Relevant and even prescient commentary on news, politics and the economy.

And on Ted Barlow, I caught this gem regarding the Presden’t recent speech in Georgia, which I mentioned here. Barlow refers to a Newsday story that leads with

There was only one problem with President George W. Bush’s claim Thursday that the nation’s top economists forecast substantial economic growth if Congress passed the president’s tax cut: The forecast with that conclusion doesn’t exist.

AB

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This AP story is somewhat amusing. Bush uses the press quite masterfully, but he really (1) doesn’t seem willing to answer unscripted questions (based on the paucity of press conferences) and (2) doesn’t want to be seen answering unscripted questions, as this quote illustrates:

White House officials promised a wide-ranging exchange, and as Monday’s meeting began Bush repeatedly said he wanted to work with the governors. As the meeting ended, he [President Bush] asked “Questions?” and then stopped as reporters were still filing out of the room before the meeting began. “Not yet, get the press out.”

Historically, the press does stay for the Goivernors’ Q&A with the president. In this case, the governors’ questions were not even unscripted:

Kempthorne, vice chairman of the National Governors Association, said he was confident the meeting would be open and constructive. He said he was asked to give the administration his question beforehand “so no one’s caught flatfooted.”

Just curious, but who is “no one”? How could anyone in the room other than the person answering, or attempting to answer, questions be caught flat-footed? In this case, the President’s strategists likely feared tough questions from governors facing massive budget shortfalls and, given the federal deficits, little prospect of a federal bailout (Federal bailouts may be a bad idea–why should any state ever balance it’s budget if the federal government will bail them out? But I digress). Bush gets positive coverage from the press, not just the op-ed pages, but in news pages. The New York Times’ Frank Bruni stands out as one of the more sycophantic, but in every story, the tone and tenor just feel positive as I read them. That’s subjective and you may disagree, but certainly it’s hard to argue that the press is hard on Bush. The point is that Bush gets good press while holding almost no press conference and while sending Ari Fleischer out for exchanges like this (I saw this on Alas A Blog):

Mokhiber: You said last week that, “Every step will be taken to protect civilian and innocent life in Iraq.” But Pentagon officials have said that under a battle plan called ‘shock and awe,’ “there will not be a safe place in Baghdad when we attack.” Baghdad is a city the size of Paris, with five million residents. If there will not be a safe place in Baghdad when we attack, then how do you plan to protect every civilian life?

Ari Fleischer: First of all, I think that any construing of any statements that are made by anybody at the Pentagon to suggest that the Pentagon does not and will not take every step to protect innocent lives is an unfair representation of what the Pentagon would say. It’s well-known how the United States conducts itself in military affairs. We are very proud of the fact that any time force is reluctantly used, the force is applied to military targets and innocents are protected.

The exchange comes from “Ari & I, White House Press Briefing with Ari Fleischer” by Russell Mokhiber. Here’s one more:

Mokhiber: Ari, two questions. Why is the President appointing convicted criminals like Eliot Abrams to policy positions at the White House?

Ari Fleischer: Russell, you asked that question last week.

Mokhiber: I did not ask that question last week.

Fleischer: You asked it about somebody else. I dispute the premise of your question.

Mokhiber: I have a second question.

Fleischer: I dispute the premise of your second question (laughter.)

As you can see, it’s an amusing read, and Fleischer and Mokhiber seem to enjoy (at least in print) the sparring. But the substantive point of all of this is that Bush doesn’t interact directly with the press, and Ari Fleischer just doesn’t give straight answers, and the press (except Helen Thomas) doesn’t complain.

AB

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I spent a few hours reading Eric Alterman’s What Liberal Media. As others have said, it’s good. Buy it and read it.

So far, it’s clear and convincing. (Of course, I started out with the belief that its fundamental premise is true). I hope to add some further commentary over the next week. But first, more dividend taxes (Monday).

AB

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I’ve developed what I fear may be an unhealthy addiction to tracking views of my blog, though I think it will pass with time. In any event, I see that I turn up on Google as the 9th most relevant hit for the search “bush’s tax consumption regressive”. That puts me one ahead of a Washington Monthly story by Robert McIntyre, but behind TAP, Slate, One Term President, and (yikes!)Free Republic.

Excitedly, I thought “what do Freepers think about this?” I hurriedly read the article and thought to myself, “hey, this is a pretty accurate discussion of the issue. Now I’ve got to link and endose Free Republic”.

