A Different Kind of Blog

news and things sacred and irreverent put together by opinionated people.

Stimulus and OUR READERS

Posted by lawman2 on February 15, 2009

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In response to the post I wrote Stimulus Package and the Average Joe we received some pretty thought evoking comments that in there own would make great post and could invoke one hell of a debate.  So I decided to post them! 

1) Wayne Moore said

February 12, 2009 at Thursday, February 12, 2009 e

I just found this blog – I don’t know if it is serious, a joke, or what. Lawman2’s description of the package is good, but modifications were made and approved in the conference committee yesterday that reduced the total by about $50 billion and eliminated the house purchase credit. If this blog is intended to be a place where the Average Joe can express opinions, I would like to hear what everyone thinks of the following.

In addition to the massive spending and individual tax cuts, the value of which could be debated forever, a stimulus package needs to cause business investment for recovery and growth. A week ago I sent my 5-page recommendation to the White House and to key Democratic and Republican Congressional leaders via UPS overnight letter. The first and fourth recommendations would be opposed by the GOP; the second and third recommendations would be opposed by the Democrats. However, all four taken together would actually stimulate the U.S. economy and would require the bi-partisan compromise that I believe Obama and the American public want. In summary, the four recommendations were:

1. Discourage executive compensation excesses by a change in IRS Code Section 162(m) that uses a ratio to median company pay and by adding SEC rules requiring full and easily accessible disclosure (transparency).

2. Make American firms more competitive in the global market by reducing corporate income tax rates to a level near the lower end of the middle range of OECD nations.

3. Make corporate dividends paid to shareholders deductible for corporate income taxes.

4. Pay the cost of the corporate tax reduction and dividend deductibility by:

a. Eliminating the special tax treatment of dividends and capital gains enacted in 2003.

b. Imposing a 35% corporate excise tax on excess compensation beyond the new Code Section 162(m) limit, in addition to it not being deductible for corporate income taxes.

A corporate income tax rate reduction from the current 35% to about 24% would place U.S. corporations in a far better position for competing in the global marketplace – it would place U.S. companies in the lower middle range of industrialized nations instead of at the top end – THIS WOULD CREATE JOBS! During Monday night’s press conference, the phrase “attracting private capital” was repeatedly used by President Obama. This could be accomplished quickly with a corporate tax rate reduction AND allowing dividends to be deductible by corporations. A major reason that the financial crisis is impacting investment is the fact that the interest paid on debt financing is tax deductible, while dividends paid on equity financing is not. This has also created some of the present Wall Street problems. The investment mindset is now oriented toward appreciation of investment rather than true return on investment, driven by the tax code bias that taxes dividends twice. I would be willing to give up the 2003 individual tax cuts (Item #4) as a way to pay for these changes (I am retired and nearly all my income is from investments).

This would probably have to be separate legislation. It would actually take money out of the pockets of highly compensated employees (executives, etc.) and make the money available for investment by companies. Would the Average Joe support or oppose this type of tax change?

2)  arkangel3 said

February 14, 2009 at Saturday, February 14, 2009 e

Wayne, you make some very interesting suggestions. While I certainly agree that lowering the Corporate Income Tax might attract more nations to do business here (and prevent our companies from leaving), allowing a tax deduction for dividends paid to shareholders just isn’t getting through to me. Dividends are based on profit, and as you stated the offset to any potential losses would be in Capital Gains changes. I think the Cap Gains taxes as they are now are fine and strike just the right balance between encouraging investment and not being burdensome (well, too much…I hate taxes, LOL) on your wallet. I absolutely agree with limits placed on Executive Compensation, but ONLY from those companies taking TARP funds. I am ADAMANTLY opposed to ANY salary ranges set by the Government for ANY Private Sector jobs. That is not letting a free market operate, and (God, now I’m going to sound like a Republican- which I am NOT) reeks of Communism.

Certainly a complete overhaul of Corporate and Personal taxes is in order and needs to be addressed as soon as possible. It will be the only way we can fund projects that we so desperately need, encourage job growth, reduce the deficit, and balance the budget. I strongly believe this needs to be addressed in the next decade, or we will be forever mired in debt and poverty as a nation.

For the record, I am an Independent who leans left (a “Pragmatic Progressive”) on almost everything, but is very fiscally conservative (having been a Banker for some 20 odd years…which I no longer am). I consider what the Banks did in helping to cause this mess we’re in a complete repudiation of EVERYTHING a Bank is supposed to do to carry out business. I think the Banks that screwed up should fail (and their customer’s allowed to collect up to the FDIC limits, of course). I think that Big Banks, if they are going under because of this (thus killing the ENTIRE economy) be Federalized until such time as the crisis has passed and they can be spun off into Private entities again.

