It is a great market, isn’t it? From the beginning of the year, the
S&P 500 has gained 16.4%, fueled by central banks’ quantitative
easing actions around the world. We thought that the stock market was
overvalued already at the beginning of the year…
If the central
banks’ goal is to elevate the stock prices, they have done it
successfully. But if their goal is to stimulate the economy, we are not
sure if they have achieved their goal. But one thing is for sure, a
higher current valuation of any asset classes always increases the risks
of investing in them. A higher gain in the past means a lower gain in
the future.
Now for the third time since 1970 (that is when our
data become available), the total market cap index is more than 100% of the GDP. The other two times were in the late 1990s to 2000 and 2006 to
2007. Both ended badly, unfortunately.
Sunday, September 30, 2012
Tuesday, September 25, 2012
total return index
For most investors, the stock market, as they know it, is the Dow Jones (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) . For the media, the two represent everything. How's the market doing? Better cite the Dow or the S&P.
It's unfortunate, really. Both indexes that we've come to obsess over have flaws. The Dow weights its components by share price, giving IBM (NYSE: IBM) 22 times the weight of Bank of America (NYSE: BAC) . No one I know has ever rationalized this practice. The S&P is weighted by market cap, which makes more sense, but often skews it toward the market's most overvalued companies.
Yet, both share a more glaring defect: They don't include dividends.
We fixate over how much the market indexes have gone up or down in the last month, year, or decade. But since the S&P 500 was created in 1957, one-third of average annual returns have come from dividends. Assuming dividends are reinvested, rising market prices on shares purchased with dividend proceeds means 82% of the market's cumulative return is the result of reinvested dividends. Why would we ignore that? It's the equivalent of measuring how much your child has grown while ignoring everything from the neck down.
Ironically, Standard & Poor's calculates a "total return" index that adjusts for dividend payments. But few pay attention to it, particularly in the media. In the last decade, the S&P 500 Total Return Index has been mentioned in news articles fewer than 100 times, according to Google.
It's unfortunate, really. Both indexes that we've come to obsess over have flaws. The Dow weights its components by share price, giving IBM (NYSE: IBM) 22 times the weight of Bank of America (NYSE: BAC) . No one I know has ever rationalized this practice. The S&P is weighted by market cap, which makes more sense, but often skews it toward the market's most overvalued companies.
Yet, both share a more glaring defect: They don't include dividends.
We fixate over how much the market indexes have gone up or down in the last month, year, or decade. But since the S&P 500 was created in 1957, one-third of average annual returns have come from dividends. Assuming dividends are reinvested, rising market prices on shares purchased with dividend proceeds means 82% of the market's cumulative return is the result of reinvested dividends. Why would we ignore that? It's the equivalent of measuring how much your child has grown while ignoring everything from the neck down.
Ironically, Standard & Poor's calculates a "total return" index that adjusts for dividend payments. But few pay attention to it, particularly in the media. In the last decade, the S&P 500 Total Return Index has been mentioned in news articles fewer than 100 times, according to Google.
Sunday, September 23, 2012
tax rates and the national debt
in a related story (to trickle-down economics below), I wondered what the relationship was between tax rates and the national debt.
For one data point, Reagan cut taxes and the national debt tripled (see that same trickle-down economics post).
So google tax rates and the national debt.
The first result is an article from money.cnn.com entitled, "National debt: why tax revenue has to go up."
Nobody likes having to pay more in taxes. And it's true that the country is on track to spend more than it can afford. So why can't Congress just cut spending to put the federal budget on a more sustainable path?
First answer: the problem is too deep to fix with spending cuts alone.
Here's just how deep: Say lawmakers wanted to permanently freeze the national debt held by the public where it is today -- 67% of GDP. They would need to cut spending by 35%, or about $1.2 trillion, immediately. And those cuts would need to be permanent, according to the Government Accountability Office.
How hard would that be? Consider that in 2010, all of discretionary spending -- including defense -- totaled $1.4 trillion.
So does the country have a spending problem or a revenue problem? In truth, it's both. (Obama's deficit problem: His tax cuts)
"Everybody would like low taxes. And they'd like government to do everything that they think government should do. But the arithmetic can be a problem," said Susan Irving, director of federal budget analysis at the Government Accountability Office.
Of course, Congress doesn't have to hike tax rates in order to raise more revenue. In fact, fiscal experts would prefer that lawmakers lower rates while eliminating or reducing the hundreds of tax credits, deductions and exemptions on the books. Such "tax expenditures" deprive federal coffers of more than $1 trillion a year.
***
The next article is the National Debt FAQ, the The Muser website apparently written by J.C. Adamson (his solution is to leave the big party and become independent). Anyway here's some excerpts from his FAQ.
Next is Mark B. Evans in the Tucson Citizen. (Who's Mark B. Evans? He's the editor of the Tucson Citizen. What is the Tucson Citizen? It's an internet publication which succeeded the print edition which stopped in 2009. According to wikipedia, it's "a compendium of blogs . . . written by Tucsonans for Tucsonans. No mention of whether it leans to the left or right.
There is this pernicious misbelief that nothing affects the economy more than taxes. Raise them and the economy goes down, lower them and the economy goes up.
It’s not true. Tax policy is one small part of an enormously complex American economy. President Reagan lowered taxes and the economy went up. Reagan raised taxes and the economy went up. George H.W Bush raised taxes and the economy went down. Bill Clinton raised taxes and the economy went up. George W. Bush lowered taxes and the economy crashed. Barrack Obama lowered taxes and the economy did nothing.
See a pattern? Neither do we.
The only pattern you can see with all of these presidents is they spent more money than they took in. In the 31 years since Reagan took office, the government has spent more than it received in every year but one.
So now the national debt is a few billion dollars short of $16 trillion.
What do we do about it? The Republicans want to tax less and spend less. The Democrats want to tax some people more and some people less but spend the same (or more, who really knows since they haven’t proposed a budget). Neither of those will work.
The only plan that will work, Simpson-Bowles, named after former Sen. Alan Simpson and former Clinton chief of staff Erskine Bowles, would tax more and spend less.
Because it gores everyone’s ox, neither Democrats nor Republicans like it. So they didn’t pass it and debt continues to pile up while the Congress does nothing.
Nothing will have to become something soon. There is no way around the fact that we’re all going to have to pay for 30 years of profligacy.
One way or another, we’re all going to have to pay a tax.
***
I think we're eventually going to go with Simpson-Bowles. What is Simpson-Bowles?
The National Commission on Fiscal Responsibility and Reform (often called Bowles-Simpson/Simpson-Bowles from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) is a Presidential Commission created in 2010 by President Barack Obama to identify "…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."[1] The commission first met on April 27, 2010.[2] A report was released on December 1, 2010,[3] but failed a vote on December 3 with 11 of 18 votes in favor, with a supermajority of 14 votes needed to formally endorse the blueprint.
Coincidentally they apparently penned an op-ed in USA Today (yesterday).
The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. [but not Paul Ryan] Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.
For one data point, Reagan cut taxes and the national debt tripled (see that same trickle-down economics post).
So google tax rates and the national debt.
The first result is an article from money.cnn.com entitled, "National debt: why tax revenue has to go up."
Nobody likes having to pay more in taxes. And it's true that the country is on track to spend more than it can afford. So why can't Congress just cut spending to put the federal budget on a more sustainable path?
First answer: the problem is too deep to fix with spending cuts alone.
Here's just how deep: Say lawmakers wanted to permanently freeze the national debt held by the public where it is today -- 67% of GDP. They would need to cut spending by 35%, or about $1.2 trillion, immediately. And those cuts would need to be permanent, according to the Government Accountability Office.
How hard would that be? Consider that in 2010, all of discretionary spending -- including defense -- totaled $1.4 trillion.
So does the country have a spending problem or a revenue problem? In truth, it's both. (Obama's deficit problem: His tax cuts)
"Everybody would like low taxes. And they'd like government to do everything that they think government should do. But the arithmetic can be a problem," said Susan Irving, director of federal budget analysis at the Government Accountability Office.
Of course, Congress doesn't have to hike tax rates in order to raise more revenue. In fact, fiscal experts would prefer that lawmakers lower rates while eliminating or reducing the hundreds of tax credits, deductions and exemptions on the books. Such "tax expenditures" deprive federal coffers of more than $1 trillion a year.
***
The next article is the National Debt FAQ, the The Muser website apparently written by J.C. Adamson (his solution is to leave the big party and become independent). Anyway here's some excerpts from his FAQ.
We have this debt because our government (that's you & me) spends more than it collects in taxes. The solutions are:
How can we get out of this mess?
The solutions are:
- Spend less. That's a lot harder than it sounds; most government spending that could be cut is relatively minor. The things that cannot be cut (or would be extremely difficult to cut) are huge.
- Tax more. If we can't—or won't—cut spending, it's our only choice.
