The Tax Burdens on Small Businesses

May 17, 2012

I am Joe the Plumber. It hit me, as I finished my tax return last week and wrote a check to Uncle Sam.
Joe (really Sam Wurzelbacher ) was the guy candidate Obama patted on the shoulder and suggested that taxes should be increased on the rich. Joe surprised Obama, said he owned his own business and would pay more taxes under the Obama plan.

Mine is the proverbial small business, one of those companies known as a partnership, sub-S corporation, or LLC which combines the business income with the owner’s income on the same tax return.

When my company income is added to my salary, I look rich, even by my own standards. Not rich like Warren Buffett or Mitt Romney. To them, my income isn’t pocket change. But to me, the income on my tax return shocks me.

The problem is that small businesses don’t get to keep or spend the income on their tax returns. Most of it stays in the company to buy new buildings (we built a new one last year), to buy more inventory (did that, too) and to support growth (that, too).

Small businesses are mythically – fired employees start most new small businesses – the job creators. For 30 years, Republicans have had a singular tax mantra: lower taxes create jobs. Our company has grown from one to almost 30 employees. Yet we’ve never thought: “We need to hire a new employee, but our federal income tax is too high. So, we can’t afford it.”

Like many small businesses, my company’s profit doesn’t feel like a profit. Last year, our inventory went up by more than our profit. We had to spend our entire profit, plus more, to replace goods on the shelf for tomorrow’s customers. As a drug store, most of our customers have insurance so that they take their drugs today and we get paid next month.

When the ink dried on my tax return last week, we reported a nice profit. Which landed on my tax return. But, because of our growth, we had no cash. So, I had to borrow money to pay my income taxes. In fact, combining my company’s profits and my salary put me in the Democrat’s “rich” tax bracket. My tax rate is higher than Warren Buffet’s secretary, and more than double Buffet’s and Mitt Romney’s tax rate.

For decades, Republicans have argued that lower tax rates encourage job creators (like me) to hire more employees, and that really low, or zero, capital gain taxes encourage the rich to invest more, thus creating even more jobs. President Bush did that, but no jobs were created during his eight-year presidency. Oh, well. Maybe it will work this time.

President Reagan is looking pretty good to me right now. He installed a 28-percent maximum tax rate on all income, regardless of source, by lowering normal rates from 50 percent and increasing capital gain rates from 15 percent.

Operating businesses that generate jobs, like mine, don’t have capital gains. They pay the full freight. Almost half the income in the economy is from finance, earned by investors who pay lower tax rates. The idea is lower rates reward the risk they take. Of course, investors like the Buffets and Romneys can sell their stock and get out any time.

My house is the collateral for my company’s loans. That’s real risk and normal for small businesses. We have to hang in there or lose our homes. Would one candidate explain how small businesses have less risk and pay twice the tax rate as super rich investors?

Both parties agree that the tax system needs to be reformed and made more “fair” by “broadening the base” and lowering tax rates. That means paying a lower rate on more income. Over the past 50 years, history has shown that when rates are lowered and the amount taxed is increased, normal people pay almost same amount while the rich pay less.

Apparently, my problem is that I’m not rich enough to pay less. Maybe President Obama will drop by my store, rest his hand on my shoulder, as he did to Joe the Plumber, and assure me that I should pay less tax. Maybe Mitt Romney will invest in my company and help it grow into a company with 90,000 employees as he did for Staples. Then, I’d be really rich, he’d be richer, and both of us would pay lower tax rates.

And what about the real Joe the Plumber? He’s running for Congress.

Digging Deeper Into Pockets, Into Debt

May 3, 2012

Does the government spend too much? Probably.

Are taxes too low? Probably.

Is there an easy or quick fix? Absolutely not.

Tax receipts cover 60 percent of government spending. We borrow the rest, so an inability to borrow means there won’t be enough money to go around. Few households and businesses can cut their expenses 40 percent overnight. Neither can the federal government.

When households and businesses face cuts like that, they go bankrupt. They lose most of what they own and creditors don’t get paid. Their credit ratings drop. Their living standards decline. If they can borrow money, interest rates rise. Anyone with a credit problem knows recovery takes years. It’s not a pretty picture.

Ben Bernanke, chairman of the Fed, who incidentally was appointed by George W. Bush, said it would be a “calamity.” It will affect everyone. A talking head should ask Congress if it will take a 40 percent pay cut and pay 40 percent of their health care.

Here’s the big picture showing federal government income and expenses last year and ten years ago:

Billions of dollars 2000 2010

Federal Receipts $ 2,025 $ 2,163

Federal Expenditures $1,789 $ 3,456

Surplus (DEFICIT) $ 216 ($ 1,293)

As percent of GDP

Federal Receipts 21 percent 15 percent

Federal Expenditures 18 percent 24 percent

Surplus (DEFICIT) 3 percent (9 percent)

Stop there, and the story is an easy one. Even though tax cuts reduced revenues, and the recession, two wars, and an expansion of Medicare increased spending, no one is discussing that. Instead, the screaming is about “no new taxes” and out of control spending.

Every mechanic knows what to do. Look under the hood and see what’s making the noise. And there it is: we’re getting older and old is expensive.