3) Wayne Moore said

February 15, 2009 at Sunday, February 15, 2009 e

arkangel3: Thanks for your response and questions. I, too, am a political independent and I voted for Obama. I was a business founder and entrepreneur for 27 years before selling my small business to a public company in 1999. I stayed on and helped that company grow until my retirement last summer. Here are my answers – I apologize for the length:

  1. Compensation: I am not suggesting that government set salary ranges. However, under the current Internal Revenue Code Section 162(m), a public company’s corporate income tax deduction is now capped at $1 million per year for amounts paid to its chief executive officer and each of the next four highest-paid executive officers. My recommendation is to replace the hard-coded “$1 million per year” for amounts paid to the top 5 executive officers with a simple ratio test for all highly compensated persons, irrespective of their job title. Amounts paid to highly compensated persons in excess of 25 times the firm’s median compensation of all its employees, for instance, would not be deducted as an expense and would be subject to corporate income taxation. For example, if the median compensation of a firm’s workforce were $50,000, then annual compensation including bonuses paid to any employee in excess of $1,250,000 would not be tax deductible by the corporation. This is not a change in the current practice; it just makes the IRS Code more flexible. This will meaningfully relate executive pay and that of other highly compensated persons to the median compensation of the firm’s employees, irrespective of the industry, and will provide transparency for shareholders (private and federal) of public firms. SEC rules should require that the TOTAL amount of excess compensation subject to corporate taxation must be disclosed and easily accessible so that the owners of the firm (shareholders like me) have an easy reference for the impact of the firm’s compensation policies and effectiveness of corporate governance.
  2. Corporate Income Taxes: This recommendation is common sense. The corporate income tax is a significant expense that becomes part of the product price for U.S. consumers and exports. According to Organisation for Economic Cooperation and Development (OECD) statistics, the current U.S. corporate tax rate is among the highest in the world. Reducing the U.S. corporate income tax rate by 30% across the board would place U.S. corporate income taxes at a level near the lower end of the middle range of member nations of the OECD, making U.S. products much more competitive in the world market. This is a true economic stimulus. This recommendation is also made by Professor Michael J. Graetz of Yale University in his new book, 100 Million Unnecessary Returns: A Simple, Fair, and Competitive Tax Plan for the United States (2009), as well as many other tax experts.
  3. Dividends: Because dividends are not deductible for corporate income taxes, the amounts distributed to shareholders as dividends are first taxed at the corporate tax rate of 35%, and then taxed as income to the shareholders on their personal tax returns, resulting in what is commonly called “double taxation of dividends.” This quirk in the tax code has resulted in much distortion in economic activity, meaning that business decisions are made to minimize tax consequences rather than for rational business reasons. The tax code was changed in 2003 to lower the tax rate on dividends and capital gains to 15%, which did mitigate the impact of double taxation to the shareholders, but did nothing to improve corporate tax efficiency and competitiveness of U.S. corporations in the global economy. When corporations obtain capital through debt financing (bonds and bank loans), the interest on that debt is tax deductible for the corporate income tax calculations. The interest paid to the bond or loan holder represents their return on investment (ROI). Permanent financing of a corporation is accomplished through the issuance of shares of stock, with the intent that a portion of corporate profits will be distributed to shareholders through dividends as their return on investment. However, unlike interest paid on debt financing, the dividends paid on equity financing (shares of the corporate stock) are not deductible for C corporations under the existing tax code, making the payment of dividends inefficient.
  4. An overlooked problem caused by the non-deductibility of dividends for corporations is the bias created toward debt financing as well as a shift in the objective or goal of investing from the simple concept of direct ROI from dividends to placing too much emphasis on capital gains. Many stock market investors pay little or no attention to dividends because their investing strategy is to buy shares of stock at a low price and sell them a higher price, with their realized capital gains being the only ROI considered. They are speculators rather than true investors. They prefer that companies do not pay dividends, but rather reinvest what would have been paid out as dividends in the business or use it to buy back outstanding shares, thereby increasing the investors’ percentage share of company ownership. Either way, the value of the stockholders’ shares should rise in bull markets, but this increase will only be taxed at the individual level as capital gains when the shares are sold. In my view, the tax code provision of not allowing dividends to be deductible has skewed the fundamentals of investing and made it into a form of gambling. The 2003 tax rate cut simply rewarded the tendency toward gambling and did nothing to improve American corporate competitiveness. Jeremy Siegel and Andrew Metrick, both finance professors at the Wharton School of Business, with Paul Gompers, a finance professor at Harvard, have argued that a simple solution to restoring investor confidence and rationality to the stock market would be to make corporate dividends tax deductible (see http://www.upenn.edu/pennnews/researchatpenn/article.php?363&bus ). The professors argue that if dividends were a deductible expense, firms would be strongly motivated to pay out much of their profits as dividends, since retained earnings would be subject to the corporate tax. Firms that did not pay dividends would be viewed unfavorably by investors who feared that the earnings were inflated and that the cash does not exist. The payment of cash dividends would therefore add significant credibility to management’s earnings reports. They further argue that allowing dividend deductibility would also eliminate the incentive for management to take on large amounts of debt and risk bankruptcy just to gain the deduction for interest costs. This could help relieve pressure on the stressed financial system.
  5. By the way, Simon Johnson, a highly regarded MIT Professor of Economics, agrees with your view of the bank problem and its solution. He was on Bill Moyer’s Journal last Friday evening on PBS.
  6. Concluding comment: Tremendous federal debt obligations have been created by the AMERICAN RECOVERY AND REINVESTMENT TAX ACT OF 2009 on top of those already created by TARP, which will have to be paid by my children, grandchildren, and great grandchildren. The recommendations above will stimulate the American economic engine in a manner that will create long term growth, helping cure the present problems as well as making payment of the incurred obligations much easier for future generations to handle.
  •  4) arkangel3 said
    1. February 15, 2009 at Sunday, February 15, 2009 e
    2. Thanks for the thoughtful reply, Wayne. Wow! I think like a prof at MIT, LOL! Alexander Hamilton may eventually get his wish.

