Category: Taxes

Economics Update

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I missed this when it was announced late Friday afternoon, but two moremonoliners hit junk status, FGIC and XL Capital and XL Financial.

I wonder when all of the monoliners will be junk rated, and I also wonder why this is not true now.

This means more than just that these insurers can no longer realistically write policies. These downgrades come with significant penalties, as MBIA’s statement that’s it downgrade will force it to make $4.7 billion in payments to creditors.

When they got downgraded, the terms of their loans changed.

In energy we have oil up despite the Saudi meeting, and retail gas prices falling. Hopefully this will bring a few months of stability at the pump.

The dollar strengthened, largely on crappy growth in the Euro zone, which would suggest that the ECB will hold off rate hikes for a while.

In real estate, we have Lehman predicting more losses for Fannie Mae and Freddie Mac, which should come as no surprise at all.

After when ¼ of Bay Area home sales in May had been in foreclosure, and statewide home sales hit a 13-year low, it’s not like there will be a whole bunch of players making money.

It’s why George W. Bush’s ownership is becoming a Pwnership society, with home ownership falling to below where it was when he announced the initiative to get people to buy houses.

BTW, if you think that this won’t effect you, you are wrong. We now have an estimate of properties falling by $1.46 Trillion, which, by my quick envelope calculation, means that state and local governments are looking at revenue shortfalls on property taxes on the order of $1.5 billion/month.

Obama’s Donut Hole Social Security Tax

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He is proposing restarting the tax for incomes above $250,000.

I’m not too fond of the donut hole he is proposing, but I understand the politics here.

There are a lot more voters between (IIRC) $104K and $250K, but a lot more money above 250K.

One thing that needs be done though is that the definition of “wages” needs to be expanded, or a lot of these folks will move “wages” to dividends and capital gains.

Good Government Policy from The Last Place You Would Expect

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Specifically, the Washington, D.C. City Council, which has voted to double the property tax on vacant properties, to $10/$100 evaluation (that’s right 10%, it had been 5%, as compared to $1.85/$100 for commercial properties, and $0.85/$100 for residential properties).

Additionally, the Council has made it more difficult to get an exemption, cutting back on the numbers of exemptions granted, though there is still a 3 month exemption for a property for lease, a 1 year exemption for residential property for sale, and a 2 year exemption for commercial property for sale.

In many inner cities, vacant properties blight the landscape, and this is a very good way of dealing with it.

School Districts Employ Snitches to Throw the Newly Foreclosed Out of School

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Yep, school districts are employing private investigators to find foreclosed children so that they can thrown them out of school.

I would note that it’s frequently illegal, “The McKinney-Vento Homeless Assistance Act, an updated version of a 1987 law, says school districts can’t deny enrollment to children who are homeless because of foreclosure or other economic hardship.”

As the good Rev. Wright says, “God bless America.”

H/T Calculated Risk

Aggressive Challenges to Property Tax Assessments Rising

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This is not surprising.

People are struggling, and their assessed property value often is well over market rate, so it is no surprise that a rapidly growing industry is evolving to help people challenge property tax assesments, particularly among people attempting to sell their homes.

The fact that one has successfully lowered the taxes makes the home more salable.

Of course, it’s going to devastate the tax revenues of municipalities just as an economic downturn increases demand for their services.

Eating Seed Corn

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Yep, Schwarzenegger is proposing borrowing against lottery future earnings to balance this year’s budget.

What the Governator is doing is exactly what destroyed the Ottoman Empire, the sale of revenue sources in order to fund the current budget, with the inevitable crash.

Of course, as a Republican, he wants the crash, it’s the whole wanting to reduce the government, “to the size where I can drag it into the bathroom and drown it in the bathtub”, and insolvency works just as well as everything else.

I would hope that at some point, the voters of California come to their senses and repeal proposition 13.

More on College Endowment Abuse

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I can’t believe that I’m agreeing with a regular contributor to the National Review’s “The Corner”, Jim Manzi, but I do.

The guy is a moron though, in the last ‘graph he claims that because Harvard employees (professors) give to Dems, the institution should not be tax exempt.

He is spot on when he calls Harvard a tax exempt “Hedge Fund”.

But he runs the numbers:

Receipts = $2 billion of operating revenue + $7.3 billion of investment income + $0.6 billion of gifts to the endowment = ~$10 billion.

Operating costs = ~$3 billion.

Profit = $10 billion – $3 billion = ~$7 billion.

This explains why Harvard’s net assets increased about $7 billion in 2007, from about $35 billion to about $42 billion.

This actually segues nicely into my previous post on executive compensation. Just how much is too much anyway?

If Harvard never generated another penny in investment, tuition, or gifts, they would be able to continue to operate for 12 years.

Too much is too much, and by making income (and donations) tax deductible, we are subsidizing “too much”.