- Realistically, we have to do both. During the five fiscal years 2003-2007, the deficit averaged 12.3% of spending.* I can't conceive that growth in the economy is going to amount to 12.3% anytime soon. I can't imagine that we can reduce actual spending by 12.3%. So taxation has to be a part of this.
- * The high during this period was 18%, the low 6%. The January 2008 forecast for 2008 was 8%, but that didn't include the costs of the economic relief package. Revenue could also drop more than forecast due to recession. The Committee for a Responsible Federal Budget has a commentary on this.
- If we are really ready to sacrifice significant spending programs, perhaps we could cut overall spending by as much as 8% or 9%. But think what that means! The average increase in spending over the past 5 years has been almost 5%. If inflation in the next few years averages 3%, and we stop the increases in spending, and we reduce spending by a real 8%, that totals 16%!! What do you think? Is that 8% reduction realistic? Nah, 1% or 2% is more realistic.
- So we have to increase taxes—we have no choice. Won't that hurt our economy? Probably not. And reducing the amount of GDP that's diverted to debt interest will surely help.
Next is Mark B. Evans in the Tucson Citizen. (Who's Mark B. Evans? He's the editor of the Tucson Citizen. What is the Tucson Citizen? It's an internet publication which succeeded the print edition which stopped in 2009. According to wikipedia, it's "a compendium of blogs . . . written by Tucsonans for Tucsonans. No mention of whether it leans to the left or right.
There is this pernicious misbelief that nothing affects the economy more than taxes. Raise them and the economy goes down, lower them and the economy goes up.
It’s not true. Tax policy is one small part of an enormously complex American economy. President Reagan lowered taxes and the economy went up. Reagan raised taxes and the economy went up. George H.W Bush raised taxes and the economy went down. Bill Clinton raised taxes and the economy went up. George W. Bush lowered taxes and the economy crashed. Barrack Obama lowered taxes and the economy did nothing.
See a pattern? Neither do we.
The only pattern you can see with all of these presidents is they spent more money than they took in. In the 31 years since Reagan took office, the government has spent more than it received in every year but one.
So now the national debt is a few billion dollars short of $16 trillion.
What do we do about it? The Republicans want to tax less and spend less. The Democrats want to tax some people more and some people less but spend the same (or more, who really knows since they haven’t proposed a budget). Neither of those will work.
The only plan that will work, Simpson-Bowles, named after former Sen. Alan Simpson and former Clinton chief of staff Erskine Bowles, would tax more and spend less.
Because it gores everyone’s ox, neither Democrats nor Republicans like it. So they didn’t pass it and debt continues to pile up while the Congress does nothing.
Nothing will have to become something soon. There is no way around the fact that we’re all going to have to pay for 30 years of profligacy.
One way or another, we’re all going to have to pay a tax.
***
I think we're eventually going to go with Simpson-Bowles. What is Simpson-Bowles?
The National Commission on Fiscal Responsibility and Reform (often called Bowles-Simpson/Simpson-Bowles from the names of co-chairs Alan Simpson and Erskine Bowles; or NCFRR) is a Presidential Commission created in 2010 by President Barack Obama to identify "…policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run."[1] The commission first met on April 27, 2010.[2] A report was released on December 1, 2010,[3] but failed a vote on December 3 with 11 of 18 votes in favor, with a supermajority of 14 votes needed to formally endorse the blueprint.
Coincidentally they apparently penned an op-ed in USA Today (yesterday).
The Simpson-Bowles commission offered a reasonable, responsible, comprehensive and bipartisan solution that won the support of a majority of Democrats and Republicans on the commission. [but not Paul Ryan] Most importantly, it would reduce the deficit by $4 trillion over the next decade — enough to put the debt on a clear downward path relative to the economy.
Our plan showed that this problem is too large to cut our way out,
it’s too large to tax our way out and it’s too large to grow our way
out. We need a combination of cutting low-priority spending throughout
the budget, reforming entitlements to slow the growth of health care
spending and make Social Security solvent, and reforming the tax code to
promote growth and generate revenue in a progressive manner. As we make
these changes, we must be sure to phase them in gradually to protect
what is clearly a very fragile economic recovery and to avoid cuts that
would harm the most vulnerable in society.
The “fiscal cliff” is the exact wrong way to reduce the deficit. By
mindlessly cutting spending across-the-board, letting tax rates go up on
everyone and abruptly taking $500 billion out of the economy in nine
months, going off this fiscal cliff would throw us back into recession.
*** (and more)
The Tax Policy Center vs. the Wall Street Journal
the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution that evaluates tax proposals submitted by presidential candidates, examined the effect of Romney’s tax rate cuts combined with the elimination of several common tax deductions. Those include the mortgage interest deduction, charitable giving deduction and the exclusion for health insurance. The center published its findings on Aug. 1, 2012.
To try and keep with Romney's guiding principles, the authors eliminated deductions and write-offs -- starting with the deductions for top earners first -- until they came up with enough revenue to offset the $360 billion in tax cuts that are part of Romney's plan.
They determined that people who earn $1 million or more in taxable income would see an average net tax decrease of $87,117. They’d save $175,961 from Romney's tax cut, but lose $88,444 in deductions.
"They would still get a tax cut," said Adam Looney, one of the authors. "The dollar value of the tax cuts is just way bigger than the mortgage interest and other deductions. There’s no way to implement this plan in a way that doesn’t result in a pretty big tax cut for that group (those making more than $1 million)."
People who earn between $500,000 and $1 million would see a cut of about $17,000, and taxes for people with incomes between $200,000 and $500,000 would decrease by about $1,800, the study found.
But to make Romney's plan revenue neutral, deductions would also have to be removed for people with incomes below $200,000, and the effects of that would be significant, the study found. In fact, the elimination of the deductions would mean outright tax increases for everyone with incomes below $200,000. People with taxable income between $50,000 and $75,000, for example, would see an average net tax increase of $641. They’d save $984 from Romney's rate cut, but lose $2,672 in write-offs.
And now the Wall Street Journal:
This editorial largely draws on other work. It echoed Jensen’s criticism that the Tax Policy Center failed to consider certain tax breaks. It labeled the center authors as "class warriors" and charged that the center "ignores the history of tax cutting."
"Every major marginal rate income tax cut of the last 50 years," said the editorial writer, "1964, 1981, 1986 and 2003 — was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code—i.e., the share of taxes paid by the richest 1 percent rose."
The editorial also said the center’s findings are "refuted by President Obama's own Simpson-Bowles deficit commission report. The Romney plan of cutting the top tax rate to 28 percent and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended."
***
Is Romney's plan conceptionally close to Simpson-Bowles?
From Forbes (Howard Gleckman)
In the recent contretemps over Mitt Romney’s tax plan, some Romney partisans have asserted that the Massachusetts governor’s revenue plank mimics the tax elements of the deficit reduction plan proposed in 2010 by Erskine Bowles and Alan Simpson, the chairs of President Obama’s deficit fiscal commission.
This claim is absurd. These two proposals could hardly be more different.
True, both propose a significant across-the-board rate cut on ordinary income. But after that, their tax plans have about as much in common as Infected Mushroom and the New York Philharmonic.
The Bowles-Simpson tax reform was fundamentally a trillion-dollar tax increase designed to help cut the deficit, while Romney flatly opposes any deficit-reducing tax hike. Bowles and Simpson would have raised taxes on capital gains and dividends, Romney would cut them. Bowles and Simpson included very specific proposals for eliminating popular tax preferences. Romney is largely silent on how he’d broaden the tax base to pay for his rate cuts.
[OK, maybe not Forbes, since this piece also appeared in the Christian Science Monitor]
OK, maybe Gleckman is biased. But here's Erskine Bowles himself.
This month, Romney said that his tax reform proposal is “very similar to the Simpson-Bowles plan.” How I wish it were. I will be the first to cheer if Romney decides to embrace our plan. Unfortunately, the numbers say otherwise: His reform plan leaves too many tax breaks in place and, as a result, does nothing to reduce the debt.
The “zero plan” our commission recommended offered both parties an appealing bargain: lower tax rates for everyone in return for sweeping reduction in tax loopholes of every stripe. Taxpayers and the economy would benefit from a vastly simpler Tax Code, and getting rid of loopholes would produce more than $1 trillion of the $4 trillion needed in deficit reduction. Our commission produced an alternative plan showing how much individual rates would need to go up, and who would have to pay for them, if lawmakers decided to preserve certain tax expenditures.
The most important lesson Al [Simpson] and I learned on the commission is that to fix the debt, everything must be on the table. Americans everywhere have told us that as long as the sacrifice is shared, they are ready to do their part. The surest way to doom deficit reduction is to play favorites by taking things off the table.
