney "suffer" or "endure something unpleasant" (i.e. constantly answering questions about his tax returns instead of his plan for the economy, not to mention the public insinuation that he's a tax cheat). 

This side show is the perfect encapsulation of the Obama campaign - remain tellingly silent on substantive issues (economy, jobs, entitlements, etc.) while creating a media circus around non-substantive issues like what tax deductions Romney might have made in 2007. 

It's unbecoming of a President, and should be insulting to each and every American who looks to that office for leadership, only to get showered with shallow excuses and hollow, populist rhetoric. 

Monday, August 6, 2012

Fixing Our Shambolic Tax Code

The United States tax code is in complete shambles. 
It’s incredibly complex, and this complexity is driven by a myriad of loopholes and subsidies that also make it wildly inequitable. 
Why should Bob get to deduct his mortgage interest but Larry cannot deduct his rent payments? 
Why should the Duggar’s get tax benefits for the 283 kids they chose to produce, while their infertile neighbors could never take advantage of those same benefits?
They shouldn’t. 
The best tax reform is as obvious as it is simple – add up all your income and multiply it by a tax rate.  That’s it.  All income is treated the same, no credits, no deductions (except charitable giving), no allowances, no 100-page tax returns, no extensions, no H&R Block consultants, no boxes of receipts.  Simply determine your gross income from all sources (wages, interest, dividends, realized cap gains, etc.), find that amount on the IRS tax table and pay the amount shown.  The tax tables would be set with progressive tax rates, for example:
First $25,000 (or wherever the poverty line sits at any given point in time) taxed at 5%
$25,000 - $50,000 – 10%
$50,000 - $200,000 – 15%
$200,000 - $1,000,000 – 20%
$1,000,000 and above – 25%
The income bands and tax rates should be initially determined to raise revenue equal to a set percentage of GDP (e.g. 20%), and adjusted every few years to ensure tax revenues keep pace with GDP growth.  This will restrain the normal activities of government to a set percentage of our economy.  To the extent extraordinary expenditures are required, this amount can either be raised through debt, with the requirement that the debts be repaid with future tax receipts (i.e. at the expense of other programs), or raised through one-off duties or levies.  For example, if Iran somehow provoked another expensive war, any defense spending above and beyond the normal budgeted amounts would be considered extraordinary and would require additional levies – i.e. every citizen owes $500 in addition to their normal tax bill to fund the war.
Will this ever happen?  Not in the foreseeable future. 
The politics of taxes is poisoned with the pill of over-exaggeration and an unrelenting obsession with comparing thoughtful and pragmatic reform proposals with today’s broken and irrational tax code.  Politicians and their media shills take a small sliver of information and overstate its relevance with the intention of pooh-poohing the entire reform proposal.  Substance and thoughtful analysis be damned.    
For instance, instead of pointing out the inescapable progressivity of our reform proposal - opponents would immediately jump to some study that shows it will result in a tax increase on the poor and middle class.  It might even be proven to lower taxes for the wealthy (doubtful). 
Could this be true? 
Perhaps, and that’s not necessarily a bad thing. 
A worker making $25,000 a year will go from an effective tax rate (including payroll taxes) of perhaps 2.5%, to a new rate of 5%.  Headlines will read, “Tax reform double taxes on the poor”! 
Ignoring the political optics of that headline, is it really so terrible to have everyone pay at least 5% in income taxes?  At that level of income, it’s likely that any tax burden is offset by various federal assistance programs (i.e. food, energy, etc – which would be separately recognized as expenditures in the federal budget), but the psychology of seeing a deduction to your paycheck, or an amount due on your 1040, reinforces the individuals roll in our democracy.  Everyone has skin in the game. 
Perhaps even more troublesome would be the headline reading, “Proposed reform cuts taxes for the rich”.  It’s entirely possible that there is an individual making $5 million a year with an effective tax rate of 30% - and under the reforms, their tax rate could come down to 25%.  Instead of noting that this person will have an effective tax rate 500% higher than someone in the lowest bracket (i.e. 25% vs. 5%), and will pay almost 100,000% more in actual tax dollars to the IRS ($1,200,000 vs. $1,250), they will obsess about the fact that their overall effective tax rate will be reduced (i.e. the “tax reform will benefit the rich as the expense of the poor”). 
And herein lies the problem with any substantive reform effort.  
Why do we insist on comparing the projected results of thoughtful and robust reform proposals with the results of a system that everyone knows is in shambles?   It’s senseless and it’s destructive.
Until we can have honest and thoughtful public debates on important reform proposals (e.g. taxes, social security, health care, etc.), we’ll continue to reap what we sow.  Incompetent and irrational public policy will continue to result in a bloated government, wasted resources and a faltering economy.    