Oops. www.freep.com is the Detroit Free Press, not Free Republic.

AB

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Dividend Taxes Part II: Options, Dilution, and Share Buyback Primer

For those familiar with dilution and share buybacks, much of this post will be old news (but do read the last paragraph), but I want to make sure that the readers understand the lingo before I start tossing it out.

Earlier, I mentioned that there are a few things companies can do with their profits. They can save them as cash, they can reinvest them (e.g., infrastructure or acquisitions), or they can give the money to the owners of the firm, shareholders.

There are actually two ways that firms can give money back to shareholders, the most obvious is to pay dividends in the way described in this post. The second way they can give money to shareholders is for the firm to buy back outstanding shares of the firm. A share buyback is just dilution working in reverse.

Dilution occurs when a corporation gives out options that are then exercised. An option gives the option-holders (usually employees) the right to buy shares in the company at some future time at a fixed price. Generally, when the market price rises above the option price, holders of options can realize a profit by exercising those options. Specifically, the profit is (Market Price – Option Price)*#Options. That’s great for option holders, but not so great for the other shareholders, because now their shares become a little bit less valuable. Go back to the example from my earlier post:

If there are 20 million shares of AB Tech outstanding, then that $4m has to be split $20 million ways, meaning each share represents the right to $4,000,000/20,000,000=$.20. AB Tech will pay this out as a dividend of 20 cents per share. If you own 10,000 shares of AB Tech then you get a check for $2,000.

If AB Tech option-holders exercise 4 million options prior to the dividend payment, the same $4m has to be split 24 million ways. This reduces the per-share payout to $4m/24m=$.167, a dividend of 16.7 cents per share. The shareholder who holds 10,000 shares now only gets $1667, not $2000, in dividend payments because his stake was diluted. To prevent dilution, companies often buyback outstanding shares, to keep the total number of shares outstanding roughly constant. Slate’s Daniel Gross is pretty good on this, here’s the relevant quote:

”Intel spends about $4 billion each year on its own shares, while it pays out just $530 million a year in dividends. Dell last fiscal year spent $3 billion on stock buybacks and paid no dividend.”

A final point on dilution. Suppose there were no options exercised, but AB Tech buys back 4 million shares. Then the same $4m gets split 16m ways, a dividend of 25 cents per share. This would increase the 10,000 share-holder’s payment from $2000 to $2500. Because each share is worth more when there are less of them, their price will go up. Shareholders can make a profit by selling those stocks at the higher price. So when AB Tech buys back outstanding shares, it is putting money into shareholders’ pockets. So at the end of the day, share buybacks work much like dividend payments: they take profits from the firm and give them to shareholders. Another way to think of buybacks is that they are dilution in reverse.

So how does a firm decide whether to put profits in shareholders’ pockets, and if so, whether to do it via share buybacks or dividend payments? (And why should we care?). A large part of the equation is tax treatment. Short term capital gains (gains realized from the price of the share increasing) are taxed at 20%. Dividends are taxed as personal income, at rate between 0 and 36%. Depending on the income-profile of shareholders and the extent to which their holdings are in retirement accounts, buybacks may impose less of a tax burden than dividends.

This is getting us close to the important point about dividend taxes: they do discourage firms from distributing profits to shareholders. And, as it turns out, when firms don’t distribute profits to shareholders they quite often do very silly things with the money. When this happens, it’s bad for the firm, bad for the shareholders, bad for the employees of the firm, bad for the stock market, and bad for the economy. More to come.

AB

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I’m getting (relatively speaking) a lot of traffic from Alas A Blog today, who writes

Angry Bear is a brand-new economist-blog, and it looks like it’ll be worth reading. (One thing, Bear: please choose a different color for your outgoing links!).

Following the author’s (Ampersand) tip, I ended up on a two hour quest to optimize the color scheme. The process was made more difficult by my lack of knowledge of the details of html. I’ve also learned that the html I do know is now “deprecated”. Sounds bad doesn’t it?

Deprecated

A deprecated element or attribute is one that has been outdated by newer constructs. Deprecated elements are defined in the reference manual in appropriate locations, but are clearly marked as deprecated. Deprecated elements may become obsolete in future versions of HTML.

Yikes! Not just obsolete or outdated, deprecated!

I’ve used up my blog time for the day on playing with the blog template. More on dividend taxes over the weekend.