In the past ten years, Social security has almost doubled from $400 to $700 billion, and federal health care costs have more than doubled from $390 to over $920 billion and continues to rise much faster than inflation.

Yet, it’s going to get worse. Here come the baby boomers and they are a tsunami. Today, 40 million people in the U.S. are over age 65, of which, 19 million are over 75. Behind them stand 79 million people between 45 and 65, so about 79 million are going to replace 19 million in the retirement pool over the next 20 years.

Medicare covers the health care of those over 65 which cost $500 billion last year. Dedicated Medicare tax receipts covered $65 billion, about 13 percent, of those costs. Another $400 billion in federal health care costs were spent on the military, veterans, federal employees, and the poor with no tax source other than the taxpayer.

In 2010, total personal income tax receipts were about $900 billion, enough to cover the government’s health care tab, but that leaves nothing for other government function. No military, no highways, no courts, no environment, no national parks. No Congress! Next year, taxes may or may not increase depending upon the economy, but retirement and health care costs will increase, certainly more than tax revenues. That is a bad formula.

Imagine this Jeopardy question: If the retirement population doubles or triples over the next thirty years, how do we pay for social security and retiree health care? What is the winning answer?
Congressman Paul Ryan (R-WI), chairman of the House Budget Committee, proposed a plan. First, eliminate Medicare in ten years, give seniors an $8,000 voucher, and let them buy their own policy. (I’m 62 and can’t buy a policy for that amount now. Maybe costs will go down over the next three years.) Second, give the states block grants and let them figure out how to deal with rising health costs. (In other words, let states raise taxes or decline care for the poor.)

Public opinion is divided on whether to raise taxes, but otherwise, public opinion is very clear: reduce spending, don’t reduce social security and save Medicare. Figure out how to do that, and Washington is calling you.

The debate should be addressing health care costs and an aging population. Instead, Washington is playing political roulette with the public’s future.

Washington needs more kindergarten teachers and coaches, those special giants in our lives who taught us to share, to be fair, to give a little and get a little, to be nice, and that we either win or lose as a team, not as individuals. How much we forget as we get older!

The Debt Ceiling: A Punch List

The Top 10 list of why the debt ceiling debate was a big joke (and this is no joke):

1. The train wreck in Washington, disguised as the debt ceiling debate, was only about posturing and how much should be cut. But no one debated what should be cut. The what is hard to find. How much spending did Congress really cut? $21 billion in 2012. And $42 billion in 2013. Not even a blip. Where is the other $900 billion going to come from? Much of it is expectations of defense cuts as the wars in Iraq and Afghanistan wind down which should happen anyway. After all, those wars are 10 years old. They should be over 10 years from now.

2. A $1 trillion tax cut last December – the extension of the Bush tax cuts for two years – took a couple days and led to a lot of bipartisan congratulatory back slapping and talk of a new era of cooperation.

3. A $1 trillion spending cut – actually $917 billion – took months of bitter acrimony, almost led to a national default, worldwide angst, and exposed the most dysfunctional government on the planet.

4. Congress agreed to raise the debt ceiling by $917 billion only if accompanied by $917 billion in budget cuts. That sounds like any additional spending must equal the budget cuts. The difference is that the debt ceiling increase covers eight or nine months while the budget cuts are spread out over 10 years. The entire debate was not about spending cuts. It was about marketing and branding for the next Presidential election.

5. This Congress acted more like a parliamentary government with four large political factions: Tea Party Republicans on the far right, moderate Republicans, moderate Democrats, and far left Democrats. Usually, the moderate middle is large enough to cut a deal. This time, the Tea Party and the far left were large enough to cause a logjam, and ironically, for different reasons, effectively joined forces refusing to compromise. They were like war time allies who fight together because, “The enemy of your enemy is my ally.”

6. Sarah Palin popularized bridges in Alaska. This year, just before the debt ceiling debate, Tea Party members in Minnesota, South Carolina, Wisconsin, and Mississippi quietly sought and received federal money for bridge construction and repair in the name of “economic development” (formerly called earmarks or pork), cashed their checks, and then began blasting Washington for “out of control government spending” and opposing an increase in the debt ceiling. Washington is the only city in the world where you can reward yourself by publicly criticizing what you do.

7. In 2001, the US spent $200 billion interest on $6 trillion in debt. In 2011, the US will spend only $200 billion interest on $14 trillion in debt because interest rates are lower. A mere 1% increase in interest rates could cost more than $100 billion per year. When the smoke clears, the cuts might only cover the increased interest cost.

8. Is the debt ceiling to become a political football from this time forward? Are Congress and the President destined to spend half of every year fighting over increases in the debt ceiling? Will there be payback when a Republican is in the White House?

9. Keynesian economics said that government spending can create growth. It worked in the Great Depression and lessened the pain in other recessions. Congress just did the opposite. It reduced government spending on the theory that less spending will create growth. Does that mean that the economy grows both when the government spends more and when the government spends less?

10. Oh Boy! ANOTHER new commission to figure out how to reduce the deficit. How will this budget commission – what, number 17? – be different? It has “triggers” that will implement “across the board cuts” if the commission can’t agree on an overall plan to cut another $1.5 trillion. What’s higher? Congress’ 14% approval rating or the percentage who think this commission will find the magic answers?