    Okay, now I’ll burden the readers of this blog with my view on the rest of the story: How would we pay for the corporate tax reduction and dividend deductibility if enacted?

    1. About 7% of federal income taxes come from corporate income taxes and this amount has been shrinking as companies have found ways to avoid the tax (relocate to other countries, etc). Keep in mind that those corporate taxes are part of the price paid for the corporate products and services by U.S. consumers and global export buyers. If the corporate tax rate were cut by 30% across the board, then about 5% of federal income taxes would come from corporate income taxes. Republicans would argue that this 2.1% revenue loss would be recovered through growth and they are probably correct. However, this is where responsible governing enters the picture. We have now created a huge federal deficit that we need to begin repaying to lessen the burden on our grandchildren and to mediate the risk of China being the biggest investor in America as the primary owners of the treasury bonds issued to cover our deficit spending.
    2. My recommendation: Instead of allowing capital gains to be tax-favored as they are under the existing tax code and rewarding stockholders for successful gambling in stock market price variations, which is frequently driven by non-economic (even fraudulent) factors causing irrational price swings, eliminate the special tax treatment of dividends and capital gains enacted in 2003. This would require a six to nine month phase-in period during which investors could make their own portfolio decisions relative to the revised tax code. The impact of this tax revision could be mitigated by increasing the amount of capital loss allowed on individual tax returns and by fixing the alternative minimum tax (AMT). The final stimulus package temporarily addresses the AMT as a concession to the GOP, but the AMT problem needs a permanent and rational fix.
    3. There would no longer be a need for special tax treatment of dividends because they would be taxed on individual returns in the same manner as the interest earned on the corporate bonds and certificates of deposit in investor portfolios. Return on investment (ROI) for both interest and dividends would finally be on an equal basis, removing the inefficiencies in capital allocation created by the bias in the current tax code.
    4. Finally, as a further means of discouraging extremely high compensation levels and generating tax revenue, a 35% corporate excise tax should be imposed upon excess compensation beyond the new Code Section 162(m) ratio-based limit, in addition to it not being deductible for corporate income taxes. The amount of such tax paid by each corporation should be made visible through SEC reporting requirements so that individual investors like me can use it as a parameter in judging corporate governance.
    5. Are these changes possible? I don’t know. My wife says that I am wasting my time. The GOP would support the tax cuts and the Democrats would support the tax increases. Both are needed in my view.
    6. This morning on Face The Nation, two Senators (D-NY, R-SC) and two House Members (D-CA, R-NY), continued the debate we have heard for the past three weeks with nothing new. However, when the discussion moved on to the banking crisis, there seemed to be a lot more common ground among them. In fact, on the issue of temporary nationalism of the banks, one from each party opposed it and one from each party said it might have to be an option. We may have an issue with a potential bi-partisan outcome.