Wednesday, July 25, 2012

"You Didn't Build That"

We're appalled, yet not completely surprised, by President Obama's recent comments about business owners and how they are not responsible for their own success.

Plenty has been written on this, so we're not going to recant all of the obvious lessons learned from this insight into President Obama's view of the private sector, but we did want to revisit our previous post - "Ask Not What Your Country Can Do For You..." - as President Obama's remarks only serve to amplify our point. 

In the post we note that, "Politicians run around bragging about all the things they will make the country do for you, without a peep about the things you should be doing for your country."

President Obama's "You Didn't Build That" moment is possibly the perfect example of this critique as it absolutely turns JFK's memorable and powerful quote on it's head.  He could have also said, "Ask not what you can do for your country, but what your country can do for you" without losing any meaning to his pathetic rant against the entrepreneurs that power our country's economy.

One last thought...where's Warren Buffett now? 

We all know Mr. Buffett loudly agrees with President Obama's tax plan (aka, the "Buffett Rule"), but it would be interesting to hear whether he agrees with President Obama view that Mr. Buffett didn't built his conglomeration of wildly successful businesses...

Monday, June 11, 2012

How To Get Money Out Of Politics

The billions of dollars spent on political campaigns is unsettling.

Not only are the amounts astronomical, but the majority of that cash is used, not to advertise one's own achievements and character, but to denigrate an opponent with out-of-context quotes or incredibly misleading, if not downright false, "facts."

We have no problems with campaigns spending money to crisscross the nation to shake hands, kiss babies and give stump speeches. We also have no problem with the use of new technologies (Facebook, Twitter, websites and blogs) that promote the candidate and their platform.  That’s campaigning at its core - promoting the candidate's abilities, accomplishments and character.

It’s the constant and involuntary assault of expensive political advertisements on TV that must go, and they will.

We don't need to rely on more government to fix this problem.  Supreme Court reversals or more “campaign finance reform” legislation are not the answer. We can’t restrict free speech. As uncomfortable as unlimited (but disclosed) political spending might make us, we can’t make exceptions to the FIRST amendment of our Constitution. We just can’t.

The power to change these tactics lies with the voters and the candidates themselves.

Voters will force this change because of two budding phenomenon:

Firstly, the days of sitting down and watching a TV program, and its accompanying ads, is dying rapidly. DVR’s, online archives, NetFlix, Hulu, iTunes, etc. are all taking over as the go to spots for entertainment. None of these business models have figured out how to incorporate ads without losing viewers – at least not yet. Therefore, as traditional advertisers know all too well, the cost effectiveness of political ads on TV will slowly erode. 

Secondly, voters are tired of the constant barrage of political ads during election season. It’s taken too long, but voters have come to realize that everything said in these ads is, at a minimum, highly misleading, and most likely a downright lie.  When was the last time you saw a political ad on TV and it actually informed your view of a candidate or issue?  Political ads have jumped the shark and voters know it.  There may even come a point in the not so distant future where running negative ads becomes a political liability. Producing and placing these political ads will be flushing money down the toilet.

Once these eventualities set in, it will be up to the candidates to abandon the negativity and run a more conventional campaign, connecting with the people, and promoting their solutions to the issues of the day without the constant need for fundraising activities. This approach might even allow a candidate to avail themselves of the option to run a publicly financed campaign, freeing them to focus on thought leadership instead of the constant search for more cash.

A key catalyst in this transformation could be a renewed focus on the televised debate. As we’ve seen from the Republican primary, there is a huge appetite from the voting public for debates. The major networks would fall over themselves to be able to produce and air the events, and they have the potential to be incredibly powerful tools for garnering votes – particularly for the most qualified candidates.

Would you watch a weekly hour-long debate between President Obama and Governor Romney where each candidate was given the same amount of airtime, were asked tough but fair questions, had a opportunity to directly respond to their opponents criticisms, and most importantly, were kept honest by the intelligence and integrity of an independent moderator?

Of course you would. What’s a better way to understand the true character and ability of a candidate - through intelligent debates, or from slimy political ads?

This system would fill the public space with accurate and useful information from which to make informed voting decisions, and will do so at a fraction of the amount currently spent on political campaigns. Who knows, if we cleaned up the political process, we might actually start to attract the best and most qualified candidates for office and not just the raging egomaniacs we get now.

Imagine if the President’s first term could actually be spent on Presidential activities rather than on re-election fundraising activities or if challengers didn't need to be independently wealthy, or backed by a network of independently wealthy individuals to be a viable candidate.

It’s a no-brainer...and therein lies the problem.