11. Health care costs have more than doubled over the past 10 years and are projected to double over the next 10 years. The government pays 50% of the national health care bill already. 80 million baby boomers are standing in line to join Social Security and Medicare over the next 20 years. If Congress cannot agree on an approach to a budget until hours before a potential calamity, how can it plan a budget ten or twenty years in advance?

OK, that was 11, not 10. Regardless of your political stripes, this is scary, isn’t it?

9 – 9 – 9, ridiculous or on the right path?

Tax reform is like birthdays. They come around every year with the promises of money and gifts.
The current flavor of the week is 9-9-9; a plain pizza with no toppings.

Herman Cain, the former CEO of Godfather’s Pizza, proposed this catch phrase as his idea for tax reform, and it vaulted him to the top of the polls of Republican presidential candidates.

His proposal is to toss out the entire tax code, repeal the 16th Amendment and replace it with a simple new system that reduces the personal income tax rate to 9 percent, reduces the corporate tax rate to 9 percent, and imposes a new 9 percent sales tax on all “new” goods.

Like all new and bold ideas, it has pros and cons. But, like our nation’s problems, they are not simple.
Reforming the tax code is different than eliminating the 16th Amendment. Beginning with the Civil War, Congress adopted several income tax laws which touched only the rich and usually expired after the need – usually a war – passed.

When Congress passed a peacetime income tax in 1894, the Supreme Court declared it unconstitutional because it was not a “direct” tax requiring each state to pay its share based on its population. For example, suppose the federal government needed $100 million and California had 10 percent of the population. It would then owe $10 million, and if California had 1 million people, each person would owe $10 which clearly could not work. The 16th Amendment, passed in 1913, fixed that, and thus began the taxation of income and what are now millions of words of law and regulations.
All tax systems have three common elements: a taxpayer, a tax rate, and a tax base. For example, individuals and corporations are income taxpayers while partnerships and non-profits are not and pay no tax.

Tax rates are easy. Just move them up or down.

The big trouble lies in defining the tax base, that is, what the taxpayer pays tax on. Mr. Cain defines individual income as “gross income minus charitable deductions” though gross income doesn’t include capital gains. His idea is to exchange sacred cows such as the mortgage interest deduction and the exemptions for children for a lower rate.

Mr. Cain’s definition of business income is gross income minus purchases from U.S.-located businesses, capital investment, and net exports. So, if Ford builds a car and uses parts that it manufactures overseas, those parts aren’t deductible, but if it exports the car, that is deductible as is the cost of the new plant that will last 40 years.

Sales taxes are regressive, so lower income taxpayers will pay more tax and higher income taxpayers will pay less. Mr. Cain argues that it may not penalize lower income people since this tax only applies to “new” goods. They can avoid the tax by buying “used” goods. Move over Walmart. Here comes Goodwill. Every new car and new house will cost 9 percent more, so those industries may be mired in the doldrums for another decade. Accountants will surely have plenty of work keeping track of all this.

But, since Mr. Cain proposes eliminating the IRS, the calculations would be completely voluntary anyway.

To be fair, Mr. Cain’s underlying theory has serous merit because he is trying to wring tax incentives out of tax policy so that taxpayers make economic decisions without weighing tax consequences.
The U.S. tax code has become a vehicle for encouraging certain economic activities and discouraging others. Because the tax base is net income rather than gross income, taxpayers are rewarded with lower taxes by reducing net income. At the same time, taxpayers have little incentive to decrease gross income.

The most popular income reduction “loophole” is the home mortgage deduction. Theoretically, it encourages people to buy houses, but a larger percentage of people own homes Canada and Germany which have no mortgage interest tax incentive (and no lobbyists to protect it).

Corporate incentives are enormous. Last year, GE earned billions and paid no tax. In 2010, U.S. corporations generated about $30 trillion in revenues and paid $227 billion in tax, or less than 1 percent of total revenues. In other words, a 1 percent gross receipts tax would raise more revenue than the byzantine game of computing net income. A gross receipts tax would also dramatically reduce complexity and the cost of compliance. States, for example, spend substantially less collecting sales tax than they do collecting income tax.

Sales taxes, the source of most state government revenues, rarely impact consumer behavior. As much as consumers enjoy tax-free weekends and buying online to save sales tax, few go to the store and think, “I’m not going to buy that because the sales tax is too high.”

Mr. Cain knows that our tax code looks like pizza all the way. So, flawed as his idea is, and it is by no means simple, he knows how consumers behave and may be on the right track.

The Wealth of Presidents

How rich is Mitt Romney compared to other presidents?

His most recent tax return reported about $8 million in interest and dividend income. If he’s earning 3 percent on his investments, that means he’s worth a cool quarter billion.

So, where would that rank? He’d be behind only President George Washington, but, unlike Washington and most wealthy presidents, Romney didn’t inherit his wealth. He earned it.

No. 1 — George Washington

George Washington was not only “first in the hearts of his countrymen,” but he was also the richest president in our nation’s history.

How do we measure Washington’s wealth? Measuring across centuries has its challenges. One approach is to estimate the value of his property when he was alive and adjust for inflation. Another is to look at his wealth as a percentage of gross domestic product. A third is to compare his income to the national budget. Each approach leads to huge numbers.

