Tag Archives: political economy

Taxes and Widows and Orphans

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Included in President Barack Obama’s demand to raise tax rates on those Americans he hates so much is a raise in tax rates on dividends, unless the Republicans pay Obama’s price.  Obama’s ransom, after all, is simple: raise the rates on the Evil Rich, or the rates will go up for everyone.  Nice economy you got there….

Here’s what happens to dividends if Obama gets either one of his choices.

Presently, qualified dividends (which are most of the dividends about which you and I care) are taxed at a 15% rate for stockholders who are in a 25% or higher income tax bracket, and at a 5% rate for those investors in a lower bracket.  If Obama gets his way on tax rates generally, those rates will rise to ordinary income rates: those in the 39.6% bracket, for instance, will pay 39.6% on their dividend income (not 15%), those in the 15% bracket (which will reappear if Obama holds out for his ransom and the Republicans refuse to fold) will pay 15% on their dividends (not 5%).  Notice that: if Obama gets his way, the poor will get the highest tax bump.

Think the poor don’t invest?  Where are the savings of the retired, and of the stereotypical widows and orphans?  In safe, stable, income-producing vehicles—mutual funds that invest heavily in dividend-paying  stocks funds (or interest-paying bond funds).  These folks—on fixed incomes—are going to see a significant bump in their tax bill because a significant share of their income is dividend income.

Two top dividend mutual funds currently have a yield, courtesy of their dividend-paying stock holdings, of between 2% and 3%.  That’s not a lot of margin on which a retiree—or a widow or an orphan—can afford to see a tripling of his tax bite.

Of course, these folks could switch entirely to funds that pay interest rather than dividends, but with the Fed artificially suppressing interest rates, where’s the value in that?

Republicans need to find some courage.  The House needs to pass, this session, a budget (again) that includes lower rates across the board and spending cuts in the amount necessary to bring Federal spending to less than Federal revenues, with the difference mandated to paying down the debt.  Let the Democrats, led by our President, defend their refusal to pass this bill in the Senate and sign it into law; let them explain why they prefer the catastrophe of the Obama tax increases and sequestration.

And Republicans need to get serious about taking their message to all Americans.

An Empirical Demonstration

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Investor’s Business Daily provides one.

Renting a 20-foot truck one-way from San Francisco to San Antonio, for example, will cost $1,693. But the U-Haul tab to go in the opposite direction is just $983.

Hmm….

This figure compares, across just a few parameters, the outcome of big government, high taxes, and profligate spending—California—with the outcome of limited government, low taxes, and (more) disciplined spending—Texas.  Texas has many faults, but the routine of government interference with its citizens’ wallets and businesses isn’t among them.

California has become a state that people are increasingly trying to escape, and Texas a state people are increasingly migrating to.

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A study by the Manhattan Institute found that Californians have been leaving for states with better job prospects, lower taxes and better business climates.

In other words, states that are pursuing the kind of low-tax, limited government, free market policies [President Barack] Obama typically rejects.

The public may have voted to give Obama a second term.  But many people in California are voting with their feet, leaving the state that’s already put in place policies Obama has promised to keep pushing for four more years.

Obamanomics, as California demonstrates—its economy actually shrank sharply in the last four years—are an utter failure.  RTWT.

The Obama Ransom

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The Wall Street Journal described the broad reach of President Barack Obama’s tax increases, which are set to occur in six weeks unless Republicans pay the ransom on the 98% of Americans which he’s demanding.  Here’s the effect on lower income Americans.

A married couple making between $20,000 and $30,000 a year would go from receiving, on average, a $15 tax credit to owing $1,408, according to research by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.

The situation of an individual from the higher end of that range makes manifest that impact.

Traci Petty, 42, [is] a single mother…studying for a master’s in business administration in Danville, VA, while earning about $30,000 a year working part-time at a nonprofit.

Ms Petty would be hit by the shrinking of the child credit to $500 from $1,000, the higher payroll taxes and the elimination of the Bush-era 10% tax bracket.  Altogether, she would face at least a $1,500 cut in the $4,000 or so tax refund she gets each year.  She counts on the refund to pay bills.

But then, we’ve seen no evidence Obama even cares about these folks; his rhetoric focuses on “helping” the middle class and abusing those Americans at the upper end of the economic scale whom he hates so much.

