I'm gonna be in hot water for this one!

Front and center in the news these days is tax reform.  Republicans go so far as to call it a "middle class tax cut", even though the facts suggest otherwise, that the middle class will get a very small slice of the tax cut pie.  But now some details are emerging that are bound to be controversial, and one in particular finally addresses something I've thought long and hard about.

Whenever someone says "home mortgage interest deduction" most people usually quickly nod off, except those few who actually receive that tax write off, and they sit bolt-upright.  Here are some numbers to illustrate where we are:  Roughly 65% of Americans own their homes, meaning they don't rent.  Of those, roughly 60 don't get a tax write off for the interest they pay on their mortgage because they either have no mortgage (their home is paid for) or they owe so little on their mortgage they're better off just taking the "standard" personal tax deduction.  

If you do the math you'll find that 61% of Americans are subsidizing the other 39% to own their homes.  I find this mildly amusing because these 39% are often the same ones who protest the loudest about the subsidies/write offs government gives to large corporations for various reasons, referring to it scathingly as "corporate welfare".  Umm...so subsidies "for me" are good, but not "for them"?  *snicker*

The traditional justification used for a mortgage interest deduction is that it promotes home ownership, which in turn promotes more civic activism and more informed citizens.  They supposedly go to the polls and vote more often and are more involved in local issues, schools, etc.  Unfortunately that argument just doesn't hold water.  There is ample evidence that shows it is the level of education and income that leads to more civic involvement, not necessarily home ownership.  (Home ownership among younger, well educated, affluent adults is slowing dramatically as they are marrying and starting families later in life.)

Of the four countries shown here that compare demographically favorably with the US, we are the only one who still allows mortgage interest deductions.  With or without special tax advantages, home ownership for all four hovers around the same 65-68%.

"But...but...without that deduction, we'll never sell any houses!  We'll all DIE!!"  So says the Realtor and builder trade groups.  (Full disclosure...I've been a homebuilder for 45 years.)  Not so fast Kemosabe.  Remember back in the 1980's (?) when the IRS began phasing out the interest deduction allowed on credit card debt and auto loans?  The cry back then from those industries was the same gloom and doom.  Truth is the financial services and auto industries were unfazed.  The deductions were phased out over a number of years, giving people time to prepare and adjust for the new reality.

Here's where it gets interesting for me.  As things are now, people are incentivized to buy the biggest home they can, with a helping hand from the IRS.  In my area at least families of just two or three people are convinced they need 4,000 square foot McMansions.  (More full disclosure...I build 4,000+ square foot McMansions.)  Imagine how much more efficiently we could use our resources if families of 2 or 3 scaled back their expectations and lived in 2,000-2,500 square foot homes?  Well appointed, custom quality, super-energy-efficient smaller homes.

I predict MORE people would buy smaller, more affordable homes, even after factoring out the tax deduction.  Builders would build more homes, employing more architects, carpenters, plumbers, electricians, painters, etc.  Our home ownership rate would go UP.  Realtors would sell more homes.  Lenders would make more loans.

Who would lose if the mortgage interest deduction was phased out?  The 39% who now enjoy it, and the tax preparers who will no longer be needed to itemize taxes when everyone goes the standard deduction route.  And the property tax collectors who right now want nothing but BIG houses in their communities because of the tax $$$$ they bring in.  (But if they'll look a bit further down the road they'll realize more smaller homes vs fewer big homes should make this all revenue neutral.)

Who wins?  The taxpayers, all of us, because we'll see another 70-100 BILLION dollars in our treasury every year.  And if the IRS used that $70-100B to fund the doubling of the standard tax deduction for everyone, then we'd have a true middle class tax cut.

Am I missing something?  Your opinion?

S

Beware the new snake oil salesmen....

Snake oil salesmen....you can find them walking around the halls of Congress hawking their Republican agenda.