While politics is flush with cash, it’s short on brains.  We hope we're prescient, but we're not holding our breath.

Friday, June 8, 2012

Quote of the Day - June 8th

In a spot-on op-ed in today's Wall Street Journal, Peggy Noonan crafts this perfect summation of our current president:
President Obama's problem now isn't what Wisconsin did, it's how he looks each day—careening around, always in flight, a superfluous figure. No one even looks to him for leadership now. He doesn't go to Wisconsin, where the fight is. He goes to Sarah Jessica Parker's place, where the money is.

Thursday, June 7, 2012

"Ask Not What Your Country Can Do For You..."

One of our earliest school memories was a quote board we had in our 4th grade class room. Ms. Selario would put a quote on the board, but instead of just writing it on the board, she would use pictures to represent each word and the class had to figure it out. The only quote we remember was JFK’s famous line in his inauguration speech “Ask not what your country can do for you - ask what you can do for your country.”

Think about that quote for a minute against the backdrop of today’s society and politics.

Politicians run around bragging about all the things they will make the country do for you, without a peep about the things you should be doing for your country (except for "millionaires" - they should be doing even more).

It’s the complete opposite of what JFK urged 51 years ago, and it’s pathetic.

Next time you hear a political ad, speech or tweet, there is a very good chance that it conveys a promise of money or services that the government should provide to individuals, rather than how government can support individuals who positively contribute to their country.  A quick scan of today's White House tweets shows promises for lower student loan interest rates, free check ups and prescriptions for women, subsidized mortgage refinancings and insurance rebates.  In other words, what the country can do for you.   

The White House did have a tweet about how tax cuts for the wealthy and small businesses are bad, but asking less than 1% of the population to fund an even higher percentage of government entitlements hardly seems to fit into JFK’s ideal. Asking the country to pay for your birth control pills, your motorized scooter, or 99 weeks of vacation job-hunting sounds a lot like asking what your country can do for you. Paying zero or negative income taxes, squandering the opportunities provided by a free education or being satisfied with a government funded life, in perpetuity, is not what JFK had in mind when asking what you can do for your country.

Based on his quote, we’d guess that JFK would be very uncomfortable with the decline in personal responsibility in society today. It’s always someone else’s responsibility or someone else’s fault – never our own.

Your kid acts out or performs poorly in school – it’s the teachers fault. Armed with your limited use liberal arts degree from Timbuktu State, you can't find a job and can’t pay your government-subsidized student loans – it’s the governments fault and they should further reduce your already subsidized interest rate or just forgive the loans altogether. You smoke 3 packs a day, hydrate on Jack Daniels, and feast on fast food and wonder why health care is so expensive – it’s the insurance industry’s fault. You bought a house you couldn’t afford, haven’t paid your mortgage in three years, have 10 maxed out credit cards, and you wonder why your house is foreclosed upon – it’s the "vampire squid" bank’s fault.

We live in the land of opportunity, not the land of entitlement.  

Once those who would rather ask what their country can do for them outnumber those who have asked what they can do for their country, reforming our entitlement society will be electorally challenging and the status quo will ultimately lead to economic and social devastation.

Just ask Greece.