     

           
  • Wayne Moore said

    February 15, 2009 at Sunday, February 15, 2009

    1. Oops! I meant nationalization of the banks.

     

    Just a footnote from just a caveman AKA Lawman2…

    According to Mr Biden: “Every economist… from conservative to liberal, acknowledges that direct government spending on a direct program now is the best way to infuse economic growth and create jobs.”

    Barack Obama said earlier this month that: “There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.”

    But the economists who signed the advert, funded by the Cato Institute in Washington DC, say that: “we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s.”

    They propose instead that: “To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”

     

          I am not sure if Wayne Moore has a blog.  I would be most interested in visiting if he does.  I do enjoy his writing style! 

     

  • Arkangel is a blogging friend of our blog.  He has a very thought evoking blog himself @ http://arkangel3.wordpress.com/
  • What do you think?  Leave us a comment and let us know!  Thanx again for reading thoughts from this ol’ caveman!

    You Can read more caveman’s perspectives from lawman Just A Caveman

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    8 Responses to “Stimulus and OUR READERS”

    1. […] zujoe wrote an interesting post today onHere’s a quick excerptMy recommendation is to replace the hard-coded “$1 million per year” for amounts paid to the top 5 executive officers with a simple ratio test for all highly compensated persons, irrespective of their job title. … They prefer that companies do not pay dividends, but rather reinvest what would have been paid out as dividends in the business or use it to buy back outstanding shares, thereby increasing the investors’ percentage share of company ownership. … […]

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    2. […] Stimulus and OUR READERS « A Different Kind of Blog […]

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    3. […] Stimulus and OUR READERS « A Different Kind of Blog […]

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    4. […] Stimulus and OUR READERS « A Different Kind of Blog […]

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    5. tothewire said

      Does Wayne Moore have a blog?

      Like

    6. arkangel3 said

      OK folks…further thoughts:

      -While I applaud the President and the Stimulus Plan, I feel it does not go far enough in terms of spending. The immediate concern is to reduce UNEMPLOYMENT, and the only way you’re going to do that is to provide jobs; in this case, “shovel ready” infrastructure projects that the States have all set do go except for the funding. Many of these jobs can (and will) come from the Private Sector, but if it becomes necessary to create a Federally Managed Infrastructure Projects Administration to employ people DIRECTLY, then that is what has to happen.

      -When you employ people, they SPEND…simple Eco 101. This puts people back to work in the Private Sector because their is now a demand for services. Again, Eco 101. This also creates a desire for small business to grow, thus ask for lending; which the Banks will agree to because there is more stability in the overall Market because of lowering unemployment.

      -When I wrote my comment at 4 am this morning about possibly nationalizing the Banks; I had absolutely NO idea that a scant six hours later, many REPUBLICANS would be in agreement with me!! (I’m in my basement office, so I can’t check for flying pigs). Naturally, Chuck Schumer (whose State harbors and gives aid and comfort to the Titans of Business and the Financial Criminals of the world) strongly disagreed. If you have Republicans calling for possible Nationalization, then I fear the situation may indeed be far worse than they are letting the General Public in on.

      -The Nation’s credit (and credibility) is shot to hell. After eight years of “gimme now” Economics and suspect “regulation”, we are on the verge of a Depression the likes of which has never been seen. Look at all the signs: the ever rising unemployment, daily bank failure COUNTS on the news (yes, you read that correctly), a tumbling stock market, and the steady creeping of deflation into the economy.

      We can complain about the awful policies over the past 28 years (The Reagan Revolution and the Clinton Error), but the fact of the matter remains we are stuck with a steaming pile of dung on a silver platter. Before any of you start cussing me out about Clinton’s great 8 years, he was the beneficiary of an overdue cyclical rise in the markets which happened to coincide at the same time as the technology boom; thus creating unprecedented prosperity. If you study a chart of the stock market over the past 70 years (or longer) he happened to come along at the crest of a wave. Mickey Mouse could have been in the Oval Office and taken credit. What GW Bush did was unforgivable in squandering that prosperity on the cost of the quagmire of foreign intervention, massive deregulation without oversight,and pure and absolute blindness to the financial tsunami he and his Administration were creating…right up until the last day they were in office.

      It has now become necessary to paraphrase President Obama, throw off the old labels and start thinking anew. No matter how much it costs, we have to spend NOW because as much as it may pain us to hand off a massive debt to succeeding generations…there will be no succeeding generations if we fail to act now, and come together as Americans and Human Beings.

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    7. arkangel3 said

      The sentence should read as follows: “This puts people back to work in the Private Sector because THERE is now a demand for services.” Just want you guys to know I really DO know how to write correctly, LOL!

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    8. […] Stimulus and OUR READERS « A Different Kind of Blog […]

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