Now don't get upset Republican friends.  I'm not saying YOU are a snake oil salesman.  I'm saying you're being SOLD snake oil by the Republican congressmen and Senators who you trusted.  You're being played.  Consider this:

Their #1 agenda item (they say) is to repeal and replace ObamaCare.  They say to you that by stripping out $800,000,000,000 it will bring down the cost of your health insurance, which is now sky-high and has deductibles so steep many of you can't even afford to use it.  Their version will be better they say.  What it will do that they conveniently play down is push up the price of insurance for those over about 55 years old who are now beginning to have some health issues.  Their premiums will go up dramatically after any new Republican plan now being considered is adapted.  

And if you or a family member have a disease or are otherwise handicapped and have effectively been pushed down into the Medicaid-eligible category, you're screwed.  Kids already living in poverty will see their healthcare cut back too, as will the 45% of all seniors (maybe one of your parents, or you one day?) living in nursing homes who depend on Medicaid to survive (and that's no exaggeration).

It isn't just liberal Democrats who believe this.  Read THIS to see why the American Medical Association, hardly a bunch of wild-eyed Bernie supporters, opposes The Republican plan(s).  The American Hospital Association, and not surprisingly the American Association of Retired Persons (AARP), feels the same.  

My Republican friends, you're being sold snake oil.  If your guys in Congress prevail, what you will actually get is NOT what they're selling you.  Reform, definitely, but this isn't it.  This is just the first step towards what they really want, which is a tax cut overwhelmingly benefiting the wealthy.  And if they can't save $800 BILLION on healthcare, they can't get their tax cut.  "Healthcare" is just a pawn in their bigger game.

Tax reform....that's what the Republican leadership calls it.  They want you to believe tax rates will be simplified, loopholes will be closed, and when the dust settles your tax system will be more equitable.  It will still be progressive (the more you make, the more you pay), but the middle class will be better off.  That's all a smoke screen.  What the middle class might save will be negligible if anything.  A tax cut for the rich, the benefactors who fund their political careers, is what it really is.

The Republican leadership will tell you that, yes, their tax reform windfall will go primarily to the rich, but the rich will in turn invest it back into the economy and create jobs.  They'll say it over and over again...JOBS, JOBS, JOBS!  That's straight out of Economics 101.  It's a valid economic theory, but doesn't fit the economic reality we have today.

This is important to understand: 

As of July 24th (yesterday) the 10 year Treasury yield was a very low 2.30%.  A low yield means there is already lots of money out there chasing very little demand.

WE'RE SWIMMING IN MONEY RIGHT NOW, LOOKING FOR A PLACE TO INVEST IT!

American corporations alone (not including individuals) already have $1.9 TRILLION dollars just sitting around.  (Check THIS for more interesting info.)  Giving the wealthy another few hundred BILLION dollars, when they can't even find a place to invest what they already have, WON'T CREATE JOBS!  We'll still see monthly job increases due to the fact that our population/economy is slowly growing and maturing.  But a massive transfer of wealth to the already wealthy won't result in a massive explosion of new jobs.

My Republican friends, you're being sold snake oil.  Your leaders have an agenda they aren't being truthful with you about.  Please stop them, and think this through.

S

You make HOW MUCH??

When I look at the issues that have our country tied in knots today, it seems to me that every single one can be traced straight back to income inequality.  Its beginning predates Citizens United (the court ruling allowing unlimited political contributions by corporations), it didn't get this way overnight, and we won't get out of it with just a few new Executive Orders.  It's WAY more complicated than that.

Without doubt my all-time favorite corporate CEO was Herb Kelleher, the (now retired) Chairman of Southwest Airlines.  His business model was simple:  "Take care of your people first, your customers second, and your stockholders last."  If you take care of your people first, they will be happy and give impeccable, smiling service to your customers.  Happy customers will come back time and again, ultimately giving your stockholders a handsome return.  Win-win-win.  While the airline industry has been in constant turmoil for years, with bankruptcies, mergers, and layoffs common, Southwest has had an unbroken string of profitable years with no layoffs, ever.