So although I give Romney credit for pledging to reform the Tax Code to reduce loopholes, his current proposal will not take us to the promised land. Our commission’s tax plan broadens the base, simplifies the code, reduces tax expenditures and generates $1 trillion for deficit reduction while making the Tax Code more progressive. The Romney plan, by sticking to revenue-neutrality and leaving in place tax breaks, would raise taxes on the middle class and do nothing to shrink the deficit.
[Note: Bowles served in the Clinton administration.]
***
Why didn't Obama support Simpson-Bowles?
[From the Huffington Post] Journalists here are homing in on Vice President Joe Biden's criticism of the GOP for not supporting any of the deficit-reduction proposals over the past year, noting that President Barack Obama did not embrace a report put out by the co-chairs of the Simpson-Bowles panel.
The problem with Biden's statement isn't that it's false. The problem is that it's true. With unemployment above 8 percent and the economy sputtering along, cutting government spending would have slowed growth further. Obama's 2011 focus on the deficit over job creation was a failure on every level, failing to reach a deal and turning the focus away from job creation.
The White House, contrary to media carping, did, in fact, desperately pursue a "grand bargain" that would dramatically trim the deficit, the sort of deal Alan Simpson and Erskine Bowles were pursuing. In so doing, the Obama administration was willing to raise the Medicare retirement age and agree to a host of other cuts to social programs that would have caused real pain, in exchange for a disproportionately small amount of tax hikes.
Obama's pursuit of this deal led him to push the Senate to create a commission to hash one out. When Senate Republicans bailed on it, he created one by executive order. That panel -- Simpson-Bowles -- rejected the co-chairs' conclusions -- meaning there was no actual report for the president to support.
But Obama didn't give up, agreeing with House Speaker John Boehner (R-Ohio) to dramatically cut spending in exchange for limited revenue increases. Meanwhile, a bipartisan group in the Senate was also working on a deficit-reduction deal.
Obama publicly backed the deal -- the kind of public support journalists are now saying was lacking.
As soon as Obama got behind the bargain, the GOP fled.
***
[Forbes/Josh Barro] The reason Obama didn’t back Simpson-Bowles is much simpler: it’s a big tax hike on the middle class. The President made a campaign promise not to raise taxes on families making $250,000 or less—98 percent of all American families. Though he has signed a couple of bills that violate that promise at the edges (raising the cigarette tax and, arguably, imposing an individual health care mandate) he has made a clear decision that it would be against his political interest to endorse any broad-based income or payroll tax increase on middle-income families. He could not endorse Simpson-Bowles because Simpson-Bowles is unpopular.
[Washingon Post/Ezra Klein] Perhaps the most common Washington criticism of the White House is that they didn’t embrace the Simpson-Bowles plan. That was, in the eyes of many pundits, the moment when President Obama revealed himself as a typical liberal rather than a postpartisan reformer. But the New York Times today suggests that much of Washington is misreading a tactical decision as an ideological one.
It’s a frustration for many White Houses that the best way to get things done is not necessarily to support them. For all that Washington thrills to the spectacle pf presidential leadership, the opposition party tends to recoil from proposals that are too closely associated with the White House. The calculus is simple: If a bill belongs to the president, then its passage is a defeat for the opposition. This dynamic is, in part, why both parties spend so much time negotiating behind closed doors. The trick is to agree on a proposal before it can become associated with either party, and thus before its passage can become a loss for one side.
[NewsBusters/Noel Sheppard] Obama didn't support Simpson-Bowles due its proposals regarding Medicare and Social Security. The far-left never would have accepted this and it could have seriously harmed him at the polls.
[Bill Maher in the same article] Let’s be honest why he didn’t: because the Republicans who were with him when he started Simpson-Bowles after he said he was for it said they weren't, because they can't do anything he does because it has cooties. That’s what happened. That’s what happened.
***
Wait. Simpson-Bowles raises taxes on the middle-class?
[Ginny Welsch] Bowles-Simpson raises the retirement age, cuts Social Security benefits, increases out-of-pocket costs for Medicare, eliminates deductions for mortgage interest and health-care benefits, eliminates subsidized student loans, and raises taxes on the bottom 80 percent of families, while cutting taxes for the top 20 percent. And that’s just the beginning. It represents a large upward shift of wealth from the middle class.
[Wikipedia] $100 billion in increased tax revenues through various tax reform proposals,[13] such as introducing a 15 cent per gallon gasoline tax and eliminating or restricting a variety of tax deductions such as the home mortgage interest deduction and the deduction for employer-provided healthcare benefits.
[So I suppose it's these proposals that would hit the middle class]
Looking at Wikipedia references, led to this article from the Washington Post
Step two would be tax reform. The plan would squeeze $100 billion a year out of the tax code through a comprehensive strategy that would eliminate all the expensive and popular deductions known as tax expenditures. Special rates for capital gains and dividends would be gone, and the inheritance tax would reappear at a rate of 45 percent for estates worth more than $3.5 million for individuals and $7 million for couples.
Not all of that cash would be dedicated to deficit reduction. Some of it would pay for an overhaul of the tax code that would lower rates for most taxpayers and eliminate the unpopular alternative minimum tax. The six current tax brackets would be replaced by three brackets with rates of 8 percent, 14 percent and 23 percent. The corporate tax rate, currently one of the highest in the industrial world at 35 percent, would be reduced to 26 percent.
[So I assume it's the gasoline tax and elimination of the mortgage interest deduction that would hit the middle class. But then it would be offset by a lowering of the tax rates.]
*** (and more)
The Tax Policy Center vs. the Wall Street Journal
the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution that evaluates tax proposals submitted by presidential candidates, examined the effect of Romney’s tax rate cuts combined with the elimination of several common tax deductions. Those include the mortgage interest deduction, charitable giving deduction and the exclusion for health insurance. The center published its findings on Aug. 1, 2012.
To try and keep with Romney's guiding principles, the authors eliminated deductions and write-offs -- starting with the deductions for top earners first -- until they came up with enough revenue to offset the $360 billion in tax cuts that are part of Romney's plan.
They determined that people who earn $1 million or more in taxable income would see an average net tax decrease of $87,117. They’d save $175,961 from Romney's tax cut, but lose $88,444 in deductions.
"They would still get a tax cut," said Adam Looney, one of the authors. "The dollar value of the tax cuts is just way bigger than the mortgage interest and other deductions. There’s no way to implement this plan in a way that doesn’t result in a pretty big tax cut for that group (those making more than $1 million)."
People who earn between $500,000 and $1 million would see a cut of about $17,000, and taxes for people with incomes between $200,000 and $500,000 would decrease by about $1,800, the study found.
But to make Romney's plan revenue neutral, deductions would also have to be removed for people with incomes below $200,000, and the effects of that would be significant, the study found. In fact, the elimination of the deductions would mean outright tax increases for everyone with incomes below $200,000. People with taxable income between $50,000 and $75,000, for example, would see an average net tax increase of $641. They’d save $984 from Romney's rate cut, but lose $2,672 in write-offs.
And now the Wall Street Journal:
This editorial largely draws on other work. It echoed Jensen’s criticism that the Tax Policy Center failed to consider certain tax breaks. It labeled the center authors as "class warriors" and charged that the center "ignores the history of tax cutting."
"Every major marginal rate income tax cut of the last 50 years," said the editorial writer, "1964, 1981, 1986 and 2003 — was followed by an unexpectedly large increase in tax revenues, a surge in taxes paid by the rich, and a more progressive tax code—i.e., the share of taxes paid by the richest 1 percent rose."
The editorial also said the center’s findings are "refuted by President Obama's own Simpson-Bowles deficit commission report. The Romney plan of cutting the top tax rate to 28 percent and closing loopholes to pay for it is conceptually very close to what Simpson-Bowles recommended."
***
Is Romney's plan conceptionally close to Simpson-Bowles?
From Forbes (Howard Gleckman)
In the recent contretemps over Mitt Romney’s tax plan, some Romney partisans have asserted that the Massachusetts governor’s revenue plank mimics the tax elements of the deficit reduction plan proposed in 2010 by Erskine Bowles and Alan Simpson, the chairs of President Obama’s deficit fiscal commission.
This claim is absurd. These two proposals could hardly be more different.
True, both propose a significant across-the-board rate cut on ordinary income. But after that, their tax plans have about as much in common as Infected Mushroom and the New York Philharmonic.
The Bowles-Simpson tax reform was fundamentally a trillion-dollar tax increase designed to help cut the deficit, while Romney flatly opposes any deficit-reducing tax hike. Bowles and Simpson would have raised taxes on capital gains and dividends, Romney would cut them. Bowles and Simpson included very specific proposals for eliminating popular tax preferences. Romney is largely silent on how he’d broaden the tax base to pay for his rate cuts.
[OK, maybe not Forbes, since this piece also appeared in the Christian Science Monitor]
OK, maybe Gleckman is biased. But here's Erskine Bowles himself.