For the first 100 years of our nation, wealth was measured mostly by land and slaves. Washington inherited ten slaves from his father at age eleven. He eventually owned more than 8,000 acres of prime farmland near what is now Washington, D.C., and more than 300 slaves. His wife, Martha, was also very wealthy, both from her dowry and inheritance from her first husband, one of the wealthiest men in Virginia. She inherited one-third of his 17,000 acres of land and 300 slaves as well as $129,650 in Colonial Virginia currency estimated by historians at Washington and Lee University to be worth $6 million in 1986.

At the time of his death, Washington’s land, slaves, house, horses and personal belongings were worth about $525,000, which has been estimated to be worth $525 million today.

In 1996, a study to calculate the 100 richest people ever in the U.S. ranked Washington 59th, the only president on the list. His net worth was estimated to be 1/777, or 0.13 percent, of GDP. By that measure, John D. Rockefeller was the wealthiest American ever. His wealth equaled 1.5 percent of GDP. Bill Gates worth about $60 billion, or about 0.4 percent of GDP, would be in the top ten.

Washington’s salary as president was 2 percent of the Federal budget in 1789, which would amount to $60 billion today. To be fair, the budget was different 225 years ago, when there was no income tax and most federal government spending was defense. Even so, 2 percent of today’s defense budget would be $2 billion per year.

For his time, Washington was incredibly wealthy, but he didn’t have air conditioning or toilets. He got strep throat riding his horse in the snow and died two days later. Today, a common antibiotic would have had him back on his horse within days.

No. 2 — Thomas Jefferson

Like Washington, Thomas Jefferson also inherited thousands of acres of land and dozens of slaves from his father. Jefferson eventually accumulated 5,000 acres of land near Charlottesville, Va., and owned hundreds of slaves. His net worth, in today’s dollars, reached an estimated $200 million. But land isn’t cash, and Jefferson had trouble maintaining his real estate late in his life. Like eight of our presidents, he was arguably bankrupt at the time of his death.

No. 3 — Theodore Roosevelt

The third wealthiest President, Theodore Roosevelt, was a trust-fund baby. Like so many lottery winners, he made some stupid investments and lost much of it. Even so, he still had his 235-acre estate, “Sagamore Hill,” located on some of the most valuable real estate on Long Island where land is worth approximately $1 million an acre.

No. 4 — John F. Kennedy

No. 4, a tough call, is probably John Kennedy, another trust fund baby. The Kennedy fortune was estimated to be worth at least $1 billion. His father Joe Kennedy’s estate was estimated to be worth $500 million when he died in 1969. Among his investments was the Chicago Merchandise Mart purchased in 1945 for $12.5 million and sold in 1998 for $625 million. JFK’s $75 million share of that one investment – worth about $100 million today – was divided between Caroline and John, Jr. In addition, the Kennedy family owned other valuable properties in Florida and Massachusetts.

Though JFK never had to file federal disclosure reports, his brother Ted Kennedy’s reports provides guidance. In 2008, Ted Kennedy reported a net worth between $50 and $150 million after parting with millions in his divorce. Caroline Kennedy is also reportedly worth $400 million, mostly from inheritances from her parents and brother. So, JFK was very wealthy.

No. 5 — Andrew Jackson

Andrew Jackson, the people’s president, was No. 5 with a net worth of about $120 million. An orphan and the first president to come from humble beginnings, Jackson married wealth and earned more. He joined the Continental Army at age 13. After the war, he studied law in Salisbury, N.C., and moved to Tennessee where he married a divorcee, whose father was wealthy and politically connected. Jackson became a gentleman, a general in the U.S. Army and a politician. After the War of 1812, Jackson “negotiated” the resettlement westward of various Indian tribes. Jackson made a fortune in the ensuing land grab. It raised ethical eyebrows, but the political climate of the times was far different than today.

Jackson’s wealth included his 1,000-acre homestead in Nashville, Tenn., “The Hermitage,” a cotton farm operated by slaves. He owned more than 500 slaves in his lifetime, including 150 at his death.

The Next Five

Rounding out the top ten wealthiest presidents are James Madison and Lyndon Johnson at about $100 million, Herbert Hoover at $75 million, Franklin Roosevelt at $60 million, and John Tyler at $50 million.

Like those of their generation, Madison and Tyler’s wealth was in land and slaves. Roosevelt, like his cousin, Teddy, inherited his wealth. Lyndon Johnson was a poor boy, but while in Congress, he and his wife, Lady Bird, purchased a small radio station in Austin, Texas. With a series of favorable rulings by the Federal Communications Commission, that radio station grew into a large regional broadcasting company that included radio, television and cable.

An orphan before age ten, Herbert Hoover was passed around between relatives. He teased that he was the first student at the newly established Stanford University where he studied geology, leading to a career and a fortune, in mining engineering. In today’s dollars, Hoover’s salary at one point reached $2.5 million. At approximately age 40, Hoover left the business world and dedicated his life to public service, where he refused any salary to avoid the appearance that he was seeking public office for money. As secretary of commerce and president, the law required Hoover to accept his salary. He gave it away, some to his political appointees whom he thought were underpaid and the rest to charity. (Kennedy was the only other president to donate his salary.)