That's Herb in the red shirt with some of his ramp employees, and the photo was not staged.  He would on a daily basis walk around and greet his people, swap a quick joke, do some back-slapping (the ladies got a kiss on the cheek....times were different then!), and just in general tell them how much he appreciated them....and they worked their asses off for him!

In 1965 the average CEO made 20-times as much as his average employee.  By 2015 the average CEO made 303-times as much as his average employee.  (source:  Fortune magazine) 

Here's where I'm going with this:  While most airline CEO's of the day were making handsome 7-figure salaries, Herb kept his salary at around $350K (?) per year.  He was seen by his people as well paid, but still with his feet on the ground.  He made sure that ALL Southwest employees received yearly profit sharing, real health insurance, a generous 401K, and stock options.  (That's where Herb made his very sizeable fortune.)  If the company made money, so did he, and his model worked....there was never an unprofitable year.

This is critical....right after 9/11, when planes were flying virtually empty and other airlines were laying off as fast as they could, top executives at SWA said they would work without pay until the crisis was over, while their employees were never asked for any wage concessions.  THAT'S how you show solidarity with your people!  (As I recall, American Airlines was at the time cutting employee pay, all while they were quietly giving generous bonuses to upper management.  The rank-and-file found out about it and the s__t hit the fan!)

Today we have a dangerous divide between workers and the "One Percent".  The upper class has never had it so good, while the middle class is actually shrinking.  Their inflation-adjusted income has been stagnant for 25 years.  Too many don't have health insurance, or if they do, they can't afford the deductibles.  Large companies are generally not expanding here, and many are moving operations overseas.  Employees are scared.  Small companies are where new jobs are being created today, but many of those have modest or even no benefits.

Too many of our new jobs that we use to pump up our high employment figures are low-paying positions.  Part-time or contract workers are popular because they allow companies to skirt offering benefits, among other things.  Workers feel estranged from their bosses, and bosses can't empathize with their workers.  Distrust and hostility is the norm.  This income inequality/attitude now permeates how our country operates from top to bottom, and it's unhealthy.

I'm not looking for some sort of instant Robin Hood "rob from the rich/give to the poor" income redistribution scheme, for that, too, would cause resentment.  But our rigged tax laws and subsidies and sweetheart breaks for the rich need to be reversed.  We all need to be on a level playing field, where everyone feels like they're getting a fair shake.  

All I'm hearing from our leaders is promises.  The "haves" are trying to get even more for themselves by taking away what little the working class has left.  This is not good.  We should look to Herb Kelleher as an example of how we can ALL thrive if we pull in the same direction.

S

Doing the wrong thing for the right reason

Tonight during President Obama's State of the Union speech that I'm not going to watch, he will request an additional tax on the wealthy in order to fund a cash distribution to middle class Americans. 

I read in the paper yesterday that by 2016 the 80 wealthiest people in the world will together own $1.9 TRILLION in assets.  Just last year it took 85 billionaires to equal that figure.  In other words, the rich are indeed getting richer.  The biggest gainers came from those with interests in finance, insurance, and health care.

"Well, yeah.  They're smarter, they work harder, and they deserve it", right?

Haha!  It seems by-and-large they got richer not by the sweat of their brow, but due to "multi-million-dollar lobbying campaigns to protect and enhance their interests."  They had connections.

That's the rub.  More people with more money to spend will mean additional profits for those who own the means of production...the wealthy.  Win-win!  Right now the wealthy are gradually strangling the goose that laid the golden (middle class) egg.  IMO we NEED more income equality, but just grabbing a chunk of the rich's cash isn't the way to do it.  

Aren't the foaming-at-the-mouth Tea Party types against government handouts?  Isn't a cash subsidy/tax break to the wealthiest just a high-class handout?  So why can't the Democrats and the Tea Party work together to end handouts?  (Love to be a fly on the wall in that conference room!) 

