Wednesday, October 31, 2007

Isn't this a no brainer

I got a good chuckle out of this:
Flaherty ignores pleas to control black-market cigarettes

OTTAWA — Pleas from senior federal officials for budget measures to help combat the black market in contraband native-made cigarettes went unheeded by Finance Minister Jim Flaherty, newly released documents show. ...

The documents, obtained by The Globe and Mail under the Access to Information Act, warn that Ottawa is suffering substantial tax losses as Canadian smokers switch to illegal, unregulated and untaxed cigarettes – profiting an extensive, cross-border network of organized crime using native land and operatives. ...

But figures in the government's Public Accounts released this month reveal federal tobacco revenues dropped to $1.6-billion in 2006-07, down from $2.97-billion two years earlier – suggesting a loss of more than $1-billion annually.
 Count me under the "not surprised" category.    Despiste the constant nattering from politicians about the "war on smoking" for "public health" reasons, the cries by revenue agents again focuses on the lost revenue.    

When you raise the prices of cigarettes from roughtly $4/pack in 2001-2002 to almost $10 today (over $10 in the Maritimes and Western provinces), you should not be suprised when  organized crime elements move in and take advantage of the "economic profits" you have given them.  Cigarette taxes are subject to the same laws of revenue and rates that the Laffer curve predicts.  

Second, this just proves that prohibition, whether the honest kind (booze in the 20's) or the more gradualist way (smoking the past 15 years) doesn't work, not to mention a gross violation of liberty.

If smoking is that much of a pox on society, then ban it and deal with the political fallout.  If not, then tax is reasonably and in the same manner as booze and you'll get your money to continue being hypocrites on the issue.

Saturday, October 27, 2007

Rangel's Tax "Reform"

 I spent some time looking over this tax "reform" package sent out by Mays and Means chairman Charlie Rangel (D-Harlem).  On first look, it has potential on some items but others are awful.

The good:

  1. Lowering corporate tax rates - these need to be brought in line with other economies.  However the proposal to drop from 34 to 31% is not enough.
  2. Getting rid of LIFO for inventory.  IRS has several methods for determing COSG for tax purposes.   LIFO, specifically as prescribed in the regs - is confusing, open to abuse, and doesn't always follow GAAP.  This will impact a lot of manufacturing and merchandising concerns.   There should be a phase in for these companies, and coupled with indexing corporate tax brackets - this isn't bad.
  3. Elimination of section 199 manufacturers deduction.   I still don't know why congress passed this monstrosity of a bill.  The reason they did it was due to the WTO ruling that the extraterritorial exculsion as an unfair subsidy.  Now, congress could have just lowered rates, changed the tax regime to what pretty well every other country in the world does and just tax income in the U.S. and not worlwide, but instead brought out the new manfucaturing activities deduction.  This is an excessively complex and difficult deduction to figure out for the initial benefit.  I know because I was responsible for figuring this out.    Rangel had it right that dropping rates and getting rid of this stupid and limited deduction.
  4. Getting rid of the AMT.  This is a stupid tax, and shows what happens when politicans create tax policy to target a small number of taxpayers - sooner or later it will expand to nail a significant number of taxpayers.
The Bad:
  1. Jacking up individual rates.  With his proposal to increase the top individual rate to 44% with the addition of surtaxes, this will kill a lot of small businesses who are set up as S-corporation or partnerships.   I know first hand dozens of former clients who have good job creating businesses who know will get soaked with at 25% increase in their federal taxes.  Now, the tax planning will shift back to C-corporations due to the distortions in top rates between corporations and individuals.  Stupid stupid stupid and will generate reduced economic growth (especially in the vulnerable construction industry, where the bulkof the business is in a S-corporation or partnership format).
  2. Distributive share of S-corporation income subject to self-employment taxes.   This now means that there will be a minimum a 4% and a maximum of 15% increase on earning on S-corporation earnings.  Stupid policy again.  So an S-corporation making $1,000,000 and one shareholder would have their federal tax burden go from approximately $350,000 to $440,000 due to the surtaxes on income and having it subject to self employment.  Tell me that isn't a job killer.
  3. Taxing carried interest at ordinary rates.   Another investment killer.  In the effort to go after "greedy" private equity managers, they want to change the investment definition of captial to be ordinary income.  This could have been better achieved under the regs for active trade or business, reasonable compensation, or even active trade or business.  But this proposal if expanded (and it would) could also spread out and kill the real estate sector too, which relies on carried interest to finance developments.
I agree with Rangel the tax rates should drop and all these preferences, deductions, and credits should go.  A broad base and low rates should be the goal of any well thought out tax plan.  But these proposals will distort economic activity, kill investment, and hamper economic growth.  And I haven't even factored in the expiration of the Bush tax cuts for 2010, which the Democrats salivate on not making permanent.

There is potential for reform in this bill, but there are some things that should not be passed at all.  Rangel's bill gives is telegraphing what a Deomcratic controlled congress will do with a Democrat in the white house, if you needed another reason not to vote for them.