Tuesday, April 10, 2012

Tax Policy Based on the 0.001%

Nothing gets us fired up more than blatantly misleading tweets from @White House.
In the absence of any real substantive ideas or accomplishments to communicate to the masses, the White House has once again resorted to its tried and tested “fair share” (sorry, #fairshare) arguments for raising taxes.  Today's tweet mentions that 1,470 taxpayers “made more than $1 million in 2009 [and] paid $0 in federal income tax” in an attempt to again try and illustrate the "fairness" problem.     
The "fairness" issue was first personified through the evil 1% and how it’s unfair that they only fund 37% of all tax revenues and as a group have an effective tax rate of 24%.  An effective tax rate of 24% is unfair because it is only 46% higher than the rate paid by the top 1-5%, 192% higher than the rate paid by the top 10-25%, and 1,199% higher than the Bottom 50%. 
Apologies if you don't recognize these figures, we like to use actual aggregated data from the IRS, not the White House “data” which seems to consist solely of the effective tax rates of Warren Buffet (17%), his secretary (36%), and 1,470 unique taxpayers with at least $1 million in income (0%).  We don't believe it makes sense to set tax policy affecting millions of Americans based on the unique tax situations of 1,472 tax returns (0.001% of all tax returns).  Is the data on the remaining 99.999%, or 137,980,731 tax returns irrelevant?  Perhaps just inconvenient.  Who needs statistically significant data and information when assumptions based on headline-grabbing outliers polls so much better?
We’ve already debunked the theory that taxes on the “rich” can solve our problems (hint: you could tax 100% of that income, and still be left with a huge annual deficit).  We’ve already debunked the idea that the marginal tax rate is the bellweather of fairness
In this piece we highlight the complete set of facts that debunks use of 1,470 taxpayers who “made more than $1 million in 2009 [and] paid $0 in federal income tax” to promote "fairness."  
Even ABC News can get its facts straight when discussing this population of 1,470 taxpayers.  After presenting the click-provoking headline that some millionaires paid zero income tax, the story actually does a good job of explaining how or why this phenomenon happens.  Again, this is 0.001% of total tax returns, so not exactly a common occurrence. 
It turns out that it’s not because these individuals are sneaky or even have good accountants, it’s just that they have unique income. 
Three main tax positions can lead to large reported income, but zero federal tax. 
1.       Tax free interest income
2.       Charitable donations
3.       Foreign Source Income and Foreign Taxes Paid. 
Tax Free Interest Income
To incentivize investing in municipal bonds, Congress has legislated that interest income on municipal bonds is not subject to federal income tax.  Therefore, someone living off the interest of $20,000,000 in municipal bonds earning 5% (remember our "unique" claim above), will report $1 million in income, but will pay zero federal income tax.
Before you scream “NOT FAIR” remember that the market has already priced in this tax exemption into the interest rate on the bonds, meaning that the interest earned on these bonds is reduced by the tax benefit received.  Despite the administrations hints to the contrary, there are no free lunches. 
Therefore, investors are effectively taxed on the income through lower returns – with the municipalities benefiting from lower interest expenses instead of the federal government benefiting from income tax revenue.  Quick example.  Grandpa wins MegaMillions and deposits his after-tax winnings of $20,000,000 in a brokerage account.  His broker gives him two high quality investment options:
  • Corporate Bond A - AAA- rated with interest rate of 7%
  • Municipal Bond B - AAA-rated with interest rate of 5%. 
At this level of income, let’s assume Grandpa has an effective tax rate of approximately 30% and no other income or deductions.  What is Grandpa’s after-tax income for each investment?  The same - $1 million. 
  • Corporate Bond A will earn $1.4 million in annual income and Grandpa will pay approx $400,000 in federal income tax on that income.  
  • Municipal Bond B will earn $1 million in annual income and Grandpa will pay zero in federal income tax.
Therefore, Grandpa’s economic results are identical regardless of whether he paid federal income taxes or not.  Not coincidentally, the difference in interest rates on these instruments exactly matches the difference in tax treatment.  It's amazing how pricing is so efficient in a free market.    
Therefore, the only substantive effect of implementing the Buffett Rule on Grandpa is that he will sell the Municipal Bonds and buy the Corporate Bonds.  Without the tax benefit, the Municipal Bonds are a bad investment at their stated interest rate.  The net effect will be that the federal government will end up with more cash, the already cash-strapped municipalities will end up will less cash and a less liquid market in which to issue bonds.  We presume the politicians would run around claiming they’ve restored fairness to country, even though Grandpa still earns $1 million after tax.  We concede his effective tax rate will be higher (yea, fairness!), but it's meaningless as his after-tax income will not change, and municipalities get crushed in the process.     
Charitable donations
Charitable donations are tax-deductible - for every $1 you give to charity, you can deduct $1 from your taxable income.  For example, if Grandpa bought the Corporate Bond above, but also donated $1.4 million to charity, he would have zero federal tax liability as his donations offset his taxable income. 
The impact of the Buffett Rule in this scenario is that Grandpa would give $400,000 less to charity, and instead give it to the IRS.  If your idea of fairness is funneling money away from worthy charities and into the government coffers, the Buffett Rule is for you! 
Foreign Income and Taxes
This one is near and dear to our hearts as former ex-patriots.  The IRS requires you to report your total income, both foreign and domestic in your tax return.  However, the IRS then lets you deduct some foreign source income from that total, and then also provides for a tax credit for taxes paid in most foreign jurisdictions. 
For example, a US citizen is living and working in London and is fortunate enough to earn £600,000, which converts roughly to $1,000,000.  By virtue of living and working in London, this executive is taxed by the Inland Revenue, the UK’s version of the IRS, at an effective rate appraoching 50% (isn’t socialism great!).  The US and the UK have an agreement in place where neither country will double tax its citizens – meaning that the US executive living and working in London does not need to pay UK taxes and US taxes on the same income.   
Therefore, in his US tax return, the US expat will show roughly $1 million in income, but zero federal tax payments as the IRS allows the £300,000 he paid in taxes to the UK to be applied to his US tax liability.