Come on Obama....wise up.  You're NEVER going to get a tax increase on the wealthy with the Republicans in control of congress.  But by holding the Tea Party's feet to the fire, making them produce on their promise to end government handouts, he just might have a chance.  End special favors, reform the tax laws, and income inequality will take care of itself.

And either the Tea Party will do what they promised, or they will be exposed as liars.  What's it gonna be, Tea Party?

Economics For Dummies

Income inequality....everyone is talking about it these days.  And by "everyone" I really just mean those who can think, and those who don't limit their reading to publications that have some knocked-up starlet on the cover and ads about how to spackle over your wrinkles.

Just to be different, let's not look at it in liberal or conservative terms.  You know, the argument that "we earned it, it's ours, you can't have it" (conservative) or "the Man skims off all the profits and pays the workers a subsistence minimum wage" (liberal).  Let's be pragmatic for once.  How is income inequality REALLY affecting us, besides just politically polarizing us?

The Reader's Digest condensed version?....Not enough people have enough disposable income (income left over after just paying for the bare necessities) to buy enough "stuff" to justify business expansion.  Without business expansion no new jobs will be created and unemployment will remain high, which means many people won't have the disposable income to buy "stuff", which won't create business expansion....  It's a vicious circle.

But our unemployment rate is down from 10% in 2009 (?) to 6.3% today.  That's good, right?  

"Lies, damn lies, and statistics."  Many of those newly employed are working low paying retail / burger flipping jobs, paying a fraction of what they were making before the recession.  Or they are only working part time.  Many have given up looking at all and are living in mama's basement.

But we ARE buying stuff.  LOTS of stuff.  

Umm, sort of, but only by going head-over-heels in debt.  Household (consumer) debt is crushing the middle class.  We're living in a house of cards.  We can't go on like this forever.

So while the middle class hasn't received a raise in 20+ years (after allowing for inflation), the wealthy have seen their income rise by well over 200%.  So much that today the wealthy have lots of money, but no where to invest it.  

Publications such as The Wall Street Journal and The Economist estimate that in the US alone there is somewhere between 1 and 2 TRILLION dollars sitting on the sidelines in short-term accounts.  Worldwide they estimate as much as 20 TRILLION dollars is just sitting there.

That much money (or at least some of it) in the hands of a vibrant middle class could buy LOTS of stuff.  Stuff that would need to be manufactured.  Stuff that would necessitate the creation of MILLIONS of new jobs.  The middle class would again be a powerful consumer engine, and remember, our economy is 70% consumer driven.  Again, it's a vicious circle, but this time in a good way.

Now for an exclamation point lemme throw out some cliches:  "A rising tide lifts all boats".  If the middle class does well so will the wealthy, who own the means of production.  Win-win.
  
"A little piece of a big pie is better than a big piece of NO pie".  If we keep going the way we are....well, let's just say that's how revolutions begin.  Beware of the unwashed masses surrounding your house while carrying pitchforks and torches.

You think that couldn't happen here?  Maybe not directly, but in most parts of the world it's common.  Unemployment in the Euro zone for example is over 10%, and the natives are very restless.  Enough discontent around the globe will definitely affect us.

So, we just grab some of the rich folks money and pass it out to the less fortunate, right?  

Hardly!  That's how you kill everyone's incentive to work.  Reform the tax code, stop giving favorable tax breaks, subsidies, etc to those who don't need them.  There are probably other ways to level the field, too, but that alone would go a long way.

One last cliche:  The rich need to wise up and recognize they are  "killing the goose that laid the golden egg".

That's not a liberal or a conservative opinion.  That's a pragmatic fact.

S

Winners and losers

According to one news story this morning Prez O'bama will again make income inequality a major issue in his upcoming State of the Union message.  The fact that there is growing income inequality is irrefutable....the rich are indeed getting richer.  The question is what, if anything, can be done about it?