I clearly understand how Harvard is the most egregious case of endowment abuse, but once we have determined that there is a problem and that it needs to be fixed, we are, as the joke goes, just haggling over price.

Massachusetts Has Great Idea, A College Endowment Tax

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Specifically, the measure calls for a 2.5% tax on any endowment in excess of $1 billion.

Massachusetts has 9 colleges and universities that meet this criterion, with Harvard’s endowment of $35+ billion leading the list, and it would be expected to raise $1.4 billion for Massachusetts.

There are a number of reasons that I think that this is a good idea, the first is that Greg Mankiw, former head of Bush’s Council of Economic Advisors hates the idea with a passion, and if a Bushie opposes an idea, you are unlikely to be wrong supporting it.

The second, and more logical reason, is that these endowments are so excessive as to run counter to the goals of these institutions as educational non-profits.

Brad Delong, a Harvard Alumni, runs the numbers, and notes that over the past 50 years, Harvard’s graduation rate has gone from 1200 to 1600/year (which means that there is $5.5 million of endowment for each student there), while the UC starting from 5000/year created many more educational openings, both through expansions at UC Berkeley and UCLA, and by improving other parts of the UC system noting that, “Today we have UC Davis, UC Merced, UC Santa Barbara, UC Santa Cruz, UC Sunnydale*, UC Irvine, UC Riverside, UC San Diego which together with UCB and UCLA graduate 40,000 undergraduates a year.”

Matthew Yglesias, also a Harvard Alumni, says “Long story short if you, like me, are a graduate of a fancy college and the development people come around asking you for money don’t do it save your money for institutions that (a) have less money and (b) do more to help people in need.“

It raises an interesting point, specifically that endowments and foundations become a sort of charitable money pit, where the accumulation of more resources become a major, if not the major driving force behind institutional activities.

*Never knew Delong was a Buffy fan.

George F. Will Is an Idiot

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Will, writing on Obama’s proposal to lift the earnings cap on wages, talks about the middle class folk who will be hurt, and gives the following example:

You favor eliminating the cap on earnings subject to the 12.4 percent Social Security tax, which now covers only the first $102,000. A Chicago police officer married to a Chicago public-school teacher, each with 20 years on the job, have a household income of $147,501, so you would take another $5,642 from them. Are they undertaxed? Are they rich?

Dude, the $102K limit is per individual. Their tax load does not change, they are both taxed on their total earnings.

Truth be told, I don’t think that there is a problem with Social Security, but there is one with Medicare, so here is my suggestion about how to fix that:

  • End the cap on employers’ part of the Social Security tax, and devote the additional revenue to Medicare and Medicaid.
  • Broaden the definition of earnings to include things like the sweetheart deals that senior executives get.
  • Tax the employee’s part of income at levels above $1 million.
    • This would mean that there is a “notch” between $102K and $1M. You can call it the Paris Hilton tax.

It would go a long way toward fixing the problem, and it is a much easier political sell.

I Disagree With Paul Krugman

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In his latest post, he thinks that Barack Obama gave too much credit to the Republicans in his Fox interview.

I agree with him on that. The ideas in question have been floating around in academic circles, and have been proposed by politicians on both sides for years.

What I disagree with is his classification of emissions trading as a successful policy.

Emissions trading is not a success relative to a tax of some sort.

They’ve never been shown to be more effective than a tax on emissions, they reduce revenues available to government, and they are more difficult to administer, which increases the regulatory load, and hence costs to taxpayers.

Additionally, if you think that mortgage backed securities are a morass of corrupt arbitrage, just wait until Wall Street gets its hands on actual dirt.

Carbon trading is a solution, it’s just a bad one.

Capital Gains Tax Bullsh$# Deconstructed

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Well, it appears that at the debates, Charlie Gibson echoed the latest right wing talking point/lie, that recent cuts in the capital gains tax rate have increased revenues, and that tax increases cut revenues. (I must have missed this because I found the debates too painful to watch).

This, along with the assertion that people making $200,000/year (the top 3%) are somehow middle class show why one should not put innumerate idiots in positions of authority in journalism.

Saying that tax cuts in capital gains increase revenue is like saying that running a year long sale in a store will increase profits.

What does happen is that one the eve of a change in the capital gains tax, you have accelerated (in the case of a future tax increase) or deferred (in the case of a future tax cut) profit taking. This is a one time per tax change effect.

It’s exactly like a store sale. It produces a temporary effect, and any attempt to use it to guide long term fiscal policy is dishonest.

Really, Really, Really Bad Ideas: Carbon Trading Edition

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Unfortunately, it’s hit the big time, with Fortune Magazine declaring that it has hit “the big time”, so it appears that much like new math, new Coke, sequels the Rocky, mortgage backed securities, and Astroturf, we will be seeing a lot of this.