This month, Romney said that his tax reform proposal is “very similar to the Simpson-Bowles plan.” How I wish it were. I will be the first to cheer if Romney decides to embrace our plan. Unfortunately, the numbers say otherwise: His reform plan leaves too many tax breaks in place and, as a result, does nothing to reduce the debt.
The “zero plan” our commission recommended offered both parties an appealing bargain: lower tax rates for everyone in return for sweeping reduction in tax loopholes of every stripe. Taxpayers and the economy would benefit from a vastly simpler Tax Code, and getting rid of loopholes would produce more than $1 trillion of the $4 trillion needed in deficit reduction. Our commission produced an alternative plan showing how much individual rates would need to go up, and who would have to pay for them, if lawmakers decided to preserve certain tax expenditures.
The most important lesson Al [Simpson] and I learned on the commission is that to fix the debt, everything must be on the table. Americans everywhere have told us that as long as the sacrifice is shared, they are ready to do their part. The surest way to doom deficit reduction is to play favorites by taking things off the table.
So although I give Romney credit for pledging to reform the Tax Code to reduce loopholes, his current proposal will not take us to the promised land. Our commission’s tax plan broadens the base, simplifies the code, reduces tax expenditures and generates $1 trillion for deficit reduction while making the Tax Code more progressive. The Romney plan, by sticking to revenue-neutrality and leaving in place tax breaks, would raise taxes on the middle class and do nothing to shrink the deficit.
[Note: Bowles served in the Clinton administration.]
***
Why didn't Obama support Simpson-Bowles?
[From the Huffington Post] Journalists here are homing in on Vice President Joe Biden's criticism of the GOP for not supporting any of the deficit-reduction proposals over the past year, noting that President Barack Obama did not embrace a report put out by the co-chairs of the Simpson-Bowles panel.
The problem with Biden's statement isn't that it's false. The problem is that it's true. With unemployment above 8 percent and the economy sputtering along, cutting government spending would have slowed growth further. Obama's 2011 focus on the deficit over job creation was a failure on every level, failing to reach a deal and turning the focus away from job creation.
The White House, contrary to media carping, did, in fact, desperately pursue a "grand bargain" that would dramatically trim the deficit, the sort of deal Alan Simpson and Erskine Bowles were pursuing. In so doing, the Obama administration was willing to raise the Medicare retirement age and agree to a host of other cuts to social programs that would have caused real pain, in exchange for a disproportionately small amount of tax hikes.
Obama's pursuit of this deal led him to push the Senate to create a commission to hash one out. When Senate Republicans bailed on it, he created one by executive order. That panel -- Simpson-Bowles -- rejected the co-chairs' conclusions -- meaning there was no actual report for the president to support.
But Obama didn't give up, agreeing with House Speaker John Boehner (R-Ohio) to dramatically cut spending in exchange for limited revenue increases. Meanwhile, a bipartisan group in the Senate was also working on a deficit-reduction deal.
Obama publicly backed the deal -- the kind of public support journalists are now saying was lacking.
As soon as Obama got behind the bargain, the GOP fled.
***
[Forbes/Josh Barro] The reason Obama didn’t back Simpson-Bowles is much simpler: it’s a big tax hike on the middle class. The President made a campaign promise not to raise taxes on families making $250,000 or less—98 percent of all American families. Though he has signed a couple of bills that violate that promise at the edges (raising the cigarette tax and, arguably, imposing an individual health care mandate) he has made a clear decision that it would be against his political interest to endorse any broad-based income or payroll tax increase on middle-income families. He could not endorse Simpson-Bowles because Simpson-Bowles is unpopular.
[Washingon Post/Ezra Klein] Perhaps the most common Washington criticism of the White House is that they didn’t embrace the Simpson-Bowles plan. That was, in the eyes of many pundits, the moment when President Obama revealed himself as a typical liberal rather than a postpartisan reformer. But the New York Times today suggests that much of Washington is misreading a tactical decision as an ideological one.
It’s a frustration for many White Houses that the best way to get things done is not necessarily to support them. For all that Washington thrills to the spectacle pf presidential leadership, the opposition party tends to recoil from proposals that are too closely associated with the White House. The calculus is simple: If a bill belongs to the president, then its passage is a defeat for the opposition. This dynamic is, in part, why both parties spend so much time negotiating behind closed doors. The trick is to agree on a proposal before it can become associated with either party, and thus before its passage can become a loss for one side.
[NewsBusters/Noel Sheppard] Obama didn't support Simpson-Bowles due its proposals regarding Medicare and Social Security. The far-left never would have accepted this and it could have seriously harmed him at the polls.
[Bill Maher in the same article] Let’s be honest why he didn’t: because the Republicans who were with him when he started Simpson-Bowles after he said he was for it said they weren't, because they can't do anything he does because it has cooties. That’s what happened. That’s what happened.
***
Wait. Simpson-Bowles raises taxes on the middle-class?
[Ginny Welsch] Bowles-Simpson raises the retirement age, cuts Social Security benefits, increases out-of-pocket costs for Medicare, eliminates deductions for mortgage interest and health-care benefits, eliminates subsidized student loans, and raises taxes on the bottom 80 percent of families, while cutting taxes for the top 20 percent. And that’s just the beginning. It represents a large upward shift of wealth from the middle class.
[Wikipedia] $100 billion in increased tax revenues through various tax reform proposals,[13] such as introducing a 15 cent per gallon gasoline tax and eliminating or restricting a variety of tax deductions such as the home mortgage interest deduction and the deduction for employer-provided healthcare benefits.
[So I suppose it's these proposals that would hit the middle class]
Looking at Wikipedia references, led to this article from the Washington Post
Step two would be tax reform. The plan would squeeze $100 billion a year out of the tax code through a comprehensive strategy that would eliminate all the expensive and popular deductions known as tax expenditures. Special rates for capital gains and dividends would be gone, and the inheritance tax would reappear at a rate of 45 percent for estates worth more than $3.5 million for individuals and $7 million for couples.
Not all of that cash would be dedicated to deficit reduction. Some of it would pay for an overhaul of the tax code that would lower rates for most taxpayers and eliminate the unpopular alternative minimum tax. The six current tax brackets would be replaced by three brackets with rates of 8 percent, 14 percent and 23 percent. The corporate tax rate, currently one of the highest in the industrial world at 35 percent, would be reduced to 26 percent.
[So I assume it's the gasoline tax and elimination of the mortgage interest deduction that would hit the middle class. But then it would be offset by a lowering of the tax rates.]
Wednesday, September 19, 2012
saving for college
I'm thinking of opening an account for Mason's college expenses.
I see there's a Coverdell Educational Account which is sort of like an IRA, but for education instead of retirement. It looks like it works more like a Roth as withdrawals are tax-deductible.
Are there other plans?
Google saving for college. I see there's a 529 Plan too.
[10/2/12] Education IRAs were first introduced in 1998. The idea was to allow families within given income guidelines to set money aside for college without having to pay taxes on earnings or distributions. Originally, contributions were limited to $500 per child per year. In 2001, as part of the tax cuts signed into law under President George W. Bush, use of the Education IRA was greatly expanded and the measure was redubbed the Coverdell Education Savings Account after Paul Coverdell, a U.S. senator from Georgia who had supported this expansion and who had died the year before. Among the most significant changes were an increase in the annual maximum contribution--to $2,000 per child--and the expansion of covered educational expenses to include those for students in kindergarten through 12th grade.
Fast forward a decade and here we are, with the Bush tax cuts (which were extended under President Obama two years ago) about to expire and taking the expanded Coverdell provisions with them. That means that, unless Congress and the president act, beginning in 2013 Coverdell contributions will again be limited to $500 per year, and proceeds from Coverdell accounts will again be usable only for college-related expenses. Other restrictions also will go into effect, including eliminating the age-limit exclusion for special needs beneficiaries and adding an excise tax that makes it prohibitive to contribute to both a Coverdell and a 529 account for the same beneficiary in the same year.
I see there's a Coverdell Educational Account which is sort of like an IRA, but for education instead of retirement. It looks like it works more like a Roth as withdrawals are tax-deductible.
Are there other plans?
Google saving for college. I see there's a 529 Plan too.
[10/2/12] Education IRAs were first introduced in 1998. The idea was to allow families within given income guidelines to set money aside for college without having to pay taxes on earnings or distributions. Originally, contributions were limited to $500 per child per year. In 2001, as part of the tax cuts signed into law under President George W. Bush, use of the Education IRA was greatly expanded and the measure was redubbed the Coverdell Education Savings Account after Paul Coverdell, a U.S. senator from Georgia who had supported this expansion and who had died the year before. Among the most significant changes were an increase in the annual maximum contribution--to $2,000 per child--and the expansion of covered educational expenses to include those for students in kindergarten through 12th grade.
