February 22, 2012
If you missed the televised interview with Robert Barone on February 16th, 2012 with Face the State on Ch.2 News, you can watch the video by clicking the link below.
February 16, 2012
It is an election year, so the media makes a big deal out of Warren Buffett’s assertion that the tax system unfairly taxes his supposedly “working class” secretary at 33% (we’ve also seen 34% and 35.8%), while he only pays 13.7% (we’ve also seen 17.4%) on the millions that he makes.
The political implication is that he, and others like him, such as GOP hopeful Mitt Romney, somehow aren’t paying their “fair share” of taxes.
But instead of doing even superficial analysis, the media carries the story at face value. That is naive. Even a slight amount of digging will turn this story upside down.
Let’s start with Buffett’s secretary, Debbie Bosanek. In order to pay a marginal tax rate of 33% (or 34% or 35.8%), she would have to be in Occupy Wall Street’s 1%, not the 99%. Using the 2011 tax tables for individuals, if she were single making a $250,000 adjusted gross income (that’s after deductions!), she would be in the 33% marginal tax bracket and would have a 27% effective tax rate. To get to the 35% marginal tax bracket, her adjusted gross income would have to be more than $379,000. Isn’t a $250,000 income the magic line that [President Barack] Obama has drawn that demarcates those who he is targeting as “rich” and should be paying more taxes? So, let’s not be deluded into thinking that his woman somehow represents America’s working class.
But the bigger deception is Buffett’s claim that he pays a much lower tax rate than he supposedly should. A quick review of business taxation in the US today will show that Buffett pays in excess of 30% of his income in taxes.
Most small-business owners choose the Subchapter-S or LLC format for their businesses. Any profit from their business flows directly to their personal taxes (form 1040). Assume two similar businesses, one owned by X and the other by Y. Both businesses make $450,000 in pretax income. Owner X has chosen the LLC format. Owner X’s company pays no taxes to the IRS, but sends Owner X a K-1 requiring X to declare $450,000 on his form 1040. His marginal tax bracket is 35%.
Owner Y has chosen the C-Corp format. Y’s company also had a pretax income of $450,000, which is taxed at the corporate 35% tax rate. Y has chosen to declare a $50,000 dividend to himself which shows up on his 1040 and is taxed at 15%. Looking only at his 1040, you would think that Y doesn’t pay much in taxes. In fact, Y pays more taxes than X because the dividend is double taxed – that is why most small businesses choose the LLC or Sub-S format.
Now let’s talk about Buffett. He is famous for buying large stakes or even controlling interests in large C-Corps. He is the equivalent to Owner Y. So, the taxes that Buffett pays go well beyond what is shown on his 1040. Like Owner Y, the 13.7% rate on Buffett’s 1040 shows only the taxes he pays on the dividends and therefore is only part of the story. I looked up Buffett’s 13F SEC filing dated January 30, 2011. That filing shows nine major holdings.
Using the share price of each holding and the number of shares shown on the 13F, I estimated the value of each of those holdings. Then, using the C-Corp’s reported effective tax rate, the pretax income per share, and the dividends per share (taxed at 15%), I calculated Buffett’s effective tax rate on each holding. Finally, using the market value of each holding to form a weighted average, I then calculated that Buffett’s effective tax rate on these nine holdings was more than 32%.
This should debunk the myth that America’s investor class does not pay its “fair share” and that we should put a minimum of 30% on their 1040 filings.
Finally, some advice for Romney. Should you become the GOP candidate, I would advise that you do an analysis on your income similar to what I did for Buffett in the table above. If you are the GOP candidate, you can take the issue of paying your “fair share” of taxes off of the table.
February 8, 2012
Over the past four years, the slow creep of government into the private sector has become a gallop. Unfortunately, a high level of structural unemployment is the unintended consequence of social engineering, picking winners, over-taxing and over-regulating every aspect of the business process.
The conventional wisdom is that a balanced budget will be a magic solution to the sluggish economy and the employment situation, but if it is done with just austerity and tax hikes but without relief from an overbearing set of governments on the business sector, what we will get is an “austerity death spiral.” Federal Reserve Chairman Ben Bernanke said as much to the Senate Banking Committee on Tuesday.