The impact of the Buffett Rule in this scenario is that every expat living abroad would be on the first flight back to the US.  If your idea of fairness is limiting US citizens ability to work abroad, then the Buffett Rule is for you!!
President Obama and his administration must think voters are only capable of reading headlines.  If voters took the time to actually understand the complete set of facts around effective tax rates, they might come to a different conclusion on what is “fair.”

Thursday, March 22, 2012

We Agree With Bill Maher!!!

We disagree with Bill Maher often, but not with his recent New York Times op-ed about feigned outrage gone wild.

Imagine if we used just a fraction of the time and effort we spend feigning outrage over some irrelevant comment made by some irrelevant "celebrity" or politician, and actually learned something or problem solved.

Thursday, March 8, 2012

Democrats Excited by Romney?

We’re consistently stupefied by the logic portrayed by Charles Blow in the New York Times and his most recent piece is no exception.
After using Mitt Romney’s relatively poor showing in the “most conservative” states as the only facts in the column, Mr. Blow proceeds to drone on about how “one could hardly design a worse candidate” than Mr. Romney (or “Mr. Roboto” as Mr. Blow quips). 
He continues, “Romney is wooden and awkward. His convictions range from fickle to flimsy. He is ineloquent and dispassionate. His past actions and comments are completely at odds with his current advocacy. Most of us call this flip-flopping….” 
Were Mr. Romney to win the Republican nomination, which is looking more likely by the day, Mr. Blow claims that “red state America would have a blue state presidential candidate.  The wrong man would rule the roost. They’d have to root for a man they dislike over a president they disdain.  How uncomfortable for them. How exciting for Democrats.”
This analysis reeks of exaggeration and is, perhaps subconsciously, an attempted reverse jinx.
We could understand why the Democrats would be excited for a Rick Santorum or Newt Gingrich  vs. President Obama election, but its misguided to be most excited, and implicitly more confident, in a Mitt Romney vs. President Obama election.  Just ask the Democrats in Michigan who they voted for in the Republican primary and why.
First, the logic.  Does Mr. Blow really think that the most conservative states are up for grabs in the general election?  Does he really believe that voters in these “above average conservative” states would be so “uncomfortable” with Mitt Romney’s level of conservatism that they would vote for President Obama?  The Presidency is a battle of electoral votes, not popular votes, and in 2008, President Obama won 11 of the 177 electoral votes available in the 21 states Mr. Blow sites in his column.  Does anyone really think President Obama is more electable now? 

In the general election, the real battle is for the votes of independents and party moderates, not for the party idealogues. 

This reminds us of a
post we wrote almost exactly one year ago, in which we chided Republicans as short sighted for suggesting that nominees focus on conservative social issues to win the nomination. 
Everyone is so caught up in the semi-final battle to find the best Republican, that they're missing the important fact that in the championship game in November, the country will elect the best candidate, not the best Republican or Democrat.  Sure you have to win the semi-final to advance to the champtionship game, but an upset in the semi-final just makes it easier for the favorite, and in this the defending champ, to win it all. 
Rick Santorum, and to a lesser extent, Newt Gingrich, are proving that discussing uber-conservative social issues helps garner support in the Republican primary.  However, we still believe prioritizing these issues as opposed to the economy and size of government is misguided and a virtual death sentence in a general election – a belief supported by many Democrats (including the Obama team who successfully focused the national discourse to these issues by igniting the contraception debate) and polls that show Mr. Romney the closest to President Obama in head to head matchups.  Tellingly, in these same polls, a generic “Republican” polls four points closer to President Obama than Mr. Romney, six points better than Mr. Santorum and almost 12 points better than Mr. Gingrich.
As we’ve noted before, the vast majority of voters need to hold their nose every time they enter a voting booth, and 2012 will be no different.  The least bad candidate will prevail, and, for better or worse, Mr. Romney is the least bad Republican candidate and therefore has the best chance of beating President Obama in November. 
Maybe he should just change his name to "Republican."

Friday, March 2, 2012

Stealth Income Redistribution

In her recent New York Times column, Gail Collins makes make the following unoriginal, lazy and Robin Hoodinan proposal for Social Security reform:
“The basic answer to fixing the long-term Social Security imbalance is just to eliminate the payroll tax cap, which currently exempts all income over $110,100 a year. Do that, and you have solved the problem. Politically speaking, you would probably have to agree to mix a limited tax increase with one of the fixes desired by fiscal conservatives, like reducing benefits for the wealthy, or changing the cost-of-living adjustment or, yeah, raising the retirement age a little. But the main answer is that cap, and anybody who refuses to even discuss the payroll tax cap is not serious about fixing Social Security.”
Ms. Collins is no doubt pandering to the New York Times reader, and judging by the comments, successfully so, but the piece grossly misdiagnoses the problems of Social Security (perhaps intentionally), and prescribes the wrong medicine.