Fast forward a decade and here we are, with the Bush tax cuts (which were extended under President Obama two years ago) about to expire and taking the expanded Coverdell provisions with them. That means that, unless Congress and the president act, beginning in 2013 Coverdell contributions will again be limited to $500 per year, and proceeds from Coverdell accounts will again be usable only for college-related expenses. Other restrictions also will go into effect, including eliminating the age-limit exclusion for special needs beneficiaries and adding an excise tax that makes it prohibitive to contribute to both a Coverdell and a 529 account for the same beneficiary in the same year.
Sunday, September 16, 2012
Liberty's Outlook
is the newsletter (archive) sent out from Liberty Coin Services. I think they're sending it to me (on occasion) because I bought some silver coins about 25 years ago.
Here's some of their latest:
Despite all the recent fireworks, though, in my judgment, we haven’t seen anything yet!
I look for gold and silver to be much stronger for the balance of 2012. It is not out of the question that gold could reach $2,000 and silver could top $60.00 by year-end. [the prices were 1690.75 and $32.75 as of 9/5/12]
The main reason for expecting precious metals prices to soar are that the financial problems that are hurting the US and global economies have not and will not be cured by politicians and bureaucrats. In fact, they are getting worse day by day.
The actions taken by the US government have the effect of destroying the value of the US dollar. Quantitative easing is just another way of saying inflation of the money supply without having to mention the “I” word.
Inflation of the money supply always ends up reducing the purchasing power of the currency, no matter whether people realize it or not and no matter how the government inflating the currency describes it.
So, it isn’t the value of gold or silver that is changing. After all, an ounce of pure gold or silver last year is still worth an ounce of pure gold or silver today. Rather, the actual problem is the falling value of the dollar when compared to gold or silver.
During his speech at Freedom Fest in Las Vegas in July, Wall Street Journal Senior Economist Stephen Moore said he considered the 2012 US Presidential election to be the most important since 1980. While I understand his reasons, I don’t agree that the 2012 elections are that important.
Why?
First, the candidates are lying. Second, even if they were honest, neither they nor other politicians have the backbone to genuinely solve the problems.
None of the major candidates for president are being honest about the financial problems of the US government, the economy, and the US dollar.
Rather than discussing the more accurate accrual basis of accounting of government finance, which includes rising future liabilities for things like Social Security, Medicare, and other pensions incurred during the accounting period, the Libertarian Gary Johnson, incumbent Democrat Barack Obama, and the Republican Mitt Romney mislead people by only referring to the numbers from the cashflow basis of accounting. [wow, even the Libertarian?]
Overall, the fiscal plans of Obama and Romney are quite similar and won’t prevent the US dollar from falling further in value. While Johnson advocates a huge 43% reduction in federal expenditures, that still leaves the US budget deficit in the trillions. Although Johnson may tip the results of the election, he will not win. No matter whether Obama or Romney is elected, the US government will be headed by someone who has repeatedly deceived the public and has no real plans to save the US economy and dollar.
I think the decline of US economy and US dollar are past the point of no return, no matter who is elected. I anticipate that they will fall so much in the coming months and years that the dollar may fail as a currency.
From that perspective, I’m sure you can see why I don’t think it matters who becomes the next US president. Whoever is elected, the real problems with the US economy and the dollar will not be addressed.
...
A recent poll by the Adelphi University Center for Health Innovation about personal emergency preparedness behaviors revealed that almost half of US households do not have any emergency plans in place!
While this particular survey focused on response to health emergencies (the West Nile virus is now considered an epidemic among Michigan’s citizenry and there have been substantial multi-day power outages along the Gulf Coast), I expect that a high percentage of Americans are also not financially ready for the economic catastrophes coming our way.
Think about your personal circumstances. What problems would you endure if the electricity failed for a week or more where you live and work? You would not be able to write checks or use your credit cards. Banks, grocery stores, and gasoline stations could be closed.
Do you have enough food and medical supplies to manage for at least a few days without electricity? And,
even though its value is declining, do you have a stash of Federal Reserve Notes to use when checks and credit cards are not accepted forms of payment?
To a greater extreme, do you have some physical gold and silver set aside in your direct possession as your insurance against the failure of the US dollar? [at last!]
and so on..
The editor, and I assume writer, is Patrick Heller (seems to be right up Buddy's alley). Fortunately you can survive all this by loading up on gold and silver (conveniently being sold by Heller's company as a public service).
What's cool [or scary] is that Heller could be appearing in a movie.
I have now an investor in the making of a motion picture titled Alongside Night. I am one of the executive producers along with actor Kevin Sorbo and others. In addition, my company, some of the staff of Liberty, and I will make cameo appearances in the film. Retiring Congressman Ron Paul (R-TX) will play himself in the film. There will also be a few other surprises that I’m not going to disclose just yet except to tell you that gold plays a significant role.
The movie is adapted from the 1979 novel Alongside Night written by J. Neil Schulman. The subtitle of the book at the time was “A Novel of 1999.” The book projects a plausible scenario how life in America
could deteriorate as governments expand their power over the citizenry.
[Then again, Buffett prefers stocks over gold. But I suppose some gold wouldn't hurt.]
Here's some of their latest:
Despite all the recent fireworks, though, in my judgment, we haven’t seen anything yet!
I look for gold and silver to be much stronger for the balance of 2012. It is not out of the question that gold could reach $2,000 and silver could top $60.00 by year-end. [the prices were 1690.75 and $32.75 as of 9/5/12]
The main reason for expecting precious metals prices to soar are that the financial problems that are hurting the US and global economies have not and will not be cured by politicians and bureaucrats. In fact, they are getting worse day by day.
The actions taken by the US government have the effect of destroying the value of the US dollar. Quantitative easing is just another way of saying inflation of the money supply without having to mention the “I” word.
Inflation of the money supply always ends up reducing the purchasing power of the currency, no matter whether people realize it or not and no matter how the government inflating the currency describes it.
So, it isn’t the value of gold or silver that is changing. After all, an ounce of pure gold or silver last year is still worth an ounce of pure gold or silver today. Rather, the actual problem is the falling value of the dollar when compared to gold or silver.
During his speech at Freedom Fest in Las Vegas in July, Wall Street Journal Senior Economist Stephen Moore said he considered the 2012 US Presidential election to be the most important since 1980. While I understand his reasons, I don’t agree that the 2012 elections are that important.
Why?
First, the candidates are lying. Second, even if they were honest, neither they nor other politicians have the backbone to genuinely solve the problems.
None of the major candidates for president are being honest about the financial problems of the US government, the economy, and the US dollar.
Rather than discussing the more accurate accrual basis of accounting of government finance, which includes rising future liabilities for things like Social Security, Medicare, and other pensions incurred during the accounting period, the Libertarian Gary Johnson, incumbent Democrat Barack Obama, and the Republican Mitt Romney mislead people by only referring to the numbers from the cashflow basis of accounting. [wow, even the Libertarian?]
Overall, the fiscal plans of Obama and Romney are quite similar and won’t prevent the US dollar from falling further in value. While Johnson advocates a huge 43% reduction in federal expenditures, that still leaves the US budget deficit in the trillions. Although Johnson may tip the results of the election, he will not win. No matter whether Obama or Romney is elected, the US government will be headed by someone who has repeatedly deceived the public and has no real plans to save the US economy and dollar.
I think the decline of US economy and US dollar are past the point of no return, no matter who is elected. I anticipate that they will fall so much in the coming months and years that the dollar may fail as a currency.
From that perspective, I’m sure you can see why I don’t think it matters who becomes the next US president. Whoever is elected, the real problems with the US economy and the dollar will not be addressed.
...
A recent poll by the Adelphi University Center for Health Innovation about personal emergency preparedness behaviors revealed that almost half of US households do not have any emergency plans in place!
While this particular survey focused on response to health emergencies (the West Nile virus is now considered an epidemic among Michigan’s citizenry and there have been substantial multi-day power outages along the Gulf Coast), I expect that a high percentage of Americans are also not financially ready for the economic catastrophes coming our way.
Think about your personal circumstances. What problems would you endure if the electricity failed for a week or more where you live and work? You would not be able to write checks or use your credit cards. Banks, grocery stores, and gasoline stations could be closed.
Do you have enough food and medical supplies to manage for at least a few days without electricity? And,
even though its value is declining, do you have a stash of Federal Reserve Notes to use when checks and credit cards are not accepted forms of payment?
To a greater extreme, do you have some physical gold and silver set aside in your direct possession as your insurance against the failure of the US dollar? [at last!]
and so on..
The editor, and I assume writer, is Patrick Heller (seems to be right up Buddy's alley). Fortunately you can survive all this by loading up on gold and silver (conveniently being sold by Heller's company as a public service).
What's cool [or scary] is that Heller could be appearing in a movie.