That’s the top ten. If Mitt Romney wins the presidency, John Tyler would be bumped off.

Moving Up the List: Bill (and Hillary) Clinton

Bill Clinton left the White House millions in debt because of accumulated legal fees. Since leaving the presidency, however, he has earned a net worth that is estimated to be approaching $80 million. Hillary Clinton’s most recent public reports as secretary of state put her net worth at $30 to 35 million. Together, their net worth would put them in the top five, and their wealth is growing.

Moving the Clintons into the top ten would bump Franklin Roosevelt off the list.

A Century of Poor Presidents

As the national debate over slavery heated up, the wealth of presidents declined. For almost the next 100 years, from 1857 until 1952, the ten poorest presidents served. Other than the Roosevelts and Hoover, only one president, Grover Cleveland, accumulated any real wealth, about $25 million, from inheritance, law practice and an estate he purchased near Princeton.

Harry Truman almost went bankrupt as a haberdasher, a clothing salesman. Instead of declaring bankruptcy, he spent the rest of his life repaying those debts. When Truman returned home to Independence, Mo., after his presidency, he was 69 and unemployed. His only income was $112 per month from his U.S. Army Reserve pension. He had saved 20 to 25 percent of his presidential salary, about $150,000, over eight years. When federal retirement benefits were expanded during his term, he excluded the president.

Truman foreswore all attempts to “cash in” when he left the presidency and turned down several offers to serve on corporate boards, believing it would demean the Office of the Presidency. When Congress learned that Truman was paying for his own stamps and licking them without any administrative assistance, it passed the Former Presidents Act, providing an annual pension and gave it to him retroactively. President Hoover, who didn’t need the pension, accepted it to avoid embarrassing Truman.

In 1966, David Post bought a Volkswagen minivan for a camping trip across America with friends. They stopped at President Truman’s home in Independence, Mo. A big black car was parked on the street with about ten persons standing beside Truman’s white picket fence. They learned that Vice President Hubert Humphrey was visiting President Truman. When he left the home and came to the sidewalk, the vice president chatted with them. President Truman stood on the porch about 40 feet away and waved as if it were any other day. Other than Humphrey’s driver, there was no security detail. It was a different day.

The Opposite Ways the GOP and Dems Choose a Nominee

Since Franklin Roosevelt was president, Republicans and Democrats have created diametrically opposite methods for choosing their presidential nominees.

Republicans pick a nominee with deep roots in the party, usually a man who previously lost an a run for the presidency. Democrats pick a nominee with virtually no name recognition, shallow roots and who is running for the presidency for the first time.

Republicans know whom they are going to nominate. They go through the motions, but they select one of their own, a proven commodity, a person who has been running since before the previous election. Democrats nominees are a surprise to their own party, to their own voters, to the public and to the Republicans.

Republicans don’t emerge. They run, lose, run again and win. It’s called paying dues. Democratic nominees seem to emerge out of nowhere and have to battle “no experience” charges which continue even if they are elected.

Before Franklin Roosevelt was elected in 1932, the parties’ conventions selected their nominees, so all candidates had deep roots and internal party allegiances. Roosevelt had been Secretary of the Navy and Governor of New York. Entering his fourth election for president, however, Roosevelt changed vice presidents and selected a former clothing store operator, a political pawn, a little known senator. Harry Truman became president a month into Roosevelt’s fourth term, having spent very little time with Roosevelt and was completely unaware that an atomic bomb – that he would order dropped a few months later – was being produced.

Since then, the parties have followed their unique paths to the presidency.

In 1948, the Republicans anointed New York Governor Thomas Dewey, a presumable shoo-in. He was so far ahead, the pollsters quit taking the public pulse in September. Truman prevailed.

In 1952, both parties knew World War II hero, Dwight Eisenhower, would win and begged him to join their party. (Remember both parties pursuing Colin Powell?) Eisenhower picked the Republicans and cruised into the White House. Richard Nixon was his vice president.

In 1960, Nixon moved into position as the Republican nominee. The Democrats selected the little known, little accomplished, junior, but wealthy, Senator John Kennedy. Kennedy defeated his Senate boss, the inside-the-party favorite, Lyndon Johnson. Nixon lost, but he won the nomination – and the presidency – in 1968.

In 1976, President Ford, the country’s only non-elected president, faced a challenge for the Republican nomination. Ronald Reagan was a famous movie star, TV commentator and a popular governor of California, the largest and typically Democratic state. Ford beat him but lost to Jimmy Carter.

Four years later in 1980, Reagan returned and defeated George H. W. Bush for the nomination. George H. W. Bush was a Texas Republican whose father had been a U.S. senator. Bush had been a congressman, had lost a run for the Senate, and had been U.S. Ambassador to China. Reagan picked Bush as his vice president and defeated the sitting President Carter.

In 1988, George H. W. Bush was Mr. Republican Establishment, won the nomination and the election against Massachusetts Governor Michael Dukakis. Again, Michael Who?