The idea is that the government issues a limited number of carbon credits, basically permission to emit a certain amount of carbon dioxide into the atmosphere, and since there are fewer credits issued than would be actually needed, a “robust market” would be established where, because they can make money on these markets, carbon emitters would, through the magic of the profit motive, cut emissions.

You see, this market, with its highly compensated traders, and the complex investment vehicles that come with them, constitutes an unparalleled opportunity to create innovation.

Well, that’s the first problem. That’s what Alan Greenspan said about mortgage backed securities and credit default swaps, but it’s supposed to work just fine with combating global warming.

The second problem is that any regime for this is going to be difficult. You have to decide how many credits are issued, and who issues them, and how to regulate the market so you don’t have a lone trader bankrupting a multi-billion dollar company.

The most basic problem however, is that this is a tax on carbon.

Because your goal is to reduce carbon emissions, the number of credits issued must necessarily be lower than what the market really wants, at least a bit, which costs every business participating in it.

Only this tax goes to the polluters, at least the ones who manage to improve efficiencies or game the system by getting excess credits, and to the Bear Stearns types, who would leverage one of my farts if they could find a way.

If you are going to put a tax on pollution, then just tax that pollution, and let the government collect the monies, as opposed to the polluters and their parasites, and spend it on something other than multi million dollar executive compensation.

A Correction on Dean Baker’s Tax Proposal

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I just had an email exchange with him, and he referred me to his (along with Robert Polli and Marc Schaberg) paper, Securities Transaction Taxes for U.S. Financial Markets, and he does in fact call for a sales tax on most securities.

ABSTRACT: This paper examines the viability of security transaction excise taxes (STETs) as one policy tool for promoting a more stable financial environment, specifically with respect to the U.S. economy. Contrary to a large recent critical literature, we show that a STET can be designed without creating large distortions between segments of the financial market. We also show that a modest STET for the U.S.—beginning with a 0.5 percent tax on equity trades and scaled appropriately for other financial instruments—would generate substantial new government revenues, on the order of $100 billion per year.

The link is to the abstract, and the whole paper is a 55 page double spaced PDF, which you need to read on paper, with a highlighting and a regular pen so you can take notes.

It’s not a light read, but it’s a good read.

On a more general level, I think that, given the current downturn, we will see a large expansion in taxes at all level, with things like internet download sales being taxed, and that we will see an aggressive pursuit of online and mail order sales taxe evasion too.

The state and local governments will have no choice.

Then again, considering my record on predictions, and the fact that the only formal training I ever had on economics was high school, where I did a presentation on microeconomics*, what the heck do I know.

*Microeconomics is a study of the economics of individual businesses, as opposed to entire economies. I prefer it, because the systems are not so huge and complex that cause and effect breaks down. Macro economics sometimes makes my head hurt.

Dean Baker Has a Great Idea, But it Needs to go Further

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Dean Baker suggests that we implement a stock transfer tax. He mentions that the UK has a stock transfer tax of 0.25%, and London is second only to New Work as one of the great financial capitols of the world.

He notes that it would generate $150 billion/year in revenue.

While I agree, I do not think that this goes far enough. It should apply to all financial transactions, stocks, bonds, derivatives, hedging, futures, etc.

I would have an exception for initial purchase, but not resale, of government bonds, but that’s it.

In addition to generating a lot of revenue, it also makes increasing level of arbitrage increasingly more expensive, which is also a good thing.

House and Senate Pass Phase Out of Bush Tax Cuts

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It’s a, good start, but we are in a deep hole, both in terms of the Federal budget deficient and the economy, and the Wall Street types who created this whole, and benefit from this hole, need to pay more of their share of the hole.

The maximum marginal tax rate needs to be increased, probably into the 45% to 50% range for people making over $½ million a year, because we are going to need massive government spending to avoid Japan’s 15 year deflationary trap, and we have massive infrastructure needs that have to be addressed regardless of the state of the economy.

Senator Looking at Lavish Lifestyles of Televangelists

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The thing that the media will cover, of course, is the expensive cars, private jets, and so on that many of these “prosperity preachers” have.

There is actually a very real issue here. Churches, unlike every other 501(c)3 tax exempt organization, is not required to file a publicly accessible 990 form.

I incorporated a 501(c)3 tax exempt organization and chase the paperwork through the IRS in 1990 as a non-lawyer, Arisia.

When I was involved in running it, gross revenues were less than $50,000/year, and now it’s probably less than $200K/year.

For any church, considering building, maintenance, salaries and benefits for, preacher, secretary, education director, and janitor, you are well above $500K on anything but the tiniest church.

It’s too expensive for them, but it’s not too expensive for us.

They object to form 990s because they do not want their parishioners to know that they are wasting their money on their own inflated lifestyles.

Check out the Trinity Foundation a Christian reform organization that has been talking about this for years.