I have now an investor in the making of a motion picture titled Alongside Night. I am one of the executive producers along with actor Kevin Sorbo and others. In addition, my company, some of the staff of Liberty, and I will make cameo appearances in the film. Retiring Congressman Ron Paul (R-TX) will play himself in the film. There will also be a few other surprises that I’m not going to disclose just yet except to tell you that gold plays a significant role.
The movie is adapted from the 1979 novel Alongside Night written by J. Neil Schulman. The subtitle of the book at the time was “A Novel of 1999.” The book projects a plausible scenario how life in America
could deteriorate as governments expand their power over the citizenry.
[Then again, Buffett prefers stocks over gold. But I suppose some gold wouldn't hurt.]
Wednesday, September 12, 2012
trickle down economics
"Trickle-down economics" and "the trickle-down theory" are terms in United States politics to refer to the idea that tax breaks
or other economic benefits provided by government to businesses and the
wealthy will benefit poorer members of society by improving the economy
as a whole.] The term has been attributed to humorist Will Rogers, who said during the Great Depression that "money was all appropriated for the top in hopes that it would trickle down to the needy." The term is mostly used ironically or as pejorative
Economist Thomas Sowell has written that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. He noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners—but in the absence of a profit motive, which is reduced in the aggregate by a raise in marginal tax rates in the upper tiers, this activity does not occur.
Proponents of Keynesian economics and related theories often criticize tax rate cuts for the wealthy as being "trickle down," arguing tax cuts directly targeting those with less income would be more economically stimulative. Keynesians generally argue for broad fiscal policies that are directed across the entire economy, not toward one specific group.
In the 1992 presidential election, Independent candidate Ross Perot called trickle-down economics "political voodoo."
In New Zealand, Labour Party MP Damien O'Connor has, in the Labour Party campaign launch video for the 2011 general election, called trickle-down economics "the rich pissing on the poor".
A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.
***
During the Reagan Administration it seemed that trickle-down economics worked. Reagan cut taxes significantly -- the top tax rate fell from 70% (for those earning $108,000+) to 28% (for anyone with an income of $18,500 or more). The corporate tax rate was also cut, from 48% to 34%. Reaganomics was successful in ending the 1980 recession. This was amazing, since the recession was marked by both double-digit unemployment and inflation, a dreadful situation known as stagflation.
However, it's difficult to say whether trickle-down economics was the only reason for the prosperity. That's because, while Reagan cut taxes, he also increased government spending -- by 2.5% a year. Reagan nearly tripled the Federal debt, which went from $997 billion in 1981 to $2.85 trillion in 1989. This spending went primarily to defense, in support of Reagan's successful efforts to end the Cold War and bring down the Soviet Union. Therefore, trickle-down economics was never really tested, since government spending is also a spur to economic growth.
To end the 2001 recession, President George W. Bush cut income taxes with JGTRRA, which ended the recession by November of that year. However, unemployment rose to 6%, so Bush cut business taxes with (EGTRRA) in 2003.
Apparently, the tax cuts worked. On the other hand, the Federal Reserve lowered the Fed funds rate from 6% to 1% during this same time period. Just like during the Reagan Administration, it's unclear whether tax cuts, or another stimulus, were what worked.
If trickle-down economics worked, then lower tax rates during the Reagan Revolution should have increased the lowest income levels. In fact, the exact opposite has occurred. Income inequality has worsened. Between 1979 and 2005, after-tax household income rose 6% for the bottom fifth of income earners. That sounds great, until you see what happened for the top fifth -- an 80% increase in income. The top 1% saw their income triple. Instead trickling down, it appears that prosperity trickled up!
***
Helping to clinch his eventual victory, Barack Obama declared in a 2008 presidential campaign ad, "The old trickle-down theory has failed us" [source: YouTube]. This statement and Obama's victory resound like a death knell to an economic mentality that some say served to line the pockets of the rich. However, the trickle-down theory to which he refers remains a highly controversial topic. That Obama seeks to end trickle-down policy is certain, but what the theory really suggests and whether it has succeeded have been less clear.
Why do trickle-down economists think that taxing the wealthy less leads to an increase in production? That can be explained in terms of tax revenue. Some argue that giving tax breaks to the wealthy can actually increase tax revenue for a government. This might seem difficult to believe, but Arthur Laffer argued otherwise. Working off ideas posed by 14th-century Muslim philosopher Ibn Khaldun and John Maynard Keynes, Laffer concluded that government tax rates and revenues don't have a directly positive correlation.
In what became known as the Laffer Curve, Laffer showed that the relationship between taxes and revenues looks like a curve rather than a straight line. In other words, tax revenues don't rise consistently like tax rates do (which would look like a straight, positive correlation). Laffer's curve shows that when tax rates are at zero, revenues are zero as well -- the government makes no money when it taxes nothing. But it's the same result if the tax rate were 100 percent. Think about what would happen if the government demanded every cent in your paycheck. Why work -- or why tell the government what you're making? The government would bring in no money because there'd be no incentive to work or to report earnings.
So tax revenues are zero when the tax rates are at zero and 100 percent -- most agree about that. The question is, what does it look like between these extremes? The Laffer Curve postulates that once the rates get too high, the steep taxes discourage work to an extent that the revenues themselves suffer. Take another scenario: By June, you've already made a million dollars, and the progressive tax system promised to tax that income 50 percent. However, anything you make over a million will be taxed 90 percent. Why work the rest of the year when you know you can only keep 10 percent of your income? You'd probably take your half a million and retire to your beach house until next year. At this point, the taxes are discouraging work and tax revenue.
The range in which taxes are too high for maximum revenues is called the prohibitive range. When taxes are in the prohibitive range, a tax cut would produce an increase in tax revenues, according to Laffer [source: Laffer]. But the ideal tax isn't necessarily 50 percent; rather, it depends on the taxpayers [source: Wanniski].
Through Laffer's Curve, we can visualize how tax rates could discourage people from producing, which results in fewer jobs and a hurting economy. On the flip side, lowering taxes at the right time can reverse these effects. Laffer points to examples in U.S. history where lowering high tax rates increased not only government revenue, but also increased gross domestic product (GDP) growth and lowered the unemployment rate [source: Laffer].
The first instance of supply-side economics being implemented came even before the trickle-down idea was fully articulated. After World War I, top income tax rates had risen from a modest 7 percent to 77 percent to help pay for the war. This high rate would fall into the prohibitive range of the Laffer Curve, according to the theory. The Harding and Coolidge administrations passed a series of tax cuts to reduce wealthy citizens' tax burden, which had ballooned. Although opponents argue that this kind of policy contributed to the Great Depression, Arthur Laffer points to the resulting increases in tax revenue, gross domestic product (GDP) and employment as evidence that the tax cuts worked by boosting production [source: Laffer].
But this policy soon faced sharp criticism. When the stock market crashed in 1929 and the U.S. economy sank into the Great Depression, the idea of giving tax breaks to the wealthy was an unpopular policy. People blamed Herbert Hoover, who'd shown support for the tax policies of his predecessors. In 1932, voters replaced him with Franklin Roosevelt, who promised the New Deal that would help the economy from the bottom up. Keynesian economics took hold.
Wealthy members of society who'd enjoyed the low marginal tax rates of the 1920s would see a dramatic reversal in the next 20 years. During the Depression and World War II, the top marginal rate rose to more than 90 percent [source: Laffer]. Enter John F. Kennedy, who was sympathetic to the idea behind supply-side economics (recall his "rising tide" comment). He argued that lowering taxes increases tax revenue, creates jobs and increases profits [source: Nugent]. His tax cuts didn't pass until after he was assassinated, but Laffer argues that they had the positive effect on the economy that Kennedy had hoped for. Others say that the cuts hurt the gross national product (GNP) growth and resulted in rising unemployment [source: Friedman].
***
So from all this, I conclude it could work as the Laffer Curve concept makes sense to me. The question is what tax rate to set and not to just reflexively raise or lower taxes. And how do you know if it's effective (how long to wait for the results)? Whatever they're doing it ain't working because it appears the middle class ain't getting richer. We're just getting more dead money at the top.
It kind of makes sense to me to raise taxes in times of war (to pay for the war). And lower taxes in times of peace. Kind of the opposite of what Bush did and what Obama wants to do with the (hopefully) ending of war.
Economist Thomas Sowell has written that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. He noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners—but in the absence of a profit motive, which is reduced in the aggregate by a raise in marginal tax rates in the upper tiers, this activity does not occur.
Proponents of Keynesian economics and related theories often criticize tax rate cuts for the wealthy as being "trickle down," arguing tax cuts directly targeting those with less income would be more economically stimulative. Keynesians generally argue for broad fiscal policies that are directed across the entire economy, not toward one specific group.
In the 1992 presidential election, Independent candidate Ross Perot called trickle-down economics "political voodoo."