In 2000, the Republicans nominated Texas Governor George W. Bush, who had defeated a popular Democratic governor in 1994. Had his name been George Walker instead of George Walker Bush, he would never have gone to Yale or Harvard, been given an ownership interest and the CEO position of the Texas Rangers major league baseball team and never have run for office. His last name was Bush, and his dad had been President. George W. Bush didn’t have to lose to win, but how establishment can a candidate be?

Since Roosevelt, the Democrats have selected Jimmy Who?, Bill Who? and Barack Huh?

In 1976, Jimmy Carter, better known as Jimmy Who, was a little known, peanut farmer who had served one term as Georgia’s governor. No one on the national scene had ever heard of him. He had a 1-percent name recognition rating going into the Iowa caucuses and defeated a slew of established Democrats for the nomination.

In 1992, establishment Democrats were afraid to run against George H. W. Bush’s 91-percent approval rating. Bill Clinton, another small-state governor who had given an awful speech at the 1988 Democratic National Convention, took the plunge. Most Americans probably cannot find Arkansas on a map. He faced ongoing charges of immoral behavior during the election (and during his presidency).

In 2008, Hilary Clinton had the nomination locked up, but Barak Obama who had served as a U.S. senator for a mere four years, surprised her, the nation and is now president.

When Democrats nominate mainstream candidates, they lose. Vice Presidents Hubert Humphrey, Walter Mondale and Al Gore couldn’t get to the finish line.

What does this mean? The only Republicans running now who have a chance to win are Mitt Romney and Newt Gingrich. Romney ran in 2004 and lost. He’s ripe. Gingrich talks about being a Washington outsider, but he lives there and is trying to ride President Reagan’s coattails.

Rick Santorum is not and Jon Huntsman was not really running this year. They are running for the Republican nomination in 2016. Whom will they run against? Some Democrat who has a 1-percent name recognition right now.

No Dodos, Bush and Obama Stopped a Depression

Forty years ago, I won what became my family’s first “Dodo of the Year” award. Instead of calling me an unmitigated idiot, my father called me a dodo, after the now-extinct bird famous for being too stupid not to run away from, but toward, its captors who then killed it.

Before each new year, while doing resolutions, my dad sought nominations for new “Dodos,” and an annual ritual was born.

My act of dodo-ism was parking my car on the hill on Main Street and failing to engage the parking brake. As I got out of the car, it began to roll backwards across four lanes of traffic. After making a useless effort to stop it, all I could do was watch helplessly. Fortunately, no cars were coming in either direction, and brick planters across the street stopped my car from crashing through two stores.

Had I not jumped out of the path of my runaway car, it would have crushed me. My dad may have had to bury me, but he still rightly would have called me a dodo. Instead, we had an honest conversation about the virtues of emergency brakes on hills.

If only we could do the same in this presidential election with all the screeching about jobs losses and bailouts.
In February 2008, 137.9 million Americans had jobs, a national high. In January 2009, 133.5 million people had jobs, a loss of 4.4 million jobs during the last year of President George W. Bush’s presidency.

In January 2010, at the end of President Barack Obama’s first year in office when jobs started to climb back up, another 4.3 million had lost jobs, leaving 129.2 million Americans employed. Both 2008 and 2009 saw similar losses, though technically, a few more were lost during Bush’s last year.

November 2008 and January 2009, both under Bush’s watch, were the two worst months of this recession, when more than 800,000 jobs were lost. February and March 2009, President Obama’s first two months in office, were the next two worst months.

Like my inability to stop my car rolling down the street, no one – a president, a Treasury secretary, a Fed chairman – could have stopped the job-loss express either immediately or within two months.

At the beginning of the Great Depression, President Herbert Hoover’s laissez-faire, leave-it-to-the-markets policy believed government should get out of the way and allow markets to fix the problem. At the same time, the Fed did nothing to stimulate the economy. The result? Unemployment jumped from 4.2 percent in 1928 to 8.7 percent in 1930 – very similar to President Bush’s last year in office – and with no government intervention, unemployment continued to rise until it hit 25 percent in 1933.

When Franklin Roosevelt became president in March 1933, he immediately closed the banks, instituted banking reforms and initiated a broad range of government programs. The bleeding stopped within a year – similar to President Obama’s first year. Though growth remained anemic under Roosevelt, unemployment trickled down to 17 percent in 1939 when the industrial production required by World War II pulled the country out of the Great Depression.

This time, Presidents Bush and Obama sought and received $700 and $800 billion, respectively, and the Fed kept money flowing. It stopped a depression.

Memories get fuzzy – or selective – in the heat of a presidential election. The various presidential candidates are arguing that the bailouts were failures, that Obama is the cause of the job losses, and that the Fed should be eliminated. In effect, they are arguing for Hoover’s laissez-faire policies.

When President Bush looked down the black hole of “laissez-faire,” he famously said, “This sucker could go down,” asked for $700 billion and cut the checks. Had President Bush done nothing, the two largest U.S. banks and two of the three U.S. auto companies – Citibank, Bank of America, GM and Chrysler – would have disappeared. Heaven knows what catastrophe would have followed. Yet, the presidential candidates, in effect, are suggesting that would have been better.

Like Roosevelt, Presidents Bush and Obama, and the Fed, took dramatic action. They saved a now-thriving auto industry. Our banks are recovering. More than 3 million new jobs have been created in the last two years. Government can do good.