Intervention is the Norm
We now live in a world where government intervention in the business process is expected. When any sort of economic issue arises, government is now expected to fix it.
- Financial institutions in trouble? No problem – the taxpayers, via the government are expected to bail them out!
- Domestic auto companies historically made awful decisions around retiree medical and pension issues and, as a result, can’t compete and are staggering toward bankruptcy. Again, no problem. Ask the government to shore them up, even if it means trampling on bondholder contract rights like in the General Motors case.
- Some homeowners can’t, and others don’t want to make their mortgage payments. That’s easy. Ask the government to intervene, stop or slow the foreclosure process, and, perhaps, even require the lenders to reduce principal balances! This deal is in the works now with the government prepared to offer big lenders like Citigroup, Bank of America, Wells Fargo and JPMorgan Chase money to offset losses on short sales.
The markets now expect intervention. When the government intervenes in an economic issue, the markets rise. If the government doesn’t, it falls precipitously. On September 29, 2008, the Dow Jones Industrial Average (DJIA) fell 778 points when Congress failed to pass the initial TARP legislation; From the time QE1 began in November, 2008 until it ended in March, 2010, the DJIA rose 28% or 2,378 points.
QE2 elicited a similar market response, 1,199 points (10.7%) from November, 2010 to June, 2011, even more if you go back to August when Bernanke articulated the strategy in Jackson Hole, Wyo.
In late November, 2011, on the day when the Fed gave unlimited swap lines to the European Central Bank (ECB), the DJIA rose 490 points; it rose 337 points just before Christmas when the ECB opened its lending facility to 540+ European banks.
I suspect we will see similar market reaction if the Fed goes through with its hinted at QE3.
Unfortunately, nearly every government intervention carries with it unintended consequences, and, if such interventions interfere with the free market processes, they have long-term negative implications on economic growth. Recent examples in the U.S. include the Keystone Pipeline and the National Labor Relations Board’s attempt to block Boeing from opening a plant in South Carolina.
Nearly every economic malady that exists today is directly traceable to the unintended consequences of government interference in the economic process or via its attempt at social engineering:
- Sub-prime and housing crisis: It is widely recognized that this was caused by three concurrent factors: 1) an extended period of low interest rates engineered by Greenspan’s and Bernanke’s Fed; 2) the social engineering goals of the Community Reinvestment Act (CRA); 3) the political and monetary aspirations of Fannie Mae and Freddie Mac executives and sponsors;
- Social Security and Medicare unfunded liabilities: As the baby boomer generation reaches retirement age, unfunded liabilities will increase by more than $3.5 trillion each year. To show how absurd this is, the payroll tax reduction, in effect since January 1, 2011, and currently an issue in the Congress, simply puts the Social Security system ever deeper into debt that cannot be repaid without hugely inflated dollars;
- Unfunded pension liabilities: While some private sector corporations have unfunded pension liability issues, the bulk of the problem lies at the local, state and federal levels;
- High structural unemployment: As alluded to earlier, impediments to business from all levels of government, but especially from the federal government, are a huge issue. Recent legislation, including Sarbanes-Oxley, Dodd-Frank, and Obamacare, is crushing small business. In addition, business must be confident that the future environment will be friendly. So, the notion of a “temporary” tax reduction doesn’t reduce business uncertainty, as businesses invest for the long-term.
This last item is particularly poignant. In a three part op-ed series published by Bloomberg in mid-January, Carl Pope, former chairman of the Sierra Club, bemoans America’s loss of manufacturing jobs. “It’s not the wages, stupid!”, he says. If wages were key, how is it that Germany, where wages are higher and unions stronger, enjoys a growing manufacturing base?
For the auto industry, which in 1998 had over 70% of the U.S. domestic auto market but now has 44%, it was the health care and pension costs of its retirees that caused the industry’s economic crisis, he says. Since the turn of the century, America’s manufacturing base has shrunk by one-third, not because of wages, which are similar to wages paid in the rest of the world, but the lack of support or even outright hostility on the part of government. (When even the Sierra Club recognizes that government is choking free enterprise, the issue must be terribly obvious!)