Let’s step back a bit to understand the original intentions of Social Security – straight from a passage on the U.S. Social Security Administration’s (USSSA) website describing the 1935 Social Security Act:
“The significance of the new social insurance program was that it sought to address the long-range problem of economic security for the aged through a contributory system in which the workers themselves contributed to their own future retirement benefit by making regular payments into a joint fund. It was thus distinct from the welfare benefits provided under Title I of the Act and from the various state ‘old-age pensions.’"
At its essence, Social Security is a government mandated and administered (herein lies the problem) defined benefit retirement plan for every American worker. Workers pay in 6.2% of their lifetime earnings for the promise of a return of that money, plus interest (i.e. the cost of living adjustment), in monthly increments upon retirement.

Ms. Collins correctly points out that workers contribution are capped at $110,100, but she conveniently fails to mention that Social Security benefits are also capped at $110,100. Anyone who makes more than $110,100 only accrues future benefits on the first $110,100 of income each year.

The intention of Social Security was to provide for a social insurance program, not a welfare program.

The problem is that the USSSA is both actuarially challenged and politically malleable - resulting in a Ponzi scheme that makes Bernie Madoff look like a child who stole a pack of Skittles from the grocery store.

The Social Security obligations have substantially grown, in large part due to American’s ever increasing life expectancy and the generous cost of living adjustments baked into the benefits formula, yet the amounts paid into the system have not grown fast enough to fund these obligations, and in some cases, most recently as part of the payroll tax “holiday” legislation, contributions have actually shrunk. Uncle Sam now needs the payroll taxes of three current workers to pay for the Social Security checks of one retiree. 

Social Security is a ticking fiscal timebomb, and without reform, the only question will be which generation gets soaked with reduced benefits and/or substantially increased taxes.

So what’s the solution?

Ms. Collins is right that fixing Social Security will require multiple actions, including an increase in the retirement age and a decrease in the cost of living adjustments. However, those actions really just tinker with the benefits formula, which is important, but its not a solution.

The only real solution is to turn the program into an economically sound retirement savings program. Americans should only be entitled to receive benefits that have been fully funded by their payroll tax contributions. Private businesses realized long ago that defined benefit plans are dangerous and can be prohibitively expensive, and have since replaced them with defined contribution plans, for example, 401(k) plans. It’s time our government did the same.

Ms. Collins idea of eliminating the payroll tax cap, while hinting at lower benefits for those now forced to pay more into the program, flies directly in the face of the original purpose of Social Security.

We should be reforming Social Security to bring it back to its original insurance mandate, not to create yet another vehicle for welfare programs funded by income redistribution. If we believe there is a population of Americans who deserve more than they put into the system, and there absolutely will be, those funds should be appropriated through Congress, along with all other welfare programs, and not obfuscated within the Social Security and payroll tax debate.

If you want to argue for an even more progressive tax code, by all means make that argument, but don’t cower behind the guise of Social Security and payroll tax “reform” to get there. You might be able to fool your core audience, but you can’t fool all the people all the time.

Friday, February 10, 2012

The Free Lunch "Compromise"