When my car was going to crush me, I jumped out of the way. Presidents Bush and Obama had the courage to step in front of failing banks, collapsing car companies, and a landslide of job losses and try to stop them. Had they followed my example, they, too, could have won “Dodo of the Year.”

The Games of Tax Rates and Jobs Creation

February 22, 2012

Remember that entertainer who puts a sponge ball under one of three cups? You watch closely as he moves them around. He stops, picks up the cup with the ball under it, and you’re proud for not having been tricked.

He does it again, but this time his hands and the cups are a blur. When he stops, you have no idea where the ball is. Someone guesses, points to a cup, and misses. The cup magician raises another cup, and there’s the ball. The crowd claps, and some leave money in his hat.

The cup magician, a small business job creator, has a tax question. How much tax should he pay on the money in his hat? Is it earned income with a possible 35-percent rate? Or can an imaginative tax guru figure a way to characterize this process as investment income, perhaps as a dividend from the capital investment in the cups and sponge ball, resulting in the lower 15-percent rate?

Suppose that instead of using a sponge ball, the magician put stock certificates under the cup and moved them around. That’s good tax planning. Moving money and investments around is clearly an investment activity. Hence, he would be entitled to the lower 15-percent rate.

The logic behind lower capital gain rates is that patient capital creates jobs, and the investor incurs the risk of loss. The investor also has the advantage of when to sell and, therefore, when to pay the tax, or to not sell and owe no tax. Employees don’t enjoy that luxury of determining when they pay their tax.

The tax rate on dividends is also 15 percent because they are generated by the capital investment. Because dividends are paid to shareholders from corporate earnings that have been taxed, Republicans want to eliminate all taxes on dividends.

Lower tax rates on investment income are among the largest loopholes in the tax code and have been the centerpiece of Republican economic policy for years. So, the big question is whether lower taxes on investment income spur economic activity and create jobs.

Here is a 30-year tax history in a nutshell:

-Ronald Reagan reduced rates on earned income, increased rates on capital gains,
increased deficits, and generated 11 million jobs.

-Bill Clinton increased rates, reduced deficits, and generated 22 million jobs.

-George W. Bush reduced tax rates, doubled the national debt, and created no jobs.

That’s right: PRESIDENT REAGAN RAISED RATES ON CAPITAL GAINS. During his second term, Reagan reduced tax rates on earned income and increased (yes – INCREASED!) rates on investment income from 20 to 28 percent.

President George W. Bush lowered taxes on investment income to 15 percent, the lowest in US history. That tax cut created no jobs (arguably lost jobs), reduced revenues and doubled the national debt. Would someone – anyone – explain why more tax cuts will work now?

On a personal level, I bought some Apple stock for $325 per share. It’s now worth $425. I also earned dividends from Microsoft. The tax rate on my Apple and Microsoft investment income is half the rate on my salary income. Did that income generate twice as many jobs as my salary income?

The Republican presidential candidates think so.

On a large scale, Mitt Romney paid $6 million tax on $41 million income over the past two years. Lower taxes on his investment income saved him $7 million. Did those tax savings – some of it parked off shore and some in Switzerland (until he ran for president) – create tons of jobs?

The Republican presidential candidates think so.

History has proven otherwise, but bidding taxes down attracts votes.
Until rates get to zero – which happens to be Ron Paul’s proposal – what’s a tax savvy cup magicians to do? Replace those sponge balls under their cups with stock certificates. That will cut their taxes in half. And maybe put more cup magicians to work

Congress Returns to Economic Reality

January 23, 2012

2011 was so much fun in Congress. Will 2012 offer the same? The House of Representatives convened on Tuesday, January 17th, and the Senate will return next week. The fun hasn’t quite started yet, but it will and it will be loud.

Here are my economic predictions for 2012:

• Last month, Congress extended the payroll tax cut that saves the average American family $1,000 per year. It expires again in a few weeks. Expect another cliff hanger. It will be extended through December. The debate will be contentious, and its outcome will hinge on a political fight disguised as an economic fight. Republicans still want the oil pipeline from Canada to Texas with minimal environmental study, and Democrats still want to increase tax on millionaires. Same old, same old.

• The debt ceiling was increased last August – but only for a few months – after almost throwing international markets into turmoil. The time has come to do it again. This time, Congress will do it without threatening to blow up the economy. With an election in progress, many will make incendiary speeches about wasteful government spending. After a short round of shouting, Congress will approve the increase.

• In March, President Obama will present his 2013 budget, showing more large deficits driven by high safety net costs and reduced revenues related to the poor economy. The president’s annual budget has no legal impact, so it will only become a source for making speeches. All of the Republican presidential candidates are attaching themselves to President Reagan’s coattails. Interestingly, of the eight budgets President Reagan prepared, Democratic Congresses passed budgets with lower deficits in seven of those eight years.

• The two largest banks in the country, Bank of American and Citibank, are underwater like many of their mortgage borrowers. The market says they are worth a lot less than the value on their books. With only three large U.S. banks still standing, our nation’s economy is dependent upon them. So, they are truly too big to fail. As long as they are sick, the entire banking world will suffer, loans will be hard to come by and the economy can only sputter.

