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Wednesday, September 26, 2012

 

Special Day of Atonement Issue

So I'm home today, atoning for a year's worth of sins ( a process that's hard to complete in only 24 hours) and took a break to watch Mahmoud Ahmadinejad's UN speech.  Iran's President went through the usual drill of blaming the world's ills on rich, capitalist, zionist loving, nuclear armed, aggressor states exploiting the world's poor, non-aligned  countries, ruining the environment and causing horrible weather in those poor countries by burning fossil fuels (imported from Iran?), etc.  Of course, most of those capitalist plutocrat nations, including the U.S., were boycotting the speech, having heard it more than enough times.  Anyway, for the last five or ten minutes (he was already 15 minutes over his time limit) of his address, the Islamic Republic's leader embarked on a discussion about how everything would be set right when the "savior" appeared.  He would come with Jesus Christ and some others not identified (presumably including the Prophet, himself) and their resurrection would usher in a messianic age of peace and love.  After several more minutes of describing this future Garden of Eden, he wrapped up, bid the delegates goodbye, and then accepted the handshakes and well wishes of the Secretary General and others seated with him, to the polite applause of those remaining in the audience.

When Ahmadinejad left, the two men with the Secretary General spoke among themselves presuming they were out of range of the C-Span microphones.  Fortunately they were not.  One with a British accent was heard to say with characteristic understatement to the Sec. Gen., "Quite an unusual speech."  (Mumbled response).    Then, "Good to hear that the Savior will make everything well."
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 For those concerned about current polling, it is certainly cause for concern, but pollsters themselves are not disinterested, and one needs to consider the sources.  It can certainly help your candidate by showing him or her in the lead.  Also, even if the organizer of the poll is not so biased, the folks doing the polling may well be.  That's why college polls, like Quinnipiac, for example, need to be taken with a grain of salt.  Some polls, if you look at Realclearpolitics.com, actually disclose their biases, like PPP (a Dem poll).  Washington Post? Are you kidding?  Have you read that paper recently?  It's even left of the New York Times!

The only polls I really count on for accuracy are those of Rasmussen and Gallop.  In particular, even though Mr. Rasmussen has a Republican bias, his polling has been uncannily accurate  for a long period of time.  Alone among the pollsters, he seems able to identify likely voters and gauge the components of what will actually be the electorate.  And unlike the Dem leaning polls, he is showing the contest to be a virtual dead heat, both nationally and in the swing states.  So this is no time to be discouraged. 

And though the Romney campaign has been portrayed by the media as a virtual gaffe machine, the media bias has caused them to really be over the top.  For example, Yahoo ran a story yesterday that Romney's regret (after Ann Romney's plane made an emergency landing) that plane windows can't be rolled down in an emergency indicated that he was somehow ignorant of cabin pressurization necessary at 30,000 feet,  But of course, the Governor was referring to an on the ground emergency capability, one that could easily be locked down during flight.

By the way, to call Yahoo a "news service" of any kind is a misuse of the term.  Believe me, unless Yahoo is reprinting a wire story (from Reuters or AP), you might as well read The National Enquirer.
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So readers want to know the Redwave position on taxes.  Is there any circumstance where taxes should be raised?  Which taxes, and on whom?  We have discussed this in bits and pieces over the years, but never comprehensively.  So here goes.

There are two ways to look at taxes, from the standpoint of the macro economist, and from the standpoint of a tax writing committee where you get into the gory details.  Let's look at the macro view first.

Federal taxes are a huge problem area, because everyone wants to feed at the revenue trough but no one wants to pay.  It's common for state representatives to brag about how much more federal spending they bring back to the district than the district contributes in taxes.  Is it a wonder then that the Federal Government is chronically in deficit?

Historically, there is a tendency for federal revenues to come in about 19% or so of GNP.  I would view that as a stasis point, that says we are in a nice equilibrium.  To my way of thinking, that should be enough to cover the constitutional powers assigned to the federal government: providing for the common defense, regulating interstate commerce, international diplomacy, the duties and expenses of Congress, the Administration and Federal Courts, maintenance of federal highways, lands and parks, etc.  To those we have added, for better or worse, certain welfare benefits: social security, Medicare, Medicaid (shared with the states), and now (God help us), PPACA.