Friday, October 19, 2007

Government Chutzpah on the subprime market

My friends at The Other Club brought up how Massachusetts Governor Deval Patrick wants to force mortgage companies to forgive loans on low income borrows who bit off more than they could chew, linking to a Boston Globe article on the matter:  
Governor Deval Patrick [D, Mass] plans to introduce an ambitious program today to assist Massachusetts communities in preventing foreclosures by pressing lenders to accept losses on their mortgages so that homeowners are able to sell their properties and pay off smaller loan balances....
In one key part of the plan, the state would press lenders to agree to a "short sale" with homeowners late on their monthly payments. In a short sale, lenders accept less than the full value of the loan, so that the homeowner can sell the house at today's market price - typically less than he or she paid for it - and use the proceeds to pay off the smaller loan balance. Short sales are a way for borrowers to prevent foreclosure.

But Thomas Callahan, executive director of the Massachusetts Association for Affordable Housing, which provides mortgages to homebuyers with modest incomes, said the administration does not have leverage, legally, to force lenders to cooperate. He said most subprime lenders are out-of-state companies that are not regulated by the state.

What is funny (or sad) about this is that both these initiatives had one Deval Patrick ivolved, either as a civil rights attorney for the Clinton Administration or as Governor of Massachusetts.   Deval Patrick was responsible for bullying financial institutions into making loans to various preferred groups, regardless of credit history or proof of actual discrimination.  From Reason Magazine:
 In an October 26 Washington Post story, Deval Patrick, head of the Justice Department's civil rights division, defended the administration's aggressive stance by saying, "It's nuts to think that we could reverse the effects of 300 years of deprivation by a few court decisions and a few good statutes."...

Perhaps the most breathtaking civil- rights enforcement affects financial services. Along with the proposed CRA regulations, the Justice and Treasury departments are pursuing banks and other financial institutions that are allegedly violating fair- lending practices. Justice has already sanctioned banks in Mississippi, New England, South Dakota, Georgia, and Maryland for supposedly discriminating against members of racial minorities. Barnett Bank, Florida's largest, is under investigation.

But there's little evidence that systematic discrimination is taking place. In the Maryland case, Chevy Chase Savings Bank was forced to cough up $140 million to African Americans by, for example, offering below- market- rate loans to minorities and placing ads in black- owned newspapers. Justice showed no evidence that Chevy Chase, the largest thrift in the D area, had denied loans to individuals because of their race. Rather, Chevy Chase hadn't opened new branches in predominantly black neighborhoods. The bank had been operating branches in African- American neighborhoods, but that didn't satisfy civil- rights enforcers: Either those branches had been acquired in a merger or the neighborhoods in which these branches operated had been predominantly white when the branches opened.

Two governors of the Federal Reserve System have criticized the proposed CRA regulations, saying financial institutions will make risky loans to women or racial minorities so that they can avoid discrimination lawsuits. Fed Governor Lawrence Lindsey considers the regulations a blatant power grab by political micromanagers in Congress and the White House. He has recently encouraged public comments, presumably critical, of the regulations. And Governor John LaWare told the Dow Jones News Service, "I feel very uneasy about the de facto allocation of credit and banking resources by administrative fiat."

Let's review.   Clinton administration threatens lenders into giving sub rate loans to minority borrowers even though they would not qualify under normal lending practices.   Clinton administration, with Deval Patrick at point, states that quantative measures like credit risks and default rates don't matter - just that the loan portfolios should "look like America".
     Without going into detail on the abject stupidity of this policy, the banks did a cost benefit analysis and essentially figured it that it would be cheaper to throw the dice, loosen their credit standards to minority lenders, and risk some defaults instead of throwing a lot of money into attorney's fees fighting the government.
     Now that the governments demand for looser credit standards has played role in the sub-prime mortgage mess, these same government officials now chatise the banks for their "predatory" lending practices, and now demand regulation to "fix" the problem.

Why aren't we surpised.

Tuesday, October 16, 2007

Friday, October 05, 2007

Jennifer Granholm, meet Bob Rae


It seems that Jennifer Granholm has taken a page from the Bob Rae/Floyd Laughren playbook and has passed a massive tax increase to cover the state budget deficit. Michigan, struggling to keep jobs in the state with a declining manufacturing and job base, is now in a worse position thanks to the Democrats in Lansing. Among those goodies passed recently were:

1. An increase of the personal income tax from 3.9 to 4.3%.
2. Expanding the 6% sales tax to cover a variety of services.

Let's see now. Bob Rae, the socialist premier of Ontario was unexpectedly voted a majority government for his NDP party in 1990, when the recession began. Their answer was a massive increase in welfare spending and tax hikes, which exacerbated the situation, further worsening the economic condition of Ontario.

Rather than do a bottom up re-evaluation of all government spending and setting priorities, Granholm and her Democratic co-conspirators in the legislature jacked up taxes. They seem to forget that it is businesses that create jobs in the state, and no private sector jobs mean no lush government jobs for their supporters. But hey, why let something like history and economics get in the way of a good tax hike?

The exodus of jobs and people out of Michigan will only accelerate with this, and it makes my decision to leave Michigan look better with the passage of time.

The good news is that if history is any indicator, in 2010 we will have the Michigan verson of Mike Harris as governor.