Wow, President Obama and his administration must really think that religious organizations, or possibly even the public at large, are incredibly stupid.  The administration’s latest attempt to address another unintended consequence of Obamacare is astonishingly absurd. 
Let’s recap the chain of events leading up to today:
  1. Obamacare is passed by Democrats in Congress (Republicans objected en masse, but didn’t have the votes to stop it), and signed into law by President Obama. 
  2. Obamacare gives incredible amount of authority to the Department of Health and Human Services (HHS), headed by a Presidential nominee. 
  3. The President uses this unilateral regulatory authority to force all private employer-provided health insurance policies, including those purchased by religious organizations, to include no-copay, no-deductible coverage for various medications and procedures deemed necessary by HHS, including some forms of contraception.
  4. Religious organizations revolt, led by the Catholic Church, claiming that their religious freedom has been crushed by the requirement to pay for medications and procedures that are nominally prohibited under the rules of their faith.
  5. Watching his Catholic support go down the drain, the President panics and issues a workaround labeled as a "compromise." 
What is this compromise?  Drum roll please…
Just say it’s “free!” 
The compromise says that the religious organizations are no longer required to include coverage for the medications and procedures that are prohibited under the rules of their faith, however, all employees of those organizations will still have coverage for those medications and procedures, but it will be provided for “free” by the insurance companies. 
Were we the only ones to laugh out loud when we heard this “compromise?” 
There is no such thing as a free lunch and therefore someone is paying for this coverage.  Insurance companies are not charities, so they are not going to just absorb this cost on behalf of women everywhere.  Therefore, it doesn’t take a Harvard graduate to deduce that one of two groups will end up footing the bill for this exemption:
1)  The employees of the religious organizations
Nothing a little bit of verbal hocus pocus can’t solve.  The insurance company will charge the same premium to the religious organization employees, but will rephrase the wording of the women’s health coverage to say that it’s “free.”   They would be subsidizing the “free” coverage by paying more than they should for their religiously acceptable insurance coverage.  If this solves the religious organizations concerns, President Obama would be correct to think the religious organizations are incredibly stupid, or that their outrage was feigned from the beginning.  We recognize that this compromise claims that religious organizations will not be required to subsidize the cost of contraception, but this will be impossible to prove as you can’t accurately differentiate between the costs of each type of coverage in a complex health care insurance policy.
2)  Everyone
The insurance company may reduce the premiums charged to the religious organization employees, but that amount will be passed on to its other customers through higher premiums.  We realize this is par for the course with Obamacare mandates – i.e. pile on the populist mandates, forcing insurance companies to take the heat for raising premiums – but if this is the result, all employees of non-religious organizations should be outraged.  This would be yet another example of one group of individuals subsidizing another more favored group of individuals.  Why should we pay more for our insurance so that a religious organization can keep a clear conscience?  Isn’t that an infringement on our religious and/or ideological liberty?
Here’s an idea – why don’t we let individuals determine how much insurance coverage they require, and let the market offer flexible plans to meet those requirements at market prices?  What a novel approach for a capitalist society. 
If the government wants to subsidize women’s health care, like it does electric cars, ethanol, mortgages, and every other cause du jour, they should do so explicitly and raise the appropriate level of revenue to pay for that explicitly.  Forcing insurance companies to act as the tax collector is cowardly and despicable.    

Wednesday, February 8, 2012

Moore on "Fairness"

Wish we wrote this...a must read column from Stephen Moore of the Wall Street Journal.

We've touched on some of these points in detail (herehere, here and here), but Stephen Moore does an excellent job highlighting the difference between the President's rhetoric on "fairness" and his actions and policies.  

Friday, January 27, 2012

Wish Them Luck? Seriously?

While making our daily trip to to see what ridiculous stories they consider “front page” news (today was MRI orgasms - we wish we were kidding), up popped the following advertisement: 

Seriously?!?! Wish them luck?

Was this a joke ad by some Republican Super PAC?

Nope, “Paid for by Obama for America.”

Millions unemployed, millions more underemployed, deficits as far as the eye can see, millions with underwater mortgages, crushing debt loads, and increasing costs on everything from gas to health care to groceries, and President Obama, with his $1 Billion campaign war chest, wants US to wish HIM luck?

“Sign the card” to “wish them luck in 2012” and, oh by the way,
give them your email address so they can send you daily propaganda and pleads for more cold hard cash!

We could not think of a clearer example of how out of touch President Obama is with the state of our union. We know all presidents need to have some level of narcissism, but this takes it to unprecedented heights.

The most powerful person on the planet needs you to wish him luck.


Thursday, January 26, 2012

Testing the Logic of "Fairness" in Taxes

Let’s test President Obama’s logic on tax “fairness” with a simple example.    
·         Person A makes $50,000,000 a year and pays $7,500,000 a year in taxes
·         Person B makes $100,000 a year and pays $30,000 a year in taxes
For the sake of discussion, let’s assume both individuals take advantage of government services in roughly the same way - both will draw the same social security benefits and Medicare eligibility at retirement, use roads, rely on police, fire departments and our military to feel safe at home.  In fact, you could make the case that Person A takes advantage of less government services as they might send their children to private schools instead of public, they won’t require a publically subsidized mortgage through Fannie, Freddie or FHA, etc. 
So the question is whether it’s fair for Person A to pay $7,500,000 for those services, and Person B to pay $30,000 or 0.4% of what Person A pays for those same services. 
According to the wisdom of President Obama, Occupy Wall Street and the Democratic Party, fairness is determined in relation to the percentage of income paid in taxes, rather than absolute dollar amounts.  Therefore they argue that this situation is completely and utterly unfair because Person A pays an effective rate of 15% while Person B pays an effective rate of 30%.  The fact that Person A paid $7,500,000 and Person B paid $30,000 is irrelevant, in fact, Person A should pay $15,000,000 in the name of fairness.       
Others believe this view is a vast oversimplification of a complex problem.  But they may also believe that we shouldn’t raise anyone’s taxes because our government is already too big.  We need to first cut spending to reasonable levels and then determine the best way of paying for the resulting lean and efficient government.  They may also believe that ignoring the difference between income earned through labor and income earned through investment overstates the supposed “unfairness.” 
We’ve written about fairness numerous times on these pages, and in a couple of op-ed's this week (here and here), the Wall Street Journal explains the reasons why investment income should be taxed differently than wage or labor income better than we ever could.
Ultimately, it’s a lazy populist sound bite to say the rich aren’t paying their fair share.  If one’s contribution to society is based purely as a percentage of the amount of income earned, then why don’t we just change the pricing of all goods and services to a percentage of income?  For example, to make sure that the pricing of a chicken nugget happy meal is “fair”, the current sales price of $5 would only apply to someone making the median income of roughly $30,000 a year.  Person A, who makes 3.3 times the median income, would be required to pay $17 for the Happy Meal, and Person B, who makes 1,700 times the median income, would pay $8,400 for the Happy Meal.  This also means that a huge portion of the population will get their Happy Meals for free.
Is that fair?