In New Zealand, Labour Party MP Damien O'Connor has, in the Labour Party campaign launch video for the 2011 general election, called trickle-down economics "the rich pissing on the poor".
A 2012 study by the Tax Justice Network indicates that wealth of the super-rich does not trickle down to improve the economy, but tends to be amassed and sheltered in tax havens with a negative effect on the tax bases of the home economy.
***
During the Reagan Administration it seemed that trickle-down economics worked. Reagan cut taxes significantly -- the top tax rate fell from 70% (for those earning $108,000+) to 28% (for anyone with an income of $18,500 or more). The corporate tax rate was also cut, from 48% to 34%. Reaganomics was successful in ending the 1980 recession. This was amazing, since the recession was marked by both double-digit unemployment and inflation, a dreadful situation known as stagflation.
However, it's difficult to say whether trickle-down economics was the only reason for the prosperity. That's because, while Reagan cut taxes, he also increased government spending -- by 2.5% a year. Reagan nearly tripled the Federal debt, which went from $997 billion in 1981 to $2.85 trillion in 1989. This spending went primarily to defense, in support of Reagan's successful efforts to end the Cold War and bring down the Soviet Union. Therefore, trickle-down economics was never really tested, since government spending is also a spur to economic growth.
To end the 2001 recession, President George W. Bush cut income taxes with JGTRRA, which ended the recession by November of that year. However, unemployment rose to 6%, so Bush cut business taxes with (EGTRRA) in 2003.
Apparently, the tax cuts worked. On the other hand, the Federal Reserve lowered the Fed funds rate from 6% to 1% during this same time period. Just like during the Reagan Administration, it's unclear whether tax cuts, or another stimulus, were what worked.
If trickle-down economics worked, then lower tax rates during the Reagan Revolution should have increased the lowest income levels. In fact, the exact opposite has occurred. Income inequality has worsened. Between 1979 and 2005, after-tax household income rose 6% for the bottom fifth of income earners. That sounds great, until you see what happened for the top fifth -- an 80% increase in income. The top 1% saw their income triple. Instead trickling down, it appears that prosperity trickled up!
***
Helping to clinch his eventual victory, Barack Obama declared in a 2008 presidential campaign ad, "The old trickle-down theory has failed us" [source: YouTube]. This statement and Obama's victory resound like a death knell to an economic mentality that some say served to line the pockets of the rich. However, the trickle-down theory to which he refers remains a highly controversial topic. That Obama seeks to end trickle-down policy is certain, but what the theory really suggests and whether it has succeeded have been less clear.
Why do trickle-down economists think that taxing the wealthy less leads to an increase in production? That can be explained in terms of tax revenue. Some argue that giving tax breaks to the wealthy can actually increase tax revenue for a government. This might seem difficult to believe, but Arthur Laffer argued otherwise. Working off ideas posed by 14th-century Muslim philosopher Ibn Khaldun and John Maynard Keynes, Laffer concluded that government tax rates and revenues don't have a directly positive correlation.
In what became known as the Laffer Curve, Laffer showed that the relationship between taxes and revenues looks like a curve rather than a straight line. In other words, tax revenues don't rise consistently like tax rates do (which would look like a straight, positive correlation). Laffer's curve shows that when tax rates are at zero, revenues are zero as well -- the government makes no money when it taxes nothing. But it's the same result if the tax rate were 100 percent. Think about what would happen if the government demanded every cent in your paycheck. Why work -- or why tell the government what you're making? The government would bring in no money because there'd be no incentive to work or to report earnings.
So tax revenues are zero when the tax rates are at zero and 100 percent -- most agree about that. The question is, what does it look like between these extremes? The Laffer Curve postulates that once the rates get too high, the steep taxes discourage work to an extent that the revenues themselves suffer. Take another scenario: By June, you've already made a million dollars, and the progressive tax system promised to tax that income 50 percent. However, anything you make over a million will be taxed 90 percent. Why work the rest of the year when you know you can only keep 10 percent of your income? You'd probably take your half a million and retire to your beach house until next year. At this point, the taxes are discouraging work and tax revenue.
The range in which taxes are too high for maximum revenues is called the prohibitive range. When taxes are in the prohibitive range, a tax cut would produce an increase in tax revenues, according to Laffer [source: Laffer]. But the ideal tax isn't necessarily 50 percent; rather, it depends on the taxpayers [source: Wanniski].
Through Laffer's Curve, we can visualize how tax rates could discourage people from producing, which results in fewer jobs and a hurting economy. On the flip side, lowering taxes at the right time can reverse these effects. Laffer points to examples in U.S. history where lowering high tax rates increased not only government revenue, but also increased gross domestic product (GDP) growth and lowered the unemployment rate [source: Laffer].
The first instance of supply-side economics being implemented came even before the trickle-down idea was fully articulated. After World War I, top income tax rates had risen from a modest 7 percent to 77 percent to help pay for the war. This high rate would fall into the prohibitive range of the Laffer Curve, according to the theory. The Harding and Coolidge administrations passed a series of tax cuts to reduce wealthy citizens' tax burden, which had ballooned. Although opponents argue that this kind of policy contributed to the Great Depression, Arthur Laffer points to the resulting increases in tax revenue, gross domestic product (GDP) and employment as evidence that the tax cuts worked by boosting production [source: Laffer].
But this policy soon faced sharp criticism. When the stock market crashed in 1929 and the U.S. economy sank into the Great Depression, the idea of giving tax breaks to the wealthy was an unpopular policy. People blamed Herbert Hoover, who'd shown support for the tax policies of his predecessors. In 1932, voters replaced him with Franklin Roosevelt, who promised the New Deal that would help the economy from the bottom up. Keynesian economics took hold.
Wealthy members of society who'd enjoyed the low marginal tax rates of the 1920s would see a dramatic reversal in the next 20 years. During the Depression and World War II, the top marginal rate rose to more than 90 percent [source: Laffer]. Enter John F. Kennedy, who was sympathetic to the idea behind supply-side economics (recall his "rising tide" comment). He argued that lowering taxes increases tax revenue, creates jobs and increases profits [source: Nugent]. His tax cuts didn't pass until after he was assassinated, but Laffer argues that they had the positive effect on the economy that Kennedy had hoped for. Others say that the cuts hurt the gross national product (GNP) growth and resulted in rising unemployment [source: Friedman].
***
So from all this, I conclude it could work as the Laffer Curve concept makes sense to me. The question is what tax rate to set and not to just reflexively raise or lower taxes. And how do you know if it's effective (how long to wait for the results)? Whatever they're doing it ain't working because it appears the middle class ain't getting richer. We're just getting more dead money at the top.
It kind of makes sense to me to raise taxes in times of war (to pay for the war). And lower taxes in times of peace. Kind of the opposite of what Bush did and what Obama wants to do with the (hopefully) ending of war.
Saturday, September 08, 2012
gold standard coming back?
Pundits are pooh-poohing the plank in the GOP platform that calls for
a commission to examine “possible ways to set a fixed value for the dollar,” declaring it a sop to Ron Paul supporters. And indeed this was a
motivation of hard-core political calculators around Governor Romney.
But these self-styled, world-weary cynical types didn’t put this item in
of their own volition. They went along with it because it was pushed
hard by Tea Party groups and several U.S. senators and representatives,
as well as Ron Paul devotees.
Gold won’t be a sizzling issue this fall. The economy, entitlements and, possibly, war in the Middle East will dominate headlines. But the yellow metal will be a hot topic in the next 24 months. The commission is going to take on an importance that will astound today’s political punditry, besotted as they are with stale Keynesian quackeries about money, taxes and spending.
Why? Events economic and political. The ever deepening financial crisis around the world will force the new Romney-Ryan Administration to consider–and quickly, too–dramatic measures to deal with the disaster.
-- Steve Forbes (via pbo)
Gold won’t be a sizzling issue this fall. The economy, entitlements and, possibly, war in the Middle East will dominate headlines. But the yellow metal will be a hot topic in the next 24 months. The commission is going to take on an importance that will astound today’s political punditry, besotted as they are with stale Keynesian quackeries about money, taxes and spending.
Why? Events economic and political. The ever deepening financial crisis around the world will force the new Romney-Ryan Administration to consider–and quickly, too–dramatic measures to deal with the disaster.
-- Steve Forbes (via pbo)
Friday, September 07, 2012
September is the cruelest month
[9/1/09] September historically has been so bad for the stock market that, even in the absence of a good explanation for why it should be such a poor performer, you may want to pull a few chips off the table.
Consider September's record back to 1896, when the Dow Jones Industrial Average was created. September on average since then has produced a return of minus 1.2%, in contrast to an average gain of 0.7% for all other months. No other month comes even close to such a dismal record.
Making the statistical case against September even stronger is the remarkable consistency of its poor performance. Consider the accompanying table, which shows how September ranks against all other months of the calendar in each of the last 11 decades, as judged by the Dow.
