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Tuesday, July 12, 2011


Both Sides Dig In On Debt Limit

I invite redwavemusings readers to review the comments appended to our last post. It seems that Dr. C. is concerned that we may have implied that we support GOP and Tea Partiers resisting increases in income tax rates at the higher brackets (or as he would put it, restoration of the rates prior to the Bush inspired tax cuts). So I guess I should clarify. I wasn't implying that holding the line on taxes is the redwave position, I was saying it, clearly and in no uncertain terms. Sorry if I soft pedaled it before.

Actually the redwavemusings position on income taxes is and has been more nuanced. The fact is, middle class taxpayers were by far the primary beneficiaries of the unfairly maligned Bush tax cuts (and misnamed since I believe they were passed by Congress - oh, never mind). That's because most taxpayers in the $250,000 + brackets were already paying their taxes based on the AMT tax calculation, so all the cutting of their rates did was transfer more of their liability from the tax rate line to the AMT line. Their taxes did not go down, for the most part. I know this has been true in my case, since I calculate my own taxes. If you let your accountant do your taxes and you simply sign the return and mail your check, it is likely you have limited if any understanding of how our tax system actually works.

Of course, some upper income taxpayers in states with low or no state income taxes may have actually enjoyed a cut, at least for a while. As the AMT works its way down the income scale (due to bracket creep and the lack of indexing), those taxpayers and actual middle income payers are losing their cut. So if we are going to compromise about anything, let's agree to stop demagoguing about the "Bush tax cuts," OK?

So that's why, for me at least, it's no big deal whether the tax rates are restored, since it won't change my taxes or that of most others in my bracket. It will only transfer some of the liability from the AMT line back to the tax rate line. Who cares? Of course, restoring those rates won't impact the deficit much either.

Also, it has long been this blog's position that the characterization of "carried interest" as capital gains, eligible for the 15% tax rate, is ridiculous. That gift to hedge fund managers should have been corrected long ago, recharacterizing that income as ordinary income.

Having said that, I see no reason for Republicans to compromise on the question of revenues, and I hope they don't. To the extent small businesses might be hurt by raising rates and eliminating deductions, we will only be hurting ourselves, since that will be yet one more reason for jobs to be eliminated (as if this Administration hadn't already provided enough). You might recall we have been through this chapter where eliminating incentives to buy yachts and corporate jets resulted in the near death experience for both industries, and so the loophole closers were repealed out of necessity. In fact, the repeal relating to corporate jets was part of the first Obama stimulus package! It takes chutzpah to berate the GOP on that one.

The other chapter that has endlessly repeated itself for the last 50 years is that various administrations have reached compromises with Congresses controlled by both parties wherein tax policy was enacted with an eye to spending cuts coming later. Somehow those cuts never happen. Now we have Obama, Conrad, Reid et al claiming to have offered all kinds of unspecified cuts when, in fact, there is no deal on the table. The current GOP majority was voted in specifically to impose fiscal discipline, and to their credit, they are for the most part honoring that commitment. They dare not break faith with the voters who put them in place or they will not survive 2012 primary challenges, and they know it.

Except for the coasts, which never seem to lose faith in tax and spend policies, the rest of the country has had it. They are imposing discipline in their states and see it working. They know that the magnitude of current and future federal deficits is out of control, making the Bush deficits look trivial by comparison. They know that actuarially, the entitlement programs are all broke. They know that, even before it starts, PPACA is fiscally unsupportable. They look across the pond and see the fiscal mess that the EU has to deal with after its failed experiments with socialism.

Compromise makes for warm feelings and everyone involved at least temporarily looks reasonable and competent. As a governing philosophy, compromise isn't one. At best, it provides for a suboptimal plan; at worst, it rationalizes continuing down the path of failure. This is not a time for compromise, though I would be willing to move on carried interest, because I think it's the wrong tax accounting in the first place. If we want to redesign the tax system to simplify it and eliminate deductions, i am all for it when there is time. In fact, this blog has said that the AMT for everyone represents a better way while still eliminating the lower half of the income population from the tax rolls (and that's probably too many). But right now, we need to leverage the opportunity presented by the debt limit. $4 trillion over ten years is only a down payment, I'm afraid. $2 trillion is a mere dent. The Dems are trying to make a political point by scoring a trivial amount of the deficit reduction as revenues. That's all it is. There's no need to give them that, though, the problem is a spending problem, not a revenue problem. But you've already heard that. The question is, when Republicans stick to their guns about spending while Dems are equally intransigent about revenues, why are only Republicans taken to task for being uncompromising? Seems to me neither side is moving, but I understand that. They'll move when it's in their interest.

One good thing this debt limit fight has done is to reenergize Tea Partiers all over again. In fact, many Tea Partiers don't want to raise the debt limit at all. That may be an extreme position, I'll admit, but it would enforce a balanced budget more quickly than a Constitutional Amendment. To accomplish that, I believe Congress would have to repeal the Nixon Era law passed against executive impoundments. And that won't happen while Dems control the Senate and the Presidency.

So let's stipulate that the debt limit will have to be raised. The logical deal will be to reduce corporate deductions in exchange for a lower corporate tax rate. Interestingly this does nothing for small businesses which are often Subchapter S organizations and whose owners pay tax rates at individual rates. But it will sound like each side got something for its base.

But budget cuts are coming. I predict the $2.4 trillion proposal over ten years. At least it's a start.

By the way, Dr. C., as an accounting guru, is there really a worse proposal than the Dems' suggestion that LIFO be scrapped? I understand that currently low inflation has reduced the impact of LIFO inventory accounting, but what happens when all the inflation that the Fed has cranked in takes hold? I suggest you provide remedial accounting and economics instruction for the dunderheads who came up with this one.

Lest anyone think otherwise, readers' comments are greatly encouraged here, especially those who might differ from the admittedly opinionated blog author. These comments hopefully will generate a little more discussion here and challenge us to write better, more accurate, and more thoughtful posts than might otherwise be the case.

On 7/6, we sold another 1000 shares of Sirius XM at 2.17, incurring a small loss even though the price is above the average we have paid for the stock. Our feelings about Sirius (SIRI) haven't changed. we still think it's a coming business, with a much improved product and a potentially better cost structure following its merger with XM. Unfortunately, it will be a long time before its balance sheet is healthy or its book value bears any relation to its stock price. We'll make money on our remaining shares, but we will have to be very patient. We had paid 4.30 for 200 shares on 7/12/06/, 3.03 for 700 shares on 12/31/07 and 2.00 for the last hundred on 6/23/08. On 7/8, we sold 100 shares of Kaman Corp KAMN) for 36.44; we paid 15.75 in 1/8/02. Another "patience is required" stock. Yesterday, we bought 25 shares of Con Ed preferred (Ed.PR.A) for the IRA at 97.46.

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