A Market Parallel

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Amity Shlaes has noted some interesting parallels between today’s economic situation and that of 1937, post reelection of another Progressive President (she’s politer than I am).

In this case, “1937” means a market drop similar to the one after the re-election of another Democratic president, Franklin D. Roosevelt, in 1936.

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[T]he parallels are visible enough to be worth tracing.  They have to do with the danger of big government, and can be captured in a few categories.

Here are those parallels [emphasis added]:

Pre-election spree that sets records.  In the old days, federal spending amounted to about 19 percent or 19.5 percent of gross domestic product. …[from that] federal spending would have dropped back once the worst of the 2008 economic crisis passed.

…even in 2012, when the crisis was long past, the government went on a spree, spending the equivalent of 24.3 percent of the economy, more than the 24.1 percent for the year earlier.

Up until 1936, federal spending flowed at smaller levels than the spending by states and towns combined, with wartime being the exception.  Roosevelt slowly ratcheted up the outlays, and in 1936, Washington spent more than the states and towns.  This shift was dizzying for a country based on the principle of federalism, of strong states.

 

Fearsome attack on the status quo.  In his first news conference on Nov 14, Obama went out of his way to make clear his tax increases would fall on the rich: “What I’m concerned about is not finding ourselves in a situation where the wealthy aren’t paying more or aren’t paying as much as they should.”

Roosevelt was also ferocious, telling the old guard: “I should like to have it said of my first administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second administration that in it these forces met their master.”

When Roosevelt followed through in 1937, both with high taxes and his effort to pack the Supreme Court with more progressives, markets shivered.

Shlaes concludes with

The obvious question is why an announcement by Obama or Roosevelt to cut back just after the election doesn’t reassure those who dislike government expansion.

The answer is that the markets, which observe a giant march forward and then a step backward, don’t believe the step back is permanent.  Giants are giants.  Expansionists tend to revert to expanding government….

In the end, FDR’s Treasury Secretary, Henry Morgenthau, learned that lesson:

We have tried spending money.  We are spending more than we have ever spent before and it does not work.  I want to see this country prosper.  I want to see people get a job.  I want to see people get enough to eat.  We have never made good on our promises.  I say after eight years of this administration, we have just as much unemployment as when we started.  And enormous debt to boot.

The Obama administration, unfortunately, has no Treasury Secretary, or anyone else, capable of (re)learning that lesson.

Why should we care about the stock market, though?  The problem with significant drop in overall market stock prices isn’t just one of hammering rich investors and any workaday American with an IRA, a 401(k), or a 403(b) retirement account.  It’s that selling shares in a company is one of two ways in which businesses raise money (the other being borrowing) for product development or business expansion, either of which means prosperity for the company and, oh by the way, more jobs.  A significant market drop, then, closes off one more avenue for business expansion, jobs, and economic recovery.

Overregulation?

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Is this an example?  Shalini Ramachandran described Dish Network’s travails in expanding into the cell phone network.

The Federal Communications Commission is leaning toward putting limits on how [Dish Network Corp Chairman Charlie] Ergen can use the billions of dollars of spectrum he controls, FCC officials said.

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The commission…is seriously considering requiring him to limit his use of a slice of the spectrum to protect against interference on a neighboring spectrum band, the officials said—a move that Mr. Ergen said in an interview Thursday “would be a game changer for us.”

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Current FCC rules require operators using satellite spectrum to offer handsets with a satellite chip, making the devices more expensive.  Dish has been awaiting the FCC’s decision on whether to allow the satellite operator to use its spectrum for a solely ground-based cellular network.

…FCC is close to approving Dish’s request, but with a buffer zone in which Mr Ergen could only operate at low power, which could mean worse wireless service.  …that limit would reduce the capability of Dish’s “uplink” spectrum—which handles the pathway from the cellphone to the tower—by 25%.  An additional 25% on top of that would be impaired due to interference…endangering Dish’s ability to compete in the wireless business….

This raises some questions in my poor, plebeian mind.  An FCC mandate concerning how a private entity might use his private property would seem to be an interference with the property rights of that private entity.  Is the restriction actually necessary to protect the neighboring property owner’s rights?

Should government be involved before the two private entities have had a chance to try to work things out on their own?

How does a satellite chip that uses a part of the spectrum create less interference from that spectrum than the absence of such a chip and continued use of that same spectrum?