• For every foreclosed house on the market, banks have almost two more that could go into foreclosure. Pushing all of them into the market will harm both the banks and the housing market even more. Declining real estate values have not only decimated the construction industry but have pushed local governments and school systems to the brink. This pattern will continue in 2012.

• Real estate sits underneath every job. Because banks are nervous about lending and foreclosures have created an overload of housing stock, the demand for new real estate construction is very restrained. Real estate will not recover in 2012. Thus, job growth will be limited, and the unemployment rate will remain well above acceptable levels.

• Occupy Wall Street has, if anything, upset people about the increasing wealth gap between rich and poor. Occupy Wall Street will die down as the year goes on. Consumer confidence will improve somewhat, but it will be an anemic and nervous improvement because most new job creation will be in low-paying service sector jobs.

• Every presidential candidate and most politicians are promising that they can simplify the tax code by closing loopholes (which increase tax collections) and reducing rates (which decrease tax collections). At first, so-called tax loopholes are born as tax incentives. It’s an indirect way that government picks winners and losers. As incentives age, they become loopholes. Those loopholes have armies of lobbyists. It is hard to take away what has been given. The tax code will not change much.

• Last August, Congress appointed a super committee to identify $1.2 trillion in budget cuts with automatic cuts – half from defense and half from domestic spending – to begin in 2013 if the super committee failed. It failed. Regardless of who wins, that deal will be re-written after this November’s election.

• The Bush tax cuts are scheduled to expire at the end of this year. If they expire, the deficit will be reduced by $4 trillion over the next ten years, ironically the amount that most agree should trimmed from the budget. 90 percent of those tax cuts went to those earning over $250,000. Republicans want to make them permanent arguing that they are necessary for job creators. Democrats want to preserve the tax cuts for those earning below $250,000. Expect a colossal fight as the year closes.

Why Age 65? How About 85?

October 19, 2011

Why is age 65 the retirement age?

Legend has it that when Otto von Bismarck, Chancellor of Germany in the 1880s, proposed the world’s first retirement insurance program, he asked his advisors, “How long do people usually live?” When told the average life span was 45 or 50 years, he said, “Then, let’s give a pension to everyone at age 65.”

Myths rarely line up with reality. Germany set that first retirement age at 70, certainly no budget buster.

By 1935, when Congress was considering Social Security, Germany had lowered its retirement age to 65. Many states and some large US companies had pension plans with retirement ages ranging from 65 to 70. By then, the average life expectancy was 60 years.

Congress adopted age 65, apparently anticipating that it would not cost much, especially since most people wouldn’t live long enough to receive it.

Thirty years later, Congress passed Medicare. By then, average life expectancy was 70 years.

To offset the cost of these programs, Congress created taxes to be shared equally by employers and employees. Social Security taxes were expected to cover the cost. In 1965, medical expenses didn’t consume 17 percent of the economy as it does today. So, when Congress enacted the Medicare tax, it only covered approximately 14 percent of costs. No tax was enacted to cover Medicaid costs.

After Medicare and Medicaid were passed, federal government spending on health care jumped to 5 percent of total spending.

Today, the average citizen lives to be almost 80. Medicare, Medicaid and other federal health care programs consume more than 25 percent of all federal spending and with projected increases of 10 percent per year, health care will consume 30 percent of the federal budget within five years.

The average cost to insure a family now exceeds $15,000 per year, more than a minimum wage worker earns in a year.

Yes, some of that increase is related to the new health care law. It’s 1 percent of that increase, mostly from allowing children to remain on their parents’ policies until they are 26 years old. The other 9 percent is the inexorable, uncontrollable creep of costs.

The harsh reality is that taxes dedicated to covering health care cover less than 10 percent of the federal government’s costs.

As a nation, we have to ask ourselves: How much longer can we bring in a dime and spend a dollar?
With the average citizen living almost 20 years longer than in 1935 and with 80 million baby boomers over or approaching age 65, ignoring the cost of social security and health care is like following Thelma and Louise – right over a cliff.

The political irony is that both political parties want the same thing: something for nothing. Republicans refuse to consider any new revenue source. Democrats draw the line at changing Social Security, Medicare and Medicaid.

The need for compromise is painfully obvious, but the political cost is equally obvious. Compromise means facing the wrath of voters.

Are there any solutions? No easy ones.

Regulate profits in the medical sector the way utility company profits are regulated by the government. (That’s going to make some enemies.)

Universal health care contains costs in other countries. The U.S. spends double on health care what other countries spend, yet US life expectancy ranks about 40th in the world. Apparently, American citizens prefer to die sooner as long as the government stays out of health care.

Or, take a page from Bismarck’s playbook: Provide benefits for those who outlive the average person by, say, five years. That’s what Congress did when it started Social Security. In other words, with life expectancy approaching 80, begin providing benefits at age 85.

As ridiculous as that sounds, consider that It would be consistent with Social Security’s “original intent.” It would balance the budget. It might even lower life expectancy. And that would further reduce budget pressures.

Is it any more ridiculous than refusing to face the reality that retirement and health benefits for 80 million baby boomers can be provided without a revenue source, without any government regulation, and without a meaningful change in the retirement age?

And, most importantly, without compromise?