Tag Archives: taxes

Unfunded Liabilities

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We’ve already seen counties and cities brought low and into bankruptcy by their blithe accumulation of future liabilities that they have no hope of honoring.  Jefferson County, AL, comes to mind, from a bond sale they had every reason to believe, a priori, that they could not honor in the future.

So does Stockton, CA’s bankruptcy, flowing from a public union pension and insurance program that they, also, must have known in advance that they could not support in future.

These are well understood, and the data that would have predicted these failures easily available to any who cared enough to look—and to face the impending problem squarely.

What of our nation’s debts, though?  Chris Cox and Bill Archer describe in a recent Wall Street Journal the hidden—and unfunded—liabilities at the Federal level that make our public national debt of $16 trillion look minor.

These hidden, but too real liabilities—debts—include

the unfunded liability of Medicare, $42.8 trillion

the unfunded liability of Social Security, $20.5 trillion

the unfunded liability of federal employees’ future retirement benefits, $23.5 trillion

But these data are carefully hidden from public scrutiny.  Federal Treasury “balance sheets” don’t include things like the debt represented by those Medicare, Social Security, and retirement unfunded liabilities.  No, the data are carefully squirreled away in the individual social welfare accounts.  You have to know where to look and what to look for—knowledge that heavily trained and experienced folks like Cox and Archer have, but which our politicians know the average American constituent lacks.

This is a time bomb that demands out entitlement programs be brought to heel, our entitlement mentality as a nation to be curbed.  Else we’ll go the way of Stockton.  And for a nation, that won’t be pretty.  Think of Greece today.  Think of Weimar Germany of the last century.

The Lies Continue

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By why would we be surprised?

President Obama returned to campaign mode on Monday – casting Republicans as against the middle class by saying their failure to accept his offer for a limited extension of tax breaks will essentially ruin Christmas for consumers and retailers.

“Stop holding the middle class and our economy hostage over a disagreement on tax cuts,” the letter [he sent to Congress Monday] states, as Congress returns…to try to reach a deal that would avert the $500 billion mix of tax increases and budget cuts set to take effect in early January.

Because, of course his way is the only way, and those Evil Republicans are blocking him, again.  And never mind that it’s Obama who’s holding not just the middle class, but our entire economy, hostage against his getting his ransom from a tiny group of Americans whom he hates so much.

Here’s the Obama compromise: he’s repeating that he won’t sign a bill that doesn’t raise tax rates on those Americans.

And this:

A growing number of Democrats say they are willing to let the country go off the fiscal cliff if a deal cannot be reached by Jan. 1 that raises taxes on the top two percent of earners while protecting costly entitlement programs.

Led by Senator Patty Murray (D, WA), Democrats have pushed the idea that the cliff is not as bad as the hype, with it being more of a “slope” than a “cliff.”

Senator Charles Schumer (D, NY) backs Murray, also saying that Democrats can’t cave in.  He and other Democrats believe that Obama won a mandate for increased taxes with the presidential election.

Also weighing in on Monday in a New York Times Op-Ed was billionaire investor Warren Buffett, who has said he think the country will be just fine going over the fiscal cliff.

The Progressive compromise, generally, remains, “Do it our way,” and Progressive bipartisanship means Republicans doing it the Progressives’ way.

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.

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.

Obama’s Economic Policies

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…are actively hurting our economy and our businesses—and so us.  Here are two illustrations.

First, The Wall Street Journal:

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009.  Corporate investment in new buildings has declined.

…

…business investment fell at a seasonally adjusted annual rate of 1.3%, according to a preliminary estimate from the Commerce Department.  The latest drop included a decline in investment in structures, such as buildings, at a 4.4% annual rate.  Investment in equipment and software stalled after growing at a roughly 5% annual pace in the first six months of the year.

It’s not just Big Business, though, the whole article from which the above excerpt came notwithstanding:

Of the four ways government can principally influence the economy for better or worse—fiscal policy, regulation, monetary policy, and trade—it appears that investors will continue to be forced to rely on monetary policy for help. Taxes will undoubtedly rise for some, and the one effective way the federal government could effectively ease more—regulatory policy—seems less likely now than ever before.  The Wall Street law firm Davis Polk has created a new business of simply keeping track of the seemingly infinite number of rules that will need to be written to complete the process of financial regulation put into place by Dodd-Frank.  Sadly, only 33% of the 398 required rulemakings have been finalized.  (Only 265 rules to go!)  Another 33% have yet to have even been proposed.  Is it any wonder the Fed has had trouble turning excess reserves into effective monetary stimulus?

What are we doing as a company in light of this uncertainty?  We’ve put on hold business expenses short of pencils, and any capital spending we were considering, including an update of the men’s bathroom some have begun to call “the latrine.”  Instead of calling clients and focusing on our research, we are scheduling, probably in vain, conference calls (read fees) with our attorneys and accountants to try to create contingencies against potentially bad outcomes for us in the tax code.  It has forced us to ask ourselves questions that seem at odds with economic growth, like, are there any unintended consequences of employing more than 50 people?

 

h/t for the second for The Spirit of Enterprise