I'm a compassionate capitalist.  In theory I don't believe there is a lock on the door that prevents anyone from getting ahead.  But facts say that it IS becoming harder, and IMO that's because there are special laws and tax advantages the government has granted to some at the expense of others. (Example:  Allowing tax deductions for companies to shut down US facilities and move them overseas.)

In other words, the rich are to a large extent getting richer NOT necessarily by their hard work, but by the wink and nod they've been given by the government.    

Consider this:  In 2008 69% of corporations paid NO corporate income taxes at all, up from 24% in 1986.  Successive administrations, both Democratic and Republican, through their policies and favors dispensed, have given special help to SOME businesses/industries (and individuals, too), primarily those who lobbied the hardest and made the largest political campaign contributions.  

Their shareholder's "windfall" wasn't the result of working any harder, but due to government largess.  If your company is still paying taxes, then you are at a competitive disadvantage.  In other words, those who paid taxes subsidized those who didn't.

We need a level playing field, one where government can't designate winners and losers.  That's what is happening now with special tax advantages and subsidies for some at the expense of others.  Income inequality can largely be addressed by simply scrapping the old tax code (for both corporations and individuals) and replacing it with one that is fair to all.  As always, the devil will be in the details.

*"Blasphemy!" said one fat cat to another* 

Your ultimate success or failure will then be largely in your hands.  Work hard, work smart....you thrive.  Slack off....you lose.  No headwinds, no tailwinds.

S

My two bits.....

The first Presidential Debate is in the can.  Time to compare notes:

IMO, Mitt Romney came across as cool, collected, and very well prepared.  It was like he knew the questions before they were asked, which of course he didn't.  Kudos.  He was aggressive, didn't have any odd mannerisms, didn't twitch, sigh, roll his eyes, etc.  He addressed his remarks towards the President.

IMO, President Obama seemed to have been caught flat-footed and often fumbled with how to respond to Romney's jabs.  He was definitely on the defensive.  He didn't seem to be as well prepared.  He looked down or nervously towards someone (Michelle?) in the audience.  He had way too many long pauses and "Ahhhh's".

But the curve ball I noticed most was, who REALLY is Mitt Romney?  I've said for months he was making a BIG mistake by pandering to ultra-right-wing Tea Party conservatives.  He had their votes automatically by default.  It will be the moderates who will be the deciding factor in this election. THEY are the ones he has to win over.

Tonight he talked straight to those moderates.  Very smart politics....but very much at odds with what he's been saying before now.  Example?  He said he would give everyone a tax deduction basket with a specific dollar amount cap.  Taxpayers could fill it with anything they wanted from a list of possible choices UP TO THAT DOLLAR AMOUNT.  He specifically said the wealthy would top off their deduction basket early, and that's it.  They would lose almost all of their current deductions.  There's no way in hell the Tea Party would have smiled on that idea! 

In other words they (the rich) would see their taxes go WAY up.  That is NOT what he's been saying for the last year.  If he had offered that before now Obama would have jumped all over it enthusiastically!

Another example?  In his closing remarks he said as Massachusetts's governor he worked well with a legislature made up 80% by Democrats.  As President he would sit down with Democrats in Congress and find common ground with them for the good of the American people.

That is definitely NOT what he's been intimating to the Tea Party crowd.  If he really felt that way, why would he choose Paul Ryan as his running mate?  Ryan, along with congressional Republican Young Gun leaders like Eric Cantor and Kevin McCarthy, have been notoriously uncompromising.  They are the main reason this Congress is gridlocked.  It's "their way or the highway".  I'm sure Paul Ryan cringed when he heard his potential boss say he would sit and sing Kum-ba-yah with the Democrats.

So was the Mitt Romney that I saw tonight, the moderate, the REAL Mitt Romney, or was tonight's Mitt Romney just a poser?

It's gonna be an interesting finish.

That's my two bits.

S