Notice from the table that in all but one of the last 11 decades, September was a below-average performer. In more than half the decades, in fact, the month's rank was dead last.
Why, given such an overwhelming record, would anyone question September's bad record? Because there is no good theory for why the month should be such an awful month for the stock market. And, without such an explanation, there's the distinct possibility that the statistical pattern is just a fluke.
[iluvbabyb]
[9/7/12] So the real question facing these investors who are having cold feet: Is there some reason to expect this coming September to buck the trend of Septembers past?
Consider September's record back to 1896, when the Dow Jones Industrial Average was created. September on average since then has produced a return of minus 1.2%, in contrast to an average gain of 0.7% for all other months. No other month comes even close to such a dismal record.
Making the statistical case against September even stronger is the remarkable consistency of its poor performance. Consider the accompanying table, which shows how September ranks against all other months of the calendar in each of the last 11 decades, as judged by the Dow.
| Decade | Sept rank | Sept ave return |
| 1901-1910 | 12th | -2.6% |
| 1911-1920 | 2nd | +2.9% |
| 1921-1930 | 12th | -2.8% |
| 1931-1940 | 10th | -3.2% |
| 1941-1950 | 8th | +0.4% |
| 1951-1960 | 12th | -1.2% |
| 1961-1970 | 9th | +0.4% |
| 1971-1980 | 12th | -1.3% |
| 1981-1990 | 12th | -1.8% |
| 1991-2000 | 10th | +0.2% |
| 2001-2008 | 12th | -3.0% |
Notice from the table that in all but one of the last 11 decades, September was a below-average performer. In more than half the decades, in fact, the month's rank was dead last.
Why, given such an overwhelming record, would anyone question September's bad record? Because there is no good theory for why the month should be such an awful month for the stock market. And, without such an explanation, there's the distinct possibility that the statistical pattern is just a fluke.
[iluvbabyb]
[9/7/12] So the real question facing these investors who are having cold feet: Is there some reason to expect this coming September to buck the trend of Septembers past?
The analysis I presented in one of my columns earlier this week, you may
recall, failed to find any historical statistical support for such an
expectation — even given the market’s strength in recent months. (
Read my Sep. 4 column, “September is a downer.”
)
Naturally, this hasn’t completely persuaded everyone, especially in
light of Thursday’s very strong market. So let me present more evidence:
The remarkable consistency with which September has been a poor
performer.
In fact, as you can see from the accompanying table, September on
average has been the worst month of the calendar in nearly half the
decades of the last century — and a below-average performer in all but
one of them. The chances that this record is the result of random chance
are extremely low.
The bottom line? Even if you didn’t know or appreciate it at the time,
September is the month you were really trying to avoid by selling in May
and going away.
Thursday, September 06, 2012
Paul Ryan's investments
The report shows that Ryan has spread his wealth among a wide variety
of investments. Ryan reported partnership income from an Oklahoma
mining business, Ava O Limited Co., and royalties from the Oklahoma
gravel rights of Blondie & Brownie. He also reported interests in
mineral rights, vacant land, a cabin and a timber business in Oklahoma.
Ryan’s stock holdings include Apple, Bristol Myers Squibb, Exxon Mobil, General Electric, Home Depot, IBM, Procter & Gamble, Wells Fargo, Google, McDonald’s, Kraft Foods, Nike and Berkshire Hathaway.
Not to mention Fidelity Contrafund.
All this makes him the 128th richest congressman.
The 15 richest? (No. 15 is worth $23.8 million, 9 of the 15 are Democrats.)
***
How Obama made his fortune
Ryan’s stock holdings include Apple, Bristol Myers Squibb, Exxon Mobil, General Electric, Home Depot, IBM, Procter & Gamble, Wells Fargo, Google, McDonald’s, Kraft Foods, Nike and Berkshire Hathaway.
Not to mention Fidelity Contrafund.
All this makes him the 128th richest congressman.
The 15 richest? (No. 15 is worth $23.8 million, 9 of the 15 are Democrats.)
***
How Obama made his fortune
Tuesday, September 04, 2012
Three economic misperceptions
1. Lower taxes lead to faster economic growth
2. We need to pay off the national debt
3. It matters who wins the presidency.
- by Morgan Housel
2. We need to pay off the national debt
3. It matters who wins the presidency.
- by Morgan Housel
stock market performance under Democrats
Thanks to their pro-business approach and the anemic recovery,
Republicans would seem to have a clear path to grab the economic mantle
heading into the 2012 race for the White House.
However, history actually shows that the U.S. economy, stock prices and corporate profits have generated stronger growth under Democratic administrations than Republican ones.
According to McGraw-Hill’s (MHP: 51.48, +0.28, +0.55%) S&P Capital IQ, the S&P 500 has rallied an average of 12.1% per year since 1901 when Democrats occupy the White House, compared with just 5.1% for the GOP.
Likewise, gross domestic product has increased 4.2% each year since 1949 when Democrats run the executive branch, versus 2.6% under Republicans.
However, history actually shows that the U.S. economy, stock prices and corporate profits have generated stronger growth under Democratic administrations than Republican ones.
According to McGraw-Hill’s (MHP: 51.48, +0.28, +0.55%) S&P Capital IQ, the S&P 500 has rallied an average of 12.1% per year since 1901 when Democrats occupy the White House, compared with just 5.1% for the GOP.
Likewise, gross domestic product has increased 4.2% each year since 1949 when Democrats run the executive branch, versus 2.6% under Republicans.
Sunday, September 02, 2012
Buffett's Alpha
While much has been said and written about Warren Buffett and his investment style, there has been little rigorous empirical analysis that explains his performance. Every investor has a view on how Buffett has done it, but we seek the answer via a thorough empirical analysis in light of some of the latest research on the drivers of stock market returns.
Buffett’s record is remarkable in many ways, but just how spectacular has the performance of Berkshire Hathaway been compared to other stocks or mutual funds? Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Berkshire has a higher Sharpe ratio than all U.S. mutual funds that have been around formore than 30 years.
We find that the Sharpe ratio of Berkshire Hathaway is 0.76 over the period 1976-2011. While nearly double the Sharpe ratio of the overall stock market, this is lower than many investors imagine. Adjusting for the market exposure, Berkshire’s information ratio is even lower, 0.66. This Sharpe ratio reflects high average returns, but also significant risk and periods of losses and significant drawdowns.
If his Sharpe ratio is very good but not unachievably good, then how did Buffett become one of the most successful investors in the world? The answer is that Buffett has boosted his returns with leverage, and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale or a career shift. We estimate that Buffett applies a leverage of about 1.6-to-1, boosting both his risk and excess return in that proportion. Thus, his many accomplishments include having the conviction, wherewithal, and skill to operate with leverage and its risk over multiple decades.
This leaves the key question: How does Buffett pick stocks to achieve a relatively attractive return stream that can be leveraged? We identify several features of his portfolio: He buys stocks that are “safe” (with low beta and low volatility), “cheap” (i.e.,value stocks with low price-to-book ratios), and high-quality (meaning stocks that [are] profitable, stable, growing, and with high payout ratios). This statistical finding is certainly with Buffett’s writings, e.g.:
Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 2008.
Buffett’s record is remarkable in many ways, but just how spectacular has the performance of Berkshire Hathaway been compared to other stocks or mutual funds? Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Berkshire has a higher Sharpe ratio than all U.S. mutual funds that have been around formore than 30 years.
We find that the Sharpe ratio of Berkshire Hathaway is 0.76 over the period 1976-2011. While nearly double the Sharpe ratio of the overall stock market, this is lower than many investors imagine. Adjusting for the market exposure, Berkshire’s information ratio is even lower, 0.66. This Sharpe ratio reflects high average returns, but also significant risk and periods of losses and significant drawdowns.
If his Sharpe ratio is very good but not unachievably good, then how did Buffett become one of the most successful investors in the world? The answer is that Buffett has boosted his returns with leverage, and that he has stuck to a good strategy for a very long time period, surviving rough periods where others might have been forced into a fire sale or a career shift. We estimate that Buffett applies a leverage of about 1.6-to-1, boosting both his risk and excess return in that proportion. Thus, his many accomplishments include having the conviction, wherewithal, and skill to operate with leverage and its risk over multiple decades.
This leaves the key question: How does Buffett pick stocks to achieve a relatively attractive return stream that can be leveraged? We identify several features of his portfolio: He buys stocks that are “safe” (with low beta and low volatility), “cheap” (i.e.,value stocks with low price-to-book ratios), and high-quality (meaning stocks that [are] profitable, stable, growing, and with high payout ratios). This statistical finding is certainly with Buffett’s writings, e.g.:
Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down – Warren Buffett, Berkshire Hathaway Inc., Annual Report, 2008.