Sunday, January 22, 2012

And the Smuggie goes to…

Welcome to the 2012 Smug Columnist Awards show!

We've all read their smug columns, but thanks to a recent trend of including a ridiculously posed picture next to their text, we get to see their smug mugs as well. After at least eight minutes of research, we found all the smugness that’s fit to print.

Without further ado, your 2012 Smuggies:

The “I am the smuggest man alive!” award – Charles Blow – New York Times

The “I’m sorry, you’re wrong, I’m right, and you’re boring me” award – Michael Lind - CNN

The “I’m trying to be serious, but inside I’m laughing hysterically because you are so stupid – seriously, you don’t even have a Nobel Prize” award – Paul Krugman – New York Times

The “I had no idea a ludicrous quote about a ‘great vampire squid wrapped around the face of humanity’ could make me this famous” award - Matt Taibbi – Rolling Stone

The “We thought dot-matrix illustrations would hide our smugness - we were wrong” award – Bret Stephens & Holman W. Jenkins, Jr. – Wall Street Journal

The “I’m so smug, I’m about to cry” award – Ruben Navarrette Jr. - CNN

The “Despite making my fortune during a 15 year career on Wall Street, I’m smug enough to bloviate and write books about the evils Wall Street with a straight face” award – William Cohen - Bloomberg

And finally…

The “biggest threat to the future of including a picture of the columnist next to their column” award – Robert J. Samuelson – Washington Post

Thursday, January 19, 2012

The Antithesis of Presidential Leadership

Yesterday’s “Statement by the President on the Keystone XL Pipeline” illustrates the antithesis of Presidential leadership.

What kind of leader rejects a proposal because time pressures were too great to make an informed decision? Let’s keep in mind the fact that the XL Pipeline application was submitted in 2008. Only Government could consider a review period of more than three years be deemed “rushed and arbitrary.” What would happen to a CEO who rejected a profitable business deal because he wasn’t given four years to perform due diligence? He’d be fired on the spot.

What kind of leader hides behind the recommendation of a subordinate? The President’s statement notes that he merely agrees with the Secretary of State’s recommendation. He references the State Department or the Secretary of State four times in the first paragraph alone. That’s interesting, we don’t seem to recall President Obama leading off his speech about the killing of Bin Laden by noting he was just following recommendations from the CIA or the CIA Director (only referenced once in the entire speech). In fact, he puffed out his chest and said the following, “I determined that we had enough intelligence to take action, and authorized an operation to get Osama bin Laden and bring him to justice.” He continued, “Today, at my direction, the United States launched a targeted operation against that compound in Abbottabad, Pakistan.”

What kind of leader claims that someone else “forced" their decision? The President’s statement claims that it was Congressional Republicans who “forced” him to agree with Secretary Clinton’s recommendation. First off, Congressional Republicans do not have the ability to pass legislation on their own - both Democrats and Republicans passed the legislation that required President Obama make a decision on the XL Pipeline. Second, President Obama signed this piece of legislation into law. If he didn't like the XL Pipeline timeline included in the law, he shouldn't have signed it. Third, the legislation does not “force” President Obama to reject the application, it merely requires him to stop dragging out the process and to make a decision on whether to approve or deny a permit for a “shovel ready” project that everyone agrees will create thousands of jobs almost immediately. To claim that he was strong armed into rejecting the permit is false and shows incredible weakness and strikingly poor leadership.

It will be interesting to see which ads make a bigger impact leading up to November 2012 - the Obama ads telling the story of Americans laid off 20 years ago by Bain Capital, or the Romney ads telling the story of Americans who today remain unemployed in towns that would have greatly benefited from XL Pipeline project.