Obviously, the Federal Government has grown into something of a leviathan, as each of these functions have expanded to cover anything with the slightest connection.  Congress, especially when controlled by Dems, and the Courts have generally cheered and enabled these expansions.  To the chagrin of true conservatives, too many Republicans, including Bush 43 did little or nothing to oppose these expansions.  Hence the Tea Party movement.  It was Ronald Reagan's great insight that holding federal revenues to 20% or less of GNP could force the spenders to rein in their plans since they could not be funded at some point except by deficits.  He ran his own deficits because he met a pressing need to restore our defense capability, which had been neglected during the Carter years.  This was a reasonable investment, since it effectively bankrupted the Russians first, who could not keep up, and ended the Soviet Union.  But it did mean that we incurred deficits during the Reagan years, despite rapidly increasing GNP and federal revenues.  He did not like that aspect, considering it a necessary evil.  The idea promoted by Democrats that Reagan would be aligned with moderate Republicans today is utter nonsense.  He would be a Tea Party leader for sure.

When tax collections soar into the twenties, or shrink through the teens as a percentage of GNP, we are in an outlier situation that needs to be addressed.  Today, we are running something like 15-16% of GNP, so federal collections are too low.  At the same time, The Obama administration is spending something like 24% of GNP and that's way too high.  Budgetarily, we are in the worst of all worlds.

The fact that we need to increase tax collections does not mean that the system in place must be changed, but it could mean that.  We all know that in a slow economy, both tax collections and GNP go down.  My view is that before we know how much to address tax rates, there are obvious things that need to be fixed.  First, as I have discussed before many times, and as I wish Governor Romney would propose, there is absolutely no good reason why hedge fund managers pay long term capital gains rates on their share of clients' gains.  They are not risking their own money, this income looks and smells like a commission or bonus, and should be taxed at ordinary income rates.  That's a fair piece of change, probably more than raising rates on the top two per cent, who will get an almost equal reduction in tax through the AMT mechanism.  Going from 15 to 39% for equity managers dwarfs their AMT liabilities.

Second, we need to end this goofy partial payroll tax holiday that lowered social security withholding.  It is stimulating nothing, because most workers don't feel it, but its cumulative impact on the fisc is powerful.  Third, the IRS must do a better job auditing small business proprietor's income.  I am all for small business, they are the job creators, etc. etc.  But we all know business owners who pay virtually all their personal and family expenses out of the business, deduct them as business expenses, and don't take that cost as personal income.    Then, they brag they have no income and pay no taxes.  Yikes!  The government is losing billions in unreported income, withholding and all the rest. 

So tax compliance is a big deal in the shortfall.  Tax simplification has potential too, both in terms of reducing deductions and corporate welfare, as well as improving compliance.   Whatever we decide to do in addition, the overall target should be no more than 19% of GNP. 

As far as individual changes, I actually favor lowering the corporate tax rate (since it is taxed twice) and keeping dividends at 15% on individual returns.  I think it would also be helpful to allow corporations to repatriate their foreign earnings without a tax penalty.  That will actually gain revenue since whatever the corporation does with the repatriated funds is likely to generate tax.  I think the investment tax inserted in PPACA is an economic disaster, and will not generate net revenue;  whatever it generates will be offset by slowing the economy.  We may get a bump in 2013 revenues since if Obama is re-elected, I expect, investors to load up on gains in 2012, and even move large amounts from qualified to non-qualified accounts in order to take advantage of 2012 rates.  These revenues will simply be taken out of future year collections. 

I agree with Governor Romney that it is actually unfair to target the top brackets for a higher proportion of income taxes, since they already pay for the bulk of government already.  In his case, he has benefitted from the hedge fund manager exception, and that should be ended.  To his credit, he did not deduct a large portion of his charitable gifts, so he increased his tax percentage some to offset that adb\vantage.  So I do not think income tax rates are too low at any bracket.  In fact, I think Bush got that about right.  Some may recall we were collecting too much tax during the second Clinton Administration, leading some to worry about whether investors would find sufficient supply of Treasury Bonds and Bills.  The Clinton tax increase caused the economy to be slower than it needed to be, and led to surpluses when he also curtailed defense spending while Congress reduced welfare spending.  So the Bush tax cuts were prudent and led to an almost immediate increase in revenues.  If only he had been so prudent to restrain Congressional spending!