AB

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Dividend Taxes, Part I: A Primer; Double-Taxation

A primer (skip ahead if you know this):

Dividends are profits that are distributed to shareholders. If Angry-Bear-Tech (AB Tech) makes an after tax profit of $10m this year, the CEO and the board must decide what to do with that $10m. Some of it, say $1m, we may keep as cash, a rainy day fund. Some of it, say $3m, we spend on improving our infrastructure. We spend another $2m to acquire Honey Bees Inc.. That leaves us with $4m. One of the things we could do with this is distribute that $4m to the owners of the firms, the shareholders. Why would we do this? In principle, the Board represents the shareholders and will, acting in the shareholders’ interests, say give the shareholders that money! If there are 20 million shares of AB Tech outstanding, then that $4m has to be split $20 million ways, meaning each share has the right to $4,000,000/20,000,000=$.20. AB Tech will pay this out as a dividend of 20 cents per share. If you own 10,000 shares of AB Tech then you get a check for $2,000. Under current tax laws, that counts as income on your 1040, so you will have to pay taxes on that $2,000.

Of course, AB Tech’s pre-tax profits were above $10m, roughly $13m. So that $13m was taxed once and it brought the total down to $10m. Then it gets paid out as dividends, where it is taxed again as personal income. If the average tax rate of AB Tech shareholders is 25% then that $10m becomes $7.5m of after-tax income. At the end of the day, $13m in pre-tax corporate profits becomes $7.5m of after-tax profits in shareholders’ pockets. This is an overall tax rate of (13-7.5)/13=.423, a 42.3% effective tax rate on income received via corporate profits.

So is the problem really that dividends are taxed twice? All sorts of income are taxed twice. It’s taxed when I get my paycheck and then it’s taxed when I buy gasoline. It’s taxed when I get my paycheck and then taxed again when my landlord receives it as income. Should we really be counting the number of times something is taxed? What if it were taxed twice at very low rates? Is that better than taxing it once at a high rate? That part of the discussion is just silly.

Returning to the example above, do you really think the advocates of eliminating the dividend tax would be happy if the corporate income tax rate were increased to 42.3% (with no dividend tax)? Then the income would only be taxed once!

Another point rarely mentioned by the pro-cut side: if you own stocks in a 401(k) or Traditional IRA, then your dividends are not taxed when you receive them, but rather when you retire and draw upon the funds (this is tantamount to paying a lower rate. Paying taxes 10 to 30 years from now is a lot better than paying them right now). Dividend income from stocks held in a Roth IRA are never taxed. I’m not sure what proportion of stocks are held in these vehicles (angrybearblog@yahoo.com), but it is a substantial amount, probably in the neighborhood of 10-20%.

One more point for the time being, but there’s more to come. If you make less than $85,000 per year, as 80% of all households do, then it’s a pretty safe bet that the vast majority of your dividend income is in retirement accounts. The same is true, though to a lesser extent, for the 95% of households that make under $150,500 per year (see Money Income in the United States, 2001, p. 19). So for the majority of the population, dividends are not taxed or are highly tax-advantaged, so there is not really much of a double taxing.

So of the myriad intricacies and oddities in the tax code, this is the one we have to fix right now? Because it’s the one that causes about 5% of the population to pay an overall tax rate around 42% on income received from corporate profits?

But there are legitimate reasons why the dividend tax is problematic, but they are more subtle than “double taxing bad”, andthus not widely invoked by the proponents of eliminating the tax.

AB

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Just turned on the TV and, flipping through the channels, I come across Bush giving a speech on the economy (I believe he’s in Georgia). The first thing I heard of note was “There’s a blue chip forecasts by economists that predicts growth this year of 3.3%–and that’s positive.” I’ll give him the benefit of the doubt and assume he meant that in the “good news” sense rather than the “greater than zero” sense of the the word “positive”.

But then what do I hear from the President?

“”This [tax] plan is fair and it is balanced”

Hmm? Who is writing Bush’s speeches and where do they get their news? It’s not my place to say…I report, you decide.

Just about to sign-off when I heard this: “Ten million seniors rely on dividend income to make sure their quality of life is strong”. See my earilier post.

Most of the speech was on the need for immediate tax relief and a push for dividend tax cuts, then a section on Iraq. I’ve made references to an upcoming dividend tax post, and it’s still upcoming.

AB

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