On estate taxation, I kind of think where we are on that is pretty good.  That is, we have increased the amount you can pass estate tax free to the point that only large estates are taxed.  Also the tax rate on those estates is no longer confiscatory (55% was much too high).  Unfortunately, if nothing is done, we might go back to high rates and low exempt amounts.  That would not be helpful.  I am not for eliminating the tax entirely as many Tea Partier's are.  As for the AMT, conceptually it is an abomination.  However, it has one salutary effect, largely unrecognized, in that it makes a lot of this talk about changing tax rates irrelevant.  In fact, I am an advocate of making the AMT the basic income tax system and throwing out the rest of it.  If you did that, things that are now deductible (but not under the AMT) would have to stand on their own merits.  For example, when states went to raise their taxes, they would have to consider that such increases are not deductible.  Too often, that issue is not considered though AMT payors don't get the benefit of those deductions.                  

Changing our system to make the AMT the basic tax system, for earned income, with schedule D the system for investment income, is in my view, the simplest way to simplify the system and put the tax schemers out of business.
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People railing about replacement officials in the NFL have short memories.  Did a week ever go by without controversial calls even with the real officials?  That said, confidence in the ability of the scab officials is lacking, and the NFL owners are kidding themselves if they think their product has the same credibility with the replacements.
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WSJ reported on the recent passing of Tinkham Veale II.  Who was Tink?  When I first got interested in stocks, the second stock I bought was a conglomerate called Alco Standard.  Tink and his brother George formed Alco in the 1960's after Tink had made a fortune in automobile air conditioning and induction heating equipment.  He was also active in horse racing, selling a track to Churchill Downs. 

The idea behind Alco was not to buy public companies, like IT&T or Gulf and Western did, but to find small business owners in need of capital and support services so that they could grow exponentially.  Alco provided those in exchange for ownership of the companies, keeping the former owner managers on to run the businesses.  Those managers were called Partners of Profit and the annual POP meetings were celebrations of US capitalism at its best.  Alco bought hundreds of businesses to build strong market share in paper distribution, office supplies and equipment, wine and spirits, glassware and bottles distribution, parts manufacturing, health product distribution, and so on.

As time went on, I accumulated lots of Alco shares through its dividend reinvestment and optional purchase program (DRIP).  I also wrote a paper for an MBA course about conglomerates highlighting Alco and its unique approach, and sent it to TInk.  He thought enough of it, he gave it to his PR Department, and they came up to do a photo shoot and included me with other shareholder profiles in its 1982 Annual Report.  The next year, all of us who were profiled were invited to the POP Club meeting on Hilton Head, a truly memorable experience.  My recollection of Tink was that he was a real character, and one of his favorite things was to play poker and craps with the attendees into the wee hours of the mornings. 

1983 was the beginning of the end of the recession, and the news of orders at the various businesses spread through the convention center and was cause for much celebration.  It was the onset of very heady times.  My Alco stock largely paid for our house.  After Tink retired for good, the Company eventually shrank itself and split up, as analysts demanded that conglomerates narrow their focus.  The remnants of its health distribution business is Amerisource Bergen (ABC), still on the musings buy/hold list.  Tink passed away at age 97.  RIP.     
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On 9/12, we sold 1000 shares of Frozen Food Express (FFEX) at 2.20 from the IRA.  We paid 1.25 for 200 on 11/10/11 and 1.28 for 800 on 12/19/11.  On 9/14, we sold 200 shares of Pulte Homes (PHM) at 16.25.  We paid 8.18 for 138 on 10/22/10 and 7.34 for 62 shares on 12/22/10.  On 9/17, we sold 300 shares of Newpark Resources (NR) at 8.13.  We paid 2.85 on 6/22/09.  On 9/19, we bought 300 shares of Genie (GNE) at 6.90, a value buy.  On 9/24, we bought 100 shares of Expeditors International (EXPD) at 36